UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-10451
NORTH AMERICAN VACCINE, INC.
----------------------------
(Exact name of registrant as specified in its charter)
CANADA 98-0121241
------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10150 OLD COLUMBIA ROAD, COLUMBIA, MARYLAND 21046
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 309-7100
FORMER ADDRESS:
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF AUGUST 3, 1999 - 32,843,169 SHARES
<PAGE>
TABLE OF CONTENTS
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Consolidated Balance Sheets.................................. 4
Consolidated Statements of Operations........................ 5
Consolidated Statements of Shareholders' Deficit............. 6
Consolidated Statements of Cash Flows........................ 7
Notes to Condensed Consolidated Financial Statements......... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 27
Item 2. Changes in Securities and Use of Proceeds.................... 27
Item 6. Exhibits and Reports on Form 8-K............................. 28
SIGNATURES ............................................................. 29
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited, condensed consolidated financial statements of North
American Vaccine, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
This report should be read in conjunction with the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1998. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the three and six
months ended June 30, 1999, will not necessarily be indicative of the results
for the entire fiscal year ending December 31, 1999.
3
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,120 $ 22,953
Accounts receivable 1,144 1,625
Inventory 4,730 4,067
Prepaid expenses and other current assets 1,034 998
-------------- --------------
Total current assets 9,028 29,643
Property, plant and equipment, net 24,264 25,315
Investment in affiliate, at market - 1,554
Deferred financing costs, net 2,033 2,505
Cash restricted for lease obligation 4,052 4,877
Other assets 739 631
-------------- --------------
TOTAL ASSETS $ 40,116 $ 64,525
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,103 $ 3,881
Deferred revenue 62 850
Obligation under capital leases, current portion 1,883 1,754
Other current liabilities 5,667 5,848
-------------- --------------
Total current liabilities 11,715 12,333
6.5% Convertible subordinated notes, due May 1, 2003 75,326 83,734
4.5% Convertible secured notes, due November 13, 2003 25,000 25,000
Obligation under capital leases, net of current portion 1,510 2,356
Deferred rent credits, net of current portion 147 76
-------------- --------------
Total liabilities 113,698 123,499
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock, no par value; unlimited shares authorized-
Series A, convertible; issued and outstanding 2,000,000
shares; entitled to Can $2.50 per share (or U.S. $3.4
million in the aggregate) in liquidation 6,538 6,538
Common stock, no par value; unlimited shares authorized;
issued 32,843,169 shares at June 30, 1999 and
32,216,096 shares at December 31, 1998 90,387 80,824
Additional paid-in capital 11,956 11,956
Cumulative comprehensive income excluded from net loss - 926
Accumulated deficit (182,463) (159,218)
-------------- --------------
Total shareholders' deficit (73,582) (58,974)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 40,116 $ 64,525
============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 1,257 $ 81 $ 2,416 $ 344
Marketing, research and development agreements 423 1,148 788 1,719
------------- ------------ ----------- -----------
Total revenues 1,680 1,229 3,204 2,063
------------- ------------ ----------- -----------
OPERATING EXPENSES:
Production 5,582 4,185 10,372 9,166
Research and development 3,857 4,490 7,625 8,533
Selling, general and administrative 2,571 2,308 5,120 4,815
------------- ------------ ----------- -----------
Total operating expenses 12,010 10,983 23,117 22,514
------------- ------------ ----------- -----------
OPERATING LOSS (10,330) (9,754) (19,913) (20,451)
OTHER INCOME (EXPENSE):
Gain on sale of investment in affiliate - - 952 -
Interest and dividend income 126 402 380 956
Interest expense (2,786) (1,605) (4,664) (3,222)
------------- ------------ ----------- -----------
NET LOSS $ (12,990) $ (10,957) $ (23,245) $ (22,717)
============= ============ =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.40) $ (0.34) $ (0.72) $ (0.71)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 32,376 32,154 32,324 32,094
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES A CUMULATIVE
CONVERTIBLE COMPREHENSIVE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL INCOME ACCUM- SHARE-
-------------------- ---------------------- PAID-IN EXCLUDED FROM ULATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL NET LOSS DEFICIT DEFICIT
-------- ----------- ---------- ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 2,000 $ 6,538 32,216 $80,824 $ 11,956 $ 926 $ (159,218) $ (58,974)
Net loss - - - - - - (23,245) (23,245)
Increase in market
value of investment - - - - - 26 - 26
Realized investment
holding gain - - - - - (952) - (952)
----------
Comprehensive loss (24,171)
Exercises of stock
options - - 58 169 - - - 169
Shares issued under
401(k) plan - - 19 166 - - - 166
Conversion of 6.5%
subordinated
convertible notes
into common stock - - 550 9,228 - - - 9,228
-------- ----------- ---------- ----------- ----------- ------------- ------------ ------------
Balance,
June 30, 1999 2,000 $ 6,538 32,843 $90,387 $ 11,956 $ - $ (182,463) $ (73,582)
======== =========== ========== =========== =========== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,245) $ (22,717)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of investment in affiliate (952) -
Depreciation and amortization 3,125 4,083
Amortization and reduction of deferred financing costs 282 244
Contribution of common stock to 401(k) plan 166 139
Debt conversion expense 940 -
Increase in other assets (108) (116)
Increase (decrease) in deferred rent 53 (32)
Cash flows used in other working capital items (878) (2,006)
------------- ----------------
Net cash used in operating activities (20,617) (20,405)
------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,814) (1,095)
Proceeds from sale of investment in affiliate 1,581 -
------------- ----------------
Net cash used in investing activities (233) (1,095)
------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options, net 169 1,992
Loan to a former officer related to the purchase of common stock - (1,228)
Principal payments on capital lease obligations (977) (777)
Cash restricted for capital lease obligation 825 (5,654)
------------- ----------------
Net cash provided by (used in) financing activities 17 (5,667)
------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,833) (27,167)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,953 45,502
------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,120 $ 18,335
============= ================
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
7
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:
(Increase) decrease in :
Accounts receivable $ 481 $ (854)
Inventory (663) (188)
Prepaid expenses and other current assets (36) (225)
Increase (decrease) in :
Accounts payable 222 (295)
Deferred revenue and other current liabilities (882) (444)
---------------- -----------------
Net cash used in other working capital items $ (878) $ (2,006)
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,476 $ 2,984
================ ================
Equipment acquired through capital lease $ 260 $ -
================ ================
Conversion of subordinated notes to common stock $ 8,408 $ -
================ ================
Use of stock to exercise stock options $ - $ 3,429
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
The Company is engaged in the research, development, production, and sale of
vaccines for the prevention of infectious diseases in children and adults. In
July 1998, the Company received marketing authorization from the U.S. Food and
Drug Administration ("FDA") to market its DTaP vaccine (Certiva(TM)) in the
United States for the prevention of diphtheria, tetanus, and pertussis (whooping
cough). Under a marketing agreement between the Company and Abbott Laboratories
("Abbott"), Abbott markets Certiva(TM) to private physicians and managed care
markets in the United States for immunization of infants and children. Abbott
began the launch of Certiva(TM) in October 1998. The Company markets Certiva(TM)
in the U.S. to government purchasers, including state governments and the
Centers for Disease Control and Prevention ("CDC"). Previously, in 1996,
regulatory approval for a European formulation of Certiva(TM) was granted in
Sweden, and regulatory approval of a combined DTaP-IPV (polio) vaccine was
granted in Denmark. In April 1997, regulatory approval for the Company's
monovalent acellular pertussis ("aP") vaccine to vaccinate children was also
granted in Sweden. In June 1998, the Company was advised that, under the
European mutual recognition procedure, the regulatory authorities in Germany,
Austria, Sweden and Finland agreed to recognize the marketing authorization
granted by Denmark for the DTaP-IPV vaccine. In the first half of 1999, both
Germany and Austria issued their national marketing authorizations for the
Company's DTaP-IPV vaccine pending the completion of labeling issues related to
distribution of the product.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF ACCOUNTING AND CURRENCY. The Company is a Canadian corporation
incorporated under the Canadian Business Corporations Act ("CBCA") on August 31,
1989. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States and are denominated in U.S. dollars, because the Company conducts the
majority of its transactions in this currency. The application of Canadian GAAP
would not result in material adjustments to the accompanying financial
statements except for the impact of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 115, and the interest charge of $12.0 million
related to the issuance of the 4.5% Convertible Secured Notes due November 13,
2003 ("4.5% Notes") during the fourth quarter of 1998. Under Canadian GAAP, the
beneficial conversion feature of the 4.5% Notes would be assigned a value and
reported as additional equity to be amortized to retained earnings ratably over
the term of the 4.5% Notes rather than being charged to interest in 1998. The
effect of foreign currency translation has been immaterial.
(b) PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
9
<PAGE>
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimates.
(c) REVENUE RECOGNITION. Nonrefundable fees or milestone payments in connection
with research and development or collaborative agreements are recognized when
they are earned in accordance with the applicable performance requirements and
contract terms. Revenue from product sales is recognized when all significant
risks of ownership have been transferred, the amount of the selling price is
fixed and determinable, all significant related acts of performance have been
completed, and no other significant uncertainties exist. In most cases, these
criteria are met when the goods are shipped.
(d) SEGMENT REPORTING. In 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company implemented SFAS No. 131 for the year ended December
31, 1998 and has determined that it currently does not have reportable segments.
Product sales in the United States were approximately $796,000 and $792,000 for
the first and second quarters of 1999, respectively, and $0 for each of the same
periods in 1998. Product sales to Europe were approximately $363,000 and
$465,000 for the first and second quarters of 1999, respectively, and $263,000
and $81,000 for the same periods in 1998. All products are currently being
manufactured at the Company's one production facility in the United States. The
production process, and ultimately product costing, is primarily the same for
all of the Company's acellular pertussis vaccine products sold in the United
States and Europe. Because of this, and the relative consistency in selling
prices, as well as the nature of the distribution methods utilized by the
Company, the Company does not differentiate and manage its business along
geographic lines.
3. PROPERTY, PLANT AND EQUIPMENT
In March 1998, the Company leased an approximately 75,500 square foot facility
to be used for research, development, general and administrative functions and
for future expansion of the Company's operations. The lease is for an initial
term of ten years, with two five-year renewal options. The initial base annual
rent under the lease is approximately $981,000 with minimum annual escalations.
At the end of the fifth year of the initial term, the Company has the right to
terminate the lease for a specified fee. In addition, the Company has an option
to purchase the facility during specified periods of the lease term. The
landlord provided the Company a tenant improvement allowance of approximately
$1.4 million.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventory cost include materials, labor, and manufacturing
overhead. Production costs attributable to a product are expensed until
regulatory approval is obtained for such product. Beginning in the third quarter
of 1998, costs to produce Certiva(TM) for sale in the United States were
capitalized, except that costs attributable to Certiva(TM) production under
non-regulatory approved optimization production processes are being expensed
until regulatory approval is obtained for such new processes. Any production
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costs incurred in excess of net realizable value are expensed in the quarter in
which they are incurred.
Inventories consist of the following:
June 30, December 31,
1999 1998
------------------------
(in thousands)
Raw materials $ 2,110 $ 2,509
Work in process 1,947 1,024
Finished goods 673 534
------- -------
Total $ 4,730 $ 4,067
======= =======
5. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
June 30, December 31,
1999 1998
------------------------
(in thousands)
Accrued interest $ 1,000 $ 1,103
Payroll and fringe benefits 1,818 1,702
Accrued taxes 926 1,149
Reserve for contract loss 720 720
Accrued consulting and professional fees 343 353
Accrued costs of clinical trials 221 216
Other accrued liabilities 639 605
------- -------
Total other current liabilities $ 5,667 $ 5,848
======= =======
6. RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE
In connection with an operating lease for a 35,000 square foot development and
production facility, the Company entered into an agreement that included the
purchase and lease of equipment and leasehold improvements. As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February 2001, but may be extended through 2011. Under
the terms of the equipment lease, there are certain financial covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes), and certain other financial ratios. The equipment lease
agreement permits the Company, at its option, to suspend the application of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company provided certain conditions are satisfied. In April 1998, as
permitted by the equipment lease agreement, the Company voluntarily posted a
letter of credit in the amount of $5.9 million, thereby suspending the
application of all financial covenants. The letter of credit decreases on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted cash deposit of an equal amount. The balance of the letter of
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credit and the corresponding restricted cash is $4.1 million at June 30, 1999.
The letter of credit will expire by its terms on November 1, 2000.
7. CONVERTIBLE DEBT
In November 1998, the Company completed a $25 million financing through the
private placement of 4.5% Convertible Secured Notes ("4.5% Notes"). The 4.5%
Notes were sold at par, mature on November 13, 2003 and provide for interest
payable semi-annually on May 13 and November 13 of each year commencing on May
13, 1999. The net proceeds from this offering were approximately $24.6 million.
The 4.5% Notes are convertible, in whole or in part, by the holder(s) at any
time prior to maturity (unless previously redeemed or repurchased) into shares
of the Company's Common Stock at the conversion price of approximately $8.54 per
share. The 4.5% Notes are secured by certain assets of the Company, are
otherwise subordinated in right of payment to all existing and future senior
indebtedness of the Company; do not restrict the incurrence of future senior or
other indebtedness of the Company and are redeemable, in whole or in part, at
the option of the Company on or after one year from the date of issuance at par,
plus accrued interest to the redemption date.
On November 12, 1998, the date on which the 4.5% Notes were issued, the closing
price for the Company's Common Stock was $12.625, which exceeded the initial
conversion price for the 4.5% Notes. The difference between the initial
conversion price and the fair market value per share on the date of issue of the
4.5% Notes, for the number of equivalent shares, has been recognized and
recorded as paid in capital, with a corresponding charge to interest expense,
thus increasing the effective interest rate of the 4.5% Notes. Given that the
4.5% Notes are immediately convertible, the interest expense of approximately
$12.0 million was recognized immediately and was included in the 1998
Consolidated Statements of Operations.
In June 1999, the Company retired $8.4 million principal amount of the 6.5%
convertible subordinated notes ("6.5% Notes") in exchange for 550,000 shares of
Common Stock. As a result of the transaction, the Company has recognized a
one-time non-cash debt conversion expense of approximately $940,000, which is
included in interest expense. The principal balance of the outstanding notes was
$75.3 million at June 30, 1999.
8. LINE OF CREDIT
In July 1999, the Company obtained a $6 million revolving line of credit from a
bank maturing December 31, 1999. The interest rate on borrowings under the line
of credit will be LIBOR plus 265 basis points. BioChem Pharma Inc. ("BioChem")
an affiliate of the Company, has provided a guarantee for a line of credit which
may remain in place for up to two years. Upon drawing down on the line of
credit, BioChem will be entitled to receive warrants to purchase up to a total
of 750,000 shares of the Company's Common Stock. The warrants will be issued by
the Company ratably as it draws down under the line of credit such that BioChem
will receive a warrant for 125,000 shares of Common Stock for each $1 million
drawn down by the Company. Each warrant will have a term of two years from the
date of issuance. The per share exercise price under the warrant is
approximately $5.14, which is the average of the closing price of the Company's
Common Stock on the American Stock Exchange over five trading days that began on
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June 28 and ended on July 2, 1999. Each warrant will contain anti-dilution
provisions and registration rights among other provisions. In July 1999, the
Company drew down $2 million under the revolving line of credit and accordingly
issued warrants to purchase 250,000 shares of Common Stock to BioChem.
The Company could recognize up to approximately $1.6 million of interest expense
based upon the issuance of these warrants to purchase up to 750,000 shares of
common stock. The Company will incur expense on a prorata basis if less than all
of the warrants are issued.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING PARAGRAPHS IN THIS FORM 10-Q CONTAIN CERTAIN FORWARD
LOOKING STATEMENTS, WHICH ARE WITHIN THE MEANING OF AND MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE REGARDING
THE PROSPECTS AND TIMING FOR FILING FOR AND OBTAINING REGULATORY APPROVAL, THE
PROSPECTS FOR AND TIMING OF MARKETING AND DISTRIBUTION OF VACCINE PRODUCTS, THE
PROSPECTS FOR AND TIMING OF INCREASING PRODUCTION CAPACITY AND EFFICIENCY, THE
PROSPECTS FOR AND FACTORS AFFECTING FUTURE REVENUES AND PROFITABILITY, PROSPECTS
FOR REDUCED PRODUCTION COSTS, LIKELIHOOD OF ADDITIONAL FUNDING UNDER LICENSE,
MARKETING, DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS OR FROM FURTHER
FINANCINGS, PROSPECTS FOR COMPLETING NEW BUSINESS COLLABORATION ARRANGEMENTS,
CASH REQUIREMENTS FOR FUTURE OPERATIONS, PROJECTED RESULTS OF OPERATIONS, AND
PROJECTED CAPITAL EXPENDITURES AND COST REDUCTIONS. READERS ARE CAUTIONED THAT
FORWARD LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES, AND FACTORS THAT MAY
AFFECT THE COMPANY'S BUSINESS AND PROSPECTS, INCLUDING WITHOUT LIMITATION THOSE
DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: OBTAINING REGULATORY
APPROVAL OF PRODUCTS AND FACILITIES BY REGULATORY AGENCIES INCLUDING THE U.S.
FOOD AND DRUG ADMINISTRATION ("FDA"); THE PRODUCTION OF VACCINES; THE TIMING FOR
AND EFFICIENCIES RECOGNIZED FROM PRODUCT CAPACITY IMPROVEMENTS; THE NATURE OF
COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE ON SUPPLIERS, INCLUDING
STATENS SERUM INSTITUT ("SSI"), AND DISTRIBUTORS; UNCERTAINTIES RELATING TO
CLINICAL TRIALS; UNCERTAINTIES RELATING TO NEGOTIATING AND COMPLETING NEW
BUSINESS COLLABORATIONS; AND THE TIMING AND NECESSITY FOR EXPENDITURES AND/OR
COST REDUCTIONS, ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION ("SEC"), INCLUDING THE 1998 ANNUAL REPORT ON
FORM 10-K, TO WHICH THE READER'S ATTENTION IS DIRECTED.
BACKGROUND
The Company is engaged in the research, development, production, and
sale of vaccines for the prevention of infectious diseases in children and
adults. In July 1998, the Company received marketing authorization from the FDA
to market its DTaP vaccine (Certiva(TM)) in the United States for the prevention
of diphtheria, tetanus, and pertussis (whooping cough). Under a marketing
agreement between the Company and Abbott Laboratories ("Abbott"), Abbott markets
Certiva(TM) to private physicians and managed care markets in the United States
for immunization of infants and children. Abbott began the launch of Certiva(TM)
in October 1998. The Company markets Certiva(TM) in the U.S. to government
purchasers, including state governments and the Centers for Disease Control and
Prevention ("CDC"). Previously, in 1996, regulatory approval for a European
formulation of Certiva(TM) was granted in Sweden, and regulatory approval of a
combined DTaP-IPV (polio) vaccine was granted in Denmark. In April 1997,
regulatory approval for the Company's monovalent acellular pertussis ("aP")
vaccine to vaccinate children was also granted in Sweden. In June 1998, the
Company was advised that, under the European mutual recognition procedure, the
regulatory authorities in Germany, Austria, Sweden and Finland agreed to
recognize the marketing authorization granted by Denmark for the DTaP-IPV
vaccine. In the first half of 1999, both Germany and Austria issued their
national marketing
14
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authorizations for the Company's DTaP-IPV vaccine pending the completion of
labeling issues related to distribution of the product.
In April 1999, the Company announced that it had significantly
shortened the timeline for preparing and submitting an application for
regulatory approval to sell its group C meningococcal conjugate vaccine in the
United Kingdom ("U.K."). The Company anticipates that during the fourth quarter
of 1999 it will file with the U.K. regulatory authorities the application for
approval of its group C meningococcal conjugate vaccine.
In May 1996, the Company completed an offering of 6.50% Convertible
Subordinated Notes in the principal amount of $86.25 million due in full on May
1, 2003 ("6.5% Notes"). The 6.5% Notes are convertible into shares of the
Company's Common Stock, at an initial conversion price of approximately $24.86
per share, are subordinated to present and future senior indebtedness of the
Company, do not restrict the incurrence of future senior or other indebtedness
by the Company, and are redeemable, in whole or in part, at the option of the
Company on or after May 1, 1999, at certain pre-established redemption prices,
plus accrued interest. Upon a change in control, the Company is required to
offer to purchase all or part of the 6.5% Notes then outstanding at a purchase
price equal to 100% of the principal amount thereof, plus interest. The
repurchase price is payable in cash or, at the option of the Company, in shares
of the Company's Common Stock. In June 1999, the Company retired $8.4 million of
the principal amount of the 6.5% Notes in exchange for 550,000 shares of Common
Stock. The exchange was privately negotiated with a single holder of the notes,
and resulted in the recognition of approximately $940,000 one-time non-cash
expense included in interest expense for the quarter ended June 30, 1999. As of
June 30, 1999, the principal amount of the outstanding notes was $75.3 million.
In November 1998, the Company completed a private placement of $25
million aggregate principal amount of 4.5% Convertible Secured Notes due
November 13, 2003 ("4.5% Notes"). The 4.5% Notes are convertible into the
Company's Common Stock at a conversion price of approximately $8.54 per share,
are secured by certain assets of the Company, and otherwise subordinated in
right of payment to all existing and future senior indebtedness of the Company,
do not restrict the incurrence of future senior or other indebtedness of the
Company and will be redeemable, in whole or in part, at the option of the
Company on or after November 13, 1999. Upon a change in control, the Company
will be required to offer to purchase all of the 4.5% Notes then outstanding at
a purchase price equal to 100% of the principal amount thereof, plus accrued
interest. The repurchase price will be payable in cash or, at the option of the
Company, in shares of the Company's Common Stock. The 4.5% Notes were issued to
certain existing shareholders, affiliates and accredited investors, including
BioChem Pharma Inc. ("BioChem") and Phillip Frost, M.D., which purchased 4.5%
Notes in the principal amount of $9 million and $4.25 million, respectively. In
addition, Societe financiere d'innovation inc. ("Sofinov"), a high technology
investment fund that is a subsidiary of La Caisse de depot et placement du
Quebec, purchased 4.5% Notes in the aggregate principal amount of $6.25 million.
Denis Dionne, a director of the Company, is the President of Sofinov.
In July 1999, the Company obtained from a commercial bank a $6
million revolving line of credit maturing December 31, 1999. BioChem has
provided a guarantee for a line of credit which may remain in place for up to
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two years. The interest rate on borrowings under the line of credit will be
LIBOR plus 265 basis points. Upon drawing down on the line of credit, BioChem
will be entitled to receive warrants to purchase up to a total of 750,000 shares
of the Company's Common Stock. The warrants will be issued by the Company
ratably as it draws down under the line of credit such that BioChem will receive
a warrant for 125,000 shares of Common Stock for each $1 million drawn down by
the Company. Each warrant will have a term of two years from the date of
issuance. The per share exercise price under the warrant is approximately $5.14,
which is the average of the closing price of the Company's Common Stock on the
American Stock Exchange over five trading days that began on June 28 and ended
on July 2, 1999. Each warrant will contain anti-dilution provisions and
registrations rights among other provisions. In July 1999, the Company drew down
$2 million under the revolving line of credit and accordingly issued warrants to
purchase 250,000 shares of Common Stock to BioChem. The Company could recognize
up to approximately $1.6 million of interest expense upon the issuance of these
warrants to purchase up to 750,000 shares of Common Stock. The Company will
incur this expense on a prorata basis if less than all of the warrants are
issued.
In August 1999, the Company entered into a contract for the sale and
leaseback of its one owned facility. The sale price for the facility is
approximately $2.1 million. The lease for the facility will be for an initial
term of ten years with two five-year renewal options. The initial base annual
rent under the lease is approximately $240,000 with minimal annual escalations.
Closing on the transaction is subject to customary due diligence and
inspections.
The Company had 303 and 296 employees as of June 30, 1999 and 1998,
respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
In 1999, the Company recognized total revenue of $1.7 million of which
approximately $792,000 was from product sales of Certiva(TM) to government
agencies and to Abbott, approximately $465,000 was from sales of product to SSI
and approximately $423,000 was under collaborative agreements. Revenue from
collaborative agreements consists of development funding under the Company's
agreement with Abbott. Revenue in 1998 totaled $1.2 million of which
approximately $81,000 was from sales of product to SSI and the remaining from
collaborative agreements.
Production expenses were $5.6 million in 1999 compared to $4.2 million
in 1998. The increase in these expenses in 1999 is primarily attributable to:
higher material and labor expenses, contractor expenses, FDA post-marketing
surveillance expenses, write-offs of finished product due to production
failures; and aP production under optimized production processes that were
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expensed during the period. These increases were partially offset by lower
depreciation related to the use of an accelerated depreciation method for
equipment acquired prior to 1998, lower repair and maintenance expenses, and
increased inventory levels. Costs attributable to Certiva(TM) production were
expensed until regulatory approval was obtained in the third quarter of 1998,
however, costs attributable to aP production under optimized production
processes are being expensed until regulatory approval is obtained for such new
processes. See "Projected Results From Operations."
Research and development expenses were $3.9 million in 1999 compared to
$4.5 million in 1998. The decrease is attributable primarily to lower
depreciation expenses related to the use of an accelerated depreciation method
for equipment acquired prior to 1998, regulatory consulting costs incurred in
1998 but not in 1999 in seeking FDA approval of Certiva(TM), lower costs
associated with the new facility obtained in the second quarter of 1998 because
in 1999 a smaller portion of this facility was occupied by the research group,
and lower clinical trial costs offset in part by higher labor cost attributed to
additional employees for product development projects.
General and administrative expenses were $2.6 million in 1999 compared
to $2.3 million in 1998. In 1999, there was an increase in labor costs as well
as increased building costs associated with the new facility occupied beginning
in the third quarter of 1998, while the Company incurred rent expense on its
former headquarters through July 1999. These increases were partially offset by
a decrease in outside marketing related costs, which was the result of
management's plan to reduce costs in the second quarter of 1999.
Interest and dividend income decreased to $126,000 in 1999 from
$402,000 in 1998. This reduction is due primarily to a decrease in the average
cash balance.
Interest expense increased to $2.8 million in 1999 from $1.6 million in
1998. The increase is due primarily to the approximate one-time non-cash
$940,000 expense recognized on the conversion of $8.4 million principal amount
of 6.5% Notes and increased debt related to the 4.5% Notes offset in part by
principal payments made on the equipment lease.
The factors cited above resulted in a net loss of $13.0 million or
$0.40 per share in 1999 as compared to a net loss of $11.0 million or $0.34 per
share in 1998. The weighted-average number of common shares outstanding was 32.4
million for 1999 compared to 32.2 million for 1998. Without the $940,000 expense
recognized on the conversion of the 6.5% Notes the net loss would have been
$12.1 million or $0.37 per share. The increase in the number of weighted-average
shares outstanding for 1999 as compared to 1998 is attributable primarily to the
exercise of stock options subsequent to June 30, 1998, and the conversion of the
6.5% Notes into 550,000 shares of Common Stock in June 1999.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
In 1999, the Company recognized total revenue of $3.2 million of which
approximately $1.6 million was from product sales of Certiva(TM) to government
agencies and to Abbott, approximately $828,000 was from sales of product to SSI
and approximately $788,000 was under collaborative agreements. Revenue from
collaborative agreements consists of development funding under the Company's
agreement with Abbott. Revenue in 1998 totaled $2.1 million of which
approximately $344,000 was from sales of product to SSI and the remaining from
collaborative agreements.
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Production expenses were $10.4 million in 1999 compared to $9.2 million
in 1998. The increase in these expenses in 1999 is primarily attributable to:
higher material and labor expenses, contractor expenses, FDA post-marketing
licensing and surveillance expenses, write-offs of finished product due to
production failures; and aP production under optimized production processes that
were expensed during the period. These increases were partially offset by lower
depreciation related to the use of an accelerated depreciation method for
equipment purchased prior to 1998, repair and maintenance expenses, and
increased inventory levels. Costs attributable to Certiva(TM) production were
expensed until regulatory approval was obtained in the third quarter of 1998;
however, costs attributable to Certiva(TM) production under optimized production
processes are being expensed until regulatory approval is obtained for such new
processes.
Research and development expenses were $7.6 million in 1999 compared to
$8.5 million in 1998. The decrease is attributable primarily to lower
depreciation expenses related to the use of an accelerated depreciation method
for equipment acquired prior to 1998, regulatory consulting costs incurred in
1998 but not in 1999 in seeking FDA approval of Certiva(TM), lower facility
related costs associated with the new facility obtained in the second quarter of
1998 because in 1999 a smaller portion of this facility was occupied by the
research group, lower clinical trial costs offset in part by higher labor cost
attributed to additional employees for product development projects and the
reimbursement of expenses under a collaborative agreement in 1998.
General and administrative expenses were $5.1 million in 1999 compared
to $4.8 million in 1998. In 1999 there was an increase in building costs
associated with the new facility occupied beginning in the third quarter of
1998, while the Company incurred rent expense on its former headquarters through
July 1999, and an increase in labor costs and supplies and services. These
increases were partially offset by a decrease in outside marketing related
costs, which was the result of management's plan to reduce costs in the second
quarter of 1999.
In March 1999, the Company sold the remaining 125,000 shares of its
investment in IVAX Corporation ("IVAX") Common Stock generating gross proceeds
of approximately $1.6 million and income of $952,000.
Interest and dividend income decreased to $380,000 in 1999 from
$956,000 in 1998. This reduction is due primarily to a decrease in the average
cash balance.
Interest expense increased to $4.7 million in 1999 from $3.2 million in
1998. The increase is due primarily to the $940,000 expense, recognized on the
conversion of $8.4 million principal amount of 6.5% Notes, and increased debt
related to the 4.5% Notes offset in part by principal payments made on the
equipment lease.
The factors cited above resulted in a net loss of $23.2 million or
$0.72 per share in 1999 as compared to a net loss of $22.7 million or $.71 per
share in 1998. The weighted-average number of common shares outstanding was 32.3
million for 1999 compared to 32.1 million for 1998. Without the gain on sale of
the investment in an affiliate and the expense recognized on the conversion of
the 6.5% Notes, the net loss would have been $23.2 million or $0.72 per share.
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The increase in the number of weighted-average shares outstanding for 1999 as
compared to 1998 is attributable primarily to the exercise of stock options
after June 30, 1998, and the conversion of the 6.5% Notes into 550,000 shares of
the Company's Common Stock in June 1999.
LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK
The Company's cash requirement for operations for the second quarter
was $10.7 million as compared to $9.9 million in the first quarter of 1999. The
Company's cash requirement for operations is the net cash used in operating
activities for the period being reported less amounts received under license,
marketing, distribution and/or development agreements and further adjusted by
the timing of proceeds from the sale of an investment in an affiliate.
At June 30, 1999, the Company had cash and cash equivalents of
approximately $2.1 million. In addition, the Company had approximately $4.1
million of restricted cash pledged as collateral under the letter of credit
agreement, which will be reduced in amount as payments are made under the
equipment lease described in Note 6 of the financial statements. In March 1999,
the Company sold all 125,000 shares of its investment in IVAX resulting in net
proceeds of approximately $1.6 million.
PROJECTED RESULTS FROM OPERATIONS. The Company anticipates that it will
report a net loss of between $10 and $11 million for the third quarter of 1999.
It will likely incur a quarterly net operating loss in the fourth quarter of
1999, based upon several factors. The factors included in assessing the
projected losses are, among others: limited projected revenues; current
manufacturing limitations; the costs required to accelerate the group C
meningococcal conjugate vaccine program; the timing and amount of milestone
payments under existing collaboration agreements; the timing and amount of
up-front and other payments under anticipated license, distribution, marketing
and collaboration agreements; and the recognition of expense associated with the
issuance of warrants to BioChem under its line of credit guarantee for the
Company, all as more completely discussed in the following paragraphs.
Quarterly operating results will be affected by the revenue from
Certiva(TM) sales, which began during the middle of the fourth quarter of 1998.
Revenues from the sale of Certiva(TM) and aP sales to SSI have been limited. The
reported net sales during the second quarter of 1999, the first quarter of 1999
and the fourth quarter of 1998 were approximately $792,000, $796,000 and $1.2
million, respectively. Although, the national marketing authorization for the
sale and distribution of its DTaP-IPV vaccine in Germany and Austria has been
completed, labeling amendments related to distribution of the product have not
been finalized. Until the labeling issues are resolved, the Company will be
unable to sell any aP vaccine through Chiron Behring GmbH and Co., its appointed
distributor. There can be no assurance that this issue will be satisfactorily
resolved, or that if resolved, any product launch will generate significant
revenues in 1999. The Company anticipates limited revenues from Certiva(TM) and
aP during the remainder of 1999 and into 2000 due to production capacity
limitations for Certiva(TM) and aP, as described below, and as the Company
changes over from Certiva(TM) and aP production to produce the group C
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meningococcal conjugate vaccine beginning in the fourth quarter of 1999 in
anticipation of the commercial launch of the product in the United Kingdom. The
Company anticipates filing in the fourth quarter of 1999 for regulatory approval
of the group C meningococcal conjugate vaccine.
As noted above, quarterly operating results will be affected by various
manufacturing limitations. The Company's manufacturing facility has limited
production capacity based on the present size, configuration, equipment,
processes and methods utilized to produce, test and release Certiva(TM) and its
acellular pertussis toxoid. In addition, production expenses are mainly fixed
and consist primarily of expenses relating to the operation of its production
facility and maintaining a ready work force. Further, from time to time, the
Company experiences disruptions and production failures. These disruptions and
failures increase unit production costs as units are lost in the production
process. These factors have contributed to higher production costs for the
Company's acellular pertussis products, which costs currently exceed their net
realizable value. These excess costs are expensed in the quarter incurred.
In order to address these production limitations, the Company is
implementing a two-step enhancement program. First, the Company is modifying its
existing facilities and operations in a manner intended to significantly expand
production capacity and efficiency. These enhancements began during the first
quarter and are on track to be completed in time for the Company to file the
appropriate documentation with the FDA by the end of the third quarter of 1999
in seeking the approval for these enhancements. Following completion of this
first step, the Company believes that the manufacturing facility will have
substantially increased production capacity and output. The second step is to
eliminate bottlenecks and streamline and strengthen the product testing and
release process thereby reducing production disruptions and failures and
enhancing the reliability of the production process. This work will be performed
during the remainder of 1999 and into early 2000. Upon completion of both of
these programs, the Company expects that unit production costs will be reduced
significantly and that Certiva(TM) could be produced in sufficient quantities to
generate a gross profit based on current known pricing arrangements, current
competitive environment, and projected mix of customer purchases.
As a result of a recent assessment of potential health risks related to
mercury contained in food and drugs conducted by the FDA, in cooperation with
the Environmental Protection Agency, the continued use of thimerosal in vaccines
has been questioned. Thimerosal is a mercury-containing preservative commonly
used in vaccines packaged in multi-dose vials. Thimerosal is approved for use by
the FDA and is currently included in more than 30 licensed vaccines in the U.S.
Vaccines containing this preservative have been administered to hundreds of
millions of children and adults worldwide, with no scientific or medical data to
suggest that it poses a public health risk. In July 1999, the Company decided to
follow the developing recommendations of these agencies and move toward the
discontinued use of thimerosal in Certiva(TM). The Company intends to submit
data to the FDA on the European formulation of Certiva(TM), which does not
contain thimerosal, to facilitate the approval and introduction in the United
States of a thimerosal-free formulation of the product in single-dose syringes.
The Company is currently evaluating the impact of this decision on the per unit
cost to produce Certiva(TM), as well as the impact to the current selling price.
The Company expects to submit data to the FDA on a thimerosal-free formulation
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of Certiva(TM) before the end of the fourth quarter of 1999, and the Company
will work expeditiously with the FDA to obtain approval. The American Academy of
Pediatrics has called for the FDA to expedite the review of manufacturers'
supplemental applications to eliminate or reduce the mercury content of vaccine
products. The U.S. Public Health Service, the Centers for Disease Control and
Prevention, and the American Academy of Pediatrics continue to recommend that
all children should be immunized against the diseases indicated in the
recommended immunization schedule. The Company will in the interim continue to
sell previously produced thimerosal containing Certiva(TM) that it has in
inventory and has begun to manufacture thimerosal-free Certiva(TM) in
anticipation of regulatory approval.
As a function of the two-step enhancement program for acellular
pertussis production and testing processes, the regulatory work for a
thimerosal-free Certiva(TM), and the market opportunities for a launch of the
group C meningococcal conjugate vaccine in 2000, the Company, beginning in early
fourth quarter 1999, will produce its group C meningococcal conjugate vaccine
for sale in the U.K. in the facility that is currently producing Certiva(TM).
All costs associated with this production effort will be expensed until
regulatory approval is obtained. Because of the planned production of Meningitis
C vaccine in this facility, neither acellular pertussis vaccine nor Certiva(TM)
will be manufactured until at the earliest, the beginning of the second quarter
of 2000. Thus, sales of acellular pertussis containing products will be limited
and may result in reduced sales in the second half of 1999 through the second or
third quarter of 2000.
Under the guarantee agreement with BioChem for the $6 million line of
credit obtained in July 1999, the Company will issue warrants to BioChem as it
draws down on the line of credit. In July, the Company drew $2 million down on
this line of credit and issued a warrant to BioChem for 250,000 shares of the
Company's Common Stock. The Company will recognize up to approximately $550,000
of interest expense associated with the issuance of these warrants. The Company
will incur additional expense on a prorata basis should the remaining warrants
be issued.
Finally, future operating results are dependent upon the amount and
timing of further milestone and other payments under existing and new license,
distribution or development agreements. During 1999, the Company will be
continuing its development efforts for several products, including those covered
by existing marketing, license and research agreements. The Company is entitled
under those agreements to milestone payments upon achievement of prescribed
events. In addition, the Company is entitled to be paid for certain prescribed
development costs as incurred. The milestone payments under the existing
agreements are tied to measured progress in the regulatory process for the
Company's combination and group B meningococcal vaccines. Although initial
clinical development plans have been completed for these products, and clinical
trials are projected to commence during 1999, there are no assurances that such
milestone events will occur during 1999, or at all, or that any such payments
will contribute materially to quarterly net operating results.
The foregoing paragraphs include forward looking statements including
statements as to: revenue projections, earnings (losses) and likelihood of
further regulatory approvals; the ability of the Company to timely and
efficiently expand its production capacity and lower unit costs; the timing of
group C meningococcal conjugate vaccine production and regulatory filings; and
the ability of the Company to address production failures, among others. The
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factors that affect the level of future revenues from product sales include,
among other things, the ability of the Company and its distribution partners to
effectively position the Company's products against competitive products
(including safety, efficacy, and pricing), the Company's ability to manufacture
and deliver products in accordance with customer orders, the timing and amount
of product orders, and the timing of future product launches. The factors that
affect the ability of the Company to timely and efficiently expand its
production capacity include, among others, the adequacy of engineering designs,
the manufacturing experience with these enhancements, the timeliness of
regulatory review of modifications, the acceptability of such modifications to
the applicable regulatory authorities, and the ability to successfully
streamline and strengthen the product testing and release process. There can be
no assurances that the Company's plans to increase production capacity and
output will be effective or result in anticipated production efficiencies and
reduced unit cost or will be acceptable to any regulatory agency. The factors
affecting timing for commercialization of the group C meningococcal conjugate
vaccine include, among other things, successful changeover in the manufacturing
facility and results of ongoing clinical trials. In addition, there are no
assurances that the steps taken by the Company to address production disruptions
and failures and quality testing inefficiencies will be effective or that
disruptions, failures, and inefficiencies will not continue in the future.
Production disruptions, failures or inefficiencies could have a material adverse
effect on the Company's future operating results and could affect the Company's
existing licenses as well as any applications for approval for its products or
the timing of such approval. No assurances can be given that the Company will be
successful in maintaining consistent and continuous commercial production of its
products. Further, because the Company's manufacturing operations are located
principally in one facility, any condition or event that adversely affects the
condition or operation of such facility would have a material adverse affect on
the Company's financial condition and future results of operations.
PROJECTED CASH REQUIREMENTS FOR OPERATIONS. The cash requirements for
operations in the third quarter of 1999 are projected to be between $9 and $11
million, and between $40 and $44 million for 1999. This range could be affected
by the timing and amount of additional cash requirements associated with the
acceleration of the group C meningococcal conjugate vaccine development program.
The third quarter cash requirement is anticipated to be slightly lower than that
incurred in the second quarter of 1999 due primarily to the semi-annual interest
payment of $2.7 million on the 6.5% Notes and the approximately $600,000 payment
for the 4.5% Notes both paid in May 1999. The foregoing is a forward looking
statement and the factors which affect the actual cash required for operations
could include, among other things: vaccine production levels; regulatory
authorization to commence clinical investigations; timing for the commencement
of planned clinical trials; and the level of expenditures for the Company's
ongoing research and development program, which includes the acceleration of the
group C meningococcal conjugate vaccine program. See "Funding Sources," below.
CAPITAL EXPENDITURES. Total capital expenditures for the first half of
1999 were $2.1 million which includes a $260,000 capital lease for equipment. As
noted above, the Company is expanding its manufacturing capacity and efficiency
for its acellular pertussis toxoid and Certiva(TM) and is planning to produce
the group C meningococcal conjugate vaccine beginning in the third or fourth
quarter of 1999. Total projected capital expenditures for the remainder of 1999
for facilities' modifications, equipment, systems and other capital additions
could range between $2 million to $4 million. The foregoing include forward
looking statements. The amount of and timing for capital expenditures could
fluctuate based upon a number of factors including, without limitation, the
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equipment purchases required in order to produce the group C meningococcal
conjugate vaccine; and the amount and timing of unanticipated costs to replace
or repair existing equipment and systems in order to keep facilities operational
and in compliance with regulatory requirements.
FUNDING SOURCES. To maintain the Company's production, research,
development and growth at current levels, present cash and cash equivalents,
expected product sales of Certiva(TM) and the Company's other products, and
revenues from existing collaborative agreements are not expected to provide
sufficient cash to fund the Company's operations, debt service payments and
capital expenditures for the remainder of 1999 and into 2000. To address the
cash needs, the Company intends to: enter into new license, marketing,
distribution and/or development agreements that are currently under active
discussion; complete a sale and lease-back of the Company's one owned facility;
and obtain one or more lines of credit, which may be secured by accounts
receivable, inventory or other assets of the Company. The Company has reached an
agreement with BioChem under which BioChem will guarantee up to a $6 million
line of credit with a commercial bank. The guarantee will remain in place for up
to two years. The current line of credit expires December 31, 1999. The proceeds
from the line of credit, which the Company has begun to draw upon, will be used
to fund the Company's near term cash requirements as it completes pending
negotiations on one or more strategic initiatives. The Company believes that it
will meet 1999 cash requirements for operations through these efforts, although
there are no assurances in this regard. The foregoing include forward looking
statements, and the factors that will determine the timing and amount of
additional funding include, without limitation, the amount and timing of product
sales, the amount and timing of payments under existing and new collaborative
agreements and the amount and timing of any proceeds from other previously
identified funding sources.
In addition, the Company continues its ongoing discussions with
numerous third parties regarding various business arrangements. These
discussions involve potential transactions ranging from single or multiple
product distribution, license or other collaboration agreements for one or more
products to expedite commercialization timelines, which may include up-front and
milestone payments, through a potential sale of part or all of the Company. The
Company has retained the services of an investment banking firm to assist it in
connection with certain of its strategic discussions. Given the status of these
negotiations, the Company believes it will be able to expeditiously complete one
or more of these arrangements. There are no assurances that the Company will
successfully negotiate and sign any such agreements or that, if executed, the
financial terms for any such agreement will be significant.
If the Company is unable to complete the transactions noted above
and/or proceeds from the transactions are inadequate, the Company would be
required to obtain additional funding through the sale of debt and/or equity
securities and/or reduce cash requirements through significant reductions in
operating levels. There can be no assurances that the Company will be able to
obtain debt or equity financing on favorable terms or in amounts required to
meet future cash requirements, or that the Company, if necessary, would be
successful in reducing operating levels or effectively controlling costs, or
that if operating levels are reduced, the Company would be able to maintain
operations for any extended period of time.
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The foregoing paragraphs contain only a partial description of the
factors affecting the Company's business prospects and risk factors affecting
future operations. Reference is made to the risk factors and other information
described elsewhere in this management's discussion and analysis of financial
condition and results of operations, including in the first paragraph hereof,
and in the Company's other filings with the SEC, for a more complete description
of the risks and uncertainties affecting the Company and its business.
TAX AND OTHER MATTERS
At December 31, 1998, the Company and its subsidiaries had income tax
loss carry forwards of approximately $30.0 million to offset future Canadian
source income and approximately $94.7 million to offset future United States
taxable income subject to the alternative minimum tax rules in the United
States.
If more than a certain percentage of the Company's assets or income
becomes passive, the Company will be classified for U.S. tax purposes as a
passive foreign investment company ("PFIC"), and a U.S. taxpayer may be subject
to an additional Federal income tax on receiving certain dividends from the
Company or selling the Company's Common Stock. The Company has not been
classified as a PFIC to date, and it intends to, and believes that it can,
generate sufficient other income to avoid being classified as a PFIC. This is a
forward looking statement and the factors affecting this classification include,
among other things, the timing and amount of revenue from product sales; the
timing and amount of license fees, milestone payments and development funding
under license, marketing, distribution and development agreements; the
classification of payments received by the Company as active or passive; and the
classification of the Company's assets as active or passive.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company implemented SFAS No. 131
for the year ended December 31, 1998 and has determined that it currently does
not have reportable segments. Product sales in the United States were
approximately $792,000 and $0 for the quarters ended June 30, 1999 and 1998,
respectively. Product sales to Europe were approximately $465,000 and $81,000
for the quarters ended June 30, 1999 and 1998, respectively. All products are
currently being manufactured at the Company's one production facility in the
United States. The production process, and ultimately product costing, is
primarily the same for all of the Company's acellular pertussis vaccine products
sold in the United States and Europe. Because of this, and the relative
consistency in selling prices, as well as the nature of the distribution methods
utilized by the Company, the Company does not differentiate and manage its
business along geographic lines.
IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY
The Year 2000 issue is the result of some computers, software and other
equipment, including computer code, in which calendar year data is abbreviated
to only two digits. Management has initiated a company-wide program to prepare
the Company's information systems for the year 2000. Based on a recent internal
interim assessment, the Company believes that the principal management
information system software that is currently being used is designed to be Year
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2000 compliant. However, there can be no assurances in this regard. The Company
intends to test the system for Year 2000 compliance. The Company also uses
various "off the shelf" software applications for the storage and analysis of
various types of data and systems. Management is dependent on this software for
day-to-day operations. The Company has substantially completed the inventory of
its information technology and date-sensitive systems. The Company is currently
completing the assessment phases and has commenced the required remediation of
noncompliant systems to achieve Year 2000 qualification. This is an ongoing
process and the Company is unable at this time to assess the impact, if any,
this program might ultimately have on the Company's systems and operations or
its future financial position or results of operations.
The Company has communicated with substantially all of its significant
suppliers to determine the extent to which the Company is vulnerable to failures
by such third parties to remediate their own Year 2000 issues. The Company has
not been advised by its suppliers that costs to obtain Year 2000 compliance will
be passed on to the Company; however, there can be no assurances that such costs
will not be passed through to the Company either directly or indirectly or, if
passed through to the Company, the magnitude of such charges. The systems of
other companies on which the Company's systems rely may not be timely converted.
Accordingly, there are no assurances that the failure by such other companies'
systems to achieve Year 2000 qualification, or qualify in a manner that is
compatible to Company systems, would not have a material adverse effect on the
Company. The Company is in the process of developing contingency plans for
various possible scenarios.
The Company has determined that it has no exposure to contingencies
related to the Year 2000 Issue for product it has sold. Based on the preliminary
internal assessment, the Company has not identified any material costs or
expenditures specifically related to modifications of information systems for
Year 2000 compatibility. This internal assessment is a continuing process,
consequently there can be no assurances that the Company will not be required to
expend significant amounts on achieving Year 2000 qualification or that such
expenditures will not have a material adverse affect on future results from
operations or financial condition.
The foregoing paragraphs contain forward looking statements and the
factors affecting the impact of Year 2000 on the Company include, among others,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, unanticipated problems identified in the ongoing
compliance assessment, and compliance of material third party suppliers and
vendors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have significant exposure to changing interest
rates on invested cash at June 30, 1999. The Company invests in U.S. Treasury
bills and investment grade commercial paper that have maturities of three months
or less. As a result, the interest rate market risk implicit in these
investments at June 30, 1999, is low, as the investments mature within three
months.
25
<PAGE>
The Company had $25 million of 4.5% Notes at June 30, 1999, which bear
interest at 4.5% per annum and mature in November 2003. The Company does not
have significant exposure to changing interest rates related to the 4.5% Notes
because the interest rate on these notes is fixed.
The Company had $75.3 million of 6.5% Notes at June 30, 1999, which
bear interest at 6.5% per annum and mature in May 2003. The Company does not
have significant exposure to changing interest rates related to the 6.5% Notes
because the interest rate on these notes is fixed.
The Company drew down $2 million under a revolving line of credit in
July 1999. The loan bears interest at LIBOR plus 265 basis points which was 7.9%
per annum through September 17, 1999 at which time a new interest rate and
period will be determined. The entire principal balance on the line of credit
must be repaid no later than December 31, 1999. The Company has exposure to
changing interest rates related to the $2 million loan but does not deem it
material due to the time limitations on the borrowing.
The Company has not undertaken any actions to cover interest market
risk and is not a party to any interest rate market risk management activities.
A hypothetical ten percent change in the market interest rates over the
next year would not materially impact the Company's earnings or cash flow as the
interest rates on the Company's long-term convertible debt are fixed and its
revolving line of credit and cash investments are short term. A hypothetical ten
percent change in the market interest rate over the next year, by itself, would
not have a material adverse effect on the fair value of the Company's long-term
convertible debt, revolving line of credit or its short-term cash investments.
The Company does principally all of its transactions in U.S. dollars
and currently has limited payment obligations in Swedish Krona; however, such
obligations are not material to the Company's operations.
26
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 23, 1999, the U.S. District Court, District of Maryland, dismissed all
claims filed by Sharon Mates, the Company's former president, against the
Company, the two named directors and affiliate, BioChem Pharma, Inc.
("BioChem"). In July 1999, Dr. Mates filed a notice of appeal of the District
Court's decision to the United States Court of Appeals for the Fourth Circuit.
The lawsuit was filed by Dr. Mates in November 1998 and included claims against
the Company and two directors for, among other things, abusive discharge,
defamation, interference with business relations, and breach of contract. In
December 1998, the Company responded by filing a motion to dismiss seeking a
court order dismissing all claims on the basis that the allegations in the
complaint are not recognizable under applicable law.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 17, 1999, the Company retired $8.4 million of the principle amount of
the 6.5% convertible subordinated notes in exchange for 550,000 shares of the
Company's Common Stock, in reliance on Section 3(a)(9) of the Securities Act.
See Part I, Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.
In July 1999 the Company obtained a $6 million revolving line of credit maturing
December 31, 1999. The interest rate on borrowings under the line of credit will
be LIBOR plus 265 basis points. BioChem, an affiliate of the Company, has
provided a guarantee, which will remain in place for up to two years, for a line
of credit from a bank. Upon drawing down on the line of credit, BioChem will be
entitled to receive warrants to purchase up to a total of 750,000 shares of the
Company's Common Stock in reliance on Section 4 (2) of the Securities Act. The
warrants will be issued by the Company ratably as it draws down under the line
of credit such that BioChem will receive a warrant for 125,000 shares of Common
Stock for each $1 million drawn down by the company. Each warrant will have a
term of two years from the date of issuance. The per share exercise price under
the warrant is approximately $5.14, which is the average of the closing price of
the Company's Common Stock on the American Stock Exchange over five trading days
that began on June 28 and ended on July 2, 1999. Each warrant will contain
anti-dilution provisions and registrations rights among other provisions. In
July 1999 the Company drew down $2 million under the revolving line of credit
and accordingly issued warrants to purchase 250,000 shares of Common Stock to
BioChem.
27
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.42 Common Stock Purchase Warrant dated July 21,
1999 issued to BioChem.
10.43 Letter Agreement dated July 1, 1999 between
the Company and BioChem.
10.44 Line of Credit Agreement dated July 12, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K
On June 17, 1999, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K under Item 5
reporting that the Company retired approximately $8.4 million of
its 6.5% convertible subordinated notes in exchange for the
issuance of 550,000 shares of the Company's Common Stock, no par
value.
28
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH AMERICAN VACCINE, INC.
----------------------------
(Registrant)
By: /s/ Randal D. Chase
----------------------------
Randal D. Chase, Ph.D.
President and Chief Executive Officer
By: /s/ Lawrence J. Hineline
----------------------------
Lawrence J. Hineline
Vice President - Finance
Date: August 11, 1999
29
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR PROVINCE OF CANADA AND SUCH SECURITIES MAY NOT
BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM
NORTH AMERICAN VACCINE, INC.
WARRANT FOR THE PURCHASE OF COMMON SHARES
No. W-1 250,000 Shares
---
FOR VALUE RECEIVED, NORTH AMERICAN VACCINE, INC. (the "Company"), a
Canadian corporation, hereby certifies that BioChem Pharma Inc. or its permitted
assigns (the "Holder") is entitled to purchase from the Company, at any time or
from time to time after the date set forth on the signature page, but prior to
5:00 p.m. on July 21, 2001, two hundred fifty thousand (250,000) fully paid and
non-assessable common shares, no par value, of the Company for an aggregate
purchase price of One Million Two Hundred Eighty-Four Thousand Three Hundred
Seventy-Five U.S. Dollars (US$1,284,375) (computed on the basis of US$5.1375 per
share). (Hereinafter, (i) said common shares, together with any other equity
securities which may be issued by the Company in substitution therefor, are
referred to as the "Common Shares":, (ii) the Common Shares purchasable
hereunder are referred to as the "Warrant Shares", (iii) the aggregate purchase
price payable hereunder for the Warrant Shares is referred to as the "Aggregate
Warrant Price", (iv) the price payable hereunder for each of the Warrant Shares,
as adjusted in the manner set forth in Section 3, is referred to as the "Per
Share Warrant Price" and (v) this Warrant and all warrants hereafter issued in
exchange or substitution for this Warrant are referred to as the "Warrants") The
Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant
Price and the number of Warrant Shares are subject to adjustment as hereinafter
provided.
1. EXERCISE OF WARRANT. This Warrant may be exercised, in whole at any
time or in part from time to time (such partial exercises to be in amounts of
not less than 1,000 Warrant Shares), on and after the date set forth on the
signature page, but prior to 5:00 p.m. on July 21, 2001, by the Holder of this
Warrant by the surrender of this Warrant (with the subscription form at the end
hereof duly executed) at the principal office of the Company in Columbia, MD
together with proper payment of the Aggregate Warrant Price applicable on such
date, or the proportionate part thereof if this Warrant is exercised in part.
Payment for Warrant Shares shall be made by (i) check payable to the order of
the Company, (ii) wire transfer to an account designated by and in the name of
the Company, (iii) by delivery to the Company of debt securities for which it is
the issuer and bound to make payment in the stated principal amount, where the
1
<PAGE>
principal amount on such debt security delivered to the Company for retirement
is equal to the Aggregate Warrant Price; or (iv) by any combination of the
methods set forth in (i) through (iii), above. If this Warrant is exercised in
part, this Warrant must be exercised for a number of whole Warrant Shares, and
the Holder is entitled to receive a new Warrant covering the number of Warrant
Shares in respect of which this Warrant has not been exercised and setting forth
the proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such surrender of this Warrant, the Company will issue a
certificate or certificates in the name of the Holder for the largest number of
whole Warrant Shares to which the Holder shall be entitled and, if this Warrant
is exercised in whole, in lieu of any fractional Warrant Share to which the
Holder shall be entitled, cash equal to the fair value of such fractional share
(determined in such reasonable manner as the Board of Directors of the Company
shall determine).
2. RESERVATION OF WARRANT SHARES. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and
reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the Warrant Shares free and clear of all restrictions
on sale or transfer (except as may arise under applicable securities laws) and
free and clear of all preemptive rights.
3. PROTECTION AGAINST DILUTION. (a) If, at any time or from time to time
after the date of this Warrant, the Company shall (i) issue to the holders of
the Common Shares any Common Shares by way of a stock dividend; (ii) subdivide
its outstanding Common Shares into a greater number of shares; (iii) combine its
outstanding number of Common Shares into a smaller number (i.e., a reverse stock
split); or (iv) issue by reclassification of its Common Shares any shares of
capital stock of the Company then, and in each such case, the Per Share Warrant
Price in effect immediately prior to the date of such action shall be adjusted,
or further adjusted, to a price (to the nearest cent) determined by dividing (x)
an amount equal to the number of Common Shares outstanding immediately prior to
such issuance multiplied by the Per Share Warrant Price in effect immediately
prior to such issuance by (y) the total number of Common Shares outstanding
immediately after such issuance. Upon each adjustment in the Per Share Warrant
Price resulting from a stock split or stock dividend, the number of Warrant
Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per
Share Warrant Price in effect immediately after such adjustment. Notice of each
such adjustment and each such readjustment shall be forthwith mailed to the
Holder.
(b) If the Company shall be consolidated with or merged into another
corporation, or shall sell all or substantially all of its assets as part of a
reorganization to which the Company is a party within the meaning of the
Internal Revenue Code of 1986, as presently in effect, or shall issue a security
convertible into its Common Shares as a dividend on its Common Shares, each
Warrant Share shall be replaced for the purposes hereof by the securities or
properties issuable or distributed in respect of one Common Share upon such
consolidation, merger, sale, reclassification or reorganization, and adequate
provisions to that effect shall be made at the time thereof. Notice of such
consolidation, merger, sale, reclassification or reorganization, and of said
provisions so proposed to be made, shall be mailed to the Holder not less than
15 days prior to such event.
2
<PAGE>
(c) If the Board of Directors of the Company shall declare any
dividend or other distribution in cash with respect to the Common Shares, other
than out of surplus, the Company shall mail notice thereof to the Holder not
less than 15 days prior to the record date fixed for determining shareholders
entitled to participate in such dividend or other distribution.
(d) If, during the term of this Warrant, the Company shall issue or
sell its Common Shares for a consideration per share less than the Per Share
Warrant Price immediately prior to the time of such issue or sale, then
forthwith upon such issue or sale, the Per Share Warrant Price in effect
immediately prior to such issue or sale shall be reduced to the lower of the
prices (calculated to the nearest cent) determined as follows:
(1) by dividing (A) an amount equal to the sum of (i) the number
of shares of Common Stock outstanding immediately prior to such issue or sale
multiplied by the then-existing Per Share Warrant Price, and (ii) the
consideration, if any, received by the Company upon such issue or sale, by (B)
the total number of Common Shares outstanding immediately after such issue or
sale; and
(2) by multiplying the Per Share Warrant Price in effect
immediately prior to the time of such issue or sale by a fraction, the numerator
of which shall be (A) the sum of (i) the number of Common Shares outstanding
immediately prior to such issue or sale multiplied by the market price
immediately prior to such issue or sale; and (ii) the consideration received by
the Company upon such sale, divided by (B) the total number of Common Shares
outstanding immediately after such issue or sale, and the denominator of which
shall be the market price immediately prior to such issue or sale.
4. FULLY PAID SHARES; TAXES. The Company agrees that the Common Shares
represented by each and every certificate for Warrant Shares delivered on the
exercise of this Warrant shall, at the time of such delivery, be validly issued
and outstanding, fully paid and non-assessable. The Company further covenants
and agrees that it will pay, when due and payable, any and all Federal and state
stamp, original issue or similar taxes which may be payable in respect of the
issue of any Warrant Share or certificate therefor.
5. TRANSFERABILITY. This Warrant and the Warrant Shares shall not be
sold, transferred, assigned or hypothecated by the Holder except (i) pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, and qualification for sale under all other applicable state and
provincial securities rules and regulations [collectively the "Securities
Acts"]; or (ii) in full compliance with all requirements necessary to establish
an exemption from the registration requirements of the Securities Acts. In order
to properly establish compliance with (ii), above, the Company shall be entitled
to request and receive in advance of authorizing any sale, transfer, assignment
or hypothecation of this Warrant or any of the Warrant Shares: (x) appropriate
transferor and transferee representation letters supporting a claimed exemption
from registration requirements of the Securities Acts; (y) an opinion of counsel
for the holder of the Warrant and/or Warrant Shares reasonably satisfactory to
the Company that the proposed transfer from the holder of the Warrant and/or
3
<PAGE>
Warrant Shares to the transferee is exempt from the registration requirements of
the Securities Act; and (z) such other documentation, representations and
filings as may be reasonably required by counsel in order to issue the foregoing
opinion. The Company may treat the registered holder of this Warrant as it
appears on the Company's books at any time as the Holder for all purposes.
6. LOSS, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company shall
execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
7. WARRANT HOLDER NOT SHAREHOLDER. Except as otherwise provided herein,
this Warrant does not confer upon the Holder any right to vote or to consent or
to receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
8. COMMUNICATION. No notice or other communication under this Warrant
shall be effective unless, but any notice or other communication shall be
effective and shall be deemed to have been given if, the same is in writing and
is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at North American Vaccine, Inc., 10150 Old Columbia
Road, Columbia, MD 21046 Attention: Vice President-Finance, or such other
address as the Company has designated in writing to the Holder, or
(b) the Holder at BioChem Pharma Inc., 275 Armand Frappier
Boulevard, Laval, H7V 4A7 Quebec, Canada Attention: Executive Vice
President-Investments & Subsidiaries, or such other address as the Holder has
designated in writing to the Company.
9. HEADINGS. The headings of this Warrant have been inserted as a matter
of convenience and shall not affect the construction hereof.
10. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, NORTH AMERICAN VACCINE, INC. has caused this Warrant
to be signed by its Chief Executive Officer and President and its corporate seal
to be hereunto affixed and attested by its Secretary this 21st day of July 1999.
ATTEST: NORTH AMERICAN VACCINE, INC.
/s/ Russell P. Wilson By: /s/ Randal Chase
- ---------------------------- --------------------------
Russell P. Wilson Randal Chase
Assistant Secretary Chief Executive Officer & President
[Corporate Seal]
NORTH AMERICAN VACCINE, INC.
July 1, 1999
BioChem Pharma Inc.
275 Armand Frappier Blvd
Laval, Quebec H7V 4A7
Canada
Re: GUARANTY OF $6 MILLION (US) LINE OF CREDIT
Gentlemen:
As you know, North American Vaccine, Inc. ["NVX"] is presently seeking a
line of credit [the "Line of Credit"] from Royal Bank of Canada in the principal
amount of Six Million Dollars (US) [$6,000,000 (US)] [the "Principal Amount"].
The bank has indicated its intention to provide the Line of Credit in the
Principal Amount to NVX in accordance with the term sheet a copy of which
attached hereto provided that it receives an unsecured guaranty [the "Guaranty"]
from BioChem Pharma Inc. ["BioChem"] in favor of, and in a form acceptable to,
the bank supporting all amounts drawn down under the Line of Credit.
This letter is to confirm the agreement between NVX and BioChem under
which BioChem will provide the Guaranty of up to the Principal Amount to support
the Line of Credit proposed to be extended to NVX by Royal Bank of Canada, or
any other mutually acceptable lending institution ["Lender"].
1. PROVISION OF GUARANTY
a. Subject to approval by its board of directors, which shall be obtained
on or before July 9, 1999, BioChem hereby agrees to provide the Guaranty in
favor of, and in a form acceptable to, the Lender up to the Principal Amount.
The Guaranty shall be furnished to the Lender in consideration of the Lender's
commitment to extend a Line of Credit to NVX in the Principal Amount. BioChem
shall execute and deliver such documents and agreements as may be required by
the Lender to implement the Guaranty in favor of the Lender within five (5)
business days of receiving the request of the Lender. BioChem shall not be
required to provide the Guaranty if the Lender does not provide the Line of
Credit to NVX.
b. BioChem agrees that the Guaranty shall remain in effect for a period of
not less than twenty-four (24) continuous months ["Guaranty Period"] to support
the Line of Credit and/or any successor line of credit or other credit facility
obtained by or for NVX; provided, however, at no time shall the Guaranty exceed
the Principal Amount and provided further that no successor line of credit or
other credit facility contain terms and condition that are less favorable to NVX
than those contained in the Line of Credit collateralized by the Guaranty and
provided further that no successor line of credit or other credit facility that
will be collateralized by the Guaranty shall be entered into by NVX without
BioChem's express written consent that will not be unreasonably withheld,
conditioned or delayed.
c. BioChem agrees to provide NVX with all reasonable cooperation and
assistance in obtaining a successor or replacement line of credit, loan or
credit facility for NVX if the Line of Credit expires unrenewed or unextended
before the expiration of the Guaranty Period, including without limitation
executive and delivery of all documents requested by Lender; provided, however
that such cooperation shall not be more onerous to BioChem than that required of
it in the initial issuance of the Guaranty and provided further that the amount
of the successor or replacement line of credit that will be collateralized by
the Guaranty shall not exceed the Principal Amount.
d. As a condition to BioChem's obligation to issue the Guaranty, NVX
agrees to give BioChem at least two (2) business days notice of its intention to
draw any borrowings under the Line of Credit. In addition, NVX understands, and
the relevant documents and agreements shall reflect to the greatest extent
possible, that BioChem's guarantee obligation under the Guaranty shall be one of
collection and that the Lender shall be required to exercise all commercially
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10150 Old Columbia Road o Columbia, MD 21046 o Phone 410-309-7100 o Fax 410-309-4077
</TABLE>
<PAGE>
BioChem Pharma Inc
July 1, 1999
Page 2 of 8
reasonable remedies, short of litigation to final judgment, to satisfy NVX's
obligations under the Line of Credit prior to requiring payments by BioChem
pursuant to the Guaranty.
2. ISSUANCE OF WARRANT In consideration of BioChem providing the Guaranty to
the Lender as contemplated by Article 1 above, NVX agrees that it shall issue to
BioChem one or more Stock Purchase Warrant(s) (individually referred to herein
as the "Warrant" and collectively referred to herein as the "Warrants") in form
and content substantially the same as that attached hereto and incorporated
herein by this reference on the following terms and conditions:
a. The exercise price of the Warrants shall be the average of the closing
prices of the common stock of NVX on the American Stock Exchange over a period
of five trading days commencing on June 28, 1999 and ending July 2, 1999.
b. If the Line of Credit is drawn down by NVX for the full amount of the
Principal Amount, BioChem shall be entitled to one or more Warrant(s) to
purchase a total of Seven Hundred Fifty Thousand (750,000) shares of common
stock of NVX. Accordingly, a Warrant shall be issued ratably as NVX draws down
on the Line of Credit as follows: for each One Million Dollars (US) [$1,000,000
(US)] (or fraction thereof) of principal amount drawn down by NVX under the Line
of Credit, NVX shall issue to BioChem a Warrant to acquire One Hundred Twenty
Five Thousand (125,000) shares of common stock of NVX.
c. Each Warrant shall have a term of two (2) years from the date of
issuance and shall be non-negotiable and non-transferable except under the terms
and conditions set forth therein.
d. The shares of common stock of NVX issuable upon exercise of each
Warrant [the "Warrant Shares"] shall be fully reserved for issuance at all times
during which the Warrant is issued and outstanding and, at the time of delivery
if such Warrant is duly and properly exercised, shall be validly issued and
outstanding, fully paid and non-assessable.
3. TRANSFER RESTRICTIONS AND REPRESENTATIONS In connection with the issuance
of the Warrants and the Warrant Shares [collectively the "Securities"], BioChem
hereby acknowledges that the Securities will be issued to it pursuant to an
exemption from the registration provisions of the Securities Act of 1933, as
amended, and other applicable securities laws [collectively the "Securities
Acts"]. BioChem specifically acknowledges and agrees that:
a. the purchase of the Securities involves a high degree of risk in that
an investment in the Company is highly speculative and BioChem may suffer a loss
of its entire investment;
b. the transferability of the Securities will be limited as set forth
below and thus it may not be able to liquidate all or any portion of the
investment;
c. it is able, either alone or with an investor representative, to
evaluate the merits and risks of this investment and that it recognizes the
highly speculative nature of this investment;
d. it has had access to all information regarding NVX that it has
requested or desired to know, that all documents which could be reasonably
provided have been made available for its inspection and review and that it has
been afforded the opportunity to ask question of and receive answers from duly
authorized officers or other representatives of the NVX concerning this
transaction and any additional information that it has requested;
e. the Securities are being acquired for its own account, for investment
purposes only and not with a view to distribution or resale to others and that
the exemption from the registration requirements of the Securities Act being
claimed by NVX for this transaction is dependent, in part, on BioChem's
investment intent;
f. it understands there is no public market for the Warrants and none is
likely to develop;
<PAGE>
BioChem Pharma Inc
July 1, 1999
Page 3 of 8
g. it is an "accredited investor" within the meaning of Section 2(15)
and/or Rule 501 under the Securities Act;
h. it understands that the Securities are being offered in a transaction
not involving any public offering within the meaning of the Securities Acts,
that the Securities will not be registered under the Securities Acts and that it
may not resell, pledge or otherwise transfer any such Securities except in
accordance with the terms and restrictions contained in the Warrants and in a
transaction exempt from the registration requirements of the Securities Acts.
i. it consents to the placement of a legend on the Securities stating
that they have not been registered under the Securities Acts and setting forth
or referring to the restrictions on transferability and sale thereof.
4. OTHER REPRESENTATIONS AND WARRANTIES
a. BioChem represents and warrants as follows:
i BioChem is a corporation duly organized and existing under the
laws of Canada and has the corporate power to conduct the business that it
conducts and proposes to conduct;
ii Upon pproval of this agreement by the Board of Directors of
BioChem, the execution, delivery and performance of this agreement by BioChem
will be duly approved by all necessary corporate action, and all other corporate
authorities, approvals and actions required to authorize BioChem to issue the
Guaranty and to receive the Warrants and purchase the Warrant Shares will have
been duly taken and approved;
iii The consummation of the transactions contemplated by this
agreement will not violate or constitute a default under BioChem's
organizational documents or any material agreements to which BioChem is a party
or by which its properties are bound or constitute a violation of any material
order, rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or foreign;
iv It has not retained a placement or selling agent, broker or
dealer to represent it in the acquisition of the Warrants or the Warrant Shares
and no person has any claim or right to any commission or other remuneration as
a result of contract or agreement with BioChem in connection with the execution
or consummation of the transactions contemplated by this agreement.
b. NVX represents and warrants as follows:
i NVX is a corporation duly organized and existing under the law
of Canada and has the corporate power to conduct the business that it conducts
and proposes to conduct;
ii The execution, delivery and performance of this agreement by
NVX has been duly approved by the Board of Directors of NVX and all other
corporate actions required to authorize and effect the issuance of the Warrants
and sale of the Warrant Shares have been duly taken and approved;
iii The Warrant Shares have been duly and validly authorized and
when issued and paid for in accordance with the terms and conditions of the
Warrants will be validly issued, fully paid and non-assessable shares of common
stock of NVX;
iv NVX is not in violation or default under, nor will the
execution and delivery of this agreement, the issuance of the Warrants or the
Warrant Shares and the incurrence of the obligations herein and therein set
forth and the consummation of the transaction contemplated hereby and thereby,
result in a violation of, or constitute a default under, NVX's certificate of
incorporation or by-laws;
<PAGE>
BioChem Pharma Inc
July 1, 1999
Page 4 of 8
v. The consummation of the transactions contemplated by this
agreement will not violate or constitute a default under any material agreements
to which NVX is a party or by which its properties are bound or constitute a
violation of any material order, rule, regulation, writ, injunction, or decree
of any government, governmental instrumentality or court, domestic or foreign.
vi. no consent, approval or filing with any governmental authority
or other party is required by NVX for the consummation of the transactions
contemplated by this agreement including in connection with the issuance of the
Warrants and the Warrant Shares other than the required and applicable notices
and filings to be made with the U.S. Securities & Exchange Commission, notices,
filings and approvals requited by state and provincial securities regulatory
authorities, and notices and listing agreements with the American Stock
Exchange.
5. REGISTRATION RIGHTS NVX and BioChem agree that the Warrant Shares shall be
included in the definition of "Registrable Securities" as that term is defined
in Schedule 4 to the Share Purchase Agreement between the parties dated January
17, 1990, as amended, ("Share Purchase Agreement") and that as such, the Warrant
Shares shall be subject to all terms and conditions of BioChem's registration
rights as specified in Section One of Schedule 4 to the Share Purchase
Agreement. As a consequence of this Section 5, the definition of "Registrable
Securities" as set forth in Schedule 4, Section 1.1 to the Share Purchase
Agreement is hereby modified to add new Subsections (iii) and (iv) at the end
thereof to read in its entirety as follows:
"Registrable Securities" shall mean (i) the Common Shares, (ii) any NAVA
common shares issued pursuant to the Options or issued or issuable in
respect of the Common Shares, upon any stock split, stock dividend,
recapitalization, or similar event, so long as the Common Shares and any
NAVA common shares issued in respect of the Common Shares are owned by
BioChem, (iii) any NAVA common shares issued pursuant to the exercise of
one or more Warrant(s) ("Warrant Shares"), which Warrant or Warrants are
granted to BioChem pursuant to the terms of that certain letter agreement
dated July 1, 1999 between NAVA and BioChem and (iv) any NAVA common shares
issued or issuable in respect of the Warrant Shares, upon any stock split,
stock dividend, recapitalization, or similar event, so long as the Warrant
Shares and any NAVA common shares issued in respect of the Warrant Shares
are owned by BioChem.
6. OTHER MATTERS
a. No modification, amendment, deletion, addition or other change in this
agreement or any provision hereof, or waiver of any right or remedy herein
provided, shall be effective for any purpose unless specifically set forth in a
writing signed by the Party to be bound thereby. No waiver of any right in
respect of an occurrence or event on one occasion shall be deemed a waiver of
such right or remedy in respect of such occurrence or event on any other
occasion.
b. Any notice required to be given hereunder shall be in English
language, in writing and shall be deemed to have been duly given and received
upon transmission when telecopied with verification of receipt or upon delivery
if sent by Federal Express, DHL or other internationally recognized overnight or
express courier. Addresses for the delivery of notices shall be as follows:
For BioChem: BioChem Pharma Inc., 275 Armand Frappier Boulevard, Laval,
Quebec H7V 4A7, Canada; Attn: Chief Financial Officer ; Telecopy:
1-450-978-7755.
For NVX: North American Vaccine, Inc.; 10150 Old Columbia Road; Columbia,
MD 21046 USA; Attn: Vice President Finance; Telecopy: (410) 309-4077
c. Notwithstanding the place where this agreement may be executed by any
of the parties hereto, the parties expressly agree that all the terms and
provision hereof shall be construed in accordance with and governed by the laws
<PAGE>
BioChem Pharma Inc
July 1, 1999
Page 5 of 8
of the State of New York (regardless of the laws that might be applicable under
principles of conflicts of law), including without limitation as to all matters
of validity, construction, effect and performance.
d. This agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
e. This agreement shall be binding on and inure to the benefit of the
parties hereto and to their respective successors and permitted assigns. This
agreement may not be assigned by operation of law, by "change of control" of NVX
or otherwise, without the express written consent of BioChem. For purposes of
this agreement, the term "change of control" shall include either of the
following events: (i) any "Person" and/or "Group" (as such terms are used in
Section 13(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act")] other than BioChem or its affiliates, becomes the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act] directly or indirectly
of more than thirty percent (30%) of NVX's total outstanding voting securities,
provided however the acquisition of beneficial ownership by such Person or Group
of more than thirty percent (30%) of NVX's total outstanding voting securities,
which acquisition was accomplished in whole or in part by virtue of a purchase
or a series of related purchases of securities, rights, or instruments from
BioChem and/or its affiliates, shall not be considered a change of control; or
(b) NVX consolidates or merges with or into any Person, or conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
Person, or any Person consolidates with or merges into NVX, in any such event
pursuant to a transaction in which the outstanding voting securities of NVX is
converted into or exchanged for cash, securities or other properties. In the
event of a "change of control" of NVX, BioChem shall have the right to cancel
this agreement and the Guaranty. The cancellation of this agreement and the
Guaranty in connection with a change of control of NVX shall in no way modify
the terms and conditions of the Warrant(s) that might have been issued by NVX to
BioChem hereunder.
f. This agreement sets forth the entire understanding of the parties as
to the subject matter hereof and merges and supercedes all prior discussions,
agreements and understandings of any and very nature among them.
g. Each party agrees to take or cause to be taken such further actions,
to execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments, and to obtain such consents as may be
necessary or as may be reasonably requested in order fully to effectuate the
purposes, terms and conditions of this agreement.
h. This agreement is written and executed in the English language. It is
understood that, for purposes of obtaining the regulatory approval of the
agreement by appropriate governmental authorities, that the text of this
<PAGE>
BioChem Pharma Inc
July 1, 1999
Page 6 of 8
agreement, if necessary, may be translated into appropriate language(s). In the
event of a difference in the meaning between the translated text and the English
text, the English text shall govern. Il est de la volonte expresse des parties
que cette convention et touts les documents s'y rattachant soient rediges et
signes en anglais.
* * * *
Please acknowledge your acceptance and agreement with the terms of this
agreement by signing and returning the enclosed copy of this letter.
Sincerely,
North American Vaccine, Inc.
By: /s/ Daniel J. Abdun-Nabi
--------------------------
Name: Daniel J. Abdun-Nabi
Title:Senior Vice President
Legal Affairs & General Counsel
ACCEPTED AND AGREED
this 1st day of July, 1999
BioChem Pharma Inc
By: /s/ Francois Legault
-----------------------------------
Name: Francois Legault
Title: Executive V.P. Corporate Development
By: /s/ Charles A. Tessier
-----------------------------------
Name: Charles A. Tessier
Title: V.P. Legal Affairs & General Counsel
<PAGE>
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR PROVINCE
OF CANADA AND SUCH SECURITIES MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM
NORTH AMERICAN VACCINE, INC.
WARRANT FOR THE PURCHASE OF COMMON SHARES
No. W-1 _____________ Shares
---
FOR VALUE RECEIVED, NORTH AMERICAN VACCINE, INC. (the "Company"), a
Canadian corporation, hereby certifies that BioChem Pharma Inc. or its permitted
assigns (the "Holder") is entitled to purchase from the Company, at any time or
from time to time after the date set forth on the signature page, but prior to
5:00 p.m. on ___________, 200_, _________________ (_______) fully paid and
non-assessable common shares, no par value, of the Company for an aggregate
purchase price of $____________ (computed on the basis of $_____ per share).
(Hereinafter, (i) said common shares, together with any other equity securities
which may be issued by the Company in substitution therefor, are referred to as
the "Common Shares":, (ii) the Common Shares purchasable hereunder are referred
to as the "Warrant Shares", (iii) the aggregate purchase price payable hereunder
for the Warrant Shares is referred to as the "Aggregate Warrant Price", (iv) the
price payable hereunder for each of the Warrant Shares, as adjusted in the
manner set forth in Section 3, is referred to as the "Per Share Warrant Price"
and (v) this Warrant and all warrants hereafter issued in exchange or
substitution for this Warrant are referred to as the "Warrants") The Aggregate
Warrant Price is not subject to adjustment. The Per Share Warrant Price and the
number of Warrant Shares are subject to adjustment as hereinafter provided.
1. EXERCISE OF WARRANT. This Warrant may be exercised, in whole at any
time or in part from time to time (such partial exercises to be in amounts of
not less than 1,000 Warrant Shares), on and after the date set forth on the
signature page, but prior to 5:00 p.m. on _____, 200_, by the Holder of this
Warrant by the surrender of this Warrant (with the subscription form at the end
hereof duly executed) at the principal office of the Company in Columbia, MD
together with proper payment of the Aggregate Warrant Price applicable on such
date, or the proportionate part thereof if this Warrant is exercised in part.
Payment for Warrant Shares shall be made by (i) check payable to the order of
the Company, (ii) wire transfer to an account designated by and in the name of
the Company, (iii) by delivery to the Company of debt securities for which it is
the issuer and bound to make payment in the stated principal amount, where the
principal amount on such debt security delivered to the Company for retirement
is equal to the Aggregate Warrant Price; or (iv) by any combination of the
methods set forth in (i) through (iii), above. If this Warrant is exercised in
part, this Warrant must be exercised for a number of whole Warrant Shares, and
the Holder is entitled to receive a new Warrant covering the number of Warrant
Shares in respect of which this Warrant has not been exercised and setting forth
the proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such surrender of this Warrant, the Company will issue a
certificate or certificates in the name of the Holder for the largest number of
whole Warrant Shares to which the Holder shall be entitled and, if this Warrant
is exercised in whole, in lieu of any fractional Warrant Share to which the
Holder shall be entitled, cash equal to the fair value of such fractional share
(determined in such reasonable manner as the Board of Directors of the Company
shall determine).
1
<PAGE>
2. RESERVATION OF WARRANT SHARES. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and
reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the Warrant Shares free and clear of all restrictions
on sale or transfer (except as may arise under applicable securities laws) and
free and clear of all preemptive rights.
3. PROTECTION AGAINST DILUTION. (a) If, at any time or from time to time
after the date of this Warrant, the Company shall (i) issue to the holders of
the Common Shares any Common Shares by way of a stock dividend; (ii) subdivide
its outstanding Common Shares into a greater number of shares; (iii) combine its
outstanding number of Common Shares into a smaller number (i.e., a reverse stock
split); or (iv) issue by reclassification of its Common Shares any shares of
capital stock of the Company then, and in each such case, the Per Share Warrant
Price in effect immediately prior to the date of such action shall be adjusted,
or further adjusted, to a price (to the nearest cent) determined by dividing (x)
an amount equal to the number of Common Shares outstanding immediately prior to
such issuance multiplied by the Per Share Warrant Price in effect immediately
prior to such issuance by (y) the total number of Common Shares outstanding
immediately after such issuance. Upon each adjustment in the Per Share Warrant
Price resulting from a stock split or stock dividend, the number of Warrant
Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per
Share Warrant Price in effect immediately after such adjustment. Notice of each
such adjustment and each such readjustment shall be forthwith mailed to the
Holder.
(b) If the Company shall be consolidated with or merged into another
corporation, or shall sell all or substantially all of its assets as part of a
reorganization to which the Company is a party within the meaning of the
Internal Revenue Code of 1986, as presently in effect, or shall issue a security
convertible into its Common Shares as a dividend on its Common Shares, each
Warrant Share shall be replaced for the purposes hereof by the securities or
properties issuable or distributed in respect of one Common Share upon such
consolidation, merger, sale, reclassification or reorganization, and adequate
provisions to that effect shall be made at the time thereof. Notice of such
consolidation, merger, sale, reclassification or reorganization, and of said
provisions so proposed to be made, shall be mailed to the Holder not less than
15 days prior to such event.
(c) If the Board of Directors of the Company shall declare any dividend or
other distribution in cash with respect to the Common Shares, other than out of
surplus, the Company shall mail notice thereof to the Holder not less than 15
days prior to the record date fixed for determining shareholders entitled to
participate in such dividend or other distribution.
(d) If, during the term of this Warrant, the Company shall issue or sell
its Common Shares for a consideration per share less than the Per Share Warrant
Price immediately prior to the time of such issue or sale, then forthwith upon
such issue or sale, the Per Share Warrant Price in effect immediately prior to
such issue or sale shall be reduced to the lower of the prices (calculated to
the nearest cent) determined as follows:
(1) by dividing (A) an amount equal to the sum of (i) the number of
shares of Common Stock outstanding immediately prior to such issue or sale
multiplied by the then-existing Per Share Warrant Price, and (ii) the
consideration, if any, received by the Company upon such issue or sale, by (B)
the total number of Common Shares outstanding immediately after such issue or
sale; and
(2) by multiplying the Per Share Warrant Price in effect immediately
prior to the time of such issue or sale by a fraction, the numerator of which
shall be (A) the sum of (i) the number of Common Shares outstanding immediately
prior to such issue or sale multiplied by the market price immediately prior to
such issue or sale; and (ii) the consideration received by the Company upon such
sale, divided by (B) the total number of Common Shares outstanding immediately
after such issue or sale, and the denominator of which shall be the market price
immediately prior to such issue or sale.
4. FULLY PAID SHARES; TAXES. The Company agrees that the Common Shares
represented by each and every certificate for Warrant Shares delivered on the
exercise of this Warrant shall, at the time of such delivery, be validly issued
2
<PAGE>
and outstanding, fully paid and non-assessable. The Company further covenants
and agrees that it will pay, when due and payable, any and all Federal and state
stamp, original issue or similar taxes which may be payable in respect of the
issue of any Warrant Share or certificate therefor.
5. TRANSFERABILITY. This Warrant and the Warrant Shares shall not be
sold, transferred, assigned or hypothecated by the Holder except (i) pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, and qualification for sale under all other applicable state and
provincial securities rules and regulations [collectively the "Securities
Acts"]; or (ii) in full compliance with all requirements necessary to establish
an exemption from the registration requirements of the Securities Acts. In order
to properly establish compliance with (ii), above, the Company shall be entitled
to request and receive in advance of authorizing any sale, transfer, assignment
or hypothecation of this Warrant or any of the Warrant Shares: (x) appropriate
transferor and transferee representation letters supporting a claimed expemption
from registration requirements of the Securities Acts; (y) an opinion of counsel
for the holder of the Warrant and/or Warrant Shares reasonably satisfactory to
the Company that the proposed transfer from the holder of the Warrant and/or
Warrant Shares to the transferee is exempt from the registration requirements of
the Securities Act; and (z) such other documentation, representations and
filings as may be reasonably required by counsel in order to issue the foregoing
opinion. The Company may treat the registered holder of this Warrant as it
appears on the Company's books at any time as the Holder for all purposes.
6. LOSS, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company shall
execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
7. WARRANT HOLDER NOT SHAREHOLDER. Except as otherwise provided herein,
this Warrant does not confer upon the Holder any right to vote or to consent or
to receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
8. COMMUNICATION. No notice or other communication under this Warrant
shall be effective unless, but any notice or other communication shall be
effective and shall be deemed to have been given if, the same is in writing and
is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at North American Vaccine, Inc., 10150 Old Columbia Road,
Columbia, MD 21046 Attention: Vice President-Finance, or such other address as
the Company has designated in writing to the Holder, or
(b) the Holder at BioChem Pharma Inc., 275 Armand Frappier Boulevard,
Laval, H7V 4A7 Quebec, Canada Attention: Executive Vice President-Investments &
Subsidiaries, or such other address as the Holder has designated in writing to
the Company.
9. HEADINGS. The headings of this Warrant have been inserted as a matter
of convenience and shall not affect the construction hereof.
10. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, NORTH AMERICAN VACCINE, INC. has caused this Warrant
to be signed by its Chief Executive Officer and President and its corporate seal
to be hereunto affixed and attested by its Secretary this ____ day of July 1999.
ATTEST: NORTH AMERICAN VACCINE, INC.
_____________________________ By: _______________________________
[Corporate Seal] Randal Chase
Chief Executive Officer & President
4
<PAGE>
SUMMARY OF PRINCIPAL TERMS AND CONDITIONS
-----------------------------------------
NORTH AMERICAN VACCINE INC.
JUNE 28, 1999
TERM SHEET
THE TERMS AND CONDITIONS SET FORTH HEREIN ARE FOR DISCUSSION PURPOSES ONLY AND
MAY NOT BE CONSTRUED IN ANY WAY TO REPRESENT A COMMITMENT BY ROYAL BANK OF
CANADA TO PROVIDE CREDIT OR TO ARRANGE A FACILITY. THIS SUMMARY OF INDICATIVE
TERMS AND CONDITIONS IS NOT INTENDED TO COVER ALL OF THE TERMS AND CONDITIONS OF
A DEFINITIVE TERM SHEET AND RELATED DOCUMENTATION THAT WILL BE NEGOTIATED IN DUE
COURSE. THIS DOCUMENT IS CONFIDENTIAL AND IS FOR INTERNAL DISCUSSION PURPOSES
ONLY.
BORROWER: North American Vaccine Inc., a corporation organized
under the laws of Canada ("the Borrower")
LENDERS: Royal Bank of Canada (the "Lender").
PURPOSE: Bridge capital market debt or equity issue.
CREDIT FACILITY: Up to a maximum of US$6,000,000 committed revolving
operating loan (the "Operating Loan").
AVAILABILITY: Available by way of US rate loans ("USLoans") and/or
Libor loans ("LIBOR"). Libor loans must be for a minimum
of $US500,000 and in whole multiples of $US100,000; 2
days notice prior to funding.
INTEREST RATES: US Base rate + 265bp
Libor + 265bp
INTEREST
PAYMENT DATES: Interest periods for LIBOR Loans shall be, at the
Borrower's option, one, two or three months.
Interest on LIBOR Loans shall be payable on the last
business day of the applicable interest period for
such loans and, if earlier, the 90th day following
the commencement of such interest period. Interest
on Prime Loans shall be payable monthly in arrears.
REPAYMENT: No later than December 31, 1999.
MANDATORY
REPAYMENT: 100% of any debt or equity issue above $US21,000,000
to be applied as a permanent reduction of the Credit
Facility.
<PAGE>
"NORTH AMERICAN VACCINE, INC. - JUNE 28, 1999" 2
SECURITY: Guarantee and Postponement of Claims for
$US6,000,000 from Biochem Pharma Inc. and Biochem
Pharma Holdings Inc. in favour of the Borrower.
DOCUMENTATION: Letter loan agreement signed by the Borrower
CONDITIONS
PRECEDENT: The obligation of the Bank to make available the
Borrowings to the Borrower is subject to and
conditional upon:
a) Satisfactory credit documentation including
receipt of all necessary closing certificates
required by the Lender, including legal opinion
and security documentation.
b) Satisfactory review of Y2K issue.
EVIDENCE OF
INDEBTEDNESS: The Bank shall open and maintain at the Branch of
Account accounts and records evidencing the
Borrowings made available to the Borrower by the Bank
under this agreement. The Bank shall record the
principal amount of such Borrowings, the payment of
principal and interest on account of the loans, and
all other amounts becoming due to the Bank under this
agreement.
The Bank's accounts and records constitute, in the
absence of manifest error, prima facie evidence of the
indebtedness of the Borrower to the Bank pursuant to
this agreement.
The Borrower authorises and directs the Bank to
automatically debit, by mechanical, electronic or manual
means, any bank account of the Borrower for all amounts
payable under this agreement, including but not limited
to, the repayment of principal and the payment of
interest, fees and all charges for the keeping of such
bank accounts.
REPRESENTATIONS
AND WARRANTIES: Borrower shall provide representations and warranties
as customary for a transaction of this nature.
AFFIRMATIVE
COVENANTS: The Borrower shall be subject to affirmative
covenants as customary for a transaction of this
nature, including, without limitation:
1. Reporting requirements on the Borrower for annual
budgets, audited annual financial statements and
company-prepared monthly financial statements.
2. Maintenance of a program of insurance for the
Borrower consistent with industry practice.
NEGATIVE
COVENANTS: The Borrower shall be subject to negative covenants
as customary for a transaction of this nature,
including, without limitation:
<PAGE>
"NORTH AMERICAN VACCINE, INC. - JUNE 28, 1999" 3
1. Prohibitions on any payments or capital
distributions.
EVENTS OF
DEFAULT: The Borrower shall be subject to events of default as
customary for a transaction of this nature,
including, without limitation:
1. Change of ownership whereby Biochem Pharma Inc.
cease to own at least (TO BE DETERMINED)
outstanding and issued voting shares of the
Borrower.
FEES AND EXPENSES: The Borrower will pay all reasonable out of pocket
fees and expenses of the Lender in connection with
consummation of the Agreement.
ROYAL BANK
- --------------------------------------------------------------------------------
R.W. SMITH ROYAL BANK OF CANADA
Senior Manager Multinational Accounts, Quebec Headquarters
1 Place Ville-Marie, 8th Floor, West Wing
P.O. Box 6001
Montreal, Quebec H3C 3A9
July 12, 1999
Tel: (514) 874-2815
Fax: (514) 874-5315
Mr. Lawrence J. Hineline
Vice President - Finance,
C/O NORTH AMERICAN VACCINE INC.
10150 Old Columbia Road
Columbia, MD
21046-2358
Dear Larry:
SUBJECT: OFFER TO FINANCE
Further to our recent discussions, we are pleased to offer you financing subject
to the following terms and conditions:
BORROWER: North American Vaccine Inc., a corporation organised
under the laws of Canada. ("the Borrower")
LENDERS: Royal Bank of Canada (the "Lender").
PURPOSE: Bridge capital market debt or equity issue.
CREDIT FACILITY: Up to a maximum of US$6,000,000 committed revolving
operating loan (the "Operating Loan").
AVAILABILITY: Available by way of US Base Rate loans ("US Loans")
and/or Libor loans ("LIBOR").
INTEREST RATES: US Base Rate + 265bp
Libor + 265bp
The expression "US Base Rate" means the annual rate of
interest announced by the Bank from time to time as its
reference rate then in effect for determining interest
rates on U.S. dollar commercial loans made by the Bank
in Canada.
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /2
INTEREST RATES: (cont'd)
The Borrower shall pay outstanding accrued interest
monthly on the date fixed by the Bank. Interest shall be
calculated on the daily principal balance at the
aforementioned annual interest rates based on the actual
number of calendar days elapsed during the period in
which interest is calculated, divided by 365. The annual
rates of interest, which correspond to the rates
calculated as aforesaid, are the rates so determined
multiplied by the actual number of days in a calendar
year and divided by 365. Outstanding interest payable
bears interest at the rate of interest applicable to the
relative loan and is payable on demand. Interest on US
Loans shall be payable monthly in arrears.
Interest periods for LIBOR Loans shall be, at the
Borrower's option, one, two or three months. Interest on
LIBOR Loans shall be payable on the last business day of
the applicable interest period for such loans and, if
earlier, the 90th day following the commencement of such
interest period. LIBOR Loans must be for a minimum of
$US500,000 and in whole multiples of $US100,000. Two
business days prior to drawdown or rollover, the
Borrower shall advice the Bank of the next applicable
LIBOR interest period.
REPAYMENT: December 31, 1999.
MANDATORY
REPAYMENT: 100% of any debt or equity issue above $US21,000,000
to be applied as a permanent reduction of the Credit
Facility.
SECURITY: Guarantee and Postponement of Claims for $US6,000,000
from Biochem Pharma Inc. and Biochem Pharma Holdings
Inc. in favour of the Borrower.
DOCUMENTATION: Letter loan agreement signed by the Borrower, Biochem
Pharma Inc. and Biochem Pharma Holdings Inc..
CONDITIONS
PRECEDENT: The obligation of the Bank to make available the
Borrowings to the Borrower is subject to and conditional
upon:
a) Satisfactory credit documentation including
receipt of all necessary closing certificates
required by the Lender, including legal opinion
and security documentation.
b) Satisfactory review of Y2K issue.
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /3
COVENANTS: The Borrower covenants with the Bank as follows:
a) The Borrower will deliver to the Bank such
financial and other information as the Bank may
reasonably require, including:
(i) Audited annual financial statements of the
Borrower within 90 days of its fiscal
year-end;
(ii) Annual budget of the Borrower within 90 days
of its fiscal year-end;
(iii)A monthly in-house financial statement of
the Borrower within 30 days of month-end.
b) The Borrower will promptly pay, when due, all
income and other taxes payable.
c) The Borrower agrees to remit, as prescribed under
the Income Tax Act (Canada), the Taxation Act
(Quebec) and any other applicable fiscal
legislation, all deductions and withholdings made
by the Borrower, as they fall due and to notify
the Bank immediately upon failure to do so.
d) The Borrower shall maintain of an insurance
program consistent with industry practice.
e) The Borrower shall not declare or pay dividends on
the common or preferred shares of its capital
without the prior written approval of the Bank.
PROVISIONS REGARDING
THE ENVIRONMENT:
a) The Borrower declares to the Bank that as of date
hereof:
- it fully complies with environmental
protection laws, regulations, bylaws and
other requirements applicable to its property
and activities;
- it has obtained the environmental protection
certificates, approvals, permits,
authorisations and orders required for the
use of its property and for carrying out its
activities, if applicable;
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /4
PROVISIONS REGARDING
THE ENVIRONMENT: (cont'd)
- no notice, demand, ordinance, lawsuit or
complaint was brought against it concerning
environmental protection;
- to its knowledge, there is no circumstance
which may give rise to the revocation of the
aforesaid certificates, approvals, permits,
authorisations and orders or to the issue of
a notice, demand, ordinance, lawsuit or
complaint as aforesaid, except for those that
it fully disclosed to the Bank in writing.
b) The Borrower shall comply strictly and in all
respects with the requirements of environmental
protection laws, regulations, bylaws and other
requirements applicable to its property and
activities and shall notify the Bank immediately
in the event of any release or discovery of any
contaminant upon, under, over or within its
property or any contiguous real property or any
real property on or near which a contaminant could
reasonably be anticipated to be released that may
affect its property and activities. The Borrower
shall promptly forward to the Bank copies of all
notices, permits, orders, demands or other
documents and reports in connection with any
release or the presence of any contaminant or any
matters relating to environmental protection laws
or otherwise as they affect its property and
activities.
c) The Borrower shall provide the Bank, upon demand
and at the Borrower's expense, with all the
information that the Bank may reasonably require
regarding the environmental situation of the
Borrower, notably concerning the Borrower's
activities, moveable and immovable property, and
all contiguous property to its properties, if
applicable, including an environmental audit
report prepared by an environmental engineering
firm acceptable to the Bank. It will be reasonable
for the Bank to periodically request from the
Borrower a confirmation that the statements
regarding the environment contained herein are
still true and that as of the date of such
confirmation, no event occurred that may affect in
any way its property and activities insofar as
environmental protection is concerned.
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /5
PROVISIONS REGARDING
THE ENVIRONMENT: (cont'd)
d) The Borrower shall allow the Bank and its agents
access to its property or to any information
regarding its property or activities to enable the
Bank to assess the risk that the Borrower's
environmental situation represents to the Bank, to
anticipate its effect or to take corrective
action.
e) The Borrower shall indemnify and hold the Bank
harmless against and from any and all claims,
suits, actions, damages, costs, judgements or
other expenses sustained or incurred by the Bank
either in the exercise of the rights conferred on
the Bank herein, or as beneficiary of security
against the property of the Borrower, or under any
other circumstance relating to environmental
protection affecting the Borrower's property and
activities.
All above covenants shall remain in force for the
benefit of the Bank regardless of the date advances are
made or security taken.
INDEMNITY: If, in the opinion of the Bank, the Bank is now or
becomes subject to, or if there is a change in:
a) any reserve or similar requirement against the
assets of the Bank, deposits made with or for the
account of, credit extended by, or any acquisition
of funds for the extension of credit by, the Bank;
b) any reserve or similar requirement with respect to
all or any part of the credit used by the Borrower
hereunder or any unused portion of the credit
facilities;
c) taxation, or the basis of taxation, of any
payments due to the Bank hereunder (except for
taxes on the overall net income of the Bank);
d) any requirement relating to capital adequacy; or
e) any other condition prescribed by law or by the
interpretation thereof by competent authority, or
any other condition, whether or not having the
force of law, with which financial institutions
carrying on business in Canada are or were
generally complying;
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /6
INDEMNITY: (cont'd)
which in the sole determination of the Bank,
causes:
(i) an additional cost with respect to the
credit facilities,
(ii) a reduction in the revenues derived
therefrom, or
(iii) a reduction in the effective return
hereunder or on the Bank's capital to a
level below that which the Bank could have
otherwise achieved (using any reasonable
averaging and attribution method),
then, in any such event, the Borrower shall pay to the
Bank, on demand, the amount which the Bank considers
sufficient to compensate that additional cost, reduction
in revenues, or reduction in rate of return. Absent
manifest error, the amount established by the Bank shall
be conclusive.
EVENTS OF DEFAULT: Without limiting its right to demand at any time
payment of sums which are payable on demand, the Bank
may, to the extent permitted by and in compliance with
applicable law, immediately terminate the right of the
Borrower to make further borrowings under the credit
facilities, and demand immediate payment of all sums
owing thereunder, including accrued interest, and
realise on all or any portion of the security granted in
its favor, upon the occurrence of any of the following
events:
a) failure by the Borrower to pay the principal,
interest or any other amount when due;
b) failure by the Borrower to observe or satisfy any
covenant, condition or provision in this agreement
or in any other agreement with the Bank, or in any
security document established in favor of the
Bank;
c) if the Borrower becomes insolvent, files a
notice of intention to make a proposal to its
creditors under the BANKRUPTCY AND INSOLVENCY ACT,
is declared bankrupt, makes an assignment of its
property for the benefit of its creditors, or
makes a bulk sale of any part of its assets
without the prior consent of the Bank;
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /7
EVENTS OF DEFAULT: (cont'd)
d) if any step is taken with respect to a compromise
or arrangement with the creditors of the Borrower,
or to have the Borrower declared bankrupt or wound
up, or if a receiver is appointed with respect to
any part of the property encumbered by security in
favor of the Bank, or if any encumbrances takes
possession of any part of the Borrower's assets;
e) if in the opinion of the Bank, there occurs:
(i) a material adverse change in the Borrower's
financial condition;
(ii) an unacceptable change in the ownership of
the capital stock of the Borrower;
(iii) the Borrower is subject to legal proceedings
detrimental to its affairs;
f) the breach of any law, regulation, bylaw or
requirement whether federal, provincial,
municipal, or otherwise, concerning pollution of
the environment, toxic materials, or other
environmental hazards, or public health and
safety, affecting any of the Borrower's property
or activities.
g) change of ownership whereby Biochem Pharma Inc.
ceases to own at least 30% of the issued and
outstanding voting shares of the Borrower.
EVIDENCE OF
INDEBTEDNESS: The Bank shall open and maintain at the Branch of
Account accounts and records evidencing the Borrowings
made available to the Borrower by the Bank under this
agreement. The Bank shall record the principal amount of
such Borrowings, the payment of principal and interest
on account of the loans, and all other amounts becoming
due to the Bank under this agreement.
The Bank's accounts and records constitute, in the
absence of manifest error, prima facie evidence of the
indebtedness of the Borrower to the Bank pursuant to
this agreement.
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /8
EVIDENCE OF
INDEBTEDNESS: (cont'd)
The Borrower authorises and directs the Bank to
automatically debit, by mechanical, electronic or manual
means, any bank account of the Borrower for all amounts
payable under this agreement, including but not limited
to, the repayment of principal and the payment of
interest, fees and all charges for the keeping of such
bank accounts.
FEES AND EXPENSES: The Borrower will pay all reasonable out of pocket
fees and expenses of the Lender in connection with
consummation of the Agreement.
GOVERNING LAW: This agreement shall be governed by the laws in force
in the province of Quebec.
This Offer to Finance will be open for acceptance up to and including July
30,1999 after which time it will be null and void.
We trust the foregoing is satisfactory to you and request that you indicate your
acceptance by signing and returning the duplicate of this letter.
Yours truly,
ROYAL BANK OF CANADA
/s/ Rod Smith
- ----------------------------------
Read and accepted on this 15th day of July 1999.
----
NORTH AMERICAN VACCINE INC.
By: /s/ Lawrence J. Hineline
-----------------------------
Name: Lawrence J. Hineline
Title: Vice President - Finance
By: /s/ Daniel J. Abdun-Nabi
-----------------------------
Name: Daniel J. Abdun-Nabi
Title: Sr. Vice President
<PAGE>
"NORTH AMERICAN VACCINE INC. - JULY 12, 1999" /9
Acknowledged on this 14th day of July 1999.
----
BIOCHEM PHARMA INC.
By: /s/ Frederick J. Andrew
-----------------------------
Name: Frederick J. Andrew
Title: Chief Financial Officer
By: /s/ Francois Legault
-----------------------------
Name: Francois Legault
Title: Executive V.P. Corporate Development and Investments
BIOCHEM PHARMA HOLDINGS INC.
By: /s/ Frederick J. Andrew
----------------------------
Name: Frederick J. Andrew
Title: Treasurer
By: /s/ Francois Legault
----------------------------
Name: Francois Legault
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000856573
<NAME> NORTH AMERICAN VACCINE INC. AND SUBSIDIARIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,120
<SECURITIES> 0
<RECEIVABLES> 1,144
<ALLOWANCES> 0
<INVENTORY> 4,730
<CURRENT-ASSETS> 9,028
<PP&E> 62,031
<DEPRECIATION> 37,767
<TOTAL-ASSETS> 40,116
<CURRENT-LIABILITIES> 11,715
<BONDS> 100,326
0
6,538
<COMMON> 90,387
<OTHER-SE> (170,507)
<TOTAL-LIABILITY-AND-EQUITY> 40,116
<SALES> 2,416
<TOTAL-REVENUES> 3,204
<CGS> 0
<TOTAL-COSTS> 23,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,664
<INCOME-PRETAX> (23,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,245)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
