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 MARCH 31, 2000
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.
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(Exact name of registrant as specified in its charter)
CANADA 98-0121241
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10150 OLD COLUMBIA ROAD, COLUMBIA, MARYLAND 21046
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 309-7100
FORMER ADDRESS:
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(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 MAY 12, 2000 - 32,870,350 SHARES
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TABLE OF CONTENTS
PAGE NUMBER
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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.... 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 30
SIGNATURES .............................................................. 31
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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, 1999. 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 months
ended March 31, 2000, will not necessarily be indicative of the results for the
entire fiscal year ending December 31, 2000.
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) MARCH 31, DECEMBER 31,
2000 1999
-------------------- ---------------------
<S> <C> <C>
ASSETS (UNAUDITED)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 937 $ 563
Accounts receivable 494 3,537
Inventory 2,773 3,285
Prepaid expenses and other current assets 1,213 753
-------------------- ---------------------
Total current assets 5,417 8,138
Property, plant and equipment, net 18,524 19,668
Deferred financing costs, net 1,644 1,773
Cash restricted for lease obligation 2,734 3,185
Other assets 821 827
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TOTAL ASSETS $ 29,140 $ 33,591
==================== =====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,291 $ 5,456
Short term debt 25,500 16,000
Obligation under capital leases, current portion 1,936 2,400
Other current liabilities 10,156 7,208
-------------------- ---------------------
Total current liabilities 41,883 31,064
6.5% Convertible subordinated notes, due May 1, 2003 75,326 75,326
4.5% Convertible secured notes, due November 13, 2003 25,000 25,000
Obligation under capital leases, net of current portion 67 79
Deferred rent credits, net of current portion 277 232
-------------------- ---------------------
Total liabilities 142,553 131,701
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. $3.5 million in the aggregate) in liquidation 6,538 6,538
Common stock, no par value; unlimited shares authorized; issued
32,870,350 shares at March 31, 2000 and December 31, 1999 90,550 90,550
Additional paid-in capital 13,593 13,593
Accumulated deficit (224,094) (208,791)
-------------------- ---------------------
Total shareholders' deficit (113,413) (98,110)
-------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 29,140 $ 33,591
==================== =====================
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
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<S> <C> <C>
REVENUES:
Product sales $ 526 $ 1,159
Marketing, research and development agreements - 365
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Total revenues 526 1,524
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OPERATING EXPENSES:
Production and cost of sales 5,286 4,790
Research and development 4,872 3,768
Selling, general and administrative 3,649 2,549
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Total operating expenses 13,807 11,107
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OPERATING LOSS (13,281) (9,583)
OTHER INCOME (EXPENSE):
Gain on sale of investment in affiliate - -
Interest and dividend income 64 254
Interest expense (2,086) (1,878)
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NET LOSS $(15,303) $ (11,207)
========== ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.47) $ (0.35)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 32,870 32,271
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUM- SHARE-
---------------------- ------------------------- PAID-IN ULATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- ----------- ------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999 2,000 $ 6,538 32,870 $ 90,550 $ 13,593 $ (208,791) $ (98,110)
Net loss - - - - - (15,303) (15,303)
----------
Comprehensive loss (15,303)
Balance, ---------- ----------- ------------- ----------- -------------- ------------ ------------
March 31, 2000 2,000 $ 6,538 32,870 $ 90,550 $ 13,593 $ (224,094) $(113,413)
========== =========== ============= =========== ============== ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,303) $ (10,255)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of investment in affiliate - (952)
Loss on disposal of property, plant, and equipment 9 -
Depreciation and amortization 1,284 1,576
Amortization and reduction of deferred financing costs 129 142
Contribution of common stock to 401(k) plan - 86
(Increase) decrease in other assets 6 (100)
Increase in deferred rent 45 17
Cash flows provided by (used in) other working capital items 4,878 (459)
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Net cash used in operating activities (8,952) (9,945)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (149) (1,134)
Proceeds from sale of investment in affiliate - 1,581
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Net cash provided by (used in) investing activities (149) 447
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities 9,500 -
Proceeds from exercises of stock options, net - 169
Principal payments on capital lease obligations (476) (544)
Cash restricted for capital lease obligation 451 407
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Net cash provided by financing activities 9,475 32
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 374 (9,466)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 563 22,953
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 937 $ 13,487
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
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CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:
(Increase) decrease in:
Accounts receivable $ 3,043 $ 88
Inventory 512 (575)
Prepaid expenses and other current assets (460) (265)
Increase (decrease) in:
Accounts payable (1,165) (849)
Deferred revenue and other current liabilities 2,948 1,142
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Net cash provided by (used in) other working capital items $ 4,878 $ (459)
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,086 $ 98
========== ==========
Equipment acquired through capital lease $ - $ 260
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
The Company is engaged in the research, development, manufacture and sale of
vaccines for the prevention of infectious diseases. The Company's mission is to
develop and market superior vaccine products intended to prevent infectious
diseases, improve the quality of life of children and adults and lower total
health care costs. The Company currently has three licensed products that
contain its acellular pertussis vaccine, two of which are in Europe, and
Certiva(REGISTERED) (its combined diphtheria, tetanus and acellular pertussis
(DTaP) vaccine for infants and children) in the U.S., as well as 12 other
products in various stages of development to prevent meningococcal,
streptococcal, pneumococcal, E. coli, and HAEMOPHILUS INFLUENZAE type b
infections. The Company's present focus is on the introduction in 2000 of
NeisVac-C(TRADEMARK), its vaccine for the prevention of meningitis, in the
United Kingdom (U.K.) upon receipt of U.K. regulatory approval.
In November 1999, the Company signed a definitive Share Exchange Agreement (the
"Share Exchange Agreement") to be acquired by Baxter International Inc.
("Baxter") in a taxable stock-for-stock transaction pursuant to a plan of
arrangement under the Canada Business Corporations Act ("CBCA") valued at
approximately $390 million. The Share Exchange Agreement was modified in April
2000. Under the modified Share Exchange Agreement, the Company's shareholders
will receive $6.73 per share, comprised of $6.70 of Baxter common stock and
$0.03 in cash. Consistent with the original Share Exchange Agreement, the number
of Baxter shares to be issued to the Company's shareholders will be set based
upon the average closing sale price of Baxter common stock for the ten trading
days ending on the fifth trading day prior to consummation of the transaction.
As part of the transaction, Baxter has agreed to purchase, as promptly as
practicable after the closing, the Company's outstanding 6.50% Convertible
Subordinated Notes due May 1, 2003 (the "6.5% Notes") and its 4.5% Convertible
Secured Notes due November 13, 2003 (the "4.5% Notes") pursuant to the terms of
their respective indentures.
The date by which the transaction is to be completed has been extended from May
31, 2000 to June 30, 2000. Under the amended Share Exchange Agreement, the
Company will commit $1.3 million to be paid in July 2000 to assist it in
retaining employees through June 30, 2000.
The Company has failed to satisfy certain conditions to closing under the
original Share Exchange Agreement. These and the other conditions to closing
have not been modified or waived by the amendment to the Share Exchange
Agreement. In addition, the transaction is still subject to shareholder
approval. As a result, even if the acquisition transaction is approved by the
Company's shareholders, Baxter will have no obligation to consummate the
acquisition transaction. Rather, Baxter will have the option, exercisable in its
discretion, prior to June 30, 2000 to either waive any non-compliance with
conditions to closing and close the transaction or terminate the Share Exchange
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Agreement, as amended. Either party, if it is not in breach of the Share
Exchange Agreement, as amended, may terminate the transaction if it does not
close by June 30, 2000. As under the original Share Exchange Agreement, the
Company's Board of Directors will recommend that the shareholders vote in favor
of the acquisition transaction. Pursuant to a shareholder agreement, as amended,
NAVA shareholders beneficially owning approximately 44% of NAVA's common shares
and 100% of NAVA's preferred shares outstanding as of May 8, 2000 (other than
NAVA shares issuable upon exercise of options or warrants or conversion of
preferred stock or debt) have agreed to vote all of their NAVA common and NAVA
preferred shares for approval of the arrangement resolution and, thereby, the
arrangement. In addition, Baxter beneficially owns approximately 2% of NAVA's
common shares outstanding as of May 8, 2000, which it will vote in favor of the
arrangement resolution and, thereby, the arrangement. The Company intends to
hold a special shareholders meeting in mid-June to approve the acquisition
transaction as promptly as practicable.
2. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF ACCOUNTING AND CURRENCY. The Company is a Canadian corporation
incorporated under the CBCA on August 31, 1989. The accompanying consolidated
financial statements have been prepared in conformity 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%
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
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.
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(D) SEGMENT REPORTING. The Company has determined that it currently does not
have reportable segments. Product sales in the United States were approximately
$526,000 and $796,000 million for the three months ended March 31, 2000 and
1999, respectively. Product sales to Europe were approximately $0 million and
$363,000 million for the three months ended March 31, 2000 and 1999,
respectively. All products are 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 September 1999, the Company completed a sale/leaseback of its only owned
facility. The approximately 31,000 square foot facility, which is used as a
warehousing and testing facility was sold for approximately $2.1 million with a
loss on the sale of $378,000. The lease for the facility is for an initial term
of ten years, with two five-year renewal options. The initial base annual rent
under the lease is approximately $237,000 with minimum annual escalations.
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. Costs attributable to
Certiva(REGISTERED) production under non-regulatory approved optimization
production processes are being expensed until regulatory approval is obtained
for such new processes. Costs to produce NeisVac-C(TRADEMARK), the Company's
vaccine for the prevention of meningitis, have been expensed until regulatory
approval is obtained. Any production costs incurred in excess of net realizable
value are expensed in the quarter in which they are incurred. Inventories
consist of the following:
March 31, December 31,
2000 1999
---------------------------
(in thousands)
Raw materials $ 2,240 $ 2,371
Work in process 84 745
Finished goods 449 169
-------- --------
Total $ 2,773 $ 3,285
======== ========
5. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
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March 31, December 31,
2000 1999
----------------------------
(in thousands)
Payroll and fringe benefits $ 4,253 $ 3,458
Accrued interest 2,582 1,069
Accrued taxes 533 833
Reserve for contract loss 720 720
Accrued consulting and professional fees 541 462
Accrued costs of clinical trials 437 245
Accrued insurance 517 45
Other accrued liabilities 573 376
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Total other current liabilities $ 10,156 $ 7,208
========= =========
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 credit and the corresponding restricted cash is $2.7 million at
March 31, 2000. The letter of credit will expire by its terms on November 1,
2000, at which time approximately $1.6 million will be released to the Company.
7. CONVERTIBLE DEBT
In June 1999, the Company retired $8.4 million principal amount of the 6.5%
Notes in exchange for 550,000 shares of Common Stock. As a result of the
transaction, the Company recognized a one-time non-cash debt conversion expense
of approximately $940,000, which was included in interest expense in the second
quarter of 1999. The principal balance of the outstanding notes was $75.3
million at March 31, 2000.
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8. LINES OF CREDIT/SUBSEQUENT EVENT
In July 1999, the Company obtained from a bank a $6 million revolving line of
credit originally maturing December 31, 1999. The interest rate on borrowings
under the line of credit is LIBOR plus 2.65%. BioChem, an affiliate of the
Company, has provided the guarantee for the line of credit, which will remain in
place until July 2001, unless there is a change of control such as the
contemplated acquisition by Baxter. Upon drawing down on the line of credit by
the Company, BioChem was entitled to receive warrants to purchase up to a total
of 750,000 shares of the Company's Common Stock. The warrants were issued by the
Company ratably as it drew down under the line of credit. Each warrant has 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 contains
anti-dilution provisions and registration rights among other provisions. The
Company drew down $6 million in 1999 under the revolving line of credit and
accordingly issued warrants to purchase 750,000 shares of Common Stock to
BioChem.
The Company recognized a total of approximately $1.6 million of interest expense
in the second half of 1999 calculated using the Black-Scholes pricing model
based upon the issuance of these warrants to purchase up to 750,000 shares of
common stock.
Upon reaching a definitive acquisition agreement with Baxter in November 1999,
to be acquired by Baxter, the Company finalized terms relating to a secured
revolving line of credit from Bank of America, N.A., which was guaranteed by
Baxter. The credit line was for $30 million at an interest rate of LIBOR plus
.625% and had a maturity of March 31, 2000. The line of credit was secured by
all of the Company's otherwise unencumbered assets, including patents, patent
applications and receivables. This line of credit was extended to April 17,
2000, and the $19.5 million outstanding at that time was repaid with part of the
proceeds from $45 million of new financing obtained on April 17, 2000. This new
financing provides up to $45 million in funding of which $40 million is being
provided by BioChem and up to $5 million by Dr. Phillip Frost through June 30,
2000 (collectively, "New Financing"). This New Financing includes the assignment
by Bank of America, N.A. to BioChem of the rights and obligations associated
with the approximately $19.5 million utilized by the Company under the $30
million line of credit provided by Bank of America. BioChem will provide the
remaining $20.5 million and Dr. Frost will provide an additional $5 million, if
needed. This New Financing is at a 15% interest rate and is subject to a
deferred financing fee of up to $11.25 million in the aggregate, which fee is
payable on the maturity date of the New Financing. The New Financing is secured
by the same collateral as under the Bank of America line of credit. Baxter has
the right to provide the final $5 million under the New Financing arrangements
in substitution for Dr. Frost and has a right of first offer to provide any
additional financing that the Company may require prior to June 30, 2000. Baxter
has consented to these interim financing arrangements and has been released from
its guarantee.
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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 FACTORS AFFECTING FUTURE REVENUES AND PROFITABILITY, THE
AVAILABILITY OF FUNDS UNDER EXISTING CREDIT FACILITIES, THE ABILITY TO SERVICE
THE COMPANY'S DEBT AND TO MEET THE COMPANY'S CASH FLOW NEEDS, PROSPECTS FOR
PRODUCTION CAPACITY, REDUCED PRODUCTION COSTS, AND THE ABILITY TO CAMPAIGN
PRODUCTS THROUGH ITS PRODUCTION FACILITY, LIKELIHOOD OF ADDITIONAL FUNDING FROM
FURTHER FINANCINGS OR UNDER ANY NEW LICENSE, MARKETING, DISTRIBUTION AND/OR
DEVELOPMENT AGREEMENTS, PROSPECTS OF AND TIMING FOR COMPLETING THE ACQUISITION
OF THE COMPANY, 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 CONSUMMATING THE
ACQUISITION OF THE COMPANY; 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 1999 ANNUAL REPORT ON
FORM 10-K, TO WHICH THE READER'S ATTENTION IS DIRECTED. THE AUDIT REPORT FOR THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999, AS PREPARED BY THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS, INDICATES THAT THERE IS SUBSTANTIAL
DOUBT AS TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.
BACKGROUND
The Company is engaged in the research, development, manufacture and
sale of vaccines for the prevention of infectious diseases. The Company's
mission is to develop and market superior vaccine products intended to prevent
infectious diseases, improve the quality of life of children and adults and
lower total health care costs. The Company currently has three licensed products
that contain its acellular pertussis vaccine, two of which are licensed in
Europe, and Certiva(REGISTERED) (its combined diphtheria, tetanus and acellular
pertussis (DTaP) vaccine for infants and children) which is licensed in the
U.S., as well as 12 other products in various stages of development to prevent
meningococcal, streptococcal, pneumococcal, E. coli, and HAEMOPHILUS INFLUENZAE
type b infections.
In November 1999, the Company signed a definitive Share Exchange
Agreement (the "Share Exchange Agreement") to be acquired by Baxter
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International Inc. ("Baxter") in a taxable stock-for-stock transaction pursuant
to a plan of arrangement under the Canada Business Corporations Act valued at
approximately $390 million. The Share Exchange Agreement was modified in April
2000. Under the modified Share Exchange Agreement, the Company's shareholders
will receive $6.73 per share, comprised of $6.70 of Baxter common stock and
$0.03 in cash. Consistent with the original Share Exchange Agreement, the number
of Baxter shares to be issued to the Company's shareholders will be set based
upon the average closing sale price of Baxter common stock for the ten trading
days ending on the fifth trading day prior to consummation of the transaction.
As part of the transaction, Baxter has agreed to purchase, as promptly as
practicable after the closing, the Company's outstanding 6.50% Convertible
Subordinated Notes due May 1, 2003 (the "6.5% Notes") and its 4.5% Convertible
Secured Notes due November 13, 2003 (the "4.5% Notes") pursuant to the terms of
their respective indentures.
The date by which the transaction is to be completed has been extended
from May 31, 2000 to June 30, 2000. Under the amended Share Exchange Agreement,
the Company will commit $1.3 million to be paid in July 2000 to assist it in
retaining employees through June 30, 2000.
The Company has failed to satisfy certain conditions to closing under
the original Share Exchange Agreement. These and the other conditions to closing
have not been modified or waived by the amendment to the Share Exchange
Agreement. In addition, the transaction is still subject to shareholder
approval. As a result, even if the acquisition transaction is approved by the
Company's shareholders, Baxter will have no obligation to consummate the
acquisition transaction. Rather, Baxter will have the option, exercisable in its
discretion, prior to June 30, 2000 to either waive any non-compliance with
conditions to closing and close the transaction or terminate the Share Exchange
Agreement, as amended. Either party, if it is not in breach of the Share
Exchange Agreement, as amended, may terminate the transaction if it does not
close by June 30, 2000. As under the original Share Exchange Agreement, the
Company's Board of Directors will recommend that the shareholders vote in favor
of the acquisition transaction. Pursuant to a shareholder agreement, as amended,
NAVA shareholders beneficially owning approximately 44% of NAVA's common shares
and 100% of NAVA's preferred shares outstanding as of May 8, 2000 (other than
NAVA shares issuable upon exercise of options or warrants or conversion of
preferred stock or debt) have agreed to vote all of their NAVA common and NAVA
preferred shares for approval of the arrangement resolution and, thereby, the
arrangement. In addition Baxter beneficially owns approximately 2% of NAVA's
common shares outstanding as of May 8, 2000, which it will vote in favor of the
arrangement resolution and, thereby, the arrangement. The Company intends to
hold a special shareholders meeting in mid-June to approve the acquisition
transaction as promptly as practicable.
Pursuant to a separate agreement, up to $45 million in funding for
Company operations is being provided by BioChem and Dr. Phillip Frost through
June 30, 2000 (collectively, "New Financing"). This New Financing includes the
assignment by Bank of America, N.A. to BioChem of the rights and obligations
associated with the approximately $19.5 million utilized by the Company under
the $30 million line of credit instituted in November 1999, which was provided
by Bank of America and guaranteed by Baxter. That line of credit was repaid with
proceeds from the New Financing. The Baxter guarantee expired on April 17, 2000.
That line of credit was secured by all of the Company's otherwise unencumbered
assets, including patents, patent applications, and receivables. This New
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Financing is at a 15% interest rate and is subject to a deferred financing fee
of up to $11.25 million in the aggregate, which fee is payable on the maturity
date of the New Financing. The New Financing is secured by the same collateral
as under the Bank of America line of credit. Baxter has the right to provide the
final $5 million under the New Financing arrangements in substitution for Dr.
Frost and has a right of first offer to provide any additional financing that
the Company may require prior to June 30, 2000. Baxter has consented to these
interim financing arrangements and has been released from its guarantee.
The Company may be required to pay Baxter a termination fee of $14
million and may be required to reimburse Baxter's out-of-pocket expenses up to
$1 million if the Share Exchange Agreement, as amended, is terminated under
specific circumstances. See "Liquidity Capital Resources; Outlook."
In connection with the Baxter transaction, the Company's present focus
is on the introduction of NeisVac-C(TRADEMARK) in the United Kingdom late second
or early third quarter of 2000. The NHS has committed to purchase 3 million
doses of NeisVac-C(TRADEMARK) in 2000 for approximately (pound)40 million (or
approximately $62 million at May 4, 2000), with shipments that were scheduled to
begin in April 2000, subject to UK regulatory approval and certain other
conditions. The Company filed its marketing authorization application with the
UK regulatory authorities on January 24, 2000 and is seeking approval of
NeisVac-C(TRADEMARK) for administration to children 12 months of age and older,
adolescents and adults. The Company did not meet the first delivery date in
April 2000 under the NHS contract. Currently, the Company expects to have
initial product quantities released and available for delivery to NHS late in
the second quarter of 2000, although there can be no assurances in this regard.
The Company has had informal discussions with NHS regarding the possible delays
in licensure and product delivery and believes that, based on these discussions,
the NHS would be willing to reschedule deliveries through the end of 2000 for
the entire 3 million doses, without penalty, if the regulatory approval for
NeisVac-C(TRADEMARK) was issued within a few months of April 2000, although
there can be no assurances in this regard.
With only one manufacturing facility, the Company currently must
alternate the production of its various products. During the fourth quarter of
1999, the Company commenced the change over from production of
Certiva(REGISTERED) and its acellular pertussis ("aP") vaccines to produce
NeisVac-C(TRADEMARK) in anticipation of its commercial launch of the product in
the U.K. Accordingly, the Company has been selling Certiva(REGISTERED) and its
aP vaccines out of limited inventories produced prior to the change over. The
Company expects to return to production of Certiva(REGISTERED) and aP vaccines
in 2000 once NeisVac-C(TRADEMARK) production requirements are completed.
The Company's revenues historically have been derived from product
sales of Certiva(REGISTERED) and the aP vaccines and from payments received
under marketing, research and development agreements. The product launch for
Certiva(REGISTERED), which was licensed by the FDA in July 1998, began in the
fourth quarter of 1998. The Company markets Certiva(REGISTERED) in the U.S. to
government purchasers, including state governments and the Centers for Disease
Control and Prevention ("CDC"). Under a distribution agreement, Abbott
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Laboratories ("Abbott") previously marketed Certiva(REGISTERED) to private
physicians and managed care markets in the United States; however, Abbott
terminated the agreement in September 1999. After Abbott's termination, the
Company has sold limited quantities of Certiva(REGISTERED) to non-government
purchasers through direct arrangements with distributors.
The Company also has derived product sales from sales of aP vaccines for use in
European formulations of Certiva(REGISTERED) and DTaP-IPV (polio) vaccines,
principally in Scandinavian countries within the territory of the Company's
European partner, SSI. Regulatory approvals for Certiva(REGISTERED)-EU and
DTaP-IPV were granted in 1996 in Sweden and Denmark, respectively. 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. Under a
marketing agreement between the Company and Chiron-Behring GmbH & Co. ("Chiron
Behring"), Chiron Behring was to market the DTaP-IPV vaccine in Germany and
Austria. In January 2000, the Company and Chiron Behring terminated the
marketing agreement in Germany and Austria for the Company's DTaP-IPV vaccine.
The Company does not expect to market DTaP-IPV in Germany and Austria until it
can secure alternative distribution arrangements.
Revenues from marketing, research and development agreements historically have
been derived principally from collaborations with Aventis Pasteur (formerly
Pasteur Merieux Connaught) and Abbott, both of which have been terminated. In
February 2000, Aventis Pasteur notified the Company that Aventis Pasteur was
exercising its option to terminate the license and clinical development
agreements for the Company's Group B meningococcal vaccine principally because
of a change in strategic direction by Aventis Pasteur. Under these agreements,
Aventis Pasteur reimbursed the Company for certain clinical development costs as
incurred and the Company also was entitled to milestone payments upon
achievement of prescribed events, principally measured by progress in the
regulatory process for the group B meningococcal vaccine. Under the marketing
agreement with Abbott, the Company received milestone payments upon the FDA
approval of Certiva(REGISTERED), and Abbott supported certain of the Company's
clinical development activities for the combination vaccines, such as the
DTaP-IPV and DTaP-IPV-Hib vaccines. Under the terms of the Share Exchange
Agreement, as amended, the Company currently cannot enter into any new or
alternative collaborative arrangements for third parties to distribute, research
or develop its products without Baxter's consent until either the transaction
with Baxter is completed or the Share Exchange Agreement, as amended, is
terminated.
The Company has a significant level of indebtedness. As of March 31,
2000, the Company's consolidated indebtedness and capitalized lease obligations
totaled approximately $142.6 million, including $75.3 million represented by the
6.5% Notes, $25 million represented by the 4.5% Notes, $6 million under a line
of credit guaranteed by BioChem, as more fully discussed below, and $19.5
million under a line of credit guaranteed by Baxter (which was subsequently
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assigned to BioChem in April 2000). See "Background" above. The Company's total
assets at March 31, 2000 were approximately $29.1 million.
The Company retired $8.4 million of the principal amount of the 6.5%
Notes in exchange for 550,000 shares of Common Stock in June 1999. The exchange
was privately negotiated with a single holder of the notes, and resulted in the
recognition of an approximately $940,000 one-time non-cash expense included in
interest expense for the quarter ended June 30, 1999.
In July 1999, the Company obtained a $6 million revolving line of
credit from a commercial bank at an interest rate of LIBOR plus 2.65%. The line
of credit currently matures on June 30, 2000 and is guaranteed by BioChem, an
affiliate of the Company. BioChem's guarantee will remain in place until July
2001, unless there is a change of control such as the contemplated acquisition
by Baxter. In return for the guarantee, the Company granted BioChem warrants to
purchase up to 750,000 shares of the Company's Common Stock at approximately
$5.14 per share ("Warrants"). Pursuant to a letter agreement, as amended,
regarding the Warrants, the Warrants expire upon consummation of the transaction
contemplated by the Share Exchange Agreement, as amended. During the second half
of 1999, the Company drew down the entire $6 million under the revolving line of
credit and accordingly issued Warrants to purchase 750,000 shares of Common
Stock to BioChem. A total of approximately $1.6 million of interest expense was
generated by the issuance of these Warrants and was recognized in total in the
last two quarters of 1999, beginning at the issuance date of the Warrants and
ending on December 31, 1999, the original repayment date for the line of credit.
The Company had 258 and 314 employees as of March 31, 2000 and 1999,
respectively.
RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31, 2000 AND 1999
In 2000, the Company recognized total revenue of $526,000, which was
from sales of Certiva(REGISTERED) in the U.S. Revenue in 1999 totaled $1.5
million of which approximately $363,000 was from sales of aP to SSI, $796,000
was from sales of Certiva(REGISTERED) in the U.S., and $365,000 from
collaborative agreements. Other than the aP supply agreement with SSI, the
Company currently has no revenue-generating collaborative agreements in place.
Production expenses were $5.3 million in 2000 compared to $4.8 million
in 1999. The increase in these expenses in 2000 is primarily attributable to:
the capitalizing of Certiva(REGISTERED) and aP production expenses in 1999,
which production expenses were not capitalized in 2000 due to the changeover to
NeisVac-C(TRADEMARK) production, and FDA post-marketing surveillance expenses.
Costs attributable to aP production under optimized production processes and
production of NeisVac-C(TRADEMARK) are being expensed until regulatory approval
is obtained for such new products and processes. See "Projected Results From
Operations."
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Research and development expenses were $4.9 million in 2000 compared to
$3.8 million in 1999. The increase is attributable primarily to contractor costs
incurred in the development of NeisVac-C(TRADEMARK) and higher clinical trials
expense offset in part by lower depreciation expenses related to the use of an
accelerated depreciation method for equipment acquired prior to 1998.
Selling, general and administrative expenses were $3.7 million in 2000
compared to $2.6 million in 1999. The increase was due primarily to $1.1 million
of accrued compensation expense related to an employee retention program.
In 1999, the Company recognized $952,000 of gain related to the sale of
an investment in an affiliate.
Interest and dividend income decreased to $64,000 in 2000 from $254,000
in 1999. This reduction is due primarily to a decrease in the average cash
balance.
Interest expense increased to $2.1 million in 2000 from $1.9 million in
1999. The increase is due primarily to increased debt as a result of the
borrowings under the lines of credit offset in part by principal payments made
on the equipment lease.
The factors cited above resulted in a net loss of $15.3 million or
$(0.47) per share in 2000 and a net loss of $10.3 million or $(0.32) per share
in 1999. Without the $952,000 gain on the sale of an investment in an affiliate,
the loss in 1999 would have been $11.2 million or $(0.35) per share. The
weighted-average number of common shares outstanding was 32.9 million for 2000
compared to 32.2 million for 1999. The increase in the number of
weighted-average shares outstanding for 2000 as compared to 1999 is attributable
primarily to the conversion of some of the 6.5% Notes into 550,000 shares of
Common Stock in June 1999.
LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK
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The Company's cash requirement for operations for the first quarter of
2000 was $9.0 million as compared to $12.9 million in the fourth quarter of
1999. The decrease is due primarily to interest payments made in November 1999
for the 6.5% and 4.5% convertible notes. The Company's cash requirement for
operations is the net cash used in operating activities for the period being
reported.
At March 31, 2000, the Company had cash and cash equivalents of
approximately $937,000. In addition, the Company had approximately $2.7 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.
PROJECTED RESULTS FROM OPERATIONS. The Company anticipates that it will
report a net loss of between $22 and $30 million for the second quarter of 2000,
and it is likely that there will be net income in the second half of 2000, with
a possible return to losses in the first quarter of 2001. The projected results
for the entire year 2000 will be a net loss. The foregoing projections are based
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upon several factors. The factors included in assessing the projected losses
are, among others: the sale of a total of 3 million doses of
NeisVac-C(TRADEMARK) under the NHS contract along with the timing and magnitude
of such sales; the recognition of up to approximately $11.25 million of expense
in the second quarter of 2000 as a result of the deferred financing fee related
to the New Financing; difficulties experienced in scaling up bulk manufacturing
of NeisVac-C(TRADEMARK); the expensing of costs to produce NeisVac-C(TRADEMARK)
prior to regulatory approval; acquisition of additional approvals and possible
contracts to supply Certiva(REGISTERED) in 2001; limited product sales in 2000
and possibly in 2001 from the limited inventory of Certiva(REGISTERED) and aP
vaccines on hand; manufacturing limitations for the Company's acellular
pertussis vaccines; and limitations on the Company's ability to negotiate and
enter into new collaborative arrangements and alternative financings pursuant to
the terms of the Share Exchange Agreement, as amended, all as more completely
discussed in the following paragraphs.
The principal source of revenues in 2000 is expected to be product
sales of NeisVac-C(TRADEMARK) to the NHS. Under the NHS contract, the Company
committed to supply NHS with 3 million doses of NeisVac-C(TRADEMARK) beginning
in April 2000 for approximately (pound)40 million (or approximately $62 million
at May 4, 2000). The Company experienced some problems in scaling up bulk
manufacturing of NeisVac-C(TRADEMARK), which have impacted the Company's
schedule for commercial production of NeisVac-C(TRADEMARK). The Company believes
that progress has been made to address all material production problems, and
that the Company will be able to deliver the full 3 million doses of
NeisVac-C(TRADEMARK) to the NHS in 2000. The Company has not met the first
delivery date in April 2000 and there can be no assurances that further
production disruptions or failures will not impact the Company's ability to
deliver NeisVac-C(TRADEMARK) timely or in sufficient quantities to meet its
obligations under the NHS contract. The Company currently expects to have
initial product quantities released and available for delivery to NHS late in
the second or early third quarter of 2000, although there can be no assurances
in this regard. The Company, however, has not yet received the required
regulatory approval to sell NeisVac-C(TRADEMARK) in the U.K.
In addition, the Company's success in achieving its production goals
will depend, in part, on its ability to attract and retain qualified personnel.
Competition for such personnel is intense, and the Company has experienced
employee losses over the last six months. Although management is taking steps to
retain its employees, which includes the payment of bonuses under an employee
retention program, no assurance can be given that the Company will continue to
attract or retain qualified personnel or that the Company will not experience
additional personnel losses in the future. The loss of additional key personnel
could adversely affect the Company.
Under the terms of the NHS contract, if the Company did not receive the
requisite marketing authorization before its first delivery date in April 2000,
NHS has the right to (1) reschedule the deliveries without reducing the minimum
volumes to be supplied by the Company, (2) reduce the volumes to be supplied by
the Company by an amount that NHS considers reasonable to reflect the shorter
life of the agreement, or (3) terminate the contract. Moreover, once
NeisVac-C(TRADEMARK) is licensed, the terms of the contract require, among other
things, that the Company reimburse the NHS and its affiliates for any costs
associated with delays caused by the Company should the Company be unable to
meet agreed-upon delivery schedules. The Company has had informal discussions
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with NHS regarding the delays in licensure and product delivery and believes
that, based on these discussions and the strong profile demonstrated by
NeisVac-C(TRADEMARK) in clinical trials, the NHS would be willing to reschedule
deliveries through the end of 2000 for the entire 3 million doses, without
penalty, if the regulatory approval for NeisVac-C(TRADEMARK) is issued within a
few months of April 2000, although there can be no assurances in this regard. If
the NHS revises or terminates its commitment to purchase NeisVac-C(TRADEMARK)
under the contract, the quarterly operating results will be directly impacted,
for this contract represents the Company's principal source of projected revenue
in 2000. Moreover, as discussed below, additional acellular pertussis products
will only be available in limited quantities for sale in 2000 because of time
required for the change over in production following the NeisVac-C(TRADEMARK)
campaign and the product cycle time for producing and releasing aP products.
All costs associated with the production of NeisVac-C(TRADEMARK) are
expensed as incurred until the vaccine receives regulatory approval in the U.K.
Therefore, the Company will continue to record significant production expenses
without any corresponding revenues until that time. The Company also expects
initial sales of NeisVac-C(TRADEMARK) to be made from inventory produced prior
to regulatory approval. Accordingly, as such inventory is sold, the cost of
goods to be reported by the Company would be lower than in subsequent periods.
Following regulatory approval, production expenses for NeisVac-C(TRADEMARK) will
be capitalized in accordance with generally accepted accounting principles and
recognized as expense when product is sold.
Quarterly operating results also will be affected by various
manufacturing limitations. As noted above, the Company has experienced some
problems in the commercial production of NeisVac-C(TRADEMARK). The production of
vaccines is a highly complex, biological process involving many steps from seed
culture through final production. From time to time, the Company experiences
disruptions and production failures and there can be no assurances that there
will not be disruptions or product failures. Any disruptions and failures
increase unit production costs as units are lost in the production process, as
well as may limit the Company's ability to meet its supply obligations for
NeisVac-C(TRADEMARK) under the NHS contract. In addition, production expenses
are mainly fixed and consist primarily of expenses relating to the operation of
the Company's one manufacturing facility and maintaining a ready work force.
During the second and third quarters of 2000, the Company expects to
have limited product sales of Certiva(REGISTERED) and its aP vaccine from the
minimal, remaining inventories on hand. The majority of this remaining inventory
was made under the Company's new production enhancement program designed to
increase production capacity and efficiency, and cannot be sold in the United
States or Europe until the appropriate regulatory authorities approve the
enhancements. Accordingly, these lots were previously expensed when made, and
the cost of goods to be reported by the Company upon sale of these products will
be lower than in subsequent periods. The Company filed the appropriate
documentation with the FDA in the fourth quarter of 1999 seeking regulatory
approval and believes that FDA approval of the enhancements will be granted in
the third quarter of 2000. SSI, the Company's European partner, has filed for
regulatory approval in its territory for the DTaP and DTaP-IPV products
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containing the bulk aP vaccine manufactured with the enhanced production
process. The Company expects that SSI will obtain regulatory approval in its
territories by the end of 2000. There can be no assurances that any of these
regulatory approvals for these production enhancements will be forthcoming in a
timely manner or at all.
The Company also has been working to eliminate bottlenecks and
streamline and strengthen the product testing and release process for its aP
vaccines, thereby reducing production disruptions and failures and enhancing the
reliability of the production process. This work will continue to be performed
off-line during the second quarter of 2000, while NeisVac-C(TRADEMARK) is being
produced in the manufacturing facility. When the enhanced production and testing
processes are fully implemented, the Company believes that unit production costs
before filling and packaging will be reduced. In prior years, the production
costs for the Company's aP products exceeded their net realizable value, and
there can be no assurances that the enhanced production and testing processes
will lower the unit production costs or permit the Company to produce sufficient
quantities of vaccine to generate a gross profit, particularly in light of the
increased filling and packaging costs associated with the decision to
manufacture Certiva(REGISTERED) without the preservative thimerosal, as
discussed below.
After the Company produces sufficient quantities of the
NeisVac-C(TRADEMARK) to fulfill its contractual obligations in the United
Kingdom, the Company expects to return to the manufacturing of aP vaccines late
in the third quarter of 2000, utilizing the enhanced production and testing
processes. Because of the lengthy manufacturing and testing cycle, product from
these manufacturing runs will not be available for sale until at least the
fourth quarter of 2000. Until such time as product is available, sales of
aP-containing products will be made from the limited product inventory currently
on hand. Accordingly, the Company expects reduced sales of these products
through the third quarter of 2000. Sales could be further limited in the second
half of 2000 if the enhanced production and testing processes do not work
properly upon startup of aP production or regulatory approval for these
enhancements is not received in a timely manner or at all. Given that the
Company expects to continue to alternate NeisVac-C(TRADEMARK) and aP production
through at least 2001, the Company will have limited time to manufacture aP
vaccines, so the Company intends first to satisfy SSI's agreed-upon
requirements, then supply aP vaccine for clinical trials of the Company's new
combination vaccines, such as DTaP-IPV and AMVAX(REGISTERED), its tetanus,
diphtheria and aP booster vaccine for adults, and then use any remaining
capacity to manufacture Certiva(REGISTERED) without thimerosal. Therefore, the
Company anticipates having lower sales of Certiva(REGISTERED) in 2000 and into
2001, and any such sales could be further diminished if the Company is unable to
reach suitable distribution arrangements to sell Certiva(REGISTERED) to
non-government purchasers in the United States. Moreover, the Company does not
expect to have any sales of DTaP-IPV vaccine in Germany and Austria until such
time as product is available and the Company secures a distributor for the
vaccine. Any such distribution arrangements would require the consent of Baxter
under the terms of the Share Exchange Agreement, as amended. Although the
national marketing authorization for the sale and distribution of its DTaP-IPV
vaccine in Germany and Austria has been completed, the Company and Chiron
Behring terminated at the end of 1999 the distribution agreement for sales
within these countries.
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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
United States. In July 1999, the Company decided to follow the recommendations
of these agencies and move toward the discontinued use of thimerosal in
Certiva(REGISTERED), which is licensed in multi-dose vials. The Company intends
to submit data to the FDA on Certiva(REGISTERED)-EU, the European formulation of
Certiva(REGISTERED), 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 previously filled
Certiva(REGISTERED) in multi-dose vials, so the added costs associated with
filling and packaging single-dose syringes will substantially increase
production costs on a per-dose basis. If the Company is not able to pass on
those additional costs in the United States through increases in the current
selling price of Certiva(REGISTERED), then the Company may not recognize a gross
profit on sales of Certiva(REGISTERED), even with full implementation of the
enhanced production and test processes described above. The Company expects to
submit data to the FDA on a thimerosal-free formulation of Certiva(REGISTERED)
before the end of the second quarter of 2000 or shortly thereafter, and the
Company will work expeditiously with the FDA to obtain approval, although there
can be no assurances that such regulatory approval will be received timely or at
all. The American Academy of Pediatrics ("AAP") has called for the FDA to
expedite the review of manufacturers' supplemental applications to eliminate or
reduce the mercury content of vaccine products. As noted above, the Company will
in the interim continue to sell previously produced thimerosal containing
Certiva(REGISTERED) that it has on hand.
The Company does not anticipate receiving any revenue in 2000 from
collaborations unless the Company enters into any new collaborative arrangements
for the research, development, marketing and distribution of its products. In
past years, the Company has recognized revenue for milestone payments and
development funding primarily under collaborative agreements with Abbott and
Aventis Pasteur; however, with the termination of both of these relationships,
the Company will not receive any further funding under these agreements.
Moreover, under the terms of the Share Exchange Agreement, as amended, the
Company may not enter into any collaborative arrangement without Baxter's
consent until the transaction with Baxter is completed or the Share Exchange
Agreement, as amended, is terminated.
In late March 2000, the Company was notified by SSI that SSI is seeking
changes in the terms, primarily with regards to pricing, quantity, territories
and exclusivity provisions of its supply agreements with the Company. The
Company is currently in discussions with SSI to address its concerns and is
unable to predict at this time what impact, if any, these proposed changes would
have on the future operations of the Company.
The foregoing paragraphs include forward looking statements including
statements as to: revenue projections; projection of earnings (losses); timing
and likelihood of further regulatory approvals; the Company's ability to timely
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and efficiently expand its production capacity and lower unit costs for
NeisVac-C(TRADEMARK) and Certiva(REGISTERED); the prospects for and timing of
NeisVac-C(TRADEMARK) production and regulatory filings; and the Company's
ability to address production failures relating to NeisVac-C(TRADEMARK) and
Certiva(REGISTERED) production, among others. The factors that affect the level
of future revenues from product sales include, among other things, the Company's
ability to obtain distribution partners, subject to Baxter's consent, for its
products in the United States and Europe; the Company's ability to effectively
position the Company's products against competitive products (including safety,
efficacy, and pricing); the Company's ability to manufacture and deliver
NeisVac-C(TRADEMARK) and pertussis vaccine 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 Company's ability to timely and
efficiently expand aP 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 stream line 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
NeisVac-C(TRADEMARK) include, among other things, overcoming production problems
in scaling up commercial production, results of ongoing clinical trials, and
expedited UK regulatory review.
In addition, there are no assurances that the steps taken by the
Company to address production disruptions and failures and quality testing
inefficiencies for both NeisVac-C(TRADEMARK) and the pertussis vaccines 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 approvals. 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 effect on the Company's financial condition and
future results of operations.
PROJECTED CASH REQUIREMENTS FOR OPERATIONS AND FINANCING ACTIVITIES. In
April 2000, the Company secured financing for up to $45 million, which will
mature on June 30, 2000. Of that total, $19.5 million was used to repay the loan
to Bank of America, which was guaranteed by Baxter. The remaining available
funds are expected to meet the Company's cash requirements through June 30,
2000. The second quarter 2000's cash requirement is anticipated to be between
$20 and $25 million, which is much higher than the $9.0 million requirement
incurred in the first quarter of 2000 due primarily to projected increased
spending related to NeisVac-C(TRADEMARK) production, and the semi-annual
interest payment of $2.4 million on the 6.5% Notes and the approximately
$600,000 payment on the 4.5% Notes both due May 2000, and the payments of
approximately $2.1 million in May 2000 for "stay" bonuses under an employee
retention program. In addition, the $6 million outstanding balance under the
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line of credit guaranteed by BioChem must be repaid by June 30, 2000. The
Company has also committed to spend an additional $1.3 million to be paid July
1, 2000 as part of the employee retention program. If the transaction with
Baxter does not close by June 30, 2000, the Company will be required to raise up
to approximately $74 million, or $89 million should the Company be required to
pay breakup fees to Baxter, in order to finance its operations through the end
of 2000, service its debt and repay its lines of credit, including the up to $45
million that would be due to BioChem and Dr. Frost in connection with the New
Financing and the deferred financing fee of up to $11.25 million, which is
payable on the maturity date of the New Financing. Should the $74-89 million
financing be required, the funds would be required on or before July 10, 2000.
This range could be affected by the timing and amount of additional cash
requirements associated with the status of commercial production of
NeisVac-C(TRADEMARK) and incorporates the sale of up to $62 million in the
second half of 2000 of NeisVac-C(TRADEMARK) to the NHS. See "Funding Sources."
The foregoing includes forward looking statements and the factors that 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.
CAPITAL EXPENDITURES. Total capital expenditures for the first three
months of 2000 were $150,000. The Company expects to spend a total of
approximately $1.5 million in 2000 for capital expenditures on minor ongoing
facilities' modifications, systems and equipment related to the acceleration of
the production for NeisVac-C(TRADEMARK). 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 equipment
purchases required in order to produce NeisVac-C(TRADEMARK); 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. Given the Company's limited projected revenues in the
second quarter of 2000 and with the termination of the Company's collaborations
with Abbott and Aventis Pasteur, the Company's principal source of financing is
the New Financing with BioChem and Dr. Frost. The outstanding principal balance
under the New Financing totaled approximately $31.2 million at May 12, 2000, and
may be increased up to $45 million through June 30, 2000.
If the Company is unable to complete the transaction with Baxter by
June 30, 2000, the Company would be required to obtain additional funding
through a borrowing arrangement with one or more of its affiliates, 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, in the timeframe required, debt or equity
financing on favorable terms or in amounts required to meet future cash
requirements and the amounts owed under outstanding lines of credit, or that the
Company, if necessary, would be successful in reducing operating levels or
- 25 -
<PAGE>
effectively controlling costs, or that if operating levels are reduced, the
Company would be able to maintain operations for any extended period of time.
Moreover, under the Share Exchange Agreement, as amended, the Company may not
enter into any new financing arrangements without Baxter's consent until the
transaction with Baxter is completed or the Share Exchange Agreement, as
amended, is terminated.
Under the Share Exchange Agreement, as amended, the Company also has
agreed to pay Baxter's out-of-pocket expenses up to $1 million if Baxter
terminates the Share Exchange Agreement, as amended, as a result of either the
Company's breach of a covenant in the Share Exchange Agreement, as amended, or
an intentional breach by the Company of any representation or warranty in the
Share Exchange Agreement, as amended. The Company has also agreed to pay Baxter
a termination fee of $14 million and reimburse Baxter for its out-of-pocket
expenses up to $1 million if the Share Exchange Agreement, as amended, is
terminated under any of the following circumstances:
o Baxter terminates the Share Exchange Agreement, as amended, because
the Company's board withdraws or modifies its recommendation as to the
Share Exchange Agreement, as amended, or the arrangement resolution or
resolves to do so, or the Company fails to comply with the
non-solicitation provisions of the Share Exchange Agreement, as
amended, or the Company's board recommends an alternative transaction
or fails to reconfirm its recommendation of the arrangement;
o either Baxter or the Company terminates the Share Exchange Agreement,
as amended, after June 30, 2000 or because the Company's shareholders
fail to approve the arrangement, and, in each case, at the time of
such termination or failure to approve the transaction, an alternative
transaction exists; or
o Baxter terminates the Share Exchange Agreement, as amended, as a
result of either a breach by the Company of a covenant in the Share
Exchange Agreement, as amended, or an intentional breach by the
Company of a representation or warranty in the Share Exchange
Agreement, as amended, and, at the time of termination, either an
alternative transaction exists or has been proposed, or within one
year after termination, the Company is acquired by another entity or
enters into an acquisition agreement with another entity.
In addition, the Company has been notified by the American Stock
Exchange ("Exchange") that it was considering delisting the Company because of
non-compliance with its listing requirements. The Exchange has deferred its
judgment on delisting. If the proposed transaction with Baxter is not
progressing or consummated, then the Exchange has requested that the Company
provide it with additional information regarding its financial condition.
While the foregoing paragraphs contain a description of the factors
affecting the Company's business prospects and risk factors affecting future
operations, reference also is made to the risk factors and other information
described in the Company's other filings with the SEC, including the 1999 Annual
- 26 -
<PAGE>
Report on Form 10-K, for a more complete description of the risks and
uncertainties affecting the Company and its business.
TAX AND REPORTING MATTERS
- -------------------------
At December 31, 1999, the Company and its subsidiaries had income tax
loss carry forwards of approximately $52.4 million to offset future Canadian
source income and approximately $114.3 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 any 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 has determined that it
currently does not have reportable segments. There were $526,000 and $796,000 of
product sales in the United States for the quarters ended March 31, 2000 and
1999, respectively. Product sales to Europe, which were all made to SSI, were
approximately $0 million and $363,000 for the quarters ended March 31, 2000 and
1999, 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
aP 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 computer programs being written
using two digits rather than four to define the applicable year. Management has
completed a Company-wide program that prepared the Company's computer systems
and programs for the Year 2000. The internal systems used to run the Company's
business run principally on third-party hardware and software. To date, the
Company has not experienced any Year 2000-related problems that could have a
material adverse effect on the future results of operations or financial
condition of the Company; however, there can be no assurances such problems will
not surface in the next few months. Additionally, the failure of suppliers and
other companies doing business with the Company to maintain Year 2000
- 27 -
<PAGE>
qualification in a manner compatible with the Company's systems could also have
a material adverse effect on the Company. The Company does not believe that it
will incur any material costs in the future because of date related problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company does not have significant exposure to changing interest
rates on invested cash at March 31, 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 March 31, 1999, is low, as the investments mature within three
months.
The Company had $25 million of 4.5% Notes at March 31, 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 March 31, 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 has drawn down a total of $6 million under the revolving
line of credit guaranteed by BioChem. The loans bear interest at LIBOR plus
2.65% basis points, which are at approximately 8.9% as of May 12, 2000. Each
draw under the line is an individual revolving loan. New interest rates and
periods will be determined when these loans mature. The entire principal balance
on the line of credit must be repaid no later than June 30, 2000. The Company
has exposure to changing interest rates related to the $6 million of debt but
does not deem it material due to the time limitations on the borrowing.
The Company has drawn down $31.2 million as of May 12, 2000 under a
revolving line of credit with BioChem and Dr. Phillip Frost. The loan bears
interest at the annual rate of 15%. The Company does not have exposure to
changing interest rates related to the $31.2 million of debt because the
interest rate on this credit facility is fixed.
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 and the New Financing
line of credit are fixed and its other 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
- 28 -
<PAGE>
effect on the fair value of the Company's long-term convertible debt, revolving
lines 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 and Danish
Kroner; however, such obligations are not material to the Company's operations.
The Company's contract with the U.K. for sale of NeisVac-C(TRADEMARK) is
denominated in British Pounds Sterling. The value of this contract is
approximately (pound)40 million or approximately $62 million at May 4, 2000. The
contract is contingent upon the Company receiving regulatory approval for
NeisVac-C(TRADEMARK) in the U.K. The Company has exposure to changing exchange
rates between the dollar and the British Pound Sterling. A hypothetical ten
percent change in the market exchange rate over the remaining eight months
ending December 31, 2000 could result in a reduction of up to approximately $4.1
million in potential revenue from this contract. The Company intends to reduce
risk to possible changes in exchange rates between the currencies by possibly
entering into a hedging transaction before the effective date of the contract.
- 29 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
10.60 Amendment No. 1 to Share Exchange Agreement dated
as of April 17, 2000 (1)
10.61 Amendment No. 1 to Shareholder Agreement dated as
of April 17, 2000, among Baxter, BioChem, and
certain other shareholders of the Company (1)
10.62 Amended and Restated Warrant Termination Letter
dated April 17, 2000 (1)
10.63 Assignment, Acceptance and Amendment Agreement
dated as of April 17, 2000, among the Bank of
America, N.A., BioChem, the Company, Baxter, and
Dr. Phillip Frost (1)
27 Financial Data Schedule
(1) Incorporated herein by reference to the Company's Current Report
on Form 8-K, dated March 30, 2000.
(b) Reports on Form 8-K
The Company filed with the Securities and Exchange Commission a Current
Report on Form 8-K dated March 16, 2000, under Items 5 and 7 reporting
the issuance of two press releases regarding the status of its
acquisition by Baxter.
The Company filed with the Securities and Exchange Commission a Current
Report on Form 8-K dated March 30, 2000, under Items 5 and 7 reporting
the settlement of a lawsuit brought by Sharon Mates, the Company's
former President, extensions related to the Company's line of credit
with Bank of America, N.A., an amendment of the Share Exchange
Agreement under which Baxter proposes to acquire the Company, and the
securing of a new line of credit with BioChem and Dr. Phillip Frost for
up to $45 million which includes the assignment by Bank of America,
N.A. to BioChem of the rights and obligations associated with the
approximately $19.5 million utilized by the Company under the line of
credit with Bank of America, N.A.
- 30 -
<PAGE>
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.
Chief Executive Officer and President
By: /s/ Lawrence J. Hineline
----------------------------
Lawrence J. Hineline
Vice President - Finance
Date: May 15, 2000
- 31 -
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> North American Vaccine, Inc.
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