UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.
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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
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
----
(Title of class)
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 __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days.
SPECIFIED DATE -- MARCH 27, 2000; AGGREGATE MARKET VALUE -- $63,394,759
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 MARCH 27, 2000 - 32,870,350
2
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DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
PART I
1 Business...............................................................4
2 Properties............................................................37
3 Legal Proceedings.....................................................38
4 Submission of Matters to a Vote of Security Holders...................39
PART II
5 Market For Registrant's Common Equity And Related Stockholder Matters.39
6 Selected Financial Data...............................................41
7 Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................................43
7A Quantitative and Qualitative Disclosures about Market Risk............57
8 Financial Statements and Supplementary Data...........................58
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................91
PART III
10 Directors and Executive Officers of the Registrant....................92
11 Executive Compensation................................................96
12 Security Ownership of Certain Beneficial Owners and Management.......101
13 Certain Relationships and Related Transactions.......................103
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on form 8-K.....107
Signatures.................................................................108
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PART I
ITEM 1. BUSINESS
EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DESCRIPTION OF THE
COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS
OR ITS FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS ARE ONLY PREDICTIONS, AND
ACTUAL EVENTS OR RESULTS MAY BE MATERIALLY DIFFERENT FROM THE PREDICTIONS. IN
EVALUATING THESE STATEMENTS, YOU SHOULD CONSIDER THE VARIOUS FACTORS IDENTIFIED
IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING BUT NOT LIMITED TO THE MATTERS SET
FORTH BELOW UNDER THE HEADING, "RISK FACTORS." THE COMPANY DISCLAIMS ANY INTENT
OR OBLIGATION TO CONTINUALLY UPDATE THESE FORWARD-LOOKING STATEMENTS.
THE COMPANY
INTRODUCTION. 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 ("aP") vaccine, including
Certiva(R), its combined diphtheria, tetanus and acellular pertussis vaccine for
infants and children, 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 of NeisVac-C(TM), its
vaccine for the prevention of group C meningococcal infections, in the United
Kingdom late in the second quarter or early in the third quarter of 2000. The
U.K. National Health Service ("NHS") has committed to purchase 3 million doses
of NeisVac-C(TM) in 2000 for approximately (British pound) 40 million (or
approximately $64 million at March 23, 2000), with shipments that were
originally scheduled to begin in April 2000 and now are expected to begin early
in the third quarter of 2000, subject to UK regulatory approval and certain
other conditions. Upon completion of the production of NeisVac-C(TM), the
Company will recommence manufacture of aP vaccines, including Certiva(R), after
the Company meets its contractual obligations in the United Kingdom.
Accordingly, the Company expects limited sales of aP containing vaccine products
from existing inventories in 2000 and 2001 until such time as the Company's aP
products are available for sale. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
The Company filed its marketing authorization application with the UK
regulatory authorities on January 24, 2000, and is seeking approval of
NeisVac-C(TM) for administration to children 12 months of age and older,
adolescents and adults. During the fourth quarter of 1999, the Company commenced
the change over from production of Certiva(R) and its aP vaccines to produce the
group C meningococcal conjugate vaccine in anticipation of the commercial launch
of the product in the United Kingdom. The Company has experienced some problems
in scaling up bulk manufacturing of NeisVac-C(TM) and believes that these
problems have been addressed; however, there can be no assurances that the
Company will not experience further production disruptions or failures. The
Company currently expects to receive regulatory approval and have commercial
product available for delivery late in the second quarter or early in the third
quarter of 2000. See "Products Under Development - Meningococcal Vaccines -
NeisVacC(TM)" and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation for a more complete discussion regarding
NeisVac-C(TM). See also "Risk Factors Risks Associated with Manufacturing and
Scale-up."
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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 valued at approximately
$390 million. Under the Share Exchange Agreement, the Company's shareholders
will receive $7 per share, comprised of $6.97 of Baxter common stock and $0.03
in cash. The number of Baxter shares to be issued to the Company's shareholders
under the Share Exchange Agreement 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 Company's principal shareholders also have entered into a
shareholder agreement with Baxter pursuant to which they have agreed to vote to
approve the transaction. The transaction is subject to a number of conditions to
closing, including, among others, receipt of U.K. regulatory approval for
NeisVac-C(TM), the Company's group C meningococcal vaccine, and the manufacture
of a two-month supply of NeisVac-C(TM) for the Company's contract with the NHS,
both before April 1, 2000. The agreement calls for closing in April 2000. The
Company currently does not expect to have received UK regulatory approval for
NeisVac-C(TM) or to have manufactured the requisite two-month supply of vaccines
available by April 1, 2000. Baxter has advised the Company that it will not
close on the acquisition transaction under the current terms of the Share
Exchange Agreement unless all conditions to closing are satisfied in the time
frame specified. Based upon the Company's failure to meet required conditions on
April 1 and other developments of concern to Baxter, Baxter has proposed that
the parties modify the Share Exchange Agreement. The parties have been in
discussions regarding proposals that involve, among other things, a reduction in
the purchase price, the terms under which additional financing would be
available to the Company, an extension of the date by which conditions to
closing are to be satisfied, additional conditions to closing and changes to
existing conditions to closing, the outside date for termination of the Share
Exchange Agreement, and an early termination of the Share Exchange Agreement.
There can be no assurances as to whether the Company and Baxter will reach an
agreement with respect to a mutually acceptable modification to the Share
Exchange Agreement or mutually acceptable termination arrangements or as to the
timing of any such agreement. If the parties are unable to reach such an
agreement and Baxter determines not to waive the conditions to closing which the
Company is unable to meet, Baxter will not be obligated to close on the
acquisition transaction and the Company will continue to be bound by the terms
of the Share Exchange Agreement through at least May 31, 2000. Baxter has
advised the Company that it does not wish to terminate the Share Exchange
Agreement. If the parties cannot agree upon a mutually acceptable modification
of the Share Exchange Agreement or mutually acceptable termination arrangements,
the Company's credit facility with the Bank of America will become due and
payable on March 31, 2000. The line of credit is secured by a pledge of all of
the Company's otherwise unencumbered assets. In such event, there can be no
assurances that the Company will be able to refinance this indebtedness or
obtain financing for its continued operations. If the Company cannot obtain
financing, there can be no assurance that the Company can continue its
operations for any period of time without seeking bankruptcy protection. In
addition, there can be no assurances that litigation will not be commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient funds
to defend such litigation, whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation for a more complete description of
the transaction. See also "Risk Factors Risk Associated with the Baxter
Transaction."
The Company was incorporated as a Canadian corporation on August 31, 1989,
for the purpose of acquiring American Vaccine Corporation, a publicly held
Delaware corporation ("American Vaccine"), and certain assets of BioChem Pharma
Inc. ("BioChem"), in a share purchase and merger transaction (collectively
described as the "Merger"). On February 28, 1990, shareholders of American
Vaccine approved the Merger. The Company had no operations prior to the Merger.
Pursuant to the Merger, the shareholders of American Vaccine received 50%
ownership in the Company. Simultaneously, BioChem purchased a 50% interest in
the Company in exchange for cash, shares of BioChem common stock, and the
license or assignment and transfer of certain rights and other intangible
assets. See Item 13 - Certain Relationships and Related Transactions.
The Company maintains its executive offices at 10150 Old Columbia Road,
Columbia, Maryland 21046, and its telephone number is (410) 309-7100. Unless
otherwise indicated or the context otherwise requires, references to the
"Company" or to "North American Vaccine" contained herein are to North American
Vaccine, Inc. and its consolidated subsidiaries.
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OVERVIEW OF VACCINE MARKET
PEDIATRIC VACCINES. Due to the potential for epidemic disease, most
countries consider vaccinations to be a matter of national importance. In the
United States, the ten vaccines generally required by state pediatric
vaccination programs are intended to prevent diphtheria, tetanus, pertussis,
measles, mumps, rubella, polio, Hib, hepatitis B and varicella (chicken pox). In
addition to these ten vaccines, the Advisory Committee on Immunization Practices
("ACIP") of the CDC and the American Academy of Pediatrics ("AAP") periodically
review current immunization practices and issue their recommendations for
additional pediatric vaccinations. In Western Europe, vaccination against
diphtheria, tetanus and pertussis is generally recommended, with each country
establishing its own vaccination schedules and requirements.
Children in the United States receive immunizations from public providers,
such as local health departments, and from private providers. Immunizations
provided by public providers are generally paid for through federal and state
government funding under public health programs. These programs are intended to
reduce barriers to immunization and to improve immunization rates by providing
free vaccine to qualifying infants and children. Government purchases
historically have been at prices substantially below those offered to the
private sector and presently account for a substantial proportion of the vaccine
doses distributed in the United States.
In addition, the government promotes the availability of an adequate
supply of necessary pediatric vaccines for United States public health programs.
In order to achieve this objective, the National Childhood Vaccine Injury Act of
1986 ("NCVI Act") created a no-fault insurance program designed to compensate
those who suffer specified vaccine-related injuries associated with the
administration of one or more of the vaccines generally required by state
pediatric vaccination programs. This insurance program is funded through the
levy of an excise tax paid by the manufacturers on the sale of certain pediatric
vaccines, including combined diphtheria-tetanus-pertussis vaccines.
ADULT VACCINES. Adults, especially older persons who are at greater risk
of contracting and succumbing to disease and infection, can benefit greatly from
immunizations. In 1994, the United States Department of Health and Human
Services estimated that the costs to society of diseases for which vaccines then
currently existed exceeded $10 billion each year. In addition, vaccines have
been widely recognized as highly cost-effective in preventing the incidence of
disease and infection. Moreover, it is becoming widely recognized that many
childhood vaccine-preventable infections and diseases, such as pertussis, are
also found among younger adults, who serve as reservoirs for, and sources of
pediatric exposure to, these infections and diseases. While the size of the
target populations for adult vaccines may vary and adult vaccination rates have
been historically low, some of these markets are much larger than the target
population for pediatric vaccines. The Company believes that the market for
adult vaccines will expand as health-care providers increasingly recognize
vaccines as a cost-effective method for preventing the incidence of disease and
infection.
PRODUCTS UNDER DEVELOPMENT
The Company currently has three licensed products that contain the
Company's aP vaccine and more than 12 others in its product pipeline. The
Company's vaccine products are intended for use in infants, children,
adolescents and adults. The Company's present focus is the manufacturing of
NeisVac-C(TM), its vaccine for the prevention of Group C meningococcal
infections, under a contract with the NHS. The NHS has committed to purchase 3
million doses of NeisVac-C(TM) in 2000, with shipments that were scheduled to
begin in April 2000 and are now expected to begin early in the third quartr of
2000, subject to UK regulatory approval and certain other conditions.
The Company also is developing combination vaccines that incorporate the
Company's patented monocomponent aP product. The Company's first such product is
Certiva(R), which was licensed by the U.S. Food and Drug Administration ("FDA")
in July 1998 and is marketed in the United States under the trade name
Certiva(R). The Company is also developing combination vaccines using Certiva(R)
as the foundation or "anchor," such as Certiva(R)-inactivated polio vaccine
("IPV") for the prevention of diphtheria, tetanus, whooping cough and polio, and
Certiva(R)-IPV-Hib, which adds a vaccine for the prevention of HAEMOPHILUS
INFLUENZAE type b ("Hib"), which can cause meningitis in infants and children.
The Company has also developed Amvax(R), a combined tetanus, diphtheria, aP
("TdaP") vaccine for booster immunization of adolescents and adults.
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In Europe, the Company's aP vaccine has been approved both as a
stand-alone product and as DTaP and DTaP-IPV combinations for use in infants and
children. One or more of these products is licensed in several European
countries, including Denmark, Sweden, Finland, Poland, Germany and Austria, and
applications are pending to expand regulatory approval in other European
jurisdictions.
Beyond the aP vaccine products, the Company has a broad portfolio of
polysaccharide-protein conjugate vaccines for use in infants, children,
adolescents and adults. These vaccines will be targeted to prevent disease
caused by: Groups B, C and Y meningococci; Groups A and B streptococci;
STREPTOCOCCUS PNEUMONIAE; and Hib. The vaccines may be developed initially in
standalone formulations, and later in various combinations.
The Company has access to a number of patented, novel carrier proteins to
be included in its polysaccharide-protein conjugate vaccines. Use of the
Company's novel carrier proteins is intended to avoid adverse reactions
associated with the overuse of conventional protein carriers, such as diphtheria
and tetanus toxoids. These novel carrier proteins also have exhibited additional
benefits, such as adjuvant activity in the Hib and meningococcal vaccines, and
an enhanced protection elicited by the proteins themselves in the Company's
group B streptococcal and pneumococcal vaccines.
Given the Company's current financial resources, the Company will have to
establish collaborations for certain products in selected territories in order
to maximize the potential of this rich product pipeline. Such collaborations,
however, cannot be established without Baxter's consent. Under the terms of the
Share Exchange Agreement, the Company may not 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 is terminated.
The Company is focusing its research and development efforts on the
vaccines set forth in Table 1 below. The Company spent $16.2 million, $18.0
million and $19.9 million on research and development of its products in 1999,
1998 and 1997, respectively. See Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation.
The summary information included in Table 1 is provided solely for
convenience of reference and is qualified in its entirety by the detailed
discussion of each of the Company's products that follows. There can be no
assurance that any of these vaccines will be developed successfully by the
Company or licensed by the FDA or any other regulatory authority for commercial
sale. See "Risk Factors-Need for Regulatory Approvals" and "Risk
Factors-Uncertainties Related to Clinical Trials."
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- --------------------------------------------------------------------------------
TABLE 1 - PRODUCTS UNDER DEVELOPMENT
PRODUCT TARGET MARKET STATUS (1)
- --------------------- ----------------------------
PEDIATRIC ADOLESCENT ADULTS
- --------------------------------------------------------------------------------
ACELLULAR PERTUSSIS VACCINES
- --------------------------------------------------------------------------------
Certiva(R) (DtaP) X Licensed in United States,
Sweden, Denmark, Germany
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Stand-alone aP X X Licensed in Sweden
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Certiva(R) - IPV X Licensed in Germany,
Denmark, Poland, Sweden,
Finland and Austria;
Phase I/II trials in U.S.
expected to commence in 2000
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Certiva(R)- IPV- Hib X Preclinical; commenced
trials of Hib vaccine in
1999; Phase II trial of Hib
vaccine expected to be
completed in 2000.
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Amvax(R) (TdaP) X X Phase I and Phase II/III
trials expected to begin in
U.S. in 2000; Phase I trials
in U.K. expected in 2000
- --------------------------------------------------------------------------------
CONJUGATE VACCINES
- --------------------------------------------------------------------------------
NeisVac-C(TM) - X X X UK license application
Group C Meningococcal filed in January 2000;
expect to begin Phase I/II
trial in U.S. in 2000
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NeisVac-B(TM) X X X Phase I trial expected to
Group B Meningococcal begin in 2000
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NeisVac-BCY(TM) X X X Preclinical
Group B/C/Y
Meningococcal
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Group B Streptococcal X X Phase I/II trials completed
on monovalent vaccine (2)
Clinical trials on
multivalent vaccine expected
to begin in 2000
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Pneumococcal X X X Preclinical
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Group A Streptococcal X X Preclinical
- --------------------------------------------------------------------------------
OTHER VACCINES
- --------------------------------------------------------------------------------
E. Coli X X Preclinical
(urinary tract
infections)
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Cancer X Preclinical
(1) Preclinical development denotes work to refine product performance
characteristics and to conduct studies relating to product composition,
stability, scale-up, toxicity and efficacy in order to create a prototype
formulation in preparation for the filing of an investigational new drug
application or IND with the FDA for authority to commence testing in humans
(clinical studies). Phase I-III clinical trials denote safety and efficacy tests
in human patients in accordance with FDA guidelines as follows:
Phase I: Safety, immunogenicity, and optimal dosage studies.
Phase II: Detailed evaluations of safety, immunogenicity and optimal dosage in
limited number of subjects in target population.
Phase III: Evaluation of safety and efficacy in expanded target population.
See "Government Regulation."
(2) Proof of principal clinical trial for monovalent vaccine manufactured by
a third party utilizing technology licensed to the Company.
- --------------------------------------------------------------------------------
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ACELLULAR PERTUSSIS VACCINES
BACKGROUND. Immunization against diphtheria, tetanus and pertussis using a
combined vaccine during infancy and childhood is a routine practice in the
United States and most countries throughout the world, and the vaccination
program is considered to be a major factor in reducing the incidence of, and
number of deaths associated with, each of these diseases. Vaccination for the
prevention of diphtheria, tetanus and pertussis currently is required in the
majority of states within the United States and is scheduled to be administered
to children at the ages of 2, 4, 6, 15 to 18 months, and 4 to 6 years of age. In
addition, immunization against diphtheria, tetanus and pertussis is also
required in many countries outside of the United States.
Since the late 1940s, the widespread use of "whole cell" DTP vaccines led
to a rapid decline in disease-related morbidity and mortality, especially in
children. These "whole cell" DTP vaccines include the entire BORDETELLA
PERTUSSIS bacterium that has been inactivated in the production process by heat
or chemicals, and it is generally believed that the use of the "whole cell"
BORDETELLA PERTUSSIS bacterium has been a leading cause of the adverse reactions
associated with the existing "whole cell" DTP vaccines. These adverse reactions
range from minor local reactions to more serious systemic reactions. Clinical
trials have established that acellular pertussis vaccines should offer
advantages over licensed "whole cell" pertussis vaccines with respect to
improved tolerability and fewer serious adverse reactions. DTaP vaccines have
now substantially replaced the "whole cell" DTP vaccines and are preferred for
all doses in the immunization schedule recommended by the ACIP and AAP.
Currently, four DTaP vaccines, including Certiva(R), have been licensed by the
FDA for use in the United States. See "Products Under Development - Acellular
Pertussis Vaccines - Certiva(R)" and "Competition."
CERTIVA(R). In July 1998, the Company received FDA approval to manufacture
and market Certiva(R) in the United States for use in infants and children six
weeks to seven years of age. The product launch for Certiva(R) began in the
fourth quarter of 1998. The Company markets Certiva(R) in the U.S. to government
purchasers, including state governments and the CDC. Under a distribution
agreement, Abbott Laboratories ("Abbott") previously marketed Certiva(R) 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(R) to non-government
purchasers through direct arrangements with distributors. See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation. See also "Risk Factors - No Assurance of Effective Marketing."
Certiva(R) combines the Company's proprietary monocomponent acellular
pertussis vaccine with diphtheria and tetanus toxoids, for use as a combined
DTaP vaccine in childhood immunization programs. The Company's acellular
pertussis vaccine is unique and distinct from all other pertussis vaccines in
that it contains only pertussis toxoid (i.e., pertussis toxin that has been
purified and chemically inactivated by hydrogen peroxide), instead of the entire
BORDETELLA PERTUSSIS bacterium or two or more of its components. In clinical
trials, this single toxoid has been shown to induce immunity with fewer serious
adverse reactions than the "whole cell" pertussis vaccine. The method of
manufacture for this pertussis toxoid are the subject of United States and
foreign patents licensed exclusively to the Company. See "Business
Relationships."
FDA approval followed prior approvals of a European formulation of
Certiva(R) ("Certiva(R)-EU"). In February 1996, a license was granted to the
Company's European partner, Statens Serum Institut ("SSI"), to market in Sweden
Certiva(R)-EU for all recommended doses for infants and children. Subsequently,
regulatory applications were filed under the European mutual recognition
procedures in other selected European countries based on the Swedish approval.
Certiva(R)-EU has been licensed in Denmark, Germany, Poland, Austria and
Finland. SSI holds the product rights and registration, and will market the
9
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product in the Scandinavian and Baltic countries and certain other countries
comprising its territory ("SSI's Territory"). The Company does not currently
have a salesforce or partner to market products in the European countries not
included in SSI's Territory. See Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operation. See also "Marketing of Vaccines,"
"Business Relationships" and "Risk Factors - No Assurance of Effective
Marketing."
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. 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 an individual or public health risk. In
July 1999, the Company decided to follow the recommendations of these agencies
and move toward the discontinued use of thimerosal in Certiva(R). The Company
intends to introduce a thimerosal-free formulation of the product in single-dose
syringes in the United States. See Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation for discussion regarding impact
on operations. The Company will submit data to the FDA on a thimerosal-free
formulation of Certiva(R), including data on the European formulation of
Certiva(R) that does not contain thimerosal by the end of the second quarter
of 2000 or shortly thereafter, and the Company will work expeditiously with the
FDA to obtain approval; however, there can be no assurances that such approval
will be granted by the FDA or that FDA review will not involve delays that would
adversely affect the Company's ability to market thimerosal-free Certiva(R). The
AAP has called for the FDA to expedite the review of manufacturers' supplemental
applications to eliminate or reduce the mercury content of vaccine products;
however, there can be no assurances that such approval will be granted by the
FDA or that FDA review will not involve delays that would adversely affect the
Company's ability to market the thimerosal-free formulation of Certiva(R). See
"Risk Factors - Government Regulation; Regulatory Approvals." The U.S. Public
Health Service, the CDC and the AAP continue to recommend that all children
should be immunized against the diseases indicated in the recommended
immunization schedule. Until regulatory approval is obtained for thimerosal-free
Certiva(R), the Company will only be able to sell previously produced thimerosal
containing Certiva(R) from its limited inventory on hand. See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
The Company has experienced production problems in the manufacture of the
aP component for Certiva(R). In order to address these production limitations,
the Company has implemented a capacity enhancement program with respect to its
production of Certiva(R) and aP vaccines. The first 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 continue to be performed
off-line during the first half of 2000, while NeisVac-C(TM) is being produced in
the manufacturing facility. Second, the Company has modified its existing
facilities and operations in a manner intended to expand production capacity and
efficiency. The Company filed the appropriate documentation with the FDA in the
fourth quarter of 1999 in seeking the approval for these enhancements; however,
there can be no assurances that such approval will be granted by the FDA or that
FDA review will not involve delays that would adversely affect the Company's
ability to market Certiva(R) made with these enhancements. See "Risk Factors -
Government Regulation; Regulatory Approvals." Upon completion of both of these
programs, the Company expects 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 increase
capacity or lower the unit production costs, particularly in light of the
increased filling and packaging costs associated with the decision to
manufacture Certiva(R) without the preservative thimerosal, as discussed in Item
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7 - Management's Discussion and Analysis of Financial Condition and Results of
Operation. See "Risk Factors - Risk Associated With Limited Production
Capacity."
AMVAX(R). Amvax(R), the Company's TdaP vaccine, is the adult formulation
of Certiva(R). Within the U.S., TdaP vaccines are likely to be recommended for
use in all adolescents and adults as a booster immunization to be given every
ten years, and will replace the currently recommended tetanus, diphtheria ("Td")
vaccine. Historically, pertussis has been recognized as a disease limited to
infants and children; however, more recently adolescents and adults have been
recognized as an important reservoir of infection, albeit with pertussis cases
usually in a milder form that is indistinguishable from other respiratory
infections. Scientists believe that waning immunity after natural infection or
immunization during childhood may contribute to disease in these older groups.
The CDC has reported that the proportion of pertussis cases occurring in
adolescents and adults increased from 15.1% of the total during 1977 through
1979 to 26.9% during 1992 through 1993.
Currently, there are no pertussis vaccines licensed in the United States
for administration to adolescents or adults; the risk of adverse reactions from
"whole-cell" vaccines outweighed the benefits of preventing the milder forms of
pertussis disease experienced by these groups. The recognition of waning
immunity in adolescents and adults, coupled with less reactogenic profile of aP
vaccines, have altered this risk/benefit calculus in favor of immunization. The
FDA's Vaccine and Related Biological Products Advisory Committee has begun
discussions regarding a recommendation for adolescent and adult booster doses of
vaccine as an ideal way to ensure protective immunity throughout adulthood. In
addition, the ACIP is now considering a revision to the current recommendation
of a Td booster every ten years to include an aP vaccine in a TdaP for all
adolescents and adults in the United States.
The Company intends to conduct safety and immunogenicity adult clinical
trials in the United States and the United Kingdom using its TdaP vaccine.
AP COMBINATION VACCINES
As new vaccines for additional childhood diseases are developed and added
to the recommended immunization schedule, the number of immunizations will
increase. Delivering protection using fewer injections, at a reasonable cost, in
a convenient manner that will enhance compliance, is a problem that may be
solved with one simple solution - combination vaccines. The market is moving in
this direction because the ACIP/AAP recommended schedules for many childhood
vaccines are compatible. For example, the immunization schedules for diphtheria,
tetanus, pertussis, polio and Hib vaccines overlap, so a DTaP-IPV-Hib vaccine
could be recommended for up to four immunizations. See Table 2 below. Therefore,
combination vaccines will likely replace most, if not all, stand-alone vaccines.
In addition, healthcare providers and parents have rising expectations for
combination vaccines. In fact, the ACIP has issued a policy statement on
combination vaccines that recommends combination vaccines, in general, over the
separate injection of their equivalent component vaccines.
The Company is developing combination vaccines using Certiva(R) as an
"anchor." Additional vaccines would be added to Certiva(R) to form the
combination vaccine. The Company's combination vaccines under development are
described below.
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- --------------------------------------------------------------------------------
TABLE 2 - RECOMMENDED CHILDHOOD IMMUNIZATION SCHEDULE IN
THE UNITED STATES FOR DTAP, HIB AND POLIO VACCINES
JANUARY 2000 - DECEMBER 2000
- --------------------------------------------------------------------------------
AGE 2 4 6 12 15 18 4-6
MOS. MOS. MOS. MOS. MOS. MOS. YRS.
VACCINE
- --------------------------------------------------------------------------------
Diphtheria,
Tetanus,
Pertussis DTaP DTaP DTaP DTaP DTaP
- --------------------------------------------------------------------------------
H.
INFLUENZAE
type b Hib (1) Hib (1) Hib (1) Hib
- --------------------------------------------------------------------------------
Polio IPV IPV IPV IPV
- --------------------------------------------------------------------------------
SOURCE: ACIP, AAP AND AMERICAN ACADEMY OF FAMILY PHYSICIANS (AAFP). IN
ADDITION TO THE VACCINES LISTED IN THE TABLE ABOVE, THE ACIP/AAP
RECOMMENDATIONS ALSO INCLUDE VACCINES TO PREVENT HEPATITIS B, MEASLES, MUMPS,
RUBELLA, VARICELLA (CHICKENPOX) AND HEPATITIS A. IN WESTERN EUROPE,
VACCINATION AGAINST THESE DISEASES IS ALSO GENERALLY RECOMMENDED, EACH COUNTRY
ESTABLISHING ITS OWN VACCINATION SCHEDULES AND REQUIREMENTS.
(1) Two or three dose primary regimen (depending on vaccine used) with
primary doses administrated at the ages of 2, 4 and 6 months, and booster
administered at between 12-15 months of age.
CERTIVA(R)-IPV VACCINE. The Company believes that a single vaccination
program for diphtheria, tetanus, pertussis and polio can be established by
combining an enhanced, injectable IPV with Certiva(R). The Company anticipates
that a DTaP-IPV vaccine can become a generally accepted multivalent vaccine
because the polio vaccination schedule is compatible with the DTaP vaccination
schedule, and because a polio vaccination program that includes IPV has been
accepted as both safe and efficacious. In July 1999, the ACIP and AAP issued a
revised recommendation related to polio vaccination. Now, IPV is recommended
over oral polio vaccination ("OPV") for all four doses in the routine childhood
polio vaccination schedule in the United States.
In September 1996, the Danish National Board of Health granted SSI
regulatory approval to market a combined DTaP-IPV vaccine, which incorporates
the Company's aP toxoid, for all primary and booster doses in infants and
children. This combination vaccine was developed jointly by SSI and the Company,
and is presently licensed in Denmark, Poland, Sweden and Finland. Under the
European mutual recognition procedures, Germany and Austria agreed in
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the first half of 1999 to recognize the Danish marketing authorization for the
DTaP-IPV vaccine pending the completion of labeling issues related to the
distribution of the product. SSI holds the product registrations under the
European mutual recognition procedures, and the Company had previously appointed
Chiron-Behring GmbH & Co. ("Chiron-Behring") to market the Certiva(R)-EU-IPV
product in Germany and Austria. In January 2000, the Company and Chiron-Behring
terminated the marketing arrangement. The Company does not expect to market
Certiva(R)-EU-IPV in Germany and Austria until it can secure alternative
distribution arrangements. See Item 3 - Legal Proceedings and Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operation. See also "Risk Factors - Risk Associated with Lack of Availability of
Capital."
In addition, the Company expects to file an investigational new drug
application with the FDA to conduct Phase II clinical trials in the United
States with a Certiva(R)-IPV vaccine. There can be no assurance that the
clinical trials will commence, that data from the clinical trials will support a
regulatory filing or that any regulatory filings for the Certiva(R)-IPV will be
accepted, or receive regulatory approval in a timely fashion or at all, by the
FDA or other regulatory agencies. See "Government Regulation" and "Risk Factors
- - Need for Regulatory Approvals."
CERTIVA(R)-IPV-HIB VACCINE. The Company is also developing a combined
single injectable DTaP-IPV-Hib vaccine in stable liquid form for the prevention
of diphtheria, tetanus, pertussis, polio and infection caused by Hib. A
Certiva(R)-IPV-Hib combination vaccine is compatible with the recommended
pediatric immunization schedule. As indicated in Table 2 above, the current
immunization schedule for diphtheria, tetanus, pertussis, polio and Hib
recommends as many as thirteen injections to protect an individual from these
diseases. The proposed combination vaccine may allow for protection against all
five diseases in as few as five injections.
Pre-clinical studies demonstrated no significant immunologic interference
between the Company's Hib and aP vaccines in combination. In addition, a
previous clinical trial in Sweden of Certiva(R)-IPV combined with a commercially
available Hib vaccine found no serious adverse reactions and no clinically
significant immunologic interference. Immunologic interference is an effect
observed in products that combine aP and Hib vaccines that suppresses the Hib
antibody response, and therefore may lower protection against Hib disease. In
the preclinical studies, the Company's Hib vaccine produced a high level of
functional antibodies such that effective protection from Hib disease is likely
to be maintained in combination with aP vaccine.
The Company believes that the ability of its Hib conjugate vaccine to
produce excellent antibody response while avoiding significant immunologic
interference is due primarily to the use of a novel carrier protein, a
recombinant meningococcal porin ("rPorB"). This protein facilitates the desired
immune response to the attached Hib polysaccharide. In addition, use of the
novel protein is expected to reduce the risk of adverse reactions that some
individuals may develop to other common carrier proteins. The Company is
presently planning clinical trials of the Certiva(R)-IPV-Hib vaccine. See
"Products Under Development - Conjugate Vaccines - HAEMOPHILUS INFLUENZAE Type b
Vaccine" for a description of the Company's Hib vaccine. See also "Competition."
CONJUGATE VACCINES
The Company, using patented and proprietary technologies, is developing
several conjugate vaccines for prevention of infectious diseases in children and
adults. Conjugate vaccines are formed by chemically linking (i.e., conjugating)
polysaccharides to a "carrier" protein. This procedure has been shown to enhance
the immunogenic properties of the polysaccharides, particularly in infants.
Conjugate vaccines may be useful in preventing several serious diseases,
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including meningitis, pneumonia and strep throat in all groups, including
infants and children. Vaccines are not currently available for the prevention of
several of these diseases.
In recent decades, vaccines have been developed for certain bacterial
diseases using polysaccharides (long-chained sugars) that coat or encapsulate
certain bacteria's outer membranes. While these polysaccharide vaccines have
generally proven to be safe, many of them do not elicit an adequate immune
response, particularly in infants whose immature immune systems do not recognize
or respond to these polysaccharides. In addition, questions have been raised
about the effectiveness of polysaccharide vaccines in the elderly and persons
with immunocompromised immune systems. The Company believes that conjugate
vaccines address these problems and will prove to be as safe as and more
effective than polysaccharide vaccines in the target populations.
The Company holds exclusive worldwide rights (excluding Canada) for the
development, production and sale of vaccines against certain bacterial
infections under a license granted by the National Research Council of Canada, a
Canadian federal government agency ("NRC"), for certain conjugate vaccine
technology. United States and, in some cases, foreign patents relating to this
technology have been issued and applied for. The Company also holds, either as
assignee or licensee, several other patents related to the development and
manufacture of conjugate vaccines, including several novel carrier proteins. Use
of the Company's novel carrier proteins reduces the risk of adverse events
associated with the overuse of conventional carrier proteins, such as diphtheria
and tetanus proteins. These novel protein carriers have exhibited additional
benefits, such as adjuvant activity in the Company's Hib and meningococcal
vaccines. In addition, these proprietary protein carriers have been designed in
some cases to have the ability to serve as immunogenic antigens on their own.
The Company is developing conjugate vaccines for the diseases discussed
below and, where appropriate, intends to combine certain of its conjugate
vaccines with Certiva(R) and its Certiva(R)-IPV vaccines. See "Products Under
Development - aP Combination Vaccines" and "Business Relationships."
MENINGOCOCCAL VACCINES. Meningitis is a serious infection involving the
membranes surrounding the brain and spinal cord, which can lead to significant
central nervous system damage in all age groups. In the United States, those
most often stricken are children and young adults. Serogroups A, B, C and Y of
NEISSERIA MENINGITIDIS (meningococcus) cause a significant number of cases of
meningitidis and systemic meningococcemia. The incidence of meningitis caused by
Group A, B, C and Y meningococcus varies from country to country, with Group B
and C meningococcus generally accounting for nearly all disease in developed
countries. In recent years, the epidemiology has shifted in the United States
such that Group Y meningococcus is now reported in one third of all cases (with
Groups B and C evenly splitting the other two thirds of reported cases).
Currently, a polysaccharide vaccine for the prevention of Group A, C, Y
and W-135 meningococcal infections is licensed in the United States. This
vaccine is predominantly used selectively in the adult population and, in
particular, is routinely administered to United States military personnel. This
vaccine has not been demonstrated to be protective in children less than two
years of age. In addition, there is currently no licensed conjugate vaccine for
the prevention of Group B meningococcal infection.
NEISVAC-C(TM). In January 2000, the Company filed a marketing
authorization application in the United Kingdom for NeisVac-C(TM), its Group C
meningococcal conjugate vaccine. The Company is seeking approval of
NeisVac-C(TM) for administration to children 12 months of age and older,
adolescents and adults. In the fourth quarter of 1999, the UK's NHS committed to
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purchase 3 million doses of NeisVac-C(TM) in 2000 for approximately (British
pound)40 million (or approximately $64 million as of March 23, 2000), with
shipments that were scheduled to begin in early April 2000 and are now expected
to begin early in the third quarter of 2000, subject to UK regulatory approval.
The NHS contract is intended to support a national immunization campaign in the
United Kingdom to prevent Group C meningococcal disease. The UK Public Health
Laboratory Service ("PHLS") has received reports of more than 1,000 cases of
meningoccocal meningitis annually since 1991, with 2,882 cases in England and
Wales for the 1998/1999 reporting period. Group C meningococci account for 35%
to 45% of all cases and caused an estimated 150 deaths in the 1998/1999
reporting period, more than half of all meningococcal related deaths. The number
of reported cases of meningococcal disease in UK teenagers has doubled since
1994.
The Company does not expect to 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 by early in the third
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(TM)
is issued within a few months of April 2000, although there can be no assurances
in this regard. In addition, there can be no assurances that further production
disruptions or failures will not impact the Company's ability to deliver
NeisVac-C(TM) timely or in sufficient quantities to meet its obligations under
the NHS contract. See Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation for a more complete discussion regarding
NeisVac-C(TM). See also "Risk Factors - Lack of Profitability."
In clinical trials supported by the PHLS, NeisVac-C(TM) demonstrated an
excellent safety and immunogenicity profile. NeisVac-C(TM) elicited
significantly higher antibody levels in several clinical studies compared to two
other Group C meningococcal conjugate vaccines. Antibody levels are accepted as
correlates to protective efficacy. Previous studies have demonstrated a
correlation between vaccine efficacy and its ability to generate immunologic
response and to stimulate bactericidal activity. The Company expects to complete
clinical trials for, and file for UK regulatory approval of, an infant
indication in 2000. See "Risk Factors - Government Regulation; Regulatory
Approvals."
NEISVAC-B (TM) VACCINE. Currently, there is no vaccine against Group B
meningococcal disease licensed for routine use. Between 30-50% of all
meningococcal disease is caused by this serogroup with no available
intervention. Everyone is vulnerable to the disease, but the most susceptible
age group is the infant population under one year of age. Fatality rates in
infants are the highest with 10-27 cases per 10,000 versus 1 per 100,000 in the
older population. As antibiotic therapy is unsuccessful if not applied early, a
vaccine to prevent Group B meningococcal infections, including meningitis, is
highly desirable.
The Company has developed a Group B meningococcal conjugate vaccine
utilizing a unique carrier protein which appears to reduce many of the
previously reported problems associated with the development of an effective
Group B meningococcal polysaccharide vaccine. Since late 1995, the Company
worked with Aventis Pasteur (formerly Pasteur Merieux Connaught) to jointly
develop this conjugate vaccine. The two companies successfully collaborated in
1997 on preclinical primate studies for this Group B meningococcal conjugate
vaccine that confirmed its safety and immunogenicity. These studies demonstrated
that the conjugate vaccine made using the Company's proprietary technologies
elicited IN VIVO superior bactericidal responses to another Group B
meningococcal conjugate vaccine. In February 2000, Aventis Pasteur informed the
Company of its decision to terminate its collaboration principally because of a
change in strategic direction by Aventis Pasteur. See "Business Relationships -
Aventis Pasteur Agreements" and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation. The Company is planning to file in
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<PAGE>
the second quarter of 2000 an investigational new drug application with the FDA
to begin a Phase I clinical trial in adults.
COMBINATION MENINGOCOCCAL VACCINES. The Company is also developing
combination conjugate vaccines against Group B/C, and B/C/Y meningococcal
disease for adults and infants. The Company has completed preclinical
development and testing of its Group A and Group A/C meningococcal conjugate
vaccines, although combination vaccines including the Group A polysaccharide are
to be developed. The clinical development and testing of these vaccines are
expected to take several years to complete.
GROUP B STREPTOCOCCAL VACCINE. Group B streptococcal ("GBS") infection
affects all age groups in the United States and is the most common cause of
life-threatening infections, including sepsis and meningitis in newborns. GBS
infections in infants occur principally during the first three months after
birth and can result in serious complications, including death, pneumonia or
permanent brain damage from meningitis. Disease in newborns during the first
week of life generally is caused by infection of the infant passing through the
mother's colonized birth canal. GBS disease is also a prominent cause of
peripartum maternal infections. Since there is no vaccine for the prevention of
GBS disease in adults or infants, the CDC has issued guidelines for detecting
and treating GBS infections in pregnant women as a means of reducing the risk
and incidence of disease in newborns. These guidelines, which have been adopted
by the AAP and the American College of Obstetricians and Gynecologists, include
diagnostic testing during the third trimester and, for those infected, a course
of intravenous antibiotics during and after labor. A primary target market for
this vaccine will be women of child-bearing age. A principal benefit to such an
immunization program is that the vaccine has the potential to generate
protective antibodies for both the mother and the infant and, therefore, prevent
a large portion of newborn infections.
A vaccine against GBS infection, utilizing patented technologies that the
Company has licensed from the NRC, the Brigham and Women's Hospital, and Harvard
University, has been tested in a Phase I/II clinical trial conducted under the
sponsorship of the NIAID. In that trial, the monovalent vaccine was well
tolerated with minimal reactogenicity and no serious side-effects in healthy,
nonpregnant women subjects. Antibodies elicited by immunization with different
conjugate vaccine serotypes displayed protective activity IN VITRO and IN VIVO.
The administration of a GBS polysaccharide conjugate vaccine to adolescent
females may be a realistic approach to the prevention of perinatal GBS infection
since antibodies transported through the placenta to the fetus during subsequent
pregnancies may confer protective immunity even to infants born prematurely
between 34 and 37 weeks of gestation. Trials of monovalent GBS vaccines have
been expanded, and the vaccines are currently in Phase II clinical trials. The
Company is presently planning clinical studies of its multivalent vaccine in
nonpregnant adolescent girls and women.
HAEMOPHILUS INFLUENZAE TYPE B VACCINE. Hib has been a frequent cause of
meningitis and other serious infections in infants and children. The ACIP has
issued a recommendation for universal vaccination of children for protection
against diseases caused by Hib. Vaccination against Hib consists of either a two
or three dose primary regimen (depending on vaccine used), with primary doses
administrated at the ages of 2, 4 and 6 months and a booster dose administered
at between 12 to 15 months of age. See Table 2 above. Children infected with Hib
bacteria can develop meningitis, which can lead to blindness, deafness, acquired
mental retardation or death. The peak incidence of Hib infection in the United
States occurs in children between 6 and 18 months of age. Three manufacturers
are currently licensed by the FDA to sell Hib conjugate vaccines for use in all
primary and booster doses. See "Competition."
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At the end of 1999, the Company completed Phase I clinical trial for its
Hib conjugate vaccine using rPorB as the protein carrier. The preliminary
results of that trial indicate that the vaccine was well-tolerated and
immunogenic. The Company expects to begin a Phase II clinical trial of this
vaccine in toddlers in 2000. See "Products Under Development - aP Combination
Vaccines."
GROUP A STREPTOCOCCAL VACCINE. Group A streptococcal disease occurs in all
age groups with a predominance in school-age children. Group A streptococcus
causes infections ranging from severe sore throat and sinus infection to
pneumonia and toxic streptococcal syndrome. Sequelae of Group A streptococcal
infections include rheumatic fever and glomerulonephritis. Currently, there is
no vaccine licensed by the FDA to prevent Group A streptococcal infection. The
Company is engaged in the research and development of a conjugate vaccine to
prevent this infection. Activities on this vaccine are in the preclinical stage.
PNEUMOCOCCAL VACCINE. There are in excess of 20 serotypes of pneumococcal
bacteria that cause pneumonia, a respiratory infection that affects individuals
of all ages, as well as other infections. The present pneumococcal vaccine is a
multivalent polysaccharide vaccine recommended for adults, particularly elderly
and other patients with a high risk of contracting pneumonia. Otitis media, or
middle ear infection, is a common illness in the United States afflicting
children under five years of age. The majority of bacterial cases are
attributable to pneumococcal organisms. Chronic otitis media can lead to hearing
defects and associated learning and language disabilities. There is no vaccine
licensed by the FDA that prevents otitis media caused by pneumococcal bacteria.
The Company is currently in the preclinical stage of the development of a
multivalent conjugate vaccine against pneumococcus infection, including otitis
media.
OTHER VACCINES
The Company, utilizing patented and proprietary technologies, is
performing research on and developing other adult and pediatric vaccines, which
it selects for development based on the anticipated need for a particular
product, the nature of the competition, and the ability of the Company to
develop the product, among other factors. The Company's research and development
efforts are being conducted independently and in conjunction or in collaboration
with governmental agencies and universities. There are no assurances that any of
these vaccines will enter clinical trials or successfully be developed or
licensed by the FDA or any other regulatory authority for commercial sale.
MARKETING OF VACCINES
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. In pursuing this objective, the
Company considers, among other things, collaborations with pharmaceutical and
other vaccine manufacturers where appropriate to maximize the value of the
Company's products and technologies.
To maximize market penetration for its first commercial products within
the least amount of time, the Company has aimed to establish marketing alliances
in the United States, Europe and other territories with well-established local
partners on a country-by-country basis. Toward this end, the Company previously
entered into marketing alliances for certain products in the United States and
selected countries within Europe. Two of these relationships were terminated in
1999. Under a marketing agreement between Abbott and the Company, Abbott began
to market Certiva(R) in October 1998 to private physicians and managed care
markets in the United States for immunization of infants and children. Abbott
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terminated the agreement in September 1999. The Company is currently selling out
of limited inventories of Certiva(R) to non-government purchasers through
wholesale distributors. In addition, effective as of the end of 1999, the
Company and Chiron-Behring terminated their collaboration whereby Chiron-Behring
would distribute the Company's DTaP and DTaP-IPV vaccines in Germany and
Austria. The Company will continue to evaluate distribution, marketing, joint
venture and similar arrangements with third parties in its territories and for
products where, in the judgment of the Company, such arrangements would be
beneficial to the successful commercialization of its products; however, under
the terms of the Share Exchange Agreement, the Company currently may not enter
into any new or alternative collaborative arrangements for third parties to
distribute, research and develop its products without Baxter's consent until
either the transaction with Baxter is completed or the Share Exchange Agreement
is terminated. See "Business Relationships" and Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operation.
The Company also has sold vaccines directly to federal and state
government programs, with Texas and California constituting approximately 44%
and 11% of sales in 1999. In the United States, federal and state governments
currently purchase a substantial portion of pediatric vaccines sold. The Company
is selling Certiva(R) directly to federal and state governments through
established purchasing programs. The Company participates in the U.S.
government's multiple contract awards for the purchase of its annual
requirements of DTaP vaccine. Under these contracts, the Company and the other
vaccine suppliers effectively are not guaranteed any minimum purchase
requirements, but they are provided the opportunity to revise their contract
proposals on a quarterly basis. The Company also is competing to supply
Certiva(R) to state government programs. See "Risk Factors - No Assurance of
Effective Marketing" and "Risk Factors - Changes in Government Purchasing
Policies." The Company expects to have limited sales of Certiva(R) in 2000
principally because of the Company's focus on fulfilling its contractual
commitments under the NHS contract for NeisVac-C(TM). See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation for a
more complete discussion.
For financial information regarding the segments in which the Company
operates, see Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation, and Note 3 of the Notes to the Consolidated
Financial Statements in Item 8 Financial Statements and Supplementary Data. All
of the Company's sales are made in U.S. dollars. The backlog of orders believed
to be firm for the Company's products was approximately $1.9 million and $1.6
million as of December 31, 1999 and 1998, respectively. The Company does not
consider orders for any of the Company's products to be firm until such time as
regulatory approval is obtained for each product. To date, sales of bulk aP
vaccines to SSI have constituted the Company's exports. In 1999, 1998 and 1997,
the Company's product sales to SSI were $2.4 million, $1 million and $1.7
million, respectively.
In 2000, sales of NeisVac-C(TM) are expected to be solely to the UK
government under the NHS contract as part of a national immunization campaign of
all newborns to young adults to prevent Group C meningococcal disease. These
sales represent a one-time opportunity, because upon completion of the national
campaign, the UK market for NeisVac-C(TM) generally will be limited to the
annual birth count of approximately 700,000 infants. Accordingly, the Company
will undertake to use the European mutual recognition procedures to have
NeisVac-C(TM) approved for marketing in additional European countries, although
there can be no assurances that these marketing authorizations will be issued
timely or at all. See "Risk Factors - Government Regulation; Regulatory
Approvals."
To successfully commercialize Certiva(R) in the United States, the Company
will be required, among other things, to continue participation in established
purchasing programs of federal and state governments, to maintain an identity
and reputation for the Company and its products, to maintain an awareness among
pediatricians of the safety and efficacy of the vaccine, to distinguish the
Company's products from those of its competitors, to maintain the Company as an
effective and reliable supplier of vaccines, to maintain efficient and
consistent production of sufficient quantities of vaccine and to establish
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effective distribution channels. There can be no assurance that the Company will
be able to continue to successfully market its vaccine products, or that it will
successfully negotiate and execute any commercial arrangements with third
parties. See "Business Relationships," "Competition" and "Risk Factors - No
Assurance of Effective Marketing."
BUSINESS RELATIONSHIPS
PERTUSSIS LICENSE AGREEMENT. The process by which the Company's pertussis
toxin is inactivated is the subject of a United States patent held by the United
States Government, which has been licensed exclusively to the Company. The
patent is scheduled to expire on August 9, 2005; however, the Company has filed
an application with the U.S. Patent and Trade Office to extend the patent term
and has received a preliminary determination that the extension will be through
2010. The Company's exclusive rights will expire on October 29, 2005. The
Company is required to pay the United States Government a royalty based on net
sales of a vaccine that utilizes the patented technology. Foreign patent
applications covering this technology have been filed and fourteen unexpired
foreign patents are issued with expiration dates ranging from 2002 to 2009. The
Company has acquired a royalty-bearing exclusive license for the use of the
patented technology in all such foreign jurisdictions for the full term of the
patents. See "Products Under Development - Acellular Pertussis Vaccines."
CANADIAN GOVERNMENT LICENSE AGREEMENTS. The Company is the assignee under
two license agreements between BioChem and the Canadian Government covering the
conjugate technology being developed by the Company. These license agreements
currently cover a total of thirty-one issued patents with expiration dates
ranging from 2005 to 2016, and the Company and the Canadian Government have
applied for additional patents, which, if issued, would be licensed to the
Company under these agreements. The Company is required to pay the Canadian
Government royalties on the sale of licensed vaccines. In the event of a change
in control of the Company, the Canadian Government retains the right to
terminate both agreements if it believes such change in control is detrimental
to the Canadian Government; however, the Company does not expect that
acquisition by Baxter to trigger this provision under the applicable licenses.
The Canadian Government also can terminate the license agreements if all
reasonable efforts are not being used to exploit the technology commercially
with due diligence. Under one license agreement, the Company has the exclusive
worldwide rights (excluding Canada) for the development, production and sale of
vaccines produced in accordance with the conjugate vaccine technology covered by
the license. The vaccines covered include, among others, those against
meningococcal, HAEMOPHILUS INFLUENZAE type b, Group B streptococcal and
pneumococcal infections. The term of the license is co-extensive with the term
of the patents. Currently, the last-to-expire patent licensed under this
agreement is scheduled to expire in 2016. Under the second license agreement,
the Company has the exclusive worldwide rights (excluding Canada) for the
development, production and sale of a vaccine against Group B meningococcal
disease produced in accordance with the licensed technology. The term of the
license is co-extensive with the terms of the patents. Currently, the
last-to-expire patent licensed under this agreement is scheduled to expire in
2016. See also "Products Under Development - Conjugate Vaccines."
STATENS SERUM INSTITUT SUPPLY AGREEMENTS. In 1991, the Company and SSI
executed a supply agreement under which SSI is required to supply the Company
with its requirements of diphtheria and tetanus toxoids to be used by the
Company for developing, producing and selling the DTaP vaccine, either alone or
as a combination vaccine. The Company has been using these diphtheria and
tetanus toxoids in producing its DTaP vaccine. In the event SSI fails to
continue to supply the Company with these components, the Company has a
royalty-bearing license to produce the diphtheria and tetanus toxoids. The
Company's right to purchase diphtheria and tetanus toxoids for sale of such
products is exclusive in certain designated countries and nonexclusive in the
rest of the world with the exception of SSI's Territory. The contract has a term
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of 20 years. The Company and SSI also have entered into another supply agreement
pursuant to which the Company has agreed, on an exclusive basis, to supply SSI
with the pertussis toxoid for combination with diphtheria and tetanus toxoids
either alone or together with other antigens for sale in SSI's Territory.
In February 1992, the Company signed two additional supply agreements with
SSI. Under the first supply agreement, SSI has agreed to provide the Company
with diphtheria and tetanus toxoids for use as carrier proteins in the
development and manufacture of the Company's conjugate vaccines. If SSI fails to
continue to supply the Company with these components, the Company has a
royalty-bearing license to produce diphtheria and tetanus toxoids for this
purpose. Under the second supply agreement, the Company has agreed to supply SSI
with its conjugate vaccines that utilize SSI's diphtheria or tetanus toxoids as
a carrier protein solely for use by SSI in combination with DTaP and DTaP-IPV
vaccines in SSI's Territory. SSI's right to market and sell these products is
exclusive in SSI's Territory. These agreements have a term of 20 years.
STATENS SERUM INSTITUT RESEARCH AND DEVELOPMENT AGREEMENT. In 1991, the
Company entered into a research and development agreement with SSI under which
the parties agreed to collaborate on the development of a DTaP-IPV vaccine. See
"Products Under Development - aP Combination Vaccines." The agreement permits
either party to add other antigens to the DTaP-IPV product. Once the Company
obtains regulatory approval, and commences sales of the DTaP-IPV product, it
will be required to make royalty payments to SSI. SSI is required to sell to the
Company all of its requirements of IPV for the purpose of developing, producing
and selling the DTaP-IPV product, either alone or together with other antigens.
The contract has a term of 20 years.
STATENS SERUM INSTITUT DISTRIBUTION AGREEMENTS. The Company has been
designated the exclusive distributor in North America and the United Kingdom for
SSI's diphtheria, tetanus and IPV vaccines. Additionally, SSI will be the
exclusive distributor in various countries for the conjugate vaccines
manufactured using the components supplied to the Company by SSI. These
agreements were executed in February 1992, and each agreement has a term of 10
years.
TECHNOLOGY TRANSFER AGREEMENT WITH BIOCHEM. In 1990, in addition to the
conjugate vaccine technologies described above, BioChem transferred to the
Company all rights to certain vaccine technologies and granted to the Company a
paid-up exclusive right (excluding Canada) and license to other technologies for
vaccine applications, including those relating to monoclonal antibodies,
synthetic peptides and adjuvants. The licenses granted under this agreement
generally will not terminate until the expiration of the last valid patent or
copyright anywhere in the world for the licensed technologies or until the last
portion of the technologies protected by trade secrecy enters the public domain
everywhere in the world, whichever occurs last. Currently, this agreement covers
one U.S. patent that expires in 2015 and two European patents which expire in
2011.
AVENTIS PASTEUR AGREEMENTS. At the end of 1995, the Company entered into a
clinical development agreement and a license agreement with Aventis Pasteur
(formerly Pasteur Merieux Connaught) under which both parties would jointly
develop the Company's new conjugate vaccine against Group B meningococcus for
both adult and pediatric indications. In addition, Aventis Pasteur was
responsible for all costs associated with the clinical development of the
vaccine through the completion of Phase II clinical trials. See "Products Under
Development - Conjugate Vaccines - Meningococcal Vaccines." In February 2000,
Aventis Pasteur informed the Company of its decision to terminate the
arrangement principally because of a change in strategic direction by Aventis
Pasteur. Under the terms of the agreements, Aventis Pasteur had the right to
terminate at any time. With termination of the agreements, all rights to the
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products and technology developed in collaboration with Aventis Pasteur reverted
immediately back to the Company. Through the termination date of the agreements,
the Company received payments from Aventis Pasteur in connection with this
project in the amount of approximately $18 million. See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.
ABBOTT LABORATORIES AGREEMENT. In October 1996, the Company and Abbott
signed a definitive agreement under which Abbott would market Certiva(R)
following FDA approval. Abbott began to market Certiva(R) in October 1998 to
private physicians and managed care markets in the United States for
immunization of infants and children. Abbott terminated the relationship in
September 1999. The Company is currently considering selling Certiva(R) to
non-government purchasers in the United States through direct arrangements with
distributors, although no formal agreements have been completed.
Under the agreement, Abbott provided the Company with clinical development
funding for its combination vaccines. The Company recognized approximately
$850,000 of revenues under this contract in 1999 prior to its termination.
During the course of the agreement, the Company received total payments of $6
million. In addition, the Company received revenues from Abbott as it purchased
Certiva(R). See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation.
OTHER RELATIONSHIPS. The Company holds licenses and other rights to
additional technologies that the Company is researching and/or developing
jointly with various research institutions.
COMPETITION
Competition in the vaccine industry is intense. The Company faces
competition from many companies, including a number of large companies and
specialized firms in the United States and abroad that are engaged in the
development and production of vaccines, and major universities and research
institutions. Many of the Company's competitors have substantially greater
financial and other resources, more extensive experience in conducting clinical
testing and obtaining regulatory approvals for their products, greater operating
experience, larger research and development and marketing staffs, and greater
production capabilities than those of the Company.
The Company believes that the principal methods of competition in the
vaccine marketplace are price, product quality (measured by the safety and
efficacy of a vaccine product) and introduction of new products (including
vaccines against diseases for which no vaccine was previously available as well
as new combination vaccines that combine existing vaccines for several diseases
into a single product). Combination vaccines frequently are favored by public
health authorities, medical practitioners and patients, particularly in the case
of pediatric vaccines, because they reduce the need for multiple injections and
may increase overall compliance with recommended vaccination schedules. As new
combination vaccines are introduced, older combinations and single products
often become obsolete. See "Marketing of Vaccines."
The Company believes that its principal competitors in the United States
are Wyeth-Lederle (a subsidiary of American Home Products), Merck & Co.,
SmithKline Beecham plc, and Aventis Pasteur, most of which are active in the
development of aP, combination and conjugate vaccines for use in infants and
children. For example, Certiva(R) currently competes in the United States with
three other DTaP vaccines, and most, if not all, manufacturers of DTaP vaccines
are expected to compete in the TdaP vaccine market. In addition, NeisVac-C(TM)
is expected to compete in the United Kingdom against at least two other Group C
meningococcal conjugate vaccines, one of which is already licensed there. To the
extent that these competitors are successful in developing and marketing
combination vaccines that include DTaP vaccines, these combination
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vaccines may gain market share at the expense of stand-alone DTaP vaccines,
including Certiva(R). One of these competitors has licensed in the United States
a vaccine that combines by reconstitution that company's Hib vaccine with its
DTaP vaccine for administration at 15-18 months of age. Another competitor has
reported that it is in clinical trials for a DTaP-Hib combination vaccine. In
addition, several competing DTaP vaccines and certain combination vaccines
incorporating DTaP, IPV, Hepatitis B and/or Hib vaccines have been licensed for
sale outside of the United States. See "Risk Factors - Competition and
Technological Change."
PATENTS AND PROPRIETARY INFORMATION
The Company actively pursues a strategy of seeking patent protection for
valuable patentable subject matter. The Company believes that patent and trade
secret protection is an important element of its business and that its success
will depend in part on its ability to obtain strong patents, to maintain trade
secret protection, and to operate without infringing the proprietary rights of
third parties. The Company holds as assignee and licensee a number of patents
and patent applications. See "Business Relationships" and "Risk Factors - Patent
Protection and Proprietary Information."
The Company also relies upon trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive position.
Disclosure and use of the Company's know-how is generally controlled under
agreements with the parties involved. In addition, the Company has
confidentiality agreements with its employees, consultants and officers. There
can be no assurance that disclosure of the Company's trade secrets will not
occur, or that others will not independently develop and patent equivalent
technology.
GOVERNMENT REGULATION
The Company and its products are subject to comprehensive regulation by
the FDA in the United States and by comparable authorities in other countries.
These national agencies and other federal, state, and local authorities
regulate, among other things, the preclinical and clinical testing, safety,
effectiveness, approval, manufacturing, labeling, advertising, promotion,
export, and marketing of the Company's products. In the United States, the FDA
regulates human vaccine products under the Federal Food, Drug, and Cosmetic Act,
the Public Health Service Act, and other laws.
The steps required before a human vaccine product may be approved for
marketing in the United States generally include: (i) preclinical laboratory and
animal testing; (ii) submission to the FDA of an Investigational New Drug
Application ("IND") for human clinical testing, which must become effective
before human clinical trials may commence; (iii) human clinical trials and other
studies to establish the safety and efficacy of the product; (iv) the submission
to the FDA of license applications; (v) FDA review of the license applications;
and (vi) satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is made to assess compliance with
Good Manufacturing Practices ("GMP"). The testing and approval process requires
substantial time, effort and financial resources, and there can be no assurance
that any approval will be granted on a timely basis, if at all. See "Risk
Factors - Government Regulation; Regulatory Approvals."
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Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess its safety, immunogenicity, and potential efficacy. The
results of preclinical tests, together with the manufacturing information and
analytical data, are submitted to the FDA as part of an IND, which must become
effective before human clinical trials may begin. An IND will automatically
become effective 30 days after receipt by the FDA, unless before that time the
FDA raises concerns or questions. If it does, the FDA's concerns and questions
must be resolved before clinical trials can proceed.
Clinical trials involve the administration of the investigational new
vaccine to healthy volunteers or to patients, under the supervision of a
qualified investigator. Clinical trials are conducted under protocols that
detail the objectives of the study and the parameters to be used to monitor
efficacy and safety. Each clinical study must be reviewed by an independent
Institutional Review Board ("IRB"), and the IRB must approve the study before it
begins. In its review, the IRB will consider, among other things, ethical
factors and the safety of human subjects.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase 1, the initial introduction of the vaccine into
human subjects (usually healthy volunteers), the vaccine is tested for safety
(adverse effects), optimal dosage, and its ability to induce an immune response
(immunogenicity). Phase II involves studies in limited target patient
populations to further evaluate immunogenicity and optimal dosage, and to
identify possible adverse effects and safety risks. Phase III clinical trials
are undertaken to evaluate clinical efficacy or some measure thereof and to
further test for safety within an expanded target patient population, usually at
geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing of any of the Company's products will be
successfully completed within any specific time period, if at all, or, that if
they are completed, that the results of the trial will be sufficient to serve as
the basis of a license application submission to the FDA. Furthermore, FDA may
suspend clinical trials at any time on various grounds, including a finding that
the subjects in the trial are being exposed to an unacceptable health risk. See
"Risk Factors - Uncertainties Related to Clinical Trials."
The results of preclinical testing and clinical trials, together with
detailed information on the manufacture and composition of a product, are
submitted to the FDA in the form of a Biologics License Application ("BLA"). The
FDA may deny a BLA if applicable regulatory criteria are not met, require
additional testing or information, and/or require post-marketing testing and
surveillance to monitor the safety or efficacy of a product. Before approving a
BLA, the FDA will inspect the facilities at which a product is manufactured, and
will not approve the product unless GMP compliance is satisfactory.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the BLA
review process, or thereafter (including after approval), may result in various
adverse consequences, including the FDA's delay in approving or refusal to
approve a product, withdrawal of an approved product from the market, seizure,
injunction, and/or the imposition of criminal penalties against the license
holder. For example, each holder of an IND or FDA license is required to report
certain adverse reactions to the FDA, and to comply with certain requirements
concerning advertising and promotional labeling for their products. Also,
quality control and manufacturing procedures must continue to conform to GMP
regulations after approval, and the FDA periodically inspects manufacturing
facilities to assess compliance with GMP. Accordingly, manufacturers must
continue to expend time, moneys, and effort in the area of production and
quality control to maintain GMP compliance. In addition, discovery of problems
may result in restrictions on a product, including withdrawal of the product
from the market. Also, new government requirements may be established that could
delay or prevent regulatory approval of the Company's products under
development.
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The Company is also subject to a variety of foreign regulations governing
clinical trials and sales of its products. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries. The approval process varies from country to country
and the time may be longer or shorter than that required for FDA approval.
Requirements similar to FDA's are also in effect in the European Union and
other foreign countries where the Company has applied or may apply for
regulatory approval for clinical studies and/or marketing of its vaccines. The
Company's research and operations also are subject to regulation by the
Occupational Safety and Health Agency, the Environmental Protection Agency, the
Department of Agriculture, and the Department of Transportation. The Company
also is subject to regulation under the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, and other regulatory statutes, and may
in the future be subject to other federal, state, local or foreign regulations.
The Company's compliance with laws that regulate the discharge of materials into
the environment or otherwise relate to the protection of the environmental does
not have a material effect on the ongoing operations of the Company. The Company
has not made any material expenditures for environmental control facilities, nor
does it anticipate any such expenditures during the current fiscal year.
RAW MATERIALS
Laboratory supplies utilized in the Company's research and development
generally are available from several commercial suppliers under standard terms
and conditions. Most raw materials necessary for process development, scale-up
and commercial manufacturing are generally available from multiple commercial
suppliers. However, certain processes require raw materials from sole sources or
materials that are difficult for suppliers to produce and certify to the
Company's specifications. In addition, the Company may experience temporary or
permanent shortages of critical raw materials necessary for continued production
of its vaccines. Accordingly, given the specific nature of, and critical need
for, certain raw materials, there is a risk that material shortages could delay
production efforts, adversely impact production costs and yields, and even
necessitate the use of substitute materials. Any of these events could have a
significant adverse impact on the Company's operations. See also "Risk Factors -
Dependence on Suppliers."
PRODUCT LIABILITY
The testing and marketing of vaccines entail an inherent risk of product
liability attributable to unwanted and potentially serious health effects. The
extent of this risk was sufficiently great in the United States that, by the
mid-1980s, many manufacturers ceased production of pediatric vaccines because of
liability exposure.
In response to these withdrawals from the vaccine market, Congress enacted
the NCVI Act to ensure the availability of government mandated pediatric
vaccines by addressing the liability of manufacturers for immunization-related
injuries. Among other things, the NCVI Act created a trust fund, supported by an
excise tax on each dose of vaccine sold, to compensate eligible injured parties.
Compensation awards are statutorily established and are generally limited to
actual and projected unreimbursed medical, rehabilitative and custodial
expenses, lost earnings, and pain and suffering, together with reasonable
attorneys' fees. Injured parties are not allowed to bring a lawsuit against the
manufacturer unless they have filed a claim with the program, received a final
determination and rejected it in favor of litigation. The NCVI Act may not,
however, protect vaccine manufacturers against liability if the conditions of
the NCVI Act are not satisfied, or against suits by family members of an injured
party.
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As the vaccines covered by the NCVI Act include vaccines for the
prevention of diphtheria, tetanus, pertussis, polio and Hib, the Company's DTaP,
IPV and Hib vaccines have certain protection from liability claims. While none
of the Company's other products are presently covered by the NCVI Act, from time
to time there are legislative and regulatory proposals to expand the list of
vaccines covered by, and to reduce the excise taxes that fund, the program. The
Company is unable to predict whether any other legislative or regulatory
proposal will ultimately be enacted or the effect any of these proposals may
ultimately have on the Company's business or results of future operations.
The testing and marketing of vaccine products involve an inherent risk of
product liability. The Company has limited product liability insurance coverage.
There can be no assurance that adequate additional insurance coverage will be
available at acceptable cost, if at all, or that a product liability claim would
not materially adversely affect the Company's business or financial condition.
If not covered by insurance, the Company faces potential liability that could be
substantial in the event of claims.
EMPLOYEES
As of December 31, 1999, the Company had 267 full-time employees of whom
29 have Ph.D. degrees and three have M.D. degrees. Of these employees, 171 were
engaged in research, development and production activities, 34 were engaged in
administration, and 62 were engaged in quality/regulatory and related aspects of
the Company's operations. The Company considers its relationship with employees
to be satisfactory.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS ANNUAL REPORT ON
FORM 10-K, READERS SHOULD CONSIDER THE FOLLOWING RISK FACTORS. THIS ANNUAL
REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS COVERED BY THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S
BUSINESS AND PROSPECTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS
SECTION.
RISK OF FAILURE TO COMPLETE THE ARRANGEMENT WITH BAXTER. If the
arrangement is not completed for any reason, NAVA may be subject to a number of
material risks, including the following:
o the Company is required to repay amounts borrowed under the credit
facility with Bank of America and guaranteed by Baxter. As of March
21, 2000 the principal amount outstanding under this credit facility
was $19.5 million;
o the Company may be required to pay Baxter a termination fee of $14
million and reimburse Baxter for expenses up to $1 million;
o the price of the Company's Common Stock may decline to the extent that
the current market price of the Common Stock reflects a market
assumption that the arrangement will be completed; and
o costs related to the arrangement, such as legal, accounting and
financial advisor fees, must be paid even if the arrangement is not
completed.
See also "Risk Factors - Risk Associated with Lack of Availability of Capital."
In addition, current and prospective employees of the Company may be
uncertain about their future roles with Baxter until Baxter's strategies with
regard to the Company are announced or executed. This may adversely affect the
Company's ability to attract and retain key management, sales, marketing and
technical personnel. Also, concern about the financial prospects of the Company
and the uncertainty related to the closing of the arrangement with Baxter has
contributed to employees leaving the Company and may contribute to additional
loss of personnel.
Further, if the arrangement is terminated and the Company's board of
directors determines to seek another arrangement or business combination, there
can be no assurance that it will be able to find a partner willing to pay an
equivalent or more attractive price than the price to be paid in the arrangement
or sufficient financing on acceptable terms that will be necessary to fund the
Company's continuing operations. In addition, while the Share Exchange Agreement
is in effect, the Company is prohibited, subject to certain exceptions, from
soliciting, initiating or encouraging or entering into certain extraordinary
transactions, such as an arrangement, sale of assets or other business
combination, with any party other than Baxter without becoming responsible for
paying a termination fee and reimbursing Baxter for expenses up to $1 million.
RISK ASSOCIATED WITH LACK OF AVAILABILITY OF CAPITAL. To maintain the
Company's production, research and development at current levels, present cash
and cash equivalents, expected product sales of Certiva(R), NeisVac-C(TM), and
the Company's other products are not expected to provide sufficient cash to fund
the Company's operations, debt service payments and capital expenditures in 2000
and into 2001. To address the cash needs, the Company obtained in November 1999
a $30 million secured revolving line of credit from Bank of America, N.A. This
line of credit is guaranteed by Baxter and is secured by all of the Company's
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otherwise unencumbered assets, including patents, patent applications and
receivables. The Company expects that this line of credit will fund its
operations through March 31 and through April 2000 if extended by the bank with
Baxter's consent. If the acquisition by Baxter does not close timely in early
April 2000, the Company will have to secure alternative interim financing and
could be required to repay any outstanding balances on March 31, 2000. In this
case, there can be no assurances that the Company will be able to obtain
additional debt or equity financing on favorable terms in amounts required to
meet cash requirements or that litigation will not result with Baxter arising
out of the Company's efforts to secure such financing. The Share Exchange
Agreement prohibits the Company from entering into certain debt and equity
financing arrangements.
In this case, the Company will be required to raise up to approximately
$62 million, or $77 million should the Company be required to pay breakup fees
to Baxter, of new financing in the second quarter of 2000 to finance its
operations, service its debt and repay the lines of credit guaranteed by Baxter
and BioChem. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. The foregoing include forward looking
statements 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.
In addition, the Company currently cannot secure any funding through third
party collaborations, because under the terms of the Share Exchange Agreement,
the Company may not enter into any new or alternative collaborative arrangements
for third parties to distribute, research and develop its products without
Baxter's consent until either the transaction with Baxter is completed or the
Share Exchange Agreement is terminated.
If the Company is unable to extend the March 31, 2000, maturity date of
its credit facility with the Bank of America or to obtain other financing to
repay the facility, then the Company would be in default under the Bank of
America credit facility, and the bank and/or Baxter (as guarantor) could
foreclose on the Company's assets, including patents, patent applications and
receivables, securing the credit facility. The $30 million line of credit with
Bank of America, N.A. guaranteed by Baxter is secured by all of the Company's
otherwise unencumbered assets, including patents, patent applications and
receivables. If an event of default occurs under the loan agreement, Baxter is
obligated to purchase all of Bank of America's rights and obligations under the
loan agreement with the Company. A default that is not timely cured would also
trigger defaults and, therefore, repayment obligations under the Company's other
financing facilities, as well as the possible foreclosure upon the remaining
Company assets by creditors. The 4.5% Notes are secured by a pledge of
collateral, which includes certain of the Company's equipment and other assets
at the Company's principal manufacturing facility and the Company's ownership
rights in U.S. Patent No. 5,425,946, entitled "Vaccines Against Group C
NEISSERIA MENINGITIDIS." Any foreclosure on the collateral would substantially
impair the Company's ability to operate its business, if it could do so at all
without seeking bankruptcy protection. See Item 6 - Selected Financial Data and
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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RISK RELATED TO SIGNIFICANT LEVEL OF INDEBTEDNESS. The Company currently
has a significant level of indebtedness. As of December 31, 1999, the Company's
consolidated indebtedness and capitalized lease obligations totaled
approximately $119 million, including $75.3 million of 6.5% Convertible
Subordinated Notes ("6.5% Notes"), $25 million of 4.5% Convertible Secured Notes
("4.5% Notes"), $6 million under a line of credit guaranteed by BioChem and $10
million under a $30 million line of credit guaranteed by Baxter. The Company's
total assets as of December 31, 1999 are approximately $34 million. As of March
21, 2000, the Company had drawn down a total of $19.5 million under the line of
credit guaranteed by Baxter, which matures on March 31, 2000. Until the Company
begins to receive significant revenues from product sales of NeisVac-C(TM) under
the NHS contract, the Company will continue to incur additional indebtedness
under the line of credit guaranteed by Baxter, which is the Company's principal
source of financing for its operations.
This level of indebtedness could have material consequences for the
Company such as:
o impairing the Company's ability to obtain additional financing for
working capital, capital expenditures, and general corporate or other
purposes, and
o limiting the availability of a substantial portion of the Company's
future cash flow from operations, if any, as it will be required for
payment of the principal and interest on its indebtedness.
The Company will not generate sufficient increases in cash flow from
operations to service its indebtedness; accordingly the Company must secure
additional financing. There can be no assurance, however, that any financing
would be available to the Company. See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
In early May 2000, the Company is obligated to pay approximately $3.0
million in interest payments to the holders of the 6.5% Notes and 4.5% Notes.
The $6 million line of credit guaranteed by BioChem also expires on May 31,
2000; although as part of the Baxter transaction, BioChem has agreed to maintain
in effect and not to terminate in any respect its guaranty until the effective
date for closing on the transaction and to loan the Company, if the Share
Exchange Agreement is still in effect, up to $5 million on commercially
reasonable terms if the line of credit becomes due prior to the effective date
on the closing of the transaction. In addition, Baxter is the guarantor of the
$30 million line of credit from the Bank of America, N.A. This line of credit
matures on March 31, 2000, unless extended by the bank at Baxter's request.
Under the terms of the Share Exchange Agreement, the transaction was scheduled
to close by mid-April 2000. The transaction is subject to a number of conditions
to closing, including, among others, receipt of UK regulatory approval of the
NeisVac-C(TM) and the manufacture of a two-month supply of NeisVac-C(TM) for the
Company's contract with the UK's National Health Service ("NHS") before April 1,
2000. The Company currently does not expect to have received UK regulatory
approval for NeisVac-C(TM) or to manufacture the requisite two-month supply of
vaccines by April 1, 2000.
Baxter has advised the Company that it will not close on the acquisition
transaction under the current terms of the Share Exchange Agreement unless all
conditions to closing are satisfied in the time frame specified. Based upon the
Company's failure to meet required conditions on April 1 and other developments
of concern to Baxter, Baxter has proposed that the parties modify the Share
Exchange Agreement. The parties have been in discussions regarding proposals
that involve, among other things, a reduction in the purchase price, the terms
under which additional financing would be available to the Company, an extension
of the date by which conditions to closing are to be satisfied, additional
conditions to closing and changes to existing conditions to closing, the outside
date for termination of the Share Exchange Agreement, and an early termination
of the Share Exchange Agreement. There can be no assurances as to whether the
Company and Baxter will reach an agreement with respect to a mutually acceptable
modification to the Share Exchange Agreement or mutually acceptable termination
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arrangements or as to the timing of any such agreement. If the parties are
unable to reach such an agreement and Baxter determines not to waive the
conditions to closing which the Company is unable to meet, Baxter will not be
obligated to close on the acquisition transaction and the Company will continue
to be bound by the terms of the Share Exchange Agreement through at least May
31, 2000. Baxter has advised the Company that it does not wish to terminate the
Share Exchange Agreement. If the parties cannot agree upon a mutually acceptable
modification of the Share Exchange Agreement or mutually acceptable termination
arrangements, the Company's credit facility with the Bank of America will become
due and payable on March 31, 2000. The line of credit is secured by a pledge of
all of the Company's otherwise unencumbered assets. In such event, there can be
no assurances that the Company will be able to refinance this indebtedness or
obtain financing for its continued operations. If the Company cannot obtain
financing, there can be no assurance that the Company can continue its
operations for any period of time without seeking bankruptcy protection. In
addition, there can be no assurances that litigation will not be commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient funds
to defend such litigation, whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.
LACK OF PROFITABILITY. The Company has operated at a loss since its
inception and its net loss for the year ended December 31, 1999 was
approximately $49.6 million. The Company expects additional losses during 2000,
although not at the same magnitude, based upon a number of factors. The factors
included in assessing the projected losses are, among others: timing and
magnitude of product sales for NeisVac-C(TM) under the NHS contract,
difficulties experienced in scaling up bulk manufacturing of NeisVac-C(TM) the
expensing of costs to produce NeisVac-C(TM) prior to regulatory approval,
limited product sales from the limited inventory of Certiva(R) and aP vaccines
on hand, manufacturing limitations for the Company's acellular pertussis
vaccines, 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, all as discussed in greater detail in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations. In addition, there can be no assurance that the Company will become
profitable after 2000. To become profitable, the Company must:
o timely receive regulatory approval of, and timely and efficiently
manufacture, NeisVac-C(TM) to meet the Company's contractual
commitments under the NHS contract to supply 3 million doses for
approximately (British pound) 40 million (or approximately $64 million
as of March 23, 2000),
o timely and efficiently expand production capacity and output for its
acellular pertussis vaccine products,
o obtain regulatory approvals for new products, and produce and market
those products efficiently, successfully and in sufficient quantities,
o secure milestone and other payments under new collaborative
agreements, and
o reduce current levels of indebtedness.
The magnitude of the Company's losses in 2000 will greatly depend on
whether the Company receives the approximately (British pound) 40 million (or
approximately $64 million at March 23, 2000) for the sale of 3 million doses of
NeisVac-C(TM) under the NHS contract, with shipments that were scheduled to
begin in early April 2000, subject to UK regulatory approval. Under that
agreement, if the Company does not receive the requisite UK marketing
authorization before its first scheduled 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. The Company has had informal
discussions with NHS regarding the possible delays in licensure and product
delivery and believes that, based on these discussions and the strong profile
demonstrated by NeisVac-C(TM) 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(TM) is issued within a
few months of April 2000, although there can be no assurances in this regard. If
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<PAGE>
the NHS significantly reduces the number of doses purchased or terminates the
contract, the Company would experience substantially greater losses and its cash
resources (and its ability to invest in research and development) would be
severely impacted.
See "Risk Factors - Risk Related to Significant Level of Indebtedness," "Risk
Factors Risk Associated with Lack of Availability of Capital," "Risk Factors -
No Assurance of Effective Marketing," "Risk Factors - Risks Associated with
Limited Production Capacity" and Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation.
NO ASSURANCE OF EFFECTIVE MARKETING. The Company sells Certiva(R) to
government purchasers in the United States through a small internal salesforce.
Under a distribution agreement, Abbott previously marketed Certiva(R) to private
physicians and managed care markets in the United States; however, Abbott
terminated the agreement in September 1999. The Company is currently selling
Certiva(R) to non-government purchasers from limited inventories in the United
States through wholesale distributors. There can be no assurance that the
Company will successfully implement its sales and marketing strategies,
particularly with respect to the private physician and managed care markets
given the limited size of its internal salesforce.
Factors affecting commercial success of the Company's vaccines in the
United States include:
o establishing the Company as an effective and reliable supplier of
vaccines,
o establishing efficient and consistent production of sufficient
quantities of vaccine,
o establishing effective distribution channels,
o maintaining an identity and reputation for the Company and its
products, and
o increasing awareness among pediatricians of the safety and efficacy of
the Company's vaccines, and
o distinguishing the Company's products from those of its competitors.
In addition, the Company has entered into supply, marketing and
distribution agreements with SSI under which SSI has to market certain of the
Company's products, such as Certiva(R)-EU and the DTaP-IPV vaccine, in SSI's
Territory. The Company does not currently have a salesforce or partner to market
products in the European countries not included in SSI's Territory. 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. The Company is considering possible arrangements with
distributors to market the Company's products in these territories, although no
formal agreements have been completed. Consequently, the Company's revenues from
product sales in Europe and other territories depend upon the timing,
implementation and effectiveness of the sales, marketing and distribution
efforts of others. In addition, the Company may not be successful in negotiating
and executing additional marketing and/or distribution agreements with any other
third parties and these other third parties may be unable to market the
Company's products successfully. See "Business - Business Relationships."
RISKS ASSOCIATED WITH LIMITED PRODUCTION CAPACITY. The Company has only
one manufacturing facility through which it alternates production of its various
products, such as Certiva(R), and given that products cannot be manufactured
concurrently in the facility, the Company experiences shortages of supply for
commercial products if inventories are not sufficient to carry over until the
next scheduled production cycle for each product. This results in the loss of
sales for that product. NeisVac-C(TM) is presently in commercial production in
the manufacturing facility, so the Company will only have its current limited
inventories of Certiva(R) and aP vaccines available for commercial sale until
such time as lots of those products are manufactured and released for sale. See
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Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The Company's manufacturing facility also has limited production capacity
based on the present size, configuration, equipment, processes and methods used
to produce its products. In addition, production expenses are mainly fixed and
consist primarily of expenses relating to the operation of its production
facilities 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
respective net selling prices. In addition, the Company is commencing the
production of NeisVac(TM) in this facility on a commercial scale, and there can
be no assurances that there will not be disruptions or product failures. See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.
In order to address production limitations for Certiva(R) and its aP
vaccines, the Company has implemented a two-step capacity enhancement program.
The first 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
continue to be performed off-line during the first half of 2000, while
NeisVac-C(TM) is being produced in the manufacturing facility. Second, the
Company has modified its existing facilities and operations in a manner intended
to expand production capacity and efficiency. The Company filed the appropriate
documentation with the FDA in the fourth quarter of 1999 in seeking the approval
for these enhancements; however, there can be no assurances that such approval
will be granted by the FDA or that FDA review will not involve delays that would
adversely affect the Company's ability to market Certiva(R) made with these
enhancements. See "Risk Factors - Government Regulation; Regulatory Approvals."
Upon completion of both of these programs, the Company expects that unit
production costs (before filling and packaging) will be reduced. In prior years,
the production costs for the Company's acellular pertussis products exceeded
their net realizable value, and there can be no assurances that the enhanced
production and testing processes will increase capacity or lower the unit
production costs, particularly in light of the increased filling and packaging
costs associated with the decision to manufacture Certiva(R) without the
preservative thimerosal, as discussed in Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operation. See "Risk Factors -
Risk Associated With Limited Production Capacity."
In addition, the Company's ability to timely and efficiently expand its
production capacity depends, in large part, upon the following:
o adequacy of engineering designs,
o manufacturing experience with these enhancements,
o timeliness of regulatory review of modifications, and
o acceptability of the modifications to applicable regulatory
authorities.
The Company's plans to increase production capacity and output for
Certiva(R) and its aP vaccines could be ineffective or may not result in
production efficiencies that cover future production costs. Failure to increase
production capacity and output could limit the Company's ability to meet market
demand or achieve profitability.
RISKS ASSOCIATED WITH MANUFACTURING AND SCALE-UP. The production of
vaccines is a highly complex, biological process involving many steps from seed
culture through final production. Thus, the Company's production process could
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fail or become subject to substantial disruptions that impede its ability to
meet production requirements.
From time to time, the Company experiences disruptions and production
failures. There is no assurance that the Company can adequately address such
failures or that production failures will not continue in the future. These
disruptions and failures:
o limit the Company's production capacity,
o increase its production costs, which would affect the Company's
prospects for profitability,
o could have a negative impact on the Company's ability to meet
commitments to provide product under its supply agreements; and
o could have a negative impact on the Company's existing licenses for
its products and delay or inhibit its ability to obtain additional
regulatory approvals for its products.
In addition, the Company may not consistently produce its vaccines in
quantity and quality sufficient to achieve competitive commercial sales or
profitability.
The Company's manufacturing operations for NeisVac-C(TM), Certiva(R) and
its acellular pertussis vaccine are located principally in one facility. Any
condition or event that adversely affects the operation of this facility would
have a material adverse effect on the Company's financial condition and future
results of operations.
DEPENDENCE ON SUPPLIERS. While the Company produces the pertussis
component of Certiva(R) and the polysaccharide component for NeisVac-C(TM), it
has purchased, and intends to continue to purchase, from SSI required diphtheria
and tetanus toxoids and enhanced IPV for Certiva(R) and the combination vaccines
and tetanus toxoids for NeisVac-C(TM). SSI may not fulfill the Company's
requirements, its components may not be supplied on commercially reasonable
terms, or it may experience difficulties in obtaining necessary regulatory
approvals or disruptions in their production of diphtheria and tetanus toxoids
or IPV. Any of the foregoing could significantly affect the Company's
operations.
In late March 2000, the Company was notified by SSI that SSI is seeking
changes in the terms, primarily with regards to pricing and quantity, of its
supply agreements with the Company. The Company currently does not know what
specific changes are being requested and has scheduled a meeting with SSI to
discuss its concerns.
Certain of the Company's production processes require raw materials from
sole sources or materials that are difficult for suppliers to produce and
certify to the Company's specifications. The Company also may experience
temporary or permanent shortages of critical raw materials necessary for
continued production of its vaccines. Any shortage of these materials could
delay production efforts, adversely impact production costs and yields, or
necessitate the use of substitute materials, any of which could have a
significant adverse impact on the Company's operations.
In addition, the Company has contracted with third parties for certain
product testing and for the sterile fill, labeling and packaging of its vaccine
products. Failure of any such contractor to meet the Company's requirements
could have a material adverse effect on the Company, may involve costly delays
and significant expense, and would require additional regulatory approval as the
Company seeks alternative arrangements.
COMPETITION AND TECHNOLOGICAL CHANGE. Competition in the vaccine industry
is intense. Competitors of the Company both in the United States and
internationally include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of these
competitors are actively developing competing vaccines.
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Certiva(R) currently competes in the United States with three other DTaP
vaccines, and most, if not all, manufacturers of DTaP vaccines are expected to
compete in the TdaP vaccine market. In addition, NeisVac-C(TM) is expected to
compete in the United Kingdom against two other Group C meningococcal conjugate
vaccines, one of which is already licensed there. If these competitors are
successful in developing and marketing combination vaccines that include DTaP
vaccines, these combination vaccines may gain market share at the expense of
stand-alone DTaP vaccines, including Certiva(R). One of these competitors has
licensed in the United States a vaccine that combines by reconstitution that
company's Hib vaccine with its DTaP vaccine for administration at 15-18 months
of age and that it continues to seek FDA approval for administration of this
combination vaccine at two, four and six months of age. Another competitor has
reported that it is in clinical trials for a DTaP-Hib combination vaccine. In
addition, several competing DTaP vaccines and certain combination vaccines
incorporating DTaP, IPV and/or Hib vaccines have been licensed for sale outside
of the United States.
Many of these competitors have substantially greater resources, more
extensive experience in conducting clinical testing and obtaining regulatory
approvals for their products, greater operating experience, larger research and
development and marketing staffs, and greater production capabilities than the
Company. These factors may be particularly advantageous because the vaccine
industry is subject to significant technological change.
The Company's competitors could also gain a competitive advantage by
designing around the Company's patents, and developing technologies and products
that are as or more effective than any that have been or are being developed by
the Company. They could also develop technologies and products that would render
the Company's technology and products obsolete and noncompetitive.
CHANGES IN GOVERNMENT PURCHASING POLICIES. Children in the United States
receive immunizations from private providers and public providers, such as local
health departments. Immunizations provided by public providers are generally
funded through federal and state government public health programs. Government
purchases historically have been at prices substantially below those offered to
the private sector and presently account for a substantial portion of the
vaccine doses distributed in the United States. In the United States, federal
and state governments historically have purchased DTaP and other vaccines from
multiple suppliers. There can be no assurances that this practice will continue.
From time to time, legislative and regulatory initiatives are proposed
that, if adopted, could significantly modify government vaccine programs. These
initiatives could materially affect the federal government's purchasing
authority, the contract award process, or the funding available for government
vaccine purchases. The Company is unable to predict which legislative
initiative, if any, will ultimately be enacted or the effect any such initiative
may ultimately have on the Company's business or results of future operations.
In addition, proposals for health-care, insurance and tax reform may be
considered in the future by federal and state governments and some of these
proposals, if adopted, may limit government or third-party, private
reimbursement policies, or prices charged by pharmaceutical and vaccine
manufacturers for their products.
GOVERNMENT REGULATION; REGULATORY APPROVALS. The Company's vaccine
products, product development activities and manufacturing facilities and
processes are subject to extensive and rigorous regulation by the FDA. FDA
regulation includes preclinical and clinical testing requirements and inspection
and approval processes. To date, the Company has received FDA approval for only
one product.
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Commercial introduction of the Company's products in the United States
currently requires a separate license for each product. Obtaining licenses can
be costly and time consuming. There can be no assurance that the licenses will
be granted, or that FDA review will not involve delays that would adversely
affect the Company's ability to market products. There also can be no assurance
that any products under development by the Company will demonstrate the safety
or efficacy profiles necessary for regulatory approval, or that the Company's
products under development or its production facilities will receive the
requisite regulatory approvals and licenses in a timely fashion or at all.
Moreover, FDA-granted licenses may impose limitations that affect the
commercialization of the product, including limitations on product use and
requirements for post-licensure testing. The FDA can withdraw approvals at any
time by following appropriate regulatory procedures. The FDA can also limit or
prevent the manufacture or distribution of the Company's products both in the
United States and abroad and can require recalls of products. FDA regulations
depend heavily on administrative and scientific interpretation and advisory
committee determinations. Such interpretations, with possible prospective and
retroactive effect, could adversely affect the Company. For example, recent
assessments of the potential health risks related to mercury contained in food
and drugs conducted by the FDA, in cooperation with the EPA, have raised
questions about the continued use of thimerosal in vaccines. In July 1999, the
Company decided to follow the recommendations of these agencies and move toward
the discontinued use of thimerosal in Certiva(R), which is licensed in multidose
vials. This change has required the Company to file for regulatory approval on a
thimerosal-free formulation of the product in single-dose syringes; however,
there can be no assurances that such approval will be granted by the FDA or that
FDA review will not involve delays that would adversely affect the Company's
ability to market Certiva(R) made with these enhancements.
In addition, the FDA and various state agencies inspect the Company and
its facilities from time to time to determine whether the Company is in
compliance with regulations, including manufacturing, testing, recordkeeping,
quality control and labeling practices. If such entities find that the Company
is in material violation of these regulations, the Company could be subject to,
among other things, product recalls, suspensions or withdrawals of licenses,
revocation or suspension of export authorizations, and denials of any pending
applications.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before obtaining regulatory
approval for the commercial sale of any products under development, the Company
must demonstrate through pre-clinical studies and clinical trials that these
products are safe and effective. The results from pre-clinical studies and early
clinical trials may not be predictive of results obtained in large-scale
clinical trials. There can be no assurance that large-scale clinical trials for
any of the Company's products will demonstrate safety and efficacy, be
sufficient to support application for regulatory approval, or lead to marketable
products. A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials even after achieving promising
results in earlier trials.
PATENT PROTECTION AND PROPRIETARY INFORMATION. Traditionally, the vaccine
industry has placed importance on obtaining and maintaining patent and trade
secret protection for significant new technologies, products and processes. The
Company believes that this protection will be an important factor in its success
and may require the expenditure of substantial resources.
Many companies, universities and research institutions have applied for
and/or obtained patents for vaccine products and technologies that may be
competitive or inconsistent with those held by or licensed to the Company. No
assurances can be given that the degree and range of protection of any patents
will be sufficient, that additional patents will be issued to the Company, or
that the Company will not infringe upon patents granted to others. Further,
others have or may independently develop or otherwise properly gain access to
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technology or information that is substantially similar to that which is
unpatented yet considered proprietary by the Company.
The Company also may desire or be required to obtain licenses from others
to effectively develop, produce and market commercially viable products. Failure
to obtain those licenses could have a significant adverse effect on the
Company's ability to commercialize its vaccine products. There can be no
assurance that the Company can obtain these licenses on commercially reasonable
terms, if at all, that the patents underlying these licenses will be valid and
enforceable or that the proprietary nature of the unpatented technology
underlying these licenses will remain proprietary.
There has been, and the Company believes that there may be in the future,
significant litigation in the industry regarding patent and other intellectual
property rights. If the Company becomes involved in this type of litigation, it
could consume substantial resources.
RISK OF PRODUCT LIABILITY AND LIMITED INSURANCE. The testing and marketing
of vaccine products involve an inherent risk of product liability. The Company
has limited product liability insurance coverage. There can be no assurance that
adequate additional insurance coverage will be available at acceptable cost, if
at all, or that a product liability claim would not materially adversely affect
the Company's business or financial condition. If not covered by insurance, the
Company faces potential liability that could be substantial in the event of
claims.
DEPENDENCE ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL. The Company's
success in developing marketable products and achieving a competitive position
will depend, in part, on its ability to attract and retain qualified personnel.
Competition for such personnel is intense. No assurance can be given that the
Company will continue to attract or retain such personnel. The loss of key
personnel could adversely affect the Company.
DIVIDENDS AND TAXATION. The Company has never paid cash dividends on its
Common Stock. The Company intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. Moreover, any profits earned by the
Company's U.S. subsidiary will be declared and paid as a dividend to the
Company, and the Company will in turn declare and pay a dividend to its
shareholders. Each such dividend would be subject to a withholding tax. See Item
5 - Market for Registrant's Common Equity and Related Stockholder Matters, and
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.
IMPACT OF BECOMING A PASSIVE FOREIGN INVESTMENT COMPANY. If more than a
certain percentage of the Company's assets or income becomes passive, the
Company would be classified as a passive foreign investment company ("PFIC") for
U.S. federal income tax purposes. As a result, U.S. taxpayers who receive
certain dividends from the Company or who sell shares of the Company's Common
Stock would be subject to additional federal income tax. See Item 5 - Market for
Registrant's Common Equity and Related Stockholder Matters, and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. The principal shareholders of
the Company, BioChem and Dr. Phillip Frost, either directly or through
affiliates, are parties to a shareholders' agreement requiring, among other
things, that the Company's Common Stock covered by the agreement be voted
together for the election of directors. As of January 31, 2000, these principal
shareholders beneficially owned approximately 20.7 million shares of the
Company's outstanding Common Stock, which represented approximately 52.7% of the
then outstanding shares of the Company's Common Stock. See Item 13 - Certain
Relationships and Related Transactions.
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VOLATILITY OF STOCK PRICE. The market prices for securities of many
biotechnology and pharmaceutical companies, including the Company, have been
highly volatile. Many factors have historically had, and are expected to
continue to have, a significant impact on the Company's business and on the
market price of the Company's securities, including:
o financial results,
o announcements by the Company and others regarding the results of
regulatory approval filings, clinical trials or other testing,
o technological innovations or new commercial products by the Company or
its competitors, government regulations,
o developments concerning proprietary rights,
o public concern as to safety of vaccine and pharmaceutical products,
and
o economic or other external factors.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market following the exercise of options or
the conversion of convertible securities could have an adverse effect on the
price of the Company's securities. If either of the two principal shareholder
groups decides to sell a substantial number of shares of the Company's Common
Stock, these sales could significantly increase the volatility of the market
price of the Company's issued and outstanding securities. In addition, one of
the principal shareholders has registration rights for the shares of the
Company's Common Stock that it owns.
YEAR 2000 ISSUES. 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. 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, and the Company is continuing to monitor its software and hardware
systems for continued compliance; however, there can be no assurances that the
Company will not experience future Year 2000-related problems. Additionally, the
failure of suppliers and other companies doing business with the Company to
maintain Year 2000 qualification in a manner compatible with the Company's
systems could also have a material adverse effect on the Company. See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
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ITEM 2. PROPERTIES
The production of vaccines is a highly complex, biological process
involving many steps, commencing from seed culture through final production. The
Company's vaccine production processes involve the use of patented technologies
and proprietary rights and trade secrets at the Company's facilities. The
Company's facilities are briefly described below:
Facility/Function Location Square Feet Own/Lease
- --------------------------------------------------------------------------------
Production Facility Beltsville, MD 26,000 Leased until February 2009
(ten-year renewal option)
Production Facility Beltsville, MD 35,000 Leased until February 2001
(two five-year renewal
options)
Warehouse and Support Beltsville, MD 31,000 Leased until September 2009
Services for (two five-year renewal
Production Facility options)
Executive Offices and Columbia, MD 75,500 Leased until June 2008
Research and (with two five-year renewal
Development options)
Laboratory Facility
The Company's production facilities have been designed and built to
produce vaccines for large scale clinical trials and commercial sales after
product licensing. The Company has modified and continues to modify its 26,000
square foot production facility to expand production capacity for Certiva(R).
The lease on this facility expires in February 2009, subject to a ten-year
renewal option. See Item I - Business - "Risk Factors - Manufacturing and
Scale-Up."
In 1996, the Company acquired a 35,000 square foot production facility in
Beltsville, Maryland. The acquisition included the purchase and lease of
equipment and leasehold improvements and the assumption of real estate leases
underlying the facility, which are scheduled to expire in 2001, subject to two
five-year extensions. The facility is dedicated to the production of vaccines
for clinical trials and commercial sale.
In September 1999, the Company completed a sale/leaseback of a building
located adjacent to its current production facility. The approximately 31,000
square foot facility which is used as a warehousing and testing facility, is
leased for an initial term of ten years, with two five-year renewal options. See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.
In the second quarter of 1998, the Company leased an approximately 75,500
square foot facility for a period of ten years, with two five-year renewal
options. 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 Company has consolidated the research and development groups and most
general and administrative functions in this facility. See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.
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ITEM 3. LEGAL PROCEEDINGS
In March 2000, the Company settled a claim filed by its former president.
The Company has agreed not to disclose the terms of the settlement. The
settlement will not have a materially adverse impact on the Company's financial
position or results of operations.
The Company and Chiron Behring agreed to terminate, effective as of the
end of 1999, a distribution arrangement whereby Chiron Behring would supply the
Company's DTAP-IPV vaccine in Germany and Austria. As part of winding up the
collaboration, the Company made a nominal payment to Chiron Behring for
reimbursement of amounts then outstanding and owing to Chiron Behring as of such
date. In October 1999, Chiron Behring had notified the Company that Chiron
Behring was seeking to terminate the distribution arrangement. At that time,
Chiron Behring had demanded that the Company repay $3 million of nonrefundable
payments that Chiron Behring made under the agreement.
The Company is, and from time to time becomes, involved in claims and
lawsuits that are incidental to its business. In the opinion of the Company's
management, there are no other material legal proceedings pending against the
Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's Common Stock is listed on the American Stock Exchange
("AMEX") under the symbol "NVX." The table below sets forth the high and low
closing sales prices as reported on the AMEX composite tape for each calendar
quarter of 1998 and 1999:
HIGH LOW
---- ---
1998
First Quarter 25 16 5/8
Second Quarter 20 1/4 15 1/4
Third Quarter 17 7/16 6 5/8
Fourth Quarter 15 7/8 7 3/8
1999
First Quarter 8 9/16 6 1/8
Second Quarter 6 7/8 4
Third Quarter 9 5
Fourth Quarter 7 5/8 4
On February 29, 2000, the last reported sales price of the Company's
Common Stock on the AMEX was $5.625 per share. The number of record holders of
the Company's Common Stock as of February 29, 2000 was approximately 221.
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer and Trust Company, which is located at 40 Wall Street,
New York, New York 10005.
The Company has never paid cash dividends on its Common Stock and
anticipates that its earnings, if any, will be retained for development of the
Company's business. Therefore, it is not anticipated that any cash dividends on
its Common Stock will be declared in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company, general business
conditions and tax considerations.
Any profits earned by its U.S. subsidiary will not be distributable
directly to shareholders. Instead, for those profits to be distributed to
shareholders, the subsidiary must declare a dividend to the Company, and the
Company in turn must declare a dividend to its shareholders. Because the Company
is a Canadian corporation, this will subject each dividend to a withholding tax.
First, the dividend from the subsidiary to the Company will be subject to a 5%
withholding tax imposed by the United States on the gross amount of the
dividend. Pursuant to the Canada-United States Income Tax Convention (1980) (the
"Treaty"), the subsequent dividend paid by the Company to a shareholder resident
in the United States will be subject to Canadian withholding tax at the rate of
15% on the gross amount of the dividend. The rate of withholding tax will be
reduced to 5% in respect of dividends paid to a company that is a resident of
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the United States for purposes of the Treaty and owns at least 10% of the voting
stock of the Company. Each shareholder should consult his or her own tax advisor
as to tax consequences associated with dividends received on the Company's
Common Stock.
If more than a certain percentage of the Company's assets or income is
passive, the Company will be classified for United States tax purposes as a
passive foreign investment company or PFIC, and a United States taxpayer may be
subject to an additional federal income tax on receiving certain dividends from
the Company or selling Common Stock. Certain interest, dividend, capital gain
and royalty income may be considered passive income for PFIC purposes, which, in
the absence of sufficient other income, would result in the Company being
classified as a PFIC.
If the Company becomes a PFIC, a United States taxpayer will be subject to
special rules with respect to transactions involving the Common Stock. Under
these rules, all gains realized on disposition of the United States taxpayer's
Common Stock will be allocated pro rata over the number of years in which the
shareholder held the Common Stock. The gain that is allocated to a prior year
(subsequent to December 31, 1986) in which the Company was a PFIC, or any
subsequent year other than the year of disposition, will be taxed at the highest
marginal rate for that year and such tax will be subject to an interest charge
as if it had originally been due in that year. In addition, gain realized on the
disposition of the United States taxpayer's Common Stock that is allocated to
the current year or to a prior year before the Company was a PFIC will be
treated as ordinary income. Similar rules will apply to distributions made by
the Company. The above rules will not apply if the United States taxpayer elects
to treat the Company as a qualified electing fund and the Company agrees to
provide certain information to the United States Internal Revenue Service. In
such case, the United States taxpayer will include in his or her income each
year his or her pro rata share of the ordinary income and capital gains of the
Company. The Company has not been classified as a PFIC to date, and during 2000,
the Company intends to, and believes that it can, generate sufficient other
income and will hold sufficient non-passive assets to avoid being classified as
a PFIC. See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation.
In July 1999 the Company obtained a $6 million revolving line of credit
with a commercial bank that is guaranteed by BioChem. Under the agreement with
BioChem, the Company agreed to issue up to 750,000 warrants to BioChem as it
drew down on the line of credit. 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. In October 1999, 250,000 of these warrants were issued in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), related
to a draw of the last $2 million available under the line of credit. Each
warrant has a term of two years from the date of issuance. The per share
exercise price under each 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 registrations rights among
other provisions. See Item 13 - Certain Relationships and Related Transactions
- - Guarantee of Line of Credit for more information regarding the line of credit.
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 until it has reviewed this Annual Report on Form 10-K. 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.
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Selected consolidated financial data for the Company are set forth below.
The selected financial data as of December 31, 1999 and 1998, and for the years
ended December 31, 1999, 1998 and 1997 have been derived from, and are qualified
by reference to, the audited financial statements included elsewhere in this
Annual Report. The selected financial data as of December 31, 1997, 1996 and
1995 and for the years ended December 31, 1996 and 1995 have been derived from
the audited financial statements of the Company not included in this Annual
Report. The selected consolidated financial data should be read in conjunction
with the financial statements of the Company and other financial information
included in this Annual Report.
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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NORTH AMERICAN VACCINE, INC.
AND SUBSIDIARIES
FISCAL YEARS ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues:
Marketing, research and
development agreements $5,909 $6,149 $8,001 $9,656 $3,000
Product sales 5,049 2,230 1,699 892 --
------- ------- ------- ------- --------
Total revenues 10,958 8,379 9,700 10,548 3,000
Operating Expenses:
Production and cost of sales 22,950 19,196 18,662 14,764 6,317
Research and development 16,179 17,986 19,860 11,594 10,206
General and administrative 12,900 10,800 11,386 6,753 6,696
------ ------- ------- ------- -------
Total operating expenses 52,029 47,982 49,908 33,111 23,219
------ ------- ------ ------ -------
Operating loss (41,071) (39,603) (40,208) (22,563) (20,219)
Gain on sale of investments in
affiliates 952 -- -- 4,228 14,429
Interest and dividend income 513 1,497 3,140 2,934 804
Interest expense (9,967) (18,503) (6,772) (4,088) --
------- -------- ------- -------- -------
Net Loss $(49,573) $(56,609) $(43,840) $(19,489) $(4,986)
========= ========= ========= ========= ========
Basic and diluted net loss per
share $ (1.52) $ (1.76) $ (1.39) $ (0.63) $ (0.17)
========= ======== ======== ======== ========
Weighted-average number
of common shares outstanding 32,595 32,152 31,641 30,764 29,745
BALANCE SHEET DATA:
Cash and cash equivalents $ 563 $22,953 $45,502 $70,881 $10,443
Investment in affiliate, at
market -- 1,554 843 1,281 9,065
Total assets 33,591 64,525 84,508 122,962 41,249
6.5% convertible subordinated
notes 75,326 83,734 83,734 86,250 --
4.5% convertible secured notes 25,000 25,000 -- -- --
Long-term portion of capital
lease 79 2,356 4,110 5,871 --
Preferred stock 6,538 6,538 6,538 6,538 6,538
Common stock 90,550 80,824 78,509 71,357 58,474
Additional Paid-in capital 13,593 11,956 -- -- --
Cumulative comprehensive
income excluded from net loss -- 926 215 653 7,466
Accumulated deficit (208,791) (159,218) (102,609) (58,769) (39,280)
Dividends -- -- -- -- --
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
-------------------------------------------------
THE FOLLOWING PARAGRAPHS IN THIS FORM 10-K 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").
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, including Certiva(R), its combined
diphtheria, tetanus and acellular pertussis (DTaP) vaccine for infants and
children, 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 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. Under the Share Exchange Agreement, the Company's shareholders
will receive $7 per share, comprised of $6.97 of Baxter common stock and $0.03
in cash. The number of Baxter shares to be issued to the Company's shareholders
under the Share Exchange Agreement 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 transaction is subject to the prior satisfaction or waiver of certain
conditions in the Share Exchange Agreement, including, among others, the
following:
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o the arrangement must be approved by the Company's shareholders;
o the plan of arrangement must be approved by a Canadian court in
accordance with the CBCA;
o Baxter's and the Company's respective representations and warranties
contained in the Share Exchange Agreement must be true and correct in
all material respects and Baxter and the Company must perform and
comply in all material respects with their respective covenants in the
Share Exchange Agreement, including, among other things, the Company's
covenant to use reasonable efforts to file the marketing authorization
application for NeisVac-C(TM)with UK regulatory authorities by January
21, 2000 (the Company believes that it met this obligation when it
filed this application with UK regulatory authorities on January 24,
2000);
o the Company must not be in default under its financing agreements
relating to a $30 million line of credit from Bank of America, N.A.
and guaranteed by Baxter;
o the Company must (i) obtain the regulatory approvals for NeisVac-C(TM)
its vaccine for the prevention of group C meningococcal infections,
necessary for the Company to perform its obligations under its
agreement with the U.K. government; (ii) manufacture, fill and prepare
a two-month supply of NeisVac-C(TM); and (iii) ensure that it will not
be prohibited by U.S. governmental authorities from exporting
NeisVac-C(TM) in each case prior to April 1, 2000;
o certain affiliates of the Company must amend the Indemnification
Agreement;
o the Company must demonstrate to Baxter that the licensor of the
technology relating to the rPorB invention has taken the requisite
steps to retain its title to this invention; and
o Baxter must receive a favorable tax ruling from the Canada Customs and
Revenue Agency. This favorable ruling was obtained on January 11,
2000.
The Company also agreed that, until the completion of the arrangement or
unless Baxter consents in writing or as otherwise permitted by the Share
Exchange Agreement, the Company will conduct its business in the ordinary course
consistent with past practices and will use reasonable efforts to keep available
the services of its officers, significant employees and consultants, and to
preserve its relationships with corporate partners, customers, suppliers and
other persons with which it has significant business relations in order to
preserve substantially intact its business organization. In addition, the
Company agreed to conduct its business, until the completion of the arrangement
or unless Baxter consents in writing, in compliance with certain specific
restrictions which prohibit, among other things:
o issuing shares of its capital stock or securities convertible into its
capital stock, except for limited issuances of securities in
connection with outstanding options or warrants;
o disposing of any material properties or assets other than in
connection with existing contracts or dispositions in the ordinary
course of business consistent with past practice;
o incurring additional indebtedness subject to certain exceptions;
o entering into or modifying or terminating material contracts;
o soliciting, initiating, encouraging or agreeing to any takeover
proposal or other extraordinary transaction proposal by a third party
subject to certain exceptions; or
o negotiating with, entering into or maintaining discussions with any
person regarding a takeover or extraordinary transaction proposal, or
permit any of its representatives to take such action subject to
certain exceptions.
An "extraordinary transaction" for these purposes includes (1) a merger,
consolidation or similar transaction; (2) a proposal to acquire 10% or more of
the Company's outstanding capital stock or assets; or (3) a license, sublicense
or sale of the Company's intellectual property. See "Liquidity and Capital
Resources; Outlook."
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Baxter and the Company may mutually agree to terminate the Share Exchange
Agreement without completing the arrangement. In addition, either company may
terminate the Share Exchange Agreement upon certain events, including:
o the arrangement is not completed, without the fault of the terminating
party, by May 31, 2000;
o a final court or governmental order prohibiting the arrangement is
issued and is not appealable;
o the Company's shareholders fail to approve the arrangement; or
o one company breaches any of its representations, warranties or
covenants in the Share Exchange Agreement in any material respect,
such that it is unable to satisfy the conditions to the completion of
the arrangement, and the breach is not cured within ten days after
receiving written notice of the breach.
Furthermore, Baxter may terminate the Share Exchange Agreement if any of the
following occurs:
o the Company's board withdraws or modifies, in a manner adverse to
Baxter, its recommendation as to the Share Exchange Agreement or the
arrangement resolution, or resolves to do so;
o the Company fails to comply with certain nonsolicitation provisions
contained in the Share Exchange Agreement regarding "extraordinary
transactions," as discussed above;
o the Company's board recommends an alternative transaction, fails to
recommend against such a transaction or fails to reconfirm its
approval and recommendation of the arrangement; or
o a default occurs under the Company's financing agreements with Bank of
America, and the Company does not cure this default within ten days
after receiving written notice of the default.
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 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(TM) in the United Kingdom early in the third
quarter of 2000. The NHS has committed to purchase 3 million doses of
NeisVac-C(TM) in 2000 for approximately (British pound) 40 million (or
approximately $64 million at March 23, 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(TM) for administration to children 12 months of age and older,
adolescents and adults. The Company does not expect to 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 early
in the third 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(TM) 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(R) and its
acellular pertussis ("aP") vaccines to produce NeisVac-C(TM) in anticipation of
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<PAGE>
its commercial launch of the product in the U.K. Accordingly, the Company has
been selling Certiva(R) and its aP vaccines out of limited inventories produced
prior to the change over. The Company expects to return to production of
Certiva(R) and aP vaccines in 2000 once NeisVac-C(TM) production requirements
are completed.
The Company's revenues historically have been derived from product sales
of Certiva(R) and the aP vaccines and from payments received under marketing,
research and development agreements. The product launch for Certiva(R), which
was licensed by the FDA in July 1998, began in the fourth quarter of 1998. The
Company markets Certiva(R) in the U.S. to government purchasers, including state
governments and the Centers for Disease Control and Prevention ("CDC"). Under a
distribution agreement, Abbott Laboratories ("Abbott") previously marketed
Certiva(R) 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(R) 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(R) and DTaP-IPV (polio) vaccines,
principally in Scandinavian countries within the territory of the Company's
European partner, Statens Serum Institut ("SSI"). Regulatory approvals for
Certiva(R)-EU and DTaP-IPV were granted in 1996 in Sweden and Denmark,
respectively. 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. 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(R), 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. During 1999 and 1998, the Company recognized
approximately $9.1 million of revenue related to support of the Company's
clinical development activities from Abbott and Aventis Pasteur. Under the terms
of the Share Exchange Agreement, 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 is
terminated.
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The Company has a significant level of indebtedness. As of December 31,
1999, the Company's consolidated indebtedness and capitalized lease obligations
totaled approximately $131.7 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 and $10 million under a line of credit
guaranteed by Baxter. The Company's total assets at December 31, 1999 were
approximately $34 million. See Item 8 - Financial Statements and Supplementary
Data - Note 10 to the Company's financial statements for a description of the
6.5% Notes and the 4.5% Notes and Note 11 to the Company's financial statements
for a description of the lines of credit guaranteed by BioChem and Baxter,
respectively. See also Item 13 - Certain Relationships and Related Transactions.
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. As of December 31, 1999,
the principal amount of the outstanding 6.5% Notes was $75.3 million.
The Company also obtained in July 1999 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 May 31, 2000 and is guaranteed by BioChem, an
affiliate of the Company. BioChem's guarantee will remain in place for a maximum
of two years, 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. 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. See Item
13 - Certain Relationships and Related Transactions. 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.
In connection with the Baxter transaction, the Company entered into a $30
million secured revolving line of credit from Bank of America, N.A., at an
interest rate of LIBOR plus 0.625%. The line of credit is guaranteed by Baxter
and is secured by all of the Company's otherwise unencumbered assets, including
patents, patent applications and receivables. As of March 21, 2000, the Company
had drawn down a total of $19.5 million. The maturity date for the line of
credit is March 31, 2000, unless extended by Bank of America or otherwise waived
by Baxter as guarantor.
To raise cash, the Company completed in the third quarter of 1999 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, resulting in a non-cash 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.
The Company had 271 and 313 employees as of December 31, 1999 and 1998,
respectively.
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RESULTS OF OPERATION
- --------------------
YEARS ENDED DECEMBER 31, 1999 AND 1998
In 1999, the Company recognized total revenue of $10.9 million of which
approximately $2.3 million was from product sales of Certiva(R) to government
agencies and $300,000 was from sales to Abbott and another distributor,
approximately $2.4 million was from sales of product to SSI and approximately
$5.9 million was under collaborative agreements. Sales of Certiva(R) were higher
in 1999 than in 1998 due primarily to the launch of this product in the fourth
quarter of 1998. Sales of Certiva(R) declined in the last two quarters of 1999
as compared to the first two quarters of 1999 due to lower than expected
production and a longer than expected release time for product that requires an
FDA release before sale. Revenue for 1999 from collaborative agreements consists
primarily of approximately $5 million of development funding under the Company's
agreement with Aventis Pasteur and recognition of approximately $900,000 of
development funding from Abbott. Revenue in 1998 totaled $8.4 million, of which
approximately $1.1 million was from sales of Certiva(R) to government agencies,
$51,000 was from sales to Abbott, approximately $1.0 million was from sales of
product to SSI, and the remaining amount was from collaborative agreements.
Revenue for 1998 from collaborative agreements consists primarily of a milestone
payment and development funding from Abbott and to a lesser extent milestone
payments under a supply and distribution agreement with Chiron Behring.
Production expenses were $22.9 million in 1999 compared to $19.2 million
in 1998. The increase in these expenses in 1999 is primarily attributable to:
facility, labor and material costs incurred but not capitalized during the
changeover from aP to NeisVac-C(TM) production beginning late in the third
quarter of 1999, aP production under enhanced production processes that were
expensed during the period, writedowns of $1.3 million of raw materials for
Certiva(R) production, a total of $900,000 of write-offs of finished product due
to production failures and to a lesser extent nonconforming product, FDA
post-marketing licensing and surveillance expenses, and higher filling and
testing contractor expenses. These increases were partially offset by lower
depreciation related to the use of an accelerated depreciation method for
equipment purchased prior to 1998, and lower repair and maintenance and royalty
expenses. Costs attributable to Certiva(R) production were expensed until
regulatory approval was obtained in the third quarter of 1998; however, costs
attributable to Certiva(R) production under optimized production processes are
being expensed until regulatory approval is obtained for such new processes.
See "Liquidity and Capital Resources; Outlook."
Research and development expenses were $16 million in 1999 compared to $18
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 as part of
the FDA approval process for Certiva(R), 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, and lower
materials and supply expense, offset in part by higher labor costs attributed to
a higher average number of employees for product development projects and the
reimbursement of expenses under a collaborative agreement in 1998.
Selling, general and administrative expenses were $12.9 million in 1999
compared to $10.8 million in 1998. In 1999, there was an increase in building
costs associated with the new facility occupied beginning late in the third
quarter of 1998, an increase primarily in deferred compensation costs of
approximately $1.2 million as part of an employee retention program estimated to
cost approximately an additional $1 million in 2000, the non-cash loss on the
sale of a Company-owned building, legal fees and expenses associated with
litigation related to the Company's former president and with partnering
opportunities and the Baxter transaction, a write-off of professional costs
related to delays in the implementation of a computer system, and supplies and
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services costs. These increases were partially offset by a decrease in outside
marketing related costs and the termination of the lease of the Company's former
headquarters in July 1999, which were the result of management's plan to reduce
costs.
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 $513,000 in 1999 from $1.5
million in 1998. This reduction is due primarily to a decrease in the average
cash balance. The average cash balance is expected to decline further in 2000.
Interest expense decreased to $9.9 million in 1999 from $18.5 million in
1998. The decrease is due primarily to the recognition of a non-recurring,
non-cash $12.0 million interest charge in 1998 due to a beneficial conversion
feature of the 4.5% Notes, the conversion of $8.4 million principal amount of
6.5% Notes in exchange for 550,000 shares of Common Stock in June 1999 and
principal payments made on a capital equipment lease. The decrease is offset in
part by the $1.6 million of interest expense associated with the issuance of
750,000 warrants under the BioChem line of credit guarantee, $940,000 of expense
recognized on the conversion of $8.4 million principal amount of 6.5% Notes,
increased debt as a result of the issuance of the 4.5% Notes in November 1998,
and the interest expense under the Company's two guaranteed lines of credit.
The factors cited above resulted in a net loss of $49.6 million or $1.52
per share in 1999 as compared to a net loss of $56.6 million or $1.76 per share
in 1998. The weighted-average number of common shares outstanding was 37.6
million for 1999 compared to 32.1 million for 1998. Without the gain on sale of
the investment in an affiliate, the expense recognized on the conversion of some
of the 6.5% Notes, the expense recognized on the issuance of 750,000 warrants,
and the loss on the sale of the building, the net loss in 1999 would have been
$47.6 million or $1.46 per share. Without the effect of the non-recurring
non-cash interest charge of $12.0 million, the loss in 1998 would have been
$44.6 million or $1.39 per share. The increase in the number of weighted-average
shares outstanding for 1999 as compared to 1998 is attributable primarily to the
conversion of some of the 6.5% Notes into 550,000 shares of the Company's Common
Stock in June 1999 and to a lesser extent the exercise of stock options after
September 30, 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
In the fourth quarter of 1998, the Company realized its first sales from
the launch of Certiva(R) in the U.S. to government purchasers and to Abbott for
distribution in the private market. Total product sales in 1998 were
approximately $2.2 million of which approximately $1.2 million were from sales
of Certiva(R) to several government agencies and approximately $1 million were
from sales of product to SSI. In addition, during 1998, the Company recognized
$6.1 million consisting primarily of milestone payments and development funding
under the Company's agreement with Abbott and to a lesser extent milestone
payments under a supply and distribution agreement with Chiron Behring. Revenue
in 1997 consisted of $1.7 million from product sales to SSI and $8.0 million of
revenue from collaborative agreements of which $6.0 million was from an
agreement with Aventis Pasteur.
Production expenses were $19.2 million in 1998 compared to $18.7 million
in 1997. The increase in these expenses in 1998 is primarily attributable to an
increase in the number of production and service-related employees as the
Company prepared for regulatory approval of Certiva(R). The increase was offset
in part by lower depreciation expense related to the use of an accelerated
depreciation method and to the capitalization of Certiva(R) inventory for sale
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in the United States following FDA approval. Costs attributable to Certiva(R)
production were expensed until regulatory approval was obtained in July 1998.
Since FDA approval, production costs have exceeded the net realizable value of
inventory produced, which excess has been recorded as production expenses
incurred in 1998.
Research and development expenses were $18.0 million in 1998 compared to
$19.9 million in 1997. The decrease is attributable primarily to lower
depreciation expense related to the use of an accelerated depreciation method,
reduced expenses for clinical trials, and reimbursements for expenses under a
collaborative agreement. These decreases were offset in part by higher labor
expenses as a result of an increase in the number of employees and higher
building costs.
General and administrative expenses were $10.8 million in 1998 as compared
to $11.4 million in 1997. The decrease is due to the recognition of a non-cash
compensation expense of approximately $1.3 million and a non-recurring royalty
payment both incurred in 1997, offset in part by higher labor expenses as a
result of an increase in the number of employees.
Interest and dividend income decreased to $1.5 million in 1998 from $3.1
million in 1997. This reduction is due primarily to a decrease in the average
cash balance.
Interest expense increased to $18.5 million in 1998 from $6.8 million in
1997. Approximately $12.0 million of this increase is due to a beneficial
conversion feature of the 4.5% Notes resulting in a non-recurring, non-cash
interest expense charge. See "Tax and Reporting Matters," below. Interest
expense also increased as a result of the accrual of interest on the 4.5% Notes.
These increases were partially offset due to principal payments made on the
equipment lease, as well as to the conversion of $2.5 million principal amount
of the 6.5% Notes into shares of the Company's Common Stock in December 1997.
The factors cited above resulted in a net loss of $56.6 million or $1.76
per share in 1998. Without the effect of the non-recurring non-cash interest
charge of $12.0 million, the loss in 1998 would have been $44.6 million or $1.39
per share. This compares to a net loss of $43.8 million or $1.39 per share in
1997. Without the effect of the $1.3 million non-cash compensation expense, the
loss in 1997 would have been $42.5 million or $1.34 per share. The
weighted-average number of shares of the Company's Common Stock outstanding was
32.2 million for 1998 compared to 31.6 million for 1997. The increase in the
number of weighted-average shares outstanding for 1998 as compared to 1997 is
attributable primarily to the exercise of stock options and the conversion of
$2.5 million principal amount of the 6.5% Notes into 101,207 shares of the
Company's Common Stock in December 1997.
LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK
- ----------------------------------------
The Company's cash requirement for operations for the fourth quarter and
year ended 1999 was $12.8 million and $43.2 million, respectively, as compared
to $12.6 million and $42.7 million for the same periods in 1998, respectively.
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 December 31, 1999, the Company had cash and cash equivalents of
approximately $563,000 and $20 million available under the line of credit
guaranteed by Baxter. In addition, the Company had approximately $3.2 million of
restricted cash pledged as collateral under the letter of credit agreement,
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which will be reduced in amount as payments are made under the capital equipment
lease described in Note 9 of the financial statements. See Item 8 - Financial
Statements and Supplementary Data.
PROJECTED RESULTS FROM OPERATIONS. The Company anticipates that it will
report a net loss of between $14 and $16 million for the first quarter of 2000.
It will likely incur a quarterly net operating loss at least through the first
two quarters 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, based upon several factors. The factors included in assessing the
projected losses are, among others: the sale of a total of 3 million doses of
Certiva(R) under the NHS contract along with the timing and magnitude of such
sales, difficulties experienced in scaling up bulk manufacturing of
NeisVac-C(TM), the expensing of costs to produce Certiva(R) prior to regulatory
approval, acquisition of additional approvals and contracts to supply Certiva(R)
in 2001, limited product sales from the limited inventory of Certiva(R) and aP
vaccines on hand; manufacturing limitations for the Company's acellular
pertussis vaccines, 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, 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(TM) to the NHS. Under the NHS contract, the Company has committed
to supply NHS with 3 million doses of NeisVac-C(TM) beginning in April 2000 for
approximately (British pound) 40 million (or approximately $64 million at March
23, 2000). The Company experienced some problems in scaling up bulk
manufacturing of Certiva(R) which have impacted the Company's schedule for
commercial production of NeisVac-C(TM). 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(TM) to the NHS in 2000,
although the Company will not meet 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(TM) 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 early in the third quarter of 2000, although there
can be no assurances in this regard.
Under the terms of the NHS contract, if the Company does 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(TM) 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
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(TM) 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(TM) 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(TM) 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(TM) campaign and the
product cycle time for producing and releasing acellular pertussis products.
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All costs associated with the production of NeisVac-C(TM) are expensed as
incurred until the vaccine receives regulatory approval. 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(TM) 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(TM) 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(TM). 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(TM)
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 first half of 2000, the Company expects to have limited product
sales of Certiva(R) 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 second quarter of 2000. In
mid-2000, SSI, the Company's European partner, will file for regulatory approval
in its territory for the DTaP and DTaP-IPV products 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 acellular
pertussis 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 first half of 2000, while NeisVac-C(TM) 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 acellular pertussis 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(R) without the preservative
thimerosal, as discussed below.
After the Company produces sufficient quantities of the NeisVac-C(TM) to
fulfill its contractual obligations in the United Kingdom, the Company expects
to return to the manufacturing of acellular pertussis vaccines 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 acellular
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pertussis-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 acellular pertussis 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(TM) and
acellular pertussis production through at least 2001, the Company will have
limited time to manufacture acellular pertussis vaccines, so the Company intends
first to satisfy SSI's agreed-upon requirements, then supply acellular pertussis
vaccine for clinical trials of the Company's new combination vaccines, such as
DTaP-IPV and AMVAX(R), its tetanus, diphtheria and acellular pertussis booster
vaccine for adults, and then use any remaining capacity to manufacture
Certiva(R) without thimerosal. Therefore, the Company anticipates having lower
sales of Certiva(R) 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(R) 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. 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.
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(R), which is licensed in multi-dose vials. The Company intends to submit
data to the FDA on Certiva(R)-EU, the European formulation of Certiva(R), 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(R) 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(R), then the Company may not
recognize a gross profit on sales of Certiva(R), 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(R)
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 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(R) 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, 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 is
terminated.
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The foregoing paragraphs include forward looking statements including
statements as to: revenue projections, earnings (losses); timing and likelihood
of further regulatory approvals; the ability of the Company to timely and
efficiently expand its production capacity and lower unit costs for
NeisVac-C(TM) and Certiva(R); the prospects for and timing of NeisVac-C(TM)
production and regulatory filings; and the ability of the Company to address
production failures relating to NeisVac-C(TM) and Certiva(R) production, among
others. The factors that affect the level of future revenues from product sales
include, among other things, the ability of the Company to obtain distribution
partners, subject to Baxter's consent, for its products in the United States and
Europe, the ability of the Company 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(TM) 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 ability of the Company to timely and efficiently expand acellular
pertussis 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(TM) 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(TM) 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 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 effect on the Company's
financial condition and future results of operations.
PROJECTED CASH REQUIREMENTS FOR OPERATIONS AND FINANCING ACTIVITIES. The
Company will be required to raise up to approximately $62 million, or $77
million should the Company be required to pay breakup fees to Baxter, of new
financing in the second quarter of 2000 to finance its operations, service its
debt and repay its lines of credit guaranteed by Baxter and BioChem. The
breakdown of this required financing is as follows. The cash requirements for
operations in the first quarter of 2000 are projected to be between $12 and $14
million. This range could be affected by the timing and amount of additional
cash requirements associated with the status of commercial production of
NeisVac-C(TM). The first quarter 2000 cash requirement is anticipated to be
about that incurred in the fourth quarter of 1999 due primarily to projected
increased spending related to NeisVac-C(TM) production, offset by the
semi-annual interest payment of $2.4 million on the 6.5% Notes and the
approximately $600,000 payment for the 4.5% Notes both paid in November 1999. In
the second quarter of 2000, the Company's cash requirements for operations are
projected to be between $20 and $25 million, which includes $3.0 million in
interest payments to the holders of the 6.5% Notes and 4.5% Notes payable in
early May 2000, and estimated payments of approximately $2.2 million in May 2000
for "stay" bonuses under an employee retention program. Finally, outstanding
balances under the lines of credit guaranteed by Baxter and the $6 million line
of credit guaranteed by BioChem must be repaid in the second quarter of 2000.
See "Funding Sources." The foregoing include forward looking statements 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;
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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 1999 were $3.1
million, which amount includes a $260,000 capital lease for equipment. These
expenditures were principally associated with work on the enhanced production
process for the acellular pertussis vaccines described above and the
acceleration of the production for NeisVac-C(TM). The Company expects to spend
approximately $2.5 million in 2000 for capital expenditures on minor ongoing
facilities' modifications, equipment, systems and other capital additions. 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(TM); 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
first half of 2000 and with the termination of the Company's collaborations with
Abbott and Aventis Pasteur, the Company's principal source of financing will be
the revolving line of credit with Bank of America, N.A., which is guaranteed by
Baxter. The outstanding principal balance under the line of credit totaled $10
million at December 31, 1999 and may be increased up to $30 million through
March 31, 2000. As of March 21, 2000, the outstanding principal balance under
the line of credit was $19.5 million.
This line of credit matures on March 31, 2000, unless extended by the bank
at Baxter's request. Under the terms of the Share Exchange Agreement, the
transaction was scheduled to close in mid-April 2000. The transaction is subject
to a number of conditions to closing, including, among others, receipt of U.K.
regulatory approval of the NeisVac-C(TM) and the manufacture of a two-month
supply of NeisVac-C(TM) for the Company's contract with the UK's National Health
Service ("NHS") before April 1, 2000. The Company currently does not expect to
have received UK regulatory approval for NeisVac-C(TM) or the requisite
two-month supply of vaccines available by April 1, 2000. Baxter has advised the
Company that it will not close on the acquisition transaction under the current
terms of the Share Exchange Agreement unless all conditions to closing are
satisfied in the time frame specified. Based upon the Company's failure to meet
required conditions on April 1 and other developments of concern to Baxter,
Baxter has proposed that the parties modify the Share Exchange Agreement. The
parties have been in discussions regarding proposals that involve, among other
things, a reduction in the purchase price, the terms under which additional
financing would be available to the Company, an extension of the date by which
conditions to closing are to be satisfied, additional conditions to closing and
changes to existing conditions to closing, the outside date for termination of
the Share Exchange Agreement, and an early termination of the Share Exchange
Agreement. There can be no assurances as to whether the Company and Baxter will
reach an agreement with respect to a mutually acceptable modification to the
Share Exchange Agreement or mutually acceptable termination arrangements or as
to the timing of any such agreement. If the parties are unable to reach such an
agreement and Baxter determines not to waive the conditions to closing which the
Company is unable to meet, Baxter will not be obligated to close on the
acquisition transaction and the Company will continue to be bound by the terms
of the Share Exchange Agreement through at least May 31, 2000. Baxter has
advised the Company that it does not wish to terminate the Share Exchange
Agreement. If the parties cannot agree upon a mutually acceptable modification
of the Share Exchange Agreement or mutually acceptable termination arrangements,
the Company's credit facility with the Bank of America will become due and
payable on March 31, 2000. The line of credit is secured by a pledge of all of
the Company's otherwise unencumbered assets. In such event, there can be no
assurances that the Company will be able to refinance this indebtedness or
obtain financing for its continued operations. If the Company cannot obtain
financing, there can be no assurance that the Company can continue its
operations for any period of time without seeking bankruptcy protection. In
addition, there can be no assurances that litigation will not be commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient funds
to defend such litigation, whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.
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Under the Share Exchange Agreement, 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 a result of either the Company's breach of a covenant in
the Share Exchange Agreement or an intentional breach by the Company of any
representation or warranty in the Share Exchange Agreement. 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 is
terminated under any of the following circumstances:
o Baxter terminates the Share Exchange Agreement because the Company's
board withdraws or modifies its recommendation as to the Share
Exchange Agreement 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 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
after May 31, 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 a result of either a
breach by the Company of a covenant in the Share Exchange Agreement or
an intentional breach by the Company of a representation or warranty
in the Share Exchange Agreement 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 until it has reviewed this Annual Report on Form 10-K. 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 Item 1 - Business - Risk Factors, as well
as the risk factors and other information described elsewhere in this Item 7,
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 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
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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 for the years ended
December 31, 1999, 1998 and 1997, were approximately $2.6 million, $2.2 million,
and $0 million, respectively. Product sales to Europe, which were all made to
SSI, were approximately $2.4 million, $1.0 million, and $1.7 million for the
years ended December 31, 1999, 1998, and 1997, 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 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
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company does not have significant exposure to changing interest rates
on invested cash at December 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 December 31, 1999, is low, as the investments mature within three
months.
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The Company had $25 million of 4.5% Notes at December 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 December 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 265 basis
points, which are currently between 8.06% and 8.09%. 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 May 31, 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 had drawn down $10 million as of December 31, 1999 under a
revolving line of credit guaranteed by Baxter. The loan bears interest at LIBOR
plus .625%. The Company has exposure to changing interest rates related to the
$10 million of debt 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 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(TM) is denominated in
British Pounds Sterling. The value of this contract is approximately (British
Pound)40 million or approximately $64 million at March 23, 2000. The contract is
contingent upon the Company receiving regulatory approval for NeisVac-C(TM) 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 nine months ending December 31, 2000 could result in a
reduction of up to approximately $6.4 million in potential revenue from this
contract. The Company intends to reduce risk to possible changes in exchange
rates between the currencies by entering into a hedging transaction before the
effective date of the contract.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Financial Statements and accompanying Notes thereto, the Accountants'
Report, required Supplementary Data, and certain other financial information are
set forth on pages 59 to 91 of this Annual Report immediately following. The
table of contents to the Financial Statements and accompanying Notes appears on
page 107 of this Annual Report.
58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NORTH AMERICAN VACCINE, INC.
AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of North
American Vaccine, Inc. (a Canadian corporation) and Subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' deficit and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North American Vaccine, Inc.
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company may be required to repay balances due under
its lines of credit as early as March 31, 2000, does not have cash on hand to
satisfy its near-term cash requirements for operations, has suffered recurring
losses from operations and has a net capital deficiency, all of which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Arthur Andersen, LLP
Baltimore, Maryland
March 30, 2000
59
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 563 $ 22,953
Accounts receivable 3,537 1,625
Inventory 3,285 4,067
Prepaid expenses and other current assets 753 998
----------- -----------
Total current assets 8,138 29,643
Property, plant and equipment, net 19,668 25,315
Investment in affiliate, at market -- 1,554
Deferred financing costs, net 1,773 2,505
Cash restricted for lease obligation 3,185 4,877
Other assets 827 631
----------- -----------
TOTAL ASSETS $ 33,591 $ 64,525
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,456 $ 3,881
Short-term debt 16,000 --
Deferred revenue -- 850
Obligation under capital lease, current portion 2,400 1,754
Other current liabilities 7,208 5,848
----------- -----------
Total current liabilities 31,064 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 lease, net of current portion 79 2,356
Deferred rent credits, net of current portion 232 76
----------- -----------
Total liabilities 131,701 123,499
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. $3.5 million in the
aggregate) in liquidation 6,538 6,538
Common stock, no par value; unlimited shares
authorized; issued 32,870,350 shares at
December 31, 1999 and 32,216,096 shares
at December 31, 1998 90,550 80,824
Additional paid-in capital 13,593 11,956
Cumulative comprehensive income excluded from net loss -- 926
Accumulated deficit (208,791) (159,218)
----------- -----------
Total shareholders' deficit (98,110) (58,974)
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 33,591 $ 64,525
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
60
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ----------
REVENUES:
Product sales $ 5,049 $ 2,230 $ 1,699
Marketing, research and
development agreements 5,909 6,149 8,001
----------- ----------- ----------
Total revenues 10,958 8,379 9,700
----------- ----------- ----------
OPERATING EXPENSES:
Production and cost of sales 22,950 19,196 18,662
Research and development 16,179 17,986 19,860
Selling, general and administrative 12,900 10,800 11,386
----------- ----------- ----------
Total operating expenses 52,029 47,982 49,908
------------ ------------ ----------
OPERATING LOSS (41,071) (39,603) (40,208)
OTHER INCOME (EXPENSES):
Gain on sale of investment in
affiliate 952 -- --
Interest and dividend income 513 1,497 3,140
Interest expense (9,967) (18,503) (6,772)
------------ ------------ ----------
NET LOSS $(49,573) $(56,609) $(43,840)
============ ============ ==========
BASIC AND DILUTED NET LOSS PER SHARE $ (1.52) $ (1.76) $ (1.39)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 32,592 32,152 31,641
The accompanying notes are an integral part of these consolidated financial
statements.
61
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
SERIES A COMPREHENSIVE TOTAL
CONVERTIBLE INCOME SHARE-
PREFERRED STOCK COMMON STOCK ADDITIONAL EXCLUDED ACCUM- HOLDER'S
----------------- ---------------- PAID-IN FROM ULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL NET LOSS DEFICIT (DEFICIT)
-------- -------- ------- -------- -------- ------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 2,000 $ 6,538 31,407 $ 71,357 $ -- $ 653 $ (58,769) $ 19,779
Net loss -- -- -- -- -- -- (43,840) (43,840)
Decrease in market
value of investment -- -- -- -- -- (438) -- (438)
---------
Comprehensive loss (44,278)
Exercises of stock
options -- -- 498 5,036 -- -- -- 5,036
Retirement of stock
used to exercise
options -- -- (80) (1,890) -- -- -- (1,890)
Shares issued under
401(k) plan -- -- 11 238 -- -- -- 238
Stock option
compensation -- -- -- 1,313 -- -- -- 1,313
Conversion of
subordinated
convertible notes
into common stock -- -- 101 2,455 -- -- -- 2,455
Balance, ------- -------- ------ -------- ------- --------- ---------- ---------
December 31, 1997 2,000 $ 6,538 31,937 $ 78,509 $ -- $ 215 $(102,609) $(17,347)
Net loss -- -- -- -- -- -- (56,609) (56,609)
Increase in market
value of investment -- -- -- -- -- 711 -- 711
---------
Comprehensive loss (55,898)
Exercises of stock
options -- -- 462 5,452 -- -- -- 5,452
Retirement of stock
used to exercise
options -- -- (201) (3,429) -- -- -- (3,429)
Beneficial conversion
feature of 4.5% Notes -- -- -- -- 11,956 -- -- 11,956
Shares issued under
401(k) plan -- -- 18 292 -- -- -- 292
Balance, ------- -------- ------ -------- ------- --------- ---------- ---------
December 31, 1998 2,000 $ 6,538 32,216 $ 80,824 $11,956 $ 926 $(159,218) $(58,974)
Net loss -- -- -- -- -- -- (49,573) (49,573)
Increase in market
value of investment -- -- -- -- -- 26 -- 26
Realized investment
holding gain -- -- -- -- -- (952) -- (952)
---------
Comprehensive loss (50,499)
Exercises of stock
options -- -- 58 169 -- -- -- 169
Shares issued under
401(k) plan -- -- 46 329 -- -- -- 329
Warrant issuance -- -- -- -- 1,637 -- -- 1,637
Conversion of 6.5%
subordinated
convertible
notes into common
stock -- -- 550 9,228 -- -- -- 9,228
Balance, ------- -------- ------ -------- ------- --------- ---------- ---------
December 31, 1999 2,000 $ 6,538 32,870 $ 90,550 $13,593 $ -- $(208,791) $(98,110)
======= ======== ====== ======== ======= ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
62
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(49,573) $(56,609) $(43,840)
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 671 181 131
Depreciation and amortization 6,217 8,177 11,017
Amortization and reduction of deferred
financing costs 2,179 498 520
Recognition of beneficial conversion
feature of 4.5% Notes -- 11,956 --
Contribution of common stock to 401(k) plan 329 292 238
Stock option compensation -- -- 1,313
Debt conversion expense 940 -- --
(Increase) decrease in other assets (196) (168) 43
Increase (decrease) in deferred rent 138 (24) (91)
Cash flows provided by (used in) other
working capital items 1,287 (4,760) 5,756
--------- -------- --------
Net cash used in operating activities (38,960) (40,457) (24,913)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,091) (2,245) (2,132)
Proceeds from sale of investment in affiliate 1,581 -- --
Proceeds from sale/leaseback 2,110 -- --
Proceeds from sale of equipment -- -- 225
--------- -------- --------
Net cash provided by (used in)
investing activities 600 (2,245) (1,907)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes -- 25,000 --
Deferred financing costs of convertible notes -- (400) --
Borrowings under revolving credit facilities 16,000 -- --
Proceeds from exercises of stock options, net 169 2,023 3,146
Loan to a former officer related to the
purchase of common stock -- (1,228) --
Repayment of loan from the former officer -- 1,228 --
Principal payments on capital lease obligations (1,891) (1,593) (1,705)
Cash restricted for capital lease obligation 1,692 (4,877) --
--------- -------- --------
Net cash provided by financing activities 15,970 20,153 1,441
--------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,390) (22,549) (25,379)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,953 45,502 70,881
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 563 $22,953 $45,502
========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
63
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1999 1998 1997
-------- ------- ---------
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:
(Increase) decrease in:
Accounts receivable $(1,912) $(1,301) $ 3,842
Inventory 782 (1,337) (948)
Prepaid expenses and other current assets 245 (383) (81)
Increase (decrease) in:
Accounts payable 1,575 538 1,431
Deferred revenue and other current liabilities 597 (2,277) 1,512
-------- ------- --------
Net cash provided by (used in) other working
capital items $ 1,287 $(4,760) $ 5,756
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,812 $ 5,936 $ 6,249
======= ======== ========
Equipment acquired through capital lease $ 260 $ -- $ --
======= ======== ========
Conversion of subordinated notes to common stock $ 8,408 $ -- $ 2,516
======= ======== ========
Use of stock to exercise stock options $ -- $ 3,429 $ 1,890
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
64
<PAGE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
North American Vaccine, Inc. and Subsidiaries (the "Company") is engaged
in the research, development, production, and sale of vaccines for the
prevention of infectious diseases in children and adults.
The Company was incorporated in Canada on August 31, 1989 to consolidate
the assets, liabilities and operations of American Vaccine Corporation
("American Vaccine"), and certain assets and vaccine-related technologies of
BioChem Pharma Inc. ("BioChem"), in a share purchase and merger transaction (the
"Merger"). On February 28, 1990, the shareholders of American Vaccine approved
the Merger. Prior to February 28, 1990, the Company had no operations.
Pursuant to the Merger, shareholders of American Vaccine exchanged their
shares for 50 percent ownership of the Company. Simultaneously, BioChem
purchased a 50 percent interest in the Company for cash, shares of BioChem
common stock, and certain rights in BioChem's vaccine-related technologies. The
net assets of American Vaccine, common stock of BioChem, and the rights in
vaccine-related technologies transferred by BioChem were carried forward to the
Company at their previously recorded amounts as reflected in the historical
financial statements of BioChem and American Vaccine.
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 valued at approximately
$390 million. Under the Share Exchange Agreement, the Company's shareholders
will receive $7 per share, comprised of $6.97 of Baxter common stock and $0.03
in cash. The number of Baxter shares to be issued to the Company's shareholders
under the Share Exchange Agreement 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. The transaction is subject
to a number of conditions to closing, including, among others, the Company
receipt of U.K. regulatory approval of the NeisVac-C(TM) and manufacture of a
two-month supply of NeisVac-C(TM) for the U.K. National Health Service ("NHS")
contract before April 1, 2000. Baxter has advised the Company that it will not
close on the acquisition transaction under the current terms of the Share
Exchange Agreement unless all conditions to closing are satisfied in the time
frame specified. Based upon the Company's failure to meet required conditions on
April 1 and other developments of concern to Baxter, Baxter has proposed that
the parties modify the Share Exchange Agreement. The parties have been in
discussions regarding proposals that involve, among other things, a reduction in
the purchase price, the terms under which additional financing would be
available to the Company, an extension of the date by which conditions to
closing are to be satisfied, additional conditions to closing and changes to
existing conditions to closing, the outside date for termination of the Share
Exchange Agreement, and an early termination of the Share Exchange Agreement.
There can be no assurances as to whether the Company and Baxter will reach an
agreement with respect to a mutually acceptable modification to the Share
Exchange Agreement or mutually acceptable termination arrangements or as to the
timing of any such agreement. If the parties are unable to reach such an
agreement and Baxter determines not to waive the conditions to closing which the
Company is unable to meet, Baxter will not be obligated to close on the
acquisition transaction and the Company will continue to be bound by the terms
of the Share Exchange Agreement through at least May 31, 2000. Baxter has
advised the Company that it does not wish to terminate the Share Exchange
Agreement. If the parties cannot agree upon a mutually acceptable modification
of the Share Exchange Agreement or mutually acceptable termination arrangements,
the Company's credit facility with the Bank of America will become due and
payable on March 31, 2000. The line of credit is secured by a pledge of all of
the Company's otherwise unencumbered assets. In such event, there can be no
assurances that the Company will be able to refinance this indebtedness or
obtain financing for its continued operations. If the Company cannot obtain
financing, there can be no assurance that the Company can continue its
operations for any period of time without seeking bankruptcy protection. In
addition, there can be no assurances that litigation will not be commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient funds
to defend such litigation, whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.
The Company has incurred recurring losses from operations and has a net
capital deficiency at December 31, 1999. Should the arrangement with Baxter be
terminated, the Company would be required to repay all balances due under its
lines of credit before the end of the second quarter of 2000, as well as fund
its ongoing operations. Given its current cash position, the Company would need
to immediately address its near-term cash requirements. The Company would seek
to arrange financing from one or more of its affiliates, seek technology based
partnering opportunities, and/or, if possible, issue debt or equity securities.
There are no assurances that any or all of these options would be available or
that they could be arranged in time to meet the cash requirements of the
Company.
65
<PAGE>
(2) RISK FACTORS
RISK OF FAILURE TO COMPLETE THE ARRANGEMENT WITH BAXTER. If the
arrangement is not completed for any reason, NAVA may be subject to a number of
material risks, including the following:
o the Company is required to repay amounts borrowed under the credit
facility with Bank of America, N.A. and guaranteed by Baxter. As of
March 30, 2000 the principal amount outstanding under this credit
facility was $19.5 million;
o the Company may be required to pay Baxter a termination fee of $14
million and reimburse Baxter for expenses up to $1 million;
o the price of the Company's Common Stock may decline to the extent that
the current market price of the Common Stock reflects a market
assumption that the arrangement will be completed; and
o costs related to the arrangement, such as legal, accounting and
financial advisor fees, must be paid even if the arrangement is not
completed.
See also "Risk Factors - Risk Associated with Lack of Availability of Capital."
In addition, current and prospective employees of the Company may be
uncertain about their future roles with Baxter until Baxter's strategies with
regard to the Company are announced or executed. This may adversely affect the
Company's ability to attract and retain key management, sales, marketing and
technical personnel. Also, concern about the financial prospects of the Company
and the uncertainty related to the closing of the arrangement with Baxter has
contributed to employees leaving the Company and may contribute to additional
loss of personnel.
Further, if the arrangement is terminated and the Company's board of
directors determines to seek another arrangement or business combination, there
can be no assurance that it will be able to find a partner willing to pay an
equivalent or more attractive price than the price to be paid in the arrangement
or sufficient financing on acceptable terms that will be necessary to fund the
Company's continuing operations. In addition, while the Share Exchange Agreement
is in effect, the Company is prohibited, subject to certain exceptions, from
soliciting, initiating or encouraging or entering into certain extraordinary
transactions, such as an arrangement, sale of assets or other business
combination, with any party other than Baxter without becoming responsible for
paying a termination fee and reimbursing Baxter for expenses up to $1 million.
RISK ASSOCIATED WITH LACK OF AVAILABILITY OF CAPITAL. To maintain the
Company's production, research and development at current levels, present cash
and cash equivalents, expected product sales of Certiva(R), NeisVac-C(TM), and
the Company's other products are not expected to provide sufficient cash to fund
the Company's operations, debt service payments and capital expenditures in 2000
and into 2001. To address the cash needs, the Company obtained in November 1999
a $30 million secured revolving line of credit from Bank of America, N.A. This
line of credit is guaranteed by Baxter and is secured by all of the Company's
otherwise unencumbered assets, including patents, patent applications and
receivables. The Company expects that this line of credit will fund its
operations through March 31 and through April 2000 if extended by the bank with
Baxter's consent. If the acquisition by Baxter does not close timely in early
April 2000, the Company will have to secure alternative interim financing and
could be required to repay any outstanding balances on March 31, 2000. In this
case, there can be no assurances that the Company will be able to obtain
additional debt or equity financing on favorable terms in amounts required to
meet cash requirements or that litigation will not result with Baxter arising
out of the Company's efforts to secure such financing. The Share Exchange
Agreement prohibits the Company from entering into certain debt and equity
financing arrangements.
66
<PAGE>
In this case, the Company will be required to raise up to approximately
$62 million, or $77 million should the Company be required to pay breakup fees
to Baxter, of new financing in the second quarter of 2000 to finance its
operations, service its debt and repay the lines of credit guaranteed by Baxter
and BioChem. 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.
In addition, the Company currently cannot secure any funding through third
party collaborations, because under the terms of the Share Exchange Agreement,
the Company may not enter into any new or alternative collaborative arrangements
for third parties to distribute, research and develop its products without
Baxter's consent until either the transaction with Baxter is completed or the
Share Exchange Agreement is terminated.
If the Company is unable to extend the March 31, 2000, maturity date of
its credit facility with the Bank of America or to obtain other financing to
repay the facility, then the Company would be in default under the Bank of
America credit facility, and the bank and/or Baxter (as guarantor) could
foreclose on the Company's assets, including patents, patent applications and
receivables, securing the credit facility. The $30 million line of credit with
Bank of America, N.A. guaranteed by Baxter is secured by all of the Company's
otherwise unencumbered assets, including patents, patent applications and
receivables. If an event of default occurs under the loan agreement, Baxter is
obligated to purchase all of Bank of America's rights and obligations under the
loan agreement with the Company. A default that is not timely cured would also
trigger defaults and, therefore, repayment obligations under the Company's other
financing facilities, as well as the possible foreclosure upon the remaining
Company assets by creditors. The 4.5% Notes are secured by a pledge of
collateral, which includes certain of the Company's equipment and other assets
at the Company's principal manufacturing facility and the Company's ownership
rights in U.S. Patent No. 5,425,946, entitled "Vaccines Against Group C
NEISSERIA MENINGITIDIS." Any foreclosure on the collateral would substantially
impair the Company's ability to operate its business, if it could do so at all
without seeking bankruptcy protection. See Item 6 - Selected Financial Data and
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation.
RISK RELATED TO SIGNIFICANT LEVEL OF INDEBTEDNESS. The Company currently
has a significant level of indebtedness. As of December 31, 1999, the Company's
consolidated indebtedness and capitalized lease obligations totaled
approximately $119 million, including $75.3 million of 6.5% Convertible
Subordinated Notes ("6.5% Notes"), $25 million of 4.5% Convertible Secured Notes
("4.5% Notes"), $6 million under a line of credit guaranteed by BioChem and $10
million under a $30 million line of credit guaranteed by Baxter. The Company's
total assets as of December 31, 1999 are approximately $34 million. As of March
30, 2000, the Company had drawn down a total of $19.5 million under the line of
credit guaranteed by Baxter, which matures on March 31, 2000. Until the Company
begins to receive significant revenues from product sales of NeisVac-C(TM) under
the NHS contract, the Company will continue to incur additional indebtedness .
This level of indebtedness could have material consequences for the
Company such as:
o impairing the Company's ability to obtain additional financing for
working capital, capital expenditures, and general corporate or other
purposes, and
o limiting the availability of a substantial portion of the Company's
future cash flow from operations, if any, as it will be required for
payment of the principal and interest on its indebtedness.
67
<PAGE>
The Company will not generate sufficient increases in cash flow from
operations to service its indebtedness; accordingly the Company must secure
additional financing. There can be no assurance, however, that any financing
would be available to the Company.
In early May 2000, the Company is obligated to pay approximately $3.0
million in interest payments to the holders of the 6.5% Notes and 4.5% Notes.
The $6 million line of credit guaranteed by BioChem also expires on May 31,
2000; although as part of the Baxter transaction, BioChem has agreed to maintain
in effect and not to terminate in any respect its guaranty until the effective
date for closing on the transaction and to loan the Company, if the Share
Exchange Agreement is still in effect, up to $5 million on commercially
reasonable terms if the line of credit becomes due prior to the effective date
of closing the transaction. In addition, Baxter is the guarantor of the $30
million line of credit from the Bank of America, N.A. This line of credit
matures on March 31, 2000, unless extended by the bank at Baxter's request.
Under the terms of the Share Exchange Agreement, the transaction was scheduled
to close by mid-April 2000. The transaction is subject to a number of conditions
to closing, including, among others, receipt of U.K. regulatory approval of the
NeisVac-C(TM) and the manufacture of a two-month supply of NeisVac-C(TM) for the
Company's contract with the UK's National Health Service ("NHS") before April 1,
2000. The Company currently does not expect to have received UK regulatory
approval for NeisVac-C(TM) or to manufacture the requisite two-month supply of
vaccines by April 1, 2000.
Baxter has advised the Company that it will not close on the acquisition
transaction under the current terms of the Share Exchange Agreement unless all
conditions to closing are satisfied in the time frame specified. Based upon the
Company's failure to meet required conditions on April 1 and other developments
of concern to Baxter, Baxter has proposed that the parties modify the Share
Exchange Agreement. The parties have been in discussions regarding proposals
that involve, among other things, a reduction in the purchase price, the terms
under which additional financing would be available to the Company, an extension
of the date by which conditions to closing are to be satisfied, additional
conditions to closing and changes to existing conditions to closing, the outside
date for termination of the Share Exchange Agreement, and an early termination
of the Share Exchange Agreement. There can be no assurances as to whether the
Company and Baxter will reach an agreement with respect to a mutually acceptable
modification to the Share Exchange Agreement or mutually acceptable termination
arrangements or as to the timing of any such agreement. If the parties are
unable to reach such an agreement and Baxter determines not to waive the
conditions to closing which the Company is unable to meet, Baxter will not be
obligated to close on the acquisition transaction and the Company will continue
to be bound by the terms of the Share Exchange Agreement through at least May
31, 2000. If the parties cannot agree upon a mutually acceptable modification of
the Share Exchange Agreement or mutually acceptable termination arrangements,
the Company's credit facility with the Bank of America will become due and
payable on March 31, 2000. The line of credit is secured by a pledge of all of
the Company's otherwise unencumbered assets. In such event, there can be no
assurances that the Company will be able to refinance this indebtedness or
obtain financing for its continued operations. If the Company cannot obtain
financing, there can be no assurance that the Company can continue its
operations for any period of time without seeking bankruptcy protection. In
addition, there can be no assurances that litigation will not be commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient funds
to defend such litigation, whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.
LACK OF PROFITABILITY. The Company has operated at a loss since its
inception and its net loss for the year ended December 31, 1999 was
approximately $49.6 million. The Company expects additional losses during 2000
based upon a number of factors. The factors included in assessing the projected
losses are, among others: timing and magnitude of product sales for
NeisVac-C(TM) under the NHS contract, difficulties experienced in scaling up
bulk manufacturing of NeisVac-C(TM), the expensing of costs to produce
NeisVac-C(TM) prior to regulatory approval, limited product sales from the
limited inventory of Certiva(R) and aP vaccines on hand; manufacturing
limitations for the Company's acellular pertussis vaccines, limitations on the
Company's ability to negotiate and enter into new collaborative arrangements and
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alternative financings pursuant to the terms of the Share Exchange Agreement. In
addition, there can be no assurance that the Company will become profitable
after 2000. To become profitable, the Company must:
o timely receive regulatory approval of, and timely and efficiently
manufacture, NeisVac-C(TM) to meet the Company's contractual
commitments under the NHS contract to supply 3 million doses for
approximately (pound)40 million (or approximately $64 million as of
March 23, 2000),
o timely and efficiently expand production capacity and output for its
acellular pertussis vaccine products,
o obtain regulatory approvals for new products, and produce and market
those products efficiently, successfully and in sufficient quantities,
o secure milestone and other payments under new collaborative
agreements, and
o reduce current levels of indebtedness.
The magnitude of the Company's losses in 2000 will greatly depend on
whether the Company receives the approximately (British pound)40 million (or
approximately $64 million at March 23, 2000) for the sale of 3 million doses of
NeisVac-C(TM) under the NHS contract, with shipments that were scheduled to
begin in early April 2000, subject to UK regulatory approval. Under that
agreement, if the Company does not receive the requisite UK marketing
authorization before its first scheduled 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(TM) is
licensed, the terms of the contract require, among other things, that the
Company reimburse the NHS and its affilates 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 with NHS regarding the
possible delays in licensure and product delivery and believes that, based on
these discussions and the strong profile demonstrated by NeisVac-C(TM) 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(TM) is issued within a few months of April 2000, although
there can be no assurances in this regard. If the NHS significantly reduces the
number of doses purchased or terminates the contract, the Company would
experience substantially greater losses and its cash resources (and its ability
to invest in research and development) would be severely impacted.
See "Risk Factors - Risk Related to Significant Level of Indebtedness,"
"Risk Factors - Risk Associated with Lack of Availability of Capital," "Risk
Factors - No Assurance of Effective Marketing," and "Risk Factors - Risks
Associated with Limited Production Capacity."
NO ASSURANCE OF EFFECTIVE MARKETING. The Company sells Certiva(R) to
government purchasers in the United States through a small internal salesforce.
Under a distribution agreement, Abbott Laboratories previously marketed
Certiva(R) to private physicians and managed care markets in the United States;
however, Abbott terminated the agreement in September 1999. The Company is
currently selling Certiva(R) to non-government purchasers in the United States
through wholesale distributors. There can be no assurance that the Company will
successfully implement its sales and marketing strategies, particularly with
respect to the private physician and managed care markets given the limited size
of its internal salesforce.
Factors affecting commercial success of the Company's vaccines in the
United States include:
o establishing the Company as an effective and reliable supplier of
vaccines,
o establishing efficient and consistent production of sufficient
quantities of vaccine,
o establishing effective distribution channels,
o maintaining an identity and reputation for the Company and its
products, and
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o increasing awareness among pediatricians of the safety and efficacy of
the Company's vaccines, and
o distinguishing the Company's products from those of its competitors.
In addition, the Company has entered into supply, marketing and
distribution agreements with Statens Serum Institute ("SSI") under which SSI has
to market certain of the Company's products, such as Certiva(R)-EU and the
DTaP-IPV vaccine, in SSI's Territory. The Company does not currently have a
salesforce or partner to market products in the European countries not included
in SSI's Territory. Although the national marketing authorization for the sale
and distribution of its DTaP-IPV vaccine in German and Austria has been
completed, the Company and Chiron-Behring terminated at the end of 1999 the
distribution agreement for sales within these countries. The Company is
considering possible arrangements with distributors to market the Company's
products in these territories, although no formal agreements have been complete.
Consequently, the Company's revenues from product sales in Europe and other
territories depend upon the timing, implementation and effectiveness of the
sales, marketing and distribution efforts of others. In addition, the Company
may not be successful in negotiating and executing additional marketing and/or
distribution agreements with any other third parties and these other third
parties may be unable to market the Company's products successfully.
RISKS ASSOCIATED WITH LIMITED PRODUCTION CAPACITY. The Company has only
one manufacturing facility through which it alternates production of its various
products, such as Certiva(R) and NeisVac-C(TM). Given that products may not be
manufactured concurrently in the facility, the Company may experience shortages
of supply for commercial products if inventories are not sufficient to carry
over until the next scheduled production cycle for each product. This may result
in the loss of sales for that product. NeisVac-C(TM) is presently in commercial
production in the manufacturing facility, so the Company will only have its
current limited inventories of Certiva(R) and aP vaccines available for
commercial sale until such time as lots of those products are manufactured and
released for sale.
The Company's manufacturing facility also has limited production capacity
based on the present size, configuration, equipment, processes and methods used
to produce its products. In addition, production expenses are mainly fixed and
consist primarily of expenses relating to the operation of its production
facilities 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
respective net selling prices. In addition, the Company is commencing the
production of NeisVac-(TM) in this facility on a commercial scale, and there can
be no assurances that there will not be disruptions or product failures.
In order to address production limitations for Certiva(R) and its aP
vaccines, the Company has implemented a two-step capacity enhancement program.
First, the Company has modified its existing facilities and operations in a
manner intended to expand production capacity and efficiency. The Company filed
the appropriate documentation with the FDA in the fourth quarter of 1999 in
seeking the approval for these enhancements; however, there can be no assurances
that such approval will be granted by the FDA or that FDA review will not
involve delays that would adversely affect the Company's ability to market
Certiva(R) made with these enhancements. See "Risk Factors - Government
Regulation; Regulatory Approvals." 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 continue to be performed off-line during
the first half of 2000, while NeisVac-C(TM) is being produced in the
manufacturing facility. Upon completion of both of these programs, the Company
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expects that unit production costs (before filling and packaging) will be
reduced. To date, the production costs for the Company's acellular pertussis
products have exceeded their net realizable value, and there can be no
assurances that the enhanced production and testing processes will increase
capacity or lower the unit production costs, particularly in light of the
increased filling and packaging costs associated with the decision to
manufacture Certiva(R) without the preservative thimerosal.
In addition, the Company's ability to timely and efficiently expand its
production capacity depends, in large part, upon the following:
o adequacy of engineering designs,
o manufacturing experience with these enhancements,
o timeliness of regulatory review of modifications, and
o acceptability of the modifications to applicable regulatory
authorities.
The Company's plans to increase production capacity and output for
Certiva(R) and its aP vaccines could be ineffective or may not result in
production efficiencies that cover future production costs. Failure to increase
production capacity and output could limit the Company's ability to meet market
demand or achieve profitability.
RISKS ASSOCIATED WITH MANUFACTURING AND SCALE-UP. The production of
vaccines is a highly complex, biological process involving many steps from seed
culture through final production. Thus, the Company's production process could
fail or become subject to substantial disruptions that impede its ability to
meet production requirements.
From time to time, the Company experiences disruptions and production
failures. There is no assurance that the Company can adequately address such
failures or that production failures will not continue in the future. These
disruptions and failures:
o limit the Company's production capacity,
o increase its production costs, which would affect the Company's
prospects for profitability,
o could have a negative impact on the Company's ability to meet
commitments to provide product under its supply agreements; and
o could have a negative impact on the Company's existing licenses for
its products and delay or inhibit its ability to obtain additional
regulatory approvals for its products.
In addition, the Company may not consistently produce its vaccines in
quantity and quality sufficient to achieve competitive commercial sales or
profitability.
The Company's manufacturing operations for NeisVac-C(TM), Certiva(R) and
its acellular pertussis vaccine are located principally in one facility. Any
condition or event that adversely affects the operation of this facility would
have a material adverse effect on the Company's financial condition and future
results of operations.
DEPENDENCE ON SUPPLIERS. While the Company produces the pertussis
component of Certiva(R) and the polysaccharide component for NeisVac-C(TM), it
has purchased, and intends to continue to purchase, from SSI required diphtheria
and tetanus toxoids and enhanced IPV for Certiva(R) and the combination vaccines
and tetanus toxoids for NeisVac-C(TM). SSI may not fulfill the Company's
requirements, its components may not be supplied on commercially reasonable
terms, or it may experience difficulties in obtaining necessary regulatory
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approvals or disruptions in their production of diphtheria and tetanus toxoids
or IPV. Any of the foregoing could significantly affect the Company's
operations.
In late March 2000, the Company was notified by SSI that SSI is seeking
changes in the terms, primarily with regards to pricing and quantity, of its
supply agreements with the Company. The Company currently does not know what
specific changes are being requested and has scheduled a meeting with SSI to
discuss its concerns.
Certain of the Company's production processes require raw materials from
sole sources or materials that are difficult for suppliers to produce and
certify to the Company's specifications. The Company also may experience
temporary or permanent shortages of critical raw materials necessary for
continued production of its vaccines. Any shortage of these materials could
delay production efforts, adversely impact production costs and yields, or
necessitate the use of substitute materials, any of which could have a
significant adverse impact on the Company's operations.
In addition, the Company has contracted with third parties for certain
product testing and for the sterile fill, labeling and packaging of its vaccine
products. Failure of any such contractor to meet the Company's requirements
could have a material adverse effect on the Company, may involve costly delays
and significant expense, and would require additional regulatory approval as the
Company seeks alternative arrangements.
COMPETITION AND TECHNOLOGICAL CHANGE. Competition in the vaccine industry
is intense. Competitors of the Company both in the United States and
internationally include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of these
competitors are actively developing competing vaccines.
Certiva(R) currently competes in the United States with three other DTaP
vaccines, and most, if not all, manufacturers of DTaP vaccines are expected to
compete in the TdaP vaccine market. In addition, NeisVac-C(TM) is expected to
compete in the United Kingdom against two other Group C meningococcal conjugate
vaccines, one of which is already licensed there. If these competitors are
successful in developing and marketing combination vaccines that include DTaP
vaccines, these combination vaccines may gain market share at the expense of
stand-alone DTaP vaccines, including Certiva(R). One of these competitors has
licensed in the United States a vaccine that combines by reconstitution that
company's Hib vaccine with its DTaP vaccine for administration at 15-18 months
of age and that it continues to seek FDA approval for administration of this
combination vaccine at two, four and six months of age. Another competitor has
reported that it is in clinical trials for a DTaP-Hib combination vaccine. In
addition, several competing DTaP vaccines and certain combination vaccines
incorporating DTaP, IPV and/or Hib vaccines have been licensed for sale outside
of the United States.
Many of these competitors have substantially greater resources, more
extensive experience in conducting clinical testing and obtaining regulatory
approvals for their products, greater operating experience, larger research and
development and marketing staffs, and greater production capabilities than the
Company. These factors may be particularly advantageous because the vaccine
industry is subject to significant technological change.
The Company's competitors could also gain a competitive advantage by
designing around the Company's patents, and developing technologies and products
that are as or more effective than any that have been or are being developed by
the Company. They could also develop technologies and products that would render
the Company's technology and products obsolete and noncompetitive.
CHANGES IN GOVERNMENT PURCHASING POLICIES. Children in the United States
receive immunizations from private providers and public providers, such as local
health departments. Immunizations provided by public providers are generally
funded through federal and state government public health programs. Government
purchases historically have been at prices substantially below those offered to
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the private sector and presently account for a substantial portion of the
vaccine doses distributed in the United States. In the United States, federal
and state governments historically have purchased DTaP and other vaccines from
multiple suppliers. There can be no assurances that this practice will continue.
From time to time, legislative and regulatory initiatives are proposed
that, if adopted, could significantly modify government vaccine programs. These
initiatives could materially affect the federal government's purchasing
authority, the contract award process, or the funding available for government
vaccine purchases. The Company is unable to predict which legislative
initiative, if any, will ultimately be enacted or the effect any such initiative
may ultimately have on the Company's business or results of future operations.
In addition, proposals for health-care, insurance and tax reform may be
considered in the future by federal and state governments and some of these
proposals, if adopted, may limit government or third-party, private
reimbursement policies, or prices charged by pharmaceutical and vaccine
manufacturers for their products.
GOVERNMENT REGULATION; REGULATORY APPROVALS. The Company's vaccine
products, product development activities and manufacturing facilities and
processes are subject to extensive and rigorous regulation by the United States
Food and Drug Administration ("FDA"). FDA regulation includes preclinical and
clinical testing requirements and inspection and approval processes. To date,
the Company has received FDA approval for only one product.
Commercial introduction of the Company's products in the United States
currently requires a separate license for each product. Obtaining licenses can
be costly and time consuming. There can be no assurance that the licenses will
be granted, or that FDA review will not involve delays that would adversely
affect the Company's ability to market products. There also can be no assurance
that any products under development by the Company will demonstrate the safety
or efficacy profiles necessary for regulatory approval, or that the Company's
products under development or its production facilities will receive the
requisite regulatory approvals and licenses in a timely fashion or at all.
Moreover, FDA-granted licenses may impose limitations that affect the
commercialization of the product, including limitations on product use and
requirements for post-licensure testing. The FDA can withdraw approvals at any
time by following appropriate regulatory procedures. The FDA can also limit or
prevent the manufacture or distribution of the Company's products both in the
United States and abroad and can require recalls of products. FDA regulations
depend heavily on administrative and scientific interpretation and advisory
committee determinations. Such interpretations, with possible prospective and
retroactive effect, could adversely affect the Company. For example, recent
assessments of the potential health risks related to mercury contained in food
and drugs conducted by the FDA, in cooperation with the United States
Environmental Protection Agency ("EPA"), have raised questions about the
continued use of thimerosal in vaccines. In July 1999, the Company decided to
follow the recommendations of these agencies and move toward the discontinued
use of thimerosal in Certiva(R), which is licensed in multidose vials. This
change has required the Company to file for regulatory approval on a
thimerosal-free formulation of the product in single-dose syringes; however,
there can be no assurances that such approval will be granted by the FDA or that
FDA review will not involve delays that would adversely affect the Company's
ability to market Certiva(R) made with these enhancements.
In addition, the FDA and various state agencies inspect the Company and
its facilities from time to time to determine whether the Company is in
compliance with regulations, including manufacturing, testing, recordkeeping,
quality control and labeling practices. If such entities find that the Company
is in material violation of these regulations, the Company could be subject to,
among other things, product recalls, suspensions or withdrawals of licenses,
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revocation or suspension of export authorizations, and denials of any pending
applications.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before obtaining regulatory
approval for the commercial sale of any products under development, the Company
must demonstrate through pre-clinical studies and clinical trials that these
products are safe and effective. The results from pre-clinical studies and early
clinical trials may not be predictive of results obtained in large-scale
clinical trials. There can be no assurance that large-scale clinical trials for
any of the Company's products will demonstrate safety and efficacy, be
sufficient to support application for regulatory approval, or lead to marketable
products. A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials even after achieving promising
results in earlier trials.
PATENT PROTECTION AND PROPRIETARY INFORMATION. Traditionally, the vaccine
industry has placed importance on obtaining and maintaining patent and trade
secret protection for significant new technologies, products and processes. The
Company believes that this protection will be an important factor in its success
and may require the expenditure of substantial resources.
Many companies, universities and research institutions have applied for
and/or obtained patents for vaccine products and technologies that may be
competitive or inconsistent with those held by or licensed to the Company. No
assurances can be given that the degree and range of protection of any patents
will be sufficient, that additional patents will be issued to the Company, or
that the Company will not infringe upon patents granted to others. Further,
others have or may independently develop or otherwise properly gain access to
technology or information that is substantially similar to that which is
unpatented yet considered proprietary by the Company.
The Company also may desire or be required to obtain licenses from others
to effectively develop, produce and market commercially viable products. Failure
to obtain those licenses could have a significant adverse effect on the
Company's ability to commercialize its vaccine products. There can be no
assurance that the Company can obtain these licenses on commercially reasonable
terms, if at all, that the patents underlying these licenses will be valid and
enforceable or that the proprietary nature of the unpatented technology
underlying these licenses will remain proprietary.
There has been, and the Company believes that there may be in the future,
significant litigation in the industry regarding patent and other intellectual
property rights. If the Company becomes involved in this type of litigation, it
could consume substantial resources.
RISK OF PRODUCT LIABILITY AND LIMITED INSURANCE. The testing and marketing
of vaccine products involve an inherent risk of product liability. The Company
has limited product liability insurance coverage. There can be no assurance that
adequate additional insurance coverage will be available at acceptable cost, if
at all, or that a product liability claim would not materially adversely affect
the Company's business or financial condition. If not covered by insurance, the
Company faces potential liability that could be substantial in the event of
claims.
DEPENDENCE ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL. The Company's
success in developing marketable products and achieving a competitive position
will depend, in part, on its ability to attract and retain qualified personnel.
Competition for such personnel is intense. No assurance can be given that the
Company will continue to attract or retain such personnel. The loss of key
personnel could adversely affect the Company.
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DIVIDENDS AND TAXATION. The Company has never paid cash dividends on its
Common Stock. The Company intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. Moreover, any profits earned by the
Company's U.S. subsidiary will be declared and paid as a dividend to the
Company, and the Company will in turn declare and pay a dividend to its
shareholders. Each such dividend would be subject to a withholding tax.
IMPACT OF BECOMING A PASSIVE FOREIGN INVESTMENT COMPANY. If more than a
certain percentage of the Company's assets or income becomes passive, the
Company would be classified as a passive foreign investment company ("PFIC") for
U.S. federal income tax purposes. As a result, U.S. taxpayers who receive
certain dividends from the Company or who sell shares of the Company's Common
Stock would be subject to additional federal income tax.
VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. The principal shareholders of
the Company, BioChem and Dr. Phillip Frost, either directly or through
affiliates, are parties to a shareholders' agreement requiring, among other
things, that the Company's Common Stock covered by the agreement be voted
together for the election of directors. As of January 31, 2000, these principal
shareholders beneficially owned approximately 20.7 million shares of the
Company's outstanding Common Stock, which represented approximately 52.7% of the
then outstanding shares of the Company's Common Stock.
VOLATILITY OF STOCK PRICE. The market prices for securities of many
biotechnology and pharmaceutical companies, including the Company, have been
highly volatile. Many factors have historically had, and are expected to
continue to have, a significant impact on the Company's business and on the
market price of the Company's securities, including:
o financial results,
o announcements by the Company and others regarding the results of
regulatory approval filings, clinical trials or other testing,
o technological innovations or new commercial products by the Company or
its competitors, government regulations,
o developments concerning proprietary rights,
o public concern as to safety of vaccine and pharmaceutical products,
and
o economic or other external factors.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market following the exercise of options or
the conversion of convertible securities could have an adverse effect on the
price of the Company's securities. If either of the two principal shareholder
groups decides to sell a substantial number of shares of the Company's Common
Stock, these sales could significantly increase the volatility of the market
price of the Company's issued and outstanding securities. In addition, one of
the principal shareholders has registration rights for the shares of the
Company's Common Stock that it owns.
YEAR 2000 ISSUES. 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. 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, and the Company is continuing to monitor its software and hardware
systems for continued compliance; however, there can be no assurances that the
Company will not experience future Year 2000-related problems. Additionally, the
failure of suppliers and other companies doing business with the Company to
maintain Year 2000 qualification in a manner compatible with the Company's
systems could also have a material adverse effect on the Company.
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(3) SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF ACCOUNTING AND CURRENCY. The accompanying consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") in the United States ("U.S.") 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, as
discussed in Note 6 and the interest charge of $12.0 million in 1998 related to
the issuance of the 4.5% Notes as discussed in Note 10. 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 the current
period. The effect of foreign currency translation has been immaterial.
(b) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of North American Vaccine, Inc. and its subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
(c) 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.
(d) CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist primarily of commercial paper and
U.S. Treasury Bills.
(e) 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(R) for sale in the United States were
capitalized. Production costs incurred in 1999 under a new but not regulatory
approved process were expensed. 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:
1999 1998
----------------
(in thousands)
Raw Materials $2,371 $2,509
Work-in-process 745 1,024
Finished goods 169 534
------- -------
$3,285 $4,067
(f) 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
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performance have been completed, and no other significant uncertainties exist.
In most cases, these criteria are met when the goods are shipped.
In July 1998, the Company received FDA approval to manufacture and market
Certiva(R) in the United States. Under the FDA approval, Certiva(R) is
indicated for active immunization against diphtheria, tetanus and pertussis
(whooping cough) in infants and children six weeks to seven years of age. The
Company produces the monocomponent acellular pertussis toxoid and formulates the
final product with diphtheria and tetanus toxoids manufactured and supplied by
SSI.
In 1999 and 1998, the Company recognized revenues from sales of its
acellular pertussis vaccine to SSI in Denmark of $2.4 million and $1.0 million,
respectively, and has recognized revenue from sales of Certiva(R), primarily
under a contract with the U.S. Centers for Disease Control and Prevention of
$2.6 million and $1.2 million, respectively.
(g) RESEARCH AND DEVELOPMENT COSTS. The Company expenses all research and
development costs as incurred. Under Canadian GAAP, certain development costs
should be deferred to future periods if certain criteria are met. No costs have
been capitalized for Canadian GAAP purposes because the Company believes that
the applicable deferral criteria have not been met.
(h) DEPRECIATION AND AMORTIZATION. Prior to 1998, depreciation of
property, plant and equipment, with the exception of leasehold improvements and
an owned facility, was provided using an accelerated method over the estimated
useful lives of the assets. The estimated useful lives are generally from five
to seven years for machinery, equipment, and furniture. Leasehold improvements
are amortized over the term of the lease. The Company's owned facility was being
depreciated on a straight-line basis over twenty years. For property, plant and
equipment purchased after 1997, depreciation is provided using the straight-line
method over the estimated useful lives. The effect of this change in accounting
principle is insignificant.
(i) DEFERRED FINANCING COSTS. Deferred financing costs represent fees and
other costs incurred in connection with the issuance of the 4.5% Notes and the
6.5% Notes. These costs are amortized over the term of the related debt using
the effective interest rate method. Total accumulated amortization through
December 31, 1999 and 1998 was $1,877,000 and $1,335,000, respectively. During
the year ended December 31, 1999, the Company incurred $1.6 million of costs
related to warrants issued to BioChem (See Footnote 11).
(j) INCOME TAXES. The Company computes deferred tax assets or liabilities
based on the difference between the financial statement and income tax basis of
assets and liabilities using the enacted tax rate.
(k) BASIC AND DILUTED NET LOSS PER COMMON SHARE. In March 1997, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company implemented SFAS No. 128 in 1997,
retroactive for all periods presented. SFAS No. 128 requires dual presentation
of basic and diluted earnings per share. Basic loss per share includes no
dilution and is computed by dividing net loss by the weighted average number of
common shares outstanding for the period. Diluted loss per share includes the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Options, warrants
and convertible securities that were outstanding at December 31, 1999, 1998 and
1997, were not included in the computation of diluted loss per share as their
effect would have been anti-dilutive. As a result, the basic and diluted loss
per share amounts are identical for all periods presented.
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(l) COMPREHENSIVE INCOME. In 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income." The Company has
implemented SFAS 130 beginning with the 1998 financial statements. The
implementation of this standard did not result in a material impact to the
Company's financial statements. The Company presents its comprehensive income in
the statement of shareholders' equity.
(m) 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 $2.6 million, $1.2
million, and $0 for the years ended December 31, 1999, 1998 and 1997,
respectively. Product sales to Europe were approximately $2.4 million, $1.0
million, and $1.7 million for the years ended December 31, 1999, 1998 and 1997,
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 for the acellular pertussis vaccine component, 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.
(4) PRODUCTION, DEVELOPMENT, AND MARKETING CONTRACTS
(a) In October 1999, the NHS committed to purchase 3 million doses in 2000
of NeisVac-C(TM), the Company's group C meningococcal conjugate vaccine. This
commitment is contingent on regulatory approval of NeisVac-C(TM) by the
appropriate U.K. regulatory authorities. The NeisVac-C(TM) contract is expected
to generate gross revenue of approximately $64 million in 2000. The Company
filed an application for approval of NeisVac-C(TM) with the U.K. regulatory
authorities in the first quarter of 2000. Following a review, approval is
anticipated in the second quarter of 2000, with initial product shipments
scheduled for the second quarter of 2000. Should the Company receive approval
and be unable to comply with the delivery terms of the NHS agreement, it may be
required to 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.
In order to produce NeisVac-C(TM) under the NHS contract, the Company
suspended production of its acellular pertussis vaccine in 1999 in its
production facility until it has produced sufficient quantities of
NeisVac-C(TM).
(b) AGREEMENTS WITH AVENTIS PASTEUR (FORMERLY PASTEUR MERIEUX CONNAUGHT).
Under a 1995 clinical development agreement and license agreements with Aventis
Pasteur, the parties agreed to jointly develop the Company's new conjugate
vaccine against Group B meningococcus for both adult and pediatric indications.
The Company recognized $4 and $6 million of research and development revenue for
non-refundable payments made by Aventis Pasteur in 1996 and 1997, respectively.
In 1999, the Company recognized $5.1 million of revenue for reimbursable costs
in connection with the clinical development agreement. In February 2000, Aventis
Pasteur notified the Company that it was exercising its option to terminate the
license and clinical development agreements.
(c) AGREEMENT WITH ABBOTT. In 1996, the Company and Abbott signed an
agreement under which Abbott would market Certiva(R), the Company's DTaP
vaccine, when approved by the FDA. With FDA approval of Certiva(R) in July
1998, Abbott began marketing Certiva(R) to private physicians and managed care
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markets in the United States for immunization of infants and children. In
accordance with the terms of the agreement, Abbott terminated the agreement in
the third quarter of 1999. The Company is marketing to government purchasers,
including state governments and the Centers for Disease Control and Prevention,
and with the termination of the Abbott agreement it began selling Certiva(R) to
private physicians and managed care organizations.
On execution of the agreement, the Company received $13 million of which
approximately $6.3 million represented payment for 350,000 shares of the
Company's common stock, and the balance represented a marketing fee and clinical
development funding. Abbott provided the Company with clinical development
funding. Amounts received for clinical development to be expended in the future
by the Company were recorded as deferred revenue. The Company received $3
million in 1997 for clinical development funding. The Company was to receive
payments upon achievement of prescribed milestones. The Company recognized
$850,000 and $5.2 million of revenues under this contract in 1999 and 1998,
respectively, including a milestone payment associated with the FDA approval of
Certiva(R) in 1998. Under the agreement, the Company paid $750,000 to support
and enhance Abbott's promotional and advertising program in 1998.
(5) PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment were recorded at cost and consisted of the
following components:
As of December 31,
------------------
1999 1998
--------------
(in thousands)
Property, plant and equipment:
Land $ - $498
Building and improvements - 2,443
Machinery, equipment and laboratory fixtures 47,188 43,806
Leasehold improvements 8,317 8,293
Office furniture, equipment and software 4,320 4,915
------ ------
59,825 59,955
------ ------
Accumulated depreciation and amortization:
Building and improvements - 372
Machinery, equipment and laboratory fixtures 31,371 26,382
Leasehold improvements 5,563 4,899
Office furniture, equipment and software 3,223 2,987
------ ------
40,157 34,640
------ ------
Property, plant and equipment, net $19,668 $25,315
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.
In 1996, the Company entered into an agreement which included the
assumption of an operating lease of a 35,000 square foot manufacturing facility
and the purchase and capital lease of equipment and leasehold improvements. See
Note 8 for further description of the transaction.
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(6) INVESTMENT IN AFFILIATE
In 1999, the Company sold the remaining 125,000 shares of its investment
in IVAX Corporation stock. The gross proceeds and the realized gain from the
sales were $1.6 million and $952,000, respectively.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," equity securities classified as available-for-sale
are reported at fair value, with unrealized gains and losses reported as a
separate component of shareholders' equity. As a result, the Company's
investment in its affiliate is reflected at its current market value as of
December 31, 1998, of $1.6 million (original cost of $629,000).
The market values of these securities as of December 31, 1998, as
disclosed on the accompanying consolidated balance sheet, were determined based
on the closing prices for registered securities of IVAX on that date.
(7) OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following components:
As of December 31,
------------------
1999 1998
--------------
(in thousands)
Payroll and fringe benefits $ 3,458 $ 1,702
Accrued interest 1,069 1,103
Accrued taxes 833 1,149
Reserve for contract loss 720 720
Accrued consulting and professional fees 462 353
Accrued costs of clinical trials 245 216
Other accrued liabilities 421 605
-------- -------
Total other current liabilities $ 7,208 $ 5,848
======== =======
(8) 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
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a restricted cash deposit of an equal amount. The balance of the letter of
credit and the corresponding restricted cash is $3.2 million at December 31,
1999. 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.
(9) COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES. The Company has extended its lease agreement for its
production facility through February 28, 2009. The Company has the option of
further extending this lease for an additional ten years. Under the terms of the
lease of this facility, the lessor reimbursed the Company for $625,000 of
improvements made to the property. This reimbursement has been reflected as a
deferred rent credit, which was amortized over the initial base term of the
lease which expired February 28, 1999. The lease provides for minimum annual
escalations of the base rent. These escalations were recorded as expense ratably
over the term of the lease.
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.
The Company has terminated its lease for certain office space that it had
leased through December 31, 2000.
As discussed in Note 8, in 1996 the Company assumed a lease to rent 35,000
square feet of space for a development and production facility through February
1, 2001, with two five-year renewal options. The lease provides for minimum
annual escalations of the base rent.
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.
Minimum future lease payments under all leases, exclusive of real estate
tax escalations, are as follows:
YEARS ENDING
DECEMBER 31,
------------
(in thousands)
2000 $ 2,054
2001 1,745
2002 1,719
2003 1,766
2004 1,813
Beyond 7,082
--------
Total $16,179
========
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Total rent expense was $2,086,000, $1,620,000, and $1,232,000 in 1999,
1998, and 1997, respectively.
(b) CAPITAL LEASE. In connection with the operating lease agreement
described in Note 8 that was entered into in 1996, the Company also entered into
an agreement that included the purchase and lease of equipment and leasehold
improvements. The total acquisition cost was approximately $24.9 million, which
included a cash payment of $17.2 million. The balance of $7.7 million was
financed through an equipment lease obligation which expires on November 1,
2000, at which time the Company may purchase the equipment at the greater of its
then fair market value or approximately $770,000. In 1997, the Company disposed
of approximately $457,000 of this equipment recognizing a non-cash loss of
approximately $97,000. The equipment lease has been accounted for as a capital
lease for financial reporting purposes, with monthly payments of approximately
$173,000. As of December 31, 1999, the total obligation under this capital lease
was $2.4 million. Total depreciation expense associated with equipment under the
capital lease was approximately $1.9 million, $2.7 million and $4.1 million for
1999, 1998 and 1997, respectively. Under the equipment lease agreement there are
financial covenants that obligate the Company to maintain certain minimum cash
and investment balances, a minimum tangible net worth and certain other
financial ratios. As discussed in Note 8, in 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 $3.2 million at December 31, 1999. The letter of credit will expire by
its terms on November 1, 2000. Minimum future lease payments remaining in 2000
are $2,495,000, which includes interest of $139,000. The Company also entered
into a financing agreement of capital lease of scientific equipment in the first
quarter of 1999.
Minimum future (capital) lease payments are as follows:
YEARS ENDING
DECEMBER 31,
------------
(in thousands)
2000 (includes interest of $150) $ 2,550
2001 (includes interest of $6) 54
2002 (includes interest of $1) 32
-------
Total 2,636
Less interest component (157)
-------
Total principal payments $ 2,479
=======
(c) FILLING CONTRACT. The Company has entered into an agreement with a
contractor to fill doses of its Meningitis C vaccine for sale under a contract
with the NHS. The agreement obligates the Company to fill its vaccine
requirements prior to November 9, 2000. Should the Company terminate this
agreement prior to meeting its obligation under this agreement, it will be
required to pay liquidating damages to the contractor. The damages would be
approximately $2.9 million should no vaccine be filled and would decrease on a
sliding scale as the obligations are met.
(d) CONTINGENCIES. In prior years, the Company was awarded various
cost-plus-fixed-fee contracts by the National Institute of Child Health and
Human Development ("NICHD"). Performance under these contracts was completed in
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1993. Provisional payments to the Company under cost-reimbursable contracts are
subject to adjustment upon completion of audits of reimbursable costs by the
NICHD. In the opinion of management, adjustments, if any, resulting from the
audits of the contracts are not expected to have a material adverse impact on
the Company's financial position or future results of operations.
In March 2000, the Company settled a claim filed by its former president.
The Company has agreed not to disclose the terms of the settlement. The
settlement will not have a materially adverse impact on the Company's financial
position or results of operations.
The Company is, and from time to time becomes, involved in various claims
and lawsuits that are incidental to its business. In the opinion of the
Company's management, there are no other material legal proceedings pending
against the Company.
(10) CONVERTIBLE DEBT
In November 1998, the Company completed a $25 million financing through
the private placement of 4.5% Notes. BioChem and Dr. Frost, affiliates of the
Company, purchased 4.5% Notes in the aggregate principal amount of $9 million
and $4.25 million, respectively. In addition, Societe financiere d'innovation
inc. ("Sofinov") 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.
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 conversion price was set based on
the average closing price of the Company's Common Stock for the twenty (20)
trading days preceding the date of the announcement of the
agreement-in-principle between the Company and prospective purchasers. The
measurement period for determining the conversion price began on August 26, 1998
and terminated on September 23, 1998. The closing prices of the Company's Common
Stock during that period ranged from a low of $6.875 to a high of $11.25. 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. Upon a change in control, the
Company is 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
interest. The repurchase price will be payable in cash or, at the option of the
Company, in shares of the Company's Common Stock (valued at 95% of the average
closing prices of the Common Stock for a specified period prior to the
repurchase date).
The 4.5% Notes are not registered under the Securities Act of 1933, as
amended, ("1933 Act") or any applicable state or foreign securities laws, and
were sold in reliance on prescribed exemptions from registrations under the 1933
Act and other applicable state or foreign securities laws.
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, thus increasing the effective interest rate of the
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4.5% Notes. Given that the 4.5% Notes are immediately convertible, the interest
expense of approximately $12.0 million was recognized immediately and is
included in the accompanying Consolidated Statements of Operations. This
interest expense is not deductible for U.S. or Canadian income tax purposes.
In May 1996, the Company completed an offering of 6.5% Notes in the
principal amount of $86.25 million due May 1, 2003. The net proceeds from this
offering were approximately $82.7 million. Interest on the notes is payable
semi-annually on May 1 and November 1 of each year. The 6.5% Notes are
convertible into common shares of the Company at the conversion price of
approximately $24.86 per common share. The 6.5% Notes are subordinated to
present and future senior indebtedness of the Company and will not restrict the
incurrence of future senior or other indebtedness by the Company. The 6.5% Notes
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 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 common shares. In December 1997, the
Company issued 101,207 shares of common stock upon conversion of the $2,516,000
principal amount of notes. In June 1999, the Company retired $8.4 million of the
6.5% notes in exchange for 550,000 shares of its common stock. The conversion
generated a non-cash debt conversion expense in 1999 of $940,000.
(11) LINES OF CREDIT
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 265 basis points. BioChem, an affiliate
of the Company, has provided the guarantee of the line of credit, which will
remain in place for a maximum of two years, 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 the $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 approximately $1.6 million of interest expense
calculated using the Black-Scholes pricing model based upon the issuance of
these warrants to purchase up to 750,000 shares of common stock. The Company
recognized interest expense for the period beginning at the issuance date of the
warrants and ending on December 31, 1999, the original repayment date for the
line of credit. The line of credit has been extended through May 31, 2000.
Upon reaching a definitive acquisition agreement with Baxter in November
1999, the Company finalized terms relating to a secured revolving line of credit
from Bank of America, N.A., which is guaranteed by Baxter. The credit line is
for $30 million at an interest rate of LIBOR plus .625% and has a maturity of
March 31, 2000. The line of credit is secured by all of the Company's otherwise
unencumbered assets, including patents, patent applications and receivables. The
Company may be required to repay any borrowed funds under the facility on March
31, 2000. There are no assurances that the Company would be able to obtain
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additional financing to repay the loan or that such financing, if obtained,
would be adequate to fund the ongoing operations of the Company.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's consolidated balance sheets
at December 31, 1999 and 1998, for cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and lines of credit
approximate fair values due to the short maturity of those instruments.
Management believes the carrying value of the 4.5% Notes and the capital lease
obligation approximate fair value. At December 31, 1999, management estimates
the fair value of the 6.5% Notes at approximately $59 million as determined by a
review of a December 31, 1999 trade of the 6.5% Notes.
(13) INCOME TAXES
The operations of the Company are taxed under Canadian income tax laws and
the operations of its United States branch are taxed under United States income
tax laws subject to applicable treaty provisions for the avoidance of double
taxation. The Company's wholly owned subsidiaries, American Vaccine Corporation
and AMVAX, Inc. ("AMVAX"), are both taxed under United States income tax laws.
In 1999, 1998 and 1997, the Company incurred a loss for income tax
reporting purposes in Canada and the United States.
The components of the net deferred tax assets consisted of:
AS OF DECEMBER 31,
------------------
1999 1998
--------------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $65,057 $48,348
Accrued intercompany interest 7,597 6,046
Depreciation and amortization 3,194 2,581
Inventory cost capitalization 827 -
Reserve for contract loss 278 278
Deferred rent 17 7
Other 2,602 3,240
----- -------
Total deferred tax assets 79,572 60,500
Deferred tax liabilities:
Historical accrual to cash difference - (745)
Investments in affiliates - (312)
-------- --------
Total deferred tax liability - (1,057)
-------- --------
Net deferred tax assets before allowance 79,572 59,443
Less: Valuation allowance (79,572) (59,443)
-------- -------
Net deferred tax assets $ - $ -
======== ========
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The Company has determined that $79.6 million in 1999 and $59.4 million in
1998 of net deferred tax assets do not satisfy the recognition criteria set
forth in SFAS No. 109. Accordingly, a valuation allowance was recorded against
the applicable net deferred tax assets.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $167.6 million. Of this consolidated total, approximately $52.4
million of the Company's net operating loss carryforwards are available to
offset future Canadian-sourced taxable income, if any. These loss carryforwards
expire between 2000 and 2006. Of the remaining balance, American Vaccine and
AMVAX had net operating loss carryforwards of approximately $114.3 million and
$911,000, respectively, available to offset future United States taxable income,
if any. These loss carryforwards expire between 2003 and 2019.
The net operating loss carryforwards available to be used in any given
year may be limited due to significant changes in ownership interests resulting
from future stock issuances or other changes in equity interests.
(14) INDEMNIFICATION AGREEMENT
In connection with the Merger described in Note 1, certain shareholders of
American Vaccine with significant ownership interests were required to file gain
recognition agreements with the United States Internal Revenue Service. Under
the terms of the gain recognition agreements, these shareholders have agreed to
amend their income tax returns for 1990 if the Company disposes of substantially
all of the stock or assets of American Vaccine prior to the end of 2000. With
those amended returns, the shareholders will be required to pay tax based on the
difference between their basis in American Vaccine stock and the value, at
February 28, 1990, of the Company stock received in the Merger, plus interest
from the time of the Merger to the disposition of American Vaccine stock or
assets by the Company.
In connection with the Merger, the Company entered into an indemnification
agreement with these shareholders of American Vaccine whereby the Company will
(i) lend to the affected shareholders, on an interest-free and after-tax basis,
an amount equal to the taxes to be paid with the amended tax returns; and (ii)
pay to the affected shareholders, on an after-tax basis, any interest and
penalties with respect to the taxes to be paid with the amended tax returns.
Under the terms of the indemnification agreement, repayment of the loans
described above will only be required at the time and to the extent that the
affected shareholders receive benefit from the resulting increase in the tax
basis of their Company stock. There can be no assurance that any such benefit
will be received.
The ultimate amount of this potential liability, if any, is not presently
determinable but will be based on the amount of gain, interest rates in effect
during the period, and the length of time between the consummation of the Merger
and the event triggering the gain recognition. Based on current interest rates,
the Company estimates that, in the event that the gain recognition would have
occurred at December 31, 1999, its obligations to the affected shareholders
could approximate $15.7 million.
(15) LICENSE AGREEMENTS
Certain of the conjugate vaccine-related technologies transferred to the
Company by BioChem in connection with the Merger are licensed under two
agreements with the National Research Council of Canada (the "NRC"), a Canadian
federal governmental agency. Under these license agreements, the Company will be
required to pay royalties to the NRC on all sales of such licensed products and
related services. Certain minimum annual royalties are payable irrespective of
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the volume of sales of such products and services. BioChem has agreed to
reimburse the Company for 10% of these minimum annual royalties. BioChem's share
of minimum annual royalties was less than five thousand dollars in each of the
last three years. The NRC has the right to terminate the license agreements
under certain specified conditions including if it concludes that all reasonable
efforts are not being used to develop and commercialize the technologies.
The Company has a license agreement with the National Technical
Information Service (the "NTIS"), an agency of the United States government, to
bring the method of preparing the acellular pertussis vaccine to the point of
practical application. In return, the NTIS granted the Company an exclusive
license to make, have made, use and sell the vaccine following approval of
commercial sale by the FDA. Under the agreement, the Company pays to the NTIS an
annual maintenance fee and a royalty based on sales or other similar
dispositions of the vaccine. The exclusive rights under this agreement will
terminate seven years from the date of the first commercial sale of the vaccine,
which was on October 29, 1998. The Company has acquired a royalty-bearing
exclusive license for the use of this patented technology in certain foreign
jurisdictions for the full term of the patents.
(16) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK. Preferred shares are nonvoting (other than as
required by law) and may be issued in one or more series. The Company has issued
shares of Series A preferred stock, which are convertible, at the option of the
holder, into common stock on the basis of two shares of common stock for each
share of preferred stock held. The preferred stock had a liquidation preference
of Can. $2.50 per share or U.S. $3.5 million in the aggregate at December 31,
1999. The conversion ratio is subject to adjustment for certain dilutive events.
(b) 1990 SHARE OPTION PLAN. In 1990, the Company adopted the North
American Vaccine, Inc. Share Option Plan (the "1990 Plan"), which, as amended,
provided for the issuance of up to 3,650,000 shares of its common stock to
officers, directors, employees and consultants. The 1990 Plan, which expired in
February 1995, provided that options be granted at no less than market value on
the date of grant. In 1997, the Company extended the expiration date for options
to purchase 150,000 shares of common stock previously granted under this plan.
The Company recognized approximately $1.3 million of expense representing the
difference between the fair market value and the exercise price of the options
on the date of the extension in 1997. For accounting purposes, the extensions of
these options have been treated as new grants.
(c) 1995 SHARE OPTION PLAN. In 1995, the Company adopted the North
American Vaccine, Inc. 1995 Share Option Plan (the "1995 Plan"), which provides
for the issuance of up to 1,000,000 shares of its common stock to officers,
directors, employees and consultants. The 1995 Plan, which expires in March
2000, provides that options be granted at no less than market value on the date
of the grant and may have a term of up to 10 years.
(d) 1997 SHARE OPTION PLAN. In 1997, the Company adopted the North
American Vaccine, Inc. 1997 Share Option Plan (the "1997 Plan"), which provides
for the issuance of up to 5,000,000 shares of its common stock to officers,
directors, employees and consultants. The 1997 Plan, which expires in December
2007, provides that options be granted at no less than market value on the date
of the grant and may have a term of up to 10 years. Upon a change of control of
the Company, all outstanding stock options granted under the 1997 Share Option
Plan become fully exercisable.
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The following table summarizes option activity outside of any formal stock
option plan and under the 1990 Plan, the 1995 Plan and the 1997 Plan for the
period from December 31, 1996, through December 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
----------------
1990 Plan 1995 Plan 1997 Plan Non-Plan Exercise Wtg.Avg.
Options Options Options Options Price Exer.Price
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,199,682 499,500 -- 115,624 $ 2.92-21.50 $ 11.59
Granted 150,000 500,500 -- -- 11.13-24.50 18.69
Exercised (230,964) (19,291) -- (57,812) 9.00-13.88 9.66
Expired or canceled (153,069) (67,738) -- -- 9.13-24.50 14.68
---------------------------------------------------------------
Balance at December 31, 1997 965,649 912,971 -- 57,812 2.92-24.50 13.93
Granted -- 60,000 879,700 -- 8.75-19.94 9.96
Exercised (368,938) (3,365) -- -- 9.00-13.88 12.44
Expired or canceled (200,603) (146,207) -- -- 9.00-24.50 14.52
---------------------------------------------------------------
Balance at December 31, 1998 396,108 823,399 879,700 57,812 2.92-24.50 12.37
Granted -- 100,000 138,300 -- 5.25-20.25 11.75
Exercised -- -- -- 57,812 2.92 2.92
Expired or canceled (347,387) (271,531) (187,934) -- 8.75-24.50 12.74
---------------------------------------------------------------
Balance at December 31, 1999 48,721 651,868 830,066 -- 5.25-24.50 12.29
</TABLE>
At December 31, 1999, under the 1990 Plan, outstanding options to purchase
an aggregate of 48,721 common shares were exercisable at $9.13 per share, and no
options were available for grant. At December 31, 1999, under the 1995 Plan,
options to purchase an aggregate of 581,246 common shares were exercisable at
prices ranging from $11.25 to $24.50 per share (weighted average exercise price
per share of $16.14), and 325,476 options were available for grant. At December
31, 1999, under the 1997 Plan, options to purchase an aggregate of 233,928
common shares were exercisable at prices ranging from $8.75 to $10.63 per share
(weighted average exercise price per share of $9.42) and 4,169,934 options were
available for grant.
The weighted-average per share grant date fair value of options granted
during 1997 for the 1990 Plan was $13.16. The weighted-average per share grant
date fair value of options granted during 1999, 1998 and 1997 for the 1995 Plan
was $0.52, $10.62, and $12.32, respectively. The weighted-average per share
grant date fair value of options granted during 1999 and 1998 for the 1997 Plan
was $3.91 and $5.49, respectively.
(e) 1990 NON-EMPLOYEE DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1990 SESOP"). In 1990, the Company adopted the 1990 SESOP, which, as amended,
provided for the issuance of up to 1,850,000 shares of its common stock to all
the Company's non-employee directors, and senior executives who are residents of
Canada. Under the 1990 SESOP, which expired in October 1995, options were
granted automatically to each non-employee director annually on January 1. The
1990 SESOP required that the exercise price must not be less than the market
value of the stock at the date of grant. Options issued to non-employee
directors under the 1990 SESOP are exercisable in Canadian currency, vest
ratably over a period of three years and expire five years from the date of
grant. Upon a change of control of the Company, all outstanding stock options
88
<PAGE>
granted under the 1990 SESOP become fully exercisable.
(f) 1995 NON-EMPLOYEE DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1995 SESOP"). In 1995, the Company adopted the 1995 SESOP, which provides for
the issuance of up to 500,000 shares of its common stock to all the Company's
non-employee directors, and its senior executives who are residents of Canada.
Under the 1995 SESOP, which expires in March 2000, options were granted
automatically to each non-employee director annually on January 1. The 1995
SESOP requires that the exercise price must not be less than the market value of
the stock at the date of grant. Options issued to non-employee directors vest
ratably over a period of three years and expire ten years from the date of
grant. Upon a change of control of the Company, all outstanding stock options
granted under the 1995 SESOP become fully exercisable.
(g) 1999 NON-EMPLOYEE DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1999 SESOP"). In 1999, the Company adopted the 1999 SESOP, which provides for
the issuance of up to 650,000 shares of its common stock to all the Company's
non-employee directors, and its senior executives who are residents of Canada.
Under the 1999 SESOP, which expires in January 2009, options are granted
automatically to each non-employee director annually on January 1. The 1999
SESOP requires that the exercise price must not be less than the market value of
the stock at the date of grant. Options issued to non-employee directors vest
ratably over a period of three years and expire ten years from the date of
grant. Upon a change of control of the Company, all outstanding stock options
granted under the 1999 SESOP become fully exercisable. No options were granted
under the plan as of December 31, 1999, and the plan was suspended indefinitely
in December 1999, and accordingly no options were granted in January 2000.
The following table summarizes option activity under the 1990 SESOP plan
and the 1995 SESOP plan from December 31, 1996, through December 31, 1999:
<TABLE>
<CAPTION>
1990 1995
SESOP SESOP Exercise Price Wtg.Avg.
Plan Options Plan Options Can.$ U.S. $ Exer.Price(U.S.)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 490,000 120,000 $11.75-15.10 $8.58-14.13 $ 10.82
Granted -- 130,000 -- 24.38 24.38
Exercised (190,000) -- 12.88-15.10 9.01-10.56 10.31
Expired or canceled -- -- -- -- --
-------------------------------------------------------------
Balance at December 31, 1997 300,000 250,000 11.75-14.56 8.22-24.38 13.83
Granted -- 130,000 -- 24.94 24.94
Exercised (90,000) -- 12.88-14.56 8.42-9.52 8.54
Expired or canceled -- (20,001) -- 14.13-24.94 22.95
-------------------------------------------------------------
Balance at December 31, 1998 210,000 359,999 11.75-14.56 7.68-24.94 16.57
Granted -- 130,000 -- 8.88 8.88
Exercised -- -- -- -- --
Expired or canceled (100,000) (9,999) 14.56 10.08-24.38 10.26
-------------------------------------------------------------
Balance at December 31, 1999 110,000 480,000 11.75 8.14-24.94 16.14
</TABLE>
89
<PAGE>
At December 31, 1999, under the 1990 SESOP, 110,000 options were
exercisable at Can. $11.75 (U.S. $8.14 ) per share and no options were available
for grant under the 1990 SESOP. At December 31, 1999, under the 1995 SESOP,
229,988 options were exercisable at prices ranging from U.S. $14.13 to U.S.
$24.94 per share (weighted average U.S. price of $19.57), and 20,000 options
were available for grant. The weighted-average per share grant date fair value
of options granted during 1999, 1998 and 1997 for the 1995 SESOP plan was U.S.
$6.51, $16.96, and $15.92, respectively.
(h) STOCK BASED COMPENSATION PLANS. The Company applies the intrinsic
value based method of accounting pursuant to APB Opinion No. 25, "Accounting For
Stock Issued To Employees," and related interpretations for option grants under
its stock based compensation plans. Accordingly, no compensation cost has been
recognized in the accompanying financial statements. Had compensation cost for
the Company's five stock option plans been determined on the fair value based
method of SFAS 123, "Accounting for Stock-Based Compensation," at the grant
dates for awards under these plans, the Company's net loss and loss per share
for 1999, 1998 and 1997 would have been $52.6 million or a loss of $1.61 per
share, $61.0 million or a loss of $1.90 per share, and $49.3 million or a loss
of $1.56 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Pursuant to SFAS 123, the fair value of each option grant is estimated on
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999, 1998, and 1997,
respectively: risk-free interest rates of 6.43 percent for the 1990 Plan option
extensions, 5.50-6.99 percent for the 1995 Plan options, 4.34-6.25 percent for
the 1997 Plan options, and 4.34-6.79 percent for the 1995 SESOP options; no
expected dividend yields; expected lives of 4 years for the 1990 Plan option
extensions, between 1.5 and 8 years for the 1995 Plan options, between 1.5 and 8
years for the 1997 Plan, and 8 years for the 1995 SESOP options; and expected
volatilities of 78, 65 and 58 percent. Of the 2,120,655 options outstanding at
December 31, 1999, 1,203,883 options have a weighted average remaining
contractual life of approximately 5.8 years. All of these options are
exercisable. The remaining 916,772 options have a weighted average remaining
contractual life of approximately 8.7 years.
(17) RETIREMENT AND SAVINGS 401(K) PLAN AND TRUST
The Company's Retirement and Savings 401(k) Plan and Trust (the "Plan")
became effective April 1, 1991. The Plan is a qualified profit-sharing plan with
a cash or deferred compensation arrangement and discretionary matching
contributions. Under the Plan, eligible employees may elect to contribute to the
Plan by salary deferrals up to an annual limit, which is the lesser of 20
percent of a participant's annual compensation or the maximum allowed by law,
and the Company may contribute matching amounts as provided by the Plan. Salary
deferrals and matching contributions are vested immediately. The Company's
matching expense, contributed in the form of the Company's common stock, was
$243,000, $309,000, and $251,000 for 1999, 1998, and 1997, respectively.
The Company may elect to make additional contributions to the Plan, from
its current or accumulated net profits, in the form of a profit sharing
contribution. This discretionary contribution will be made for all eligible
90
<PAGE>
participants regardless of whether such participants make any salary deferrals
for that plan year. Profit sharing contributions are vested ratably over a five
year period. From inception of the Plan, the Company has not made a profit
sharing contribution.
The Plan provides for an overall limitation with respect to the amount of
contributions (including Company match, if any) which can be allocated to any
participant in any plan year. This limitation is the lesser of 25 percent of a
participant's annual compensation or the maximum allowed by law.
(18) RELATED-PARTY TRANSACTIONS
In the Merger, as discussed in Note 1, the Company and BioChem granted to
each other a one time demand registration right (with expenses to be paid by the
party exercising the registration right) and certain piggy-back registration
rights, through January 17, 1995. In connection with a proposed offering of the
Company's stock in 1994 by both BioChem and the Company, which offering was
later withdrawn at BioChem's request, BioChem's one-time demand registration
right was extended through January 17, 1998, and at that time was further
extended to January 17, 2001.
In April 1998, the Company extended a loan to its then president, related
to the exercise of expiring stock options. The loan was comprised of
approximately $1.0 million for the exercise of the options and $217,000 for
payment of withholding taxes. The loan was made on a full recourse basis, was
for a six month period, was collateralized by approximately 94,000 shares of
common stock of the Company, which at the time of the loan had a fair market
value of 125% of the principal amount of the loan. The loan accrued interest at
a fair market rate, was repaid in full at maturity in October 1998, and the
related collateral has been released.
In 1998, the Company completed a $25 million financing through the private
placement of an offering of 4.5% Notes. BioChem and Dr. Frost, affiliates of the
Company, purchased 4.5% Notes in the aggregate principal amount of $9 million
and $4.25, respectively. In addition, Sofinov 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. See Note 10 for further details.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
91
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Following is a list of the Company's directors:
NAME AGE(1) POSITION
---- ------ --------
Neil W. Flanzraich 56 Director; Chairman
Francesco Bellini, Ph.D. 52 Director; Vice Chairman
Phillip Frost, M.D. 63 Director; Vice Chairman
Randal D. Chase, Ph.D. 50 Director; Chief Executive Officer and
President
Alain Cousineau 58 Director
Jonathan Deitcher 53 Director
Denis Dionne 50 Director
Gervais Dionne, Ph.D. 53 Director
Lyle Kasprick 67 Director
Francois Legault 43 Director
Richard C. Pfenniger, Jr. 44 Director
- ---------------------------
(1) As of March 1, 2000.
The Company's directors are elected at each annual meeting of the
Company's shareholders and serve until the next annual meeting of shareholders
or until their respective successors are duly elected and qualified, or their
prior resignation or removal. There are no family relationships among any of the
executive officers or directors of the Company. Under the terms of a
Shareholders' Agreement, the Company's principal shareholders have agreed to
vote together for the election of directors. See Item 13 - Certain Relationships
and Related Transactions. Background information regarding each of the Company's
directors is set forth below.
NEIL W. FLANZRAICH: Director of the Company since October 1989 and
Chairman since January 1995; Vice Chairman and President since May 1998 and a
director since 1997 of IVAX Corporation ("IVAX") (pharmaceutical company);
shareholder with law firm of Heller Ehrman White & McAuliffe and Chairman of the
Life Sciences Group of that firm from September 1995 through May 1998; General
Counsel, Senior Vice President and Secretary of Syntex (U.S.A.), Inc.
(pharmaceutical company), a subsidiary of Roche Holding Ltd., from January 1995
to August 1995; General Counsel from January 1992 to December 1994, Co-General
Counsel from August 1987 through January 1992, and Senior Vice President from
June 1981 to December 1994 of Syntex Corporation, a pharmaceutical company
acquired by Roche Holding Ltd. at the end of 1994; Director of Whitman
Educational Group, Inc. (operator of degree and non-degree granting
post-secondary schools) since 1997; and Director of Continucare Corporation
(health-care management) since January 1998.
FRANCESCO BELLINI, PH.D.: Director of the Company since October 1989 and
Vice Chairman since June 1991; President from September 1986 to May 1998, Chief
Executive Officer since October 1986 and Director since September 1986 of
BioChem Pharma Inc.
("BioChem") (pharmaceutical company).
PHILLIP FROST, M.D.: Director of the Company since October 1989 and Vice
Chairman since December 1990; Chairman of the Board and Chief Executive Officer
of IVAX since 1987 and President from July 1991 to January 1995; Chairman of
Whitman Education Group, Inc. since 1992; Director of Northrop Grumman
Corporation (aerospace company) since 1996; Vice Chairman and Director of
Continucare Corporation since 1996; a trustee of the University of Miami since
1983; and a member of the Board of Governors of the American Stock Exchange
since 1992.
RANDAL D. CHASE, PH.D.: Chief Executive Officer and President of the
Company since October 1998; President and Chief Executive Officer of Aventis
Pasteur (Canada) (pharmaceutical company) from January 1996 to October 1998 and
also served as a member of the Executive Committee for Aventis Pasteur
(Worldwide), as Chairman of Aventis Pasteur (Mexico) and a member of the Board
of Directors of Rhone-Poulenc Canada (a pharmaceutical company); and from July
1993 to January 1996, Dr. Chase was with QLT Phototherapeutics (a biotechnology
company) holding various positions including: Director, President and Chief
Executive Officer, and Vice President and Chief Operating Officer.
92
<PAGE>
ALAIN COUSINEAU: Director of the Company since October 1989; Chairman of
the Board of Groupe SECOR Inc. (management consultants in corporate strategic
planning) since February 1993 and President from September 1985 to February
1993; Partner of Groupe SECOR Inc. since July 1983; Director of Bioniche Life
Sciences Inc. (biopharmaceutical company) since September 1996 and Heroux Inc.
(manufacture and repair of aerospace and industrial products) since September
1999, both of which are public companies trading on the Toronto Stock Exchange.
JONATHAN DEITCHER: Director of the Company since February 1990; Director
and Vice President of RBC Dominion Securities (securities investment dealer)
since May 1984; and Director of Renaissance Energy Ltd. (oil and gas
exploration) since 1982 and Vincor International Inc. (wine producer and
retailer) since November 1993, both of which are public companies trading on the
Toronto Stock Exchange.
DENIS DIONNE: Director of the Company since October 1989; President of
Societe financiere d'innovation inc. ("Sofinov"), a high technology investment
fund that is a subsidiary of La Caisse de dep6t et placement du Quebec, since
April 1996; and Senior Vice President, Economic Development and Strategic
Investments from 1995 to March 1996, and Senior Vice President, Security and
Investment from 1988 to March 1996, of Fonds de Solidarite des Travailleurs du
Quebec, an investment fund.
GERVAIS DIONNE, PH.D.: Director of the Company since May 1998; currently
Chief Scientific Officer of BioChem; Executive Vice President, Research and
Development of BioChem since November 1994; President and Chief Executive
Officer of BioChem Therapeutics Inc. (pharmaceutical company) from February 1993
to November 1994; Vice President, Research and Development of BioChem from
September 1986 to November 1994; Director of BioChem since 1991; Director of
BioChem Therapeutics Inc. from 1993 to 1998; Director of GeneChem Technologies
(investment fund) since May 1997; and Director of Scriptogen Pharmaceuticals
Inc.
LYLE KASPRICK: Director of the Company since October 1989 and Chairman
from June 1991 to January 1995; private investor since March 1988; and, since
June 1993, a member of the Board of Directors and the Investment Committee of
the University of North Dakota Foundation.
FRANCOIS LEGAULT: Director of the Company since June 1996; Executive
Vice-President Corporate Development and Investments of BioChem since February
1997; Senior Vice President, Finance, Administration and Treasurer of BioChem,
from February 1993 to February 1997; and Vice President, Finance and Treasurer
of BioChem from 1987 to February 1993.
RICHARD C. PFENNIGER, JR.: Director of the Company since 1992; Chief
Executive Officer and Vice Chairman of Whitman Education Group, Inc. since March
1997 and Director since 1992; Chief Operating Officer of IVAX from May 1994 to
March 1997; and Senior Vice President -- Legal Affairs and General Counsel of
IVAX from 1989 to May 1994 and Secretary from 1990 to April 1994.
EXECUTIVE OFFICERS
The following table identifies the executive officers of the Company and
the positions that they hold. Officers of the Company are elected by the Board
of Directors at the annual meeting thereof to hold office until successors are
elected and qualified, or their prior resignation or removal.
93
<PAGE>
NAME (1) AGE (2) POSITION
---- --- --------
Randal D. Chase, Ph.D. (3) 50 Chief Executive Officer and
President
Stephen N. Keith, M.D., MSPH 47 Vice President - Marketing & Sales
Wayne Morges, Ph.D. 53 Vice President - Quality/Regulatory
Affairs
Joan D.S. Fusco, Ph.D. 44 Vice President - Business
Development
C. Jo White, M.D. 45 Vice President - Clinical
Development
Lawrence J. Hineline 43 Vice President - Finance
- ----------------------
(1) These persons are "executive officers" for purposes of the rules and
regulations of the Securities and Exchange Commission.
(2) As of January 1, 2000.
(3) See background description under "Directors" above.
Background information regarding each of the Company's senior management
is set forth below:
STEPHEN N. KEITH, M.D., M.S.P.H.: Vice President - Marketing and Sales of
the Company since August 1995; from 1990 to 1995, Dr. Keith was with Merck & Co.
(pharmaceutical company) holding various positions including: Senior Director,
Merck-Medco Managed Care Division; Senior Customer Manager, U.S. Human Health
Division; and Senior Director, Corporate Public Affairs.
WAYNE MORGES, PH.D.: Vice President - Quality/Regulatory Affairs of the
Company since January 1995; Vice President -- Manufacturing Operations of the
Company from June 1994 to January 1995; and from 1981 to 1994, Dr. Morges was
with Merck & Co. holding various positions including: Senior Director and
Responsible Head, Biological Quality Control; Director, Biological Quality
Control; Manager, Hepatitis Vaccines and Recombinant Products; and Manager,
Biological Quality Control Technical Services.
JOAN D.S. FUSCO, PH.D.: Vice President - Business Development of the
Company since January 1997; Director of Business Development of the Company from
1995 to January 1997; and from 1991 to 1994, Dr. Fusco served in various
scientific and research positions with the Company.
C. JO WHITE, M.D.: Vice President -- Clinical Development of the Company
since March 1999; Senior Vice President - Medical Affairs of Aviron (a
biopharmaceutical/vaccine company) from September 1997 to January 1999; Vice
President -- Clinical Development of the Company from February 1997 to September
1997; Vice President, Clinical Development of PPD Pharmaco, a clinical research
organization from 1996 to January 1997; pharmaceutical industry consultant from
1995 to 1996; from 1987 to 1995, Dr. White was with Merck & Co. holding various
positions including Senior Director, Clinical Research.
LAWRENCE J. HINELINE: Vice President - Finance of the Company since
November 1993.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's executive officers and directors, and
persons who own more than ten percent of the Company's Common Stock, to file
initial reports of ownership and reports of changes in ownership with the SEC
and the American Stock Exchange (the "AMEX"), the exchange on which the
Company's Common Stock is listed for trading. Executive officers, directors and
94
<PAGE>
greater than ten-percent shareholders (collectively, the "Reporting Persons")
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, and written representations by the Reporting Persons received to date,
the Company believes that with respect to the year ended December 31, 1999, all
Section 16(a) filing requirements applicable to the Reporting Persons were met,
except that one monthly report, covering one transaction, was not timely filed
by BioChem, an affiliate of the Company. The Company is not aware of any other
exceptions.
95
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years awarded to (1) the Chief Executive Officer and
President, (2) the four other most highly compensated executive officers of the
Company for the year ended December 31, 1999 and (3) the Company's former Senior
Vice President - Operations & Chief Operating Officer and former Senior Vice
President - Legal Affairs & General Counsel (collectively, the "Named
Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG-TERM
- ------------------------- ------------------------------------ COMPENSATION
AWARDS
- ------------------------- -------------
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER ANNUAL SECURITIES ALL OTHER
POSITION ($) ($) COMPENSATION UNDERLYING COMPENSATION(2)
(1) OPTIONS ($)
($) (#)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------
Randal D. Chase, Ph.D. (3) 1999 $212,954 $155,000 (4) -- -- $5,427
Chief Executive Officer 1998 32,778 -- -- 250,000 104
& President 1997 -- -- -- -- --
- ----------------------------
Stephen N. Keith, M.D., MSPH 1999 222,346 20,000 (5) -- -- 5,427
Vice President - 1998 207,800 -- -- 25,000 5,623
Marketing & Sales 1997 207,800 -- -- 25,000 5,374
- ----------------------------
Wayne Morges, Ph.D. 1999 232,956 10,000 (5) -- -- 5,427
Vice President - 1998 215,700 -- -- 25,000 5,623
Quality/Regulatory Affairs 1997 215,700 -- -- 25,000 5,374
- ----------------------------
C. Jo White, M.D. (6) 1999 158,333 20,000 (5) -- 50,000 3,173
Vice President - 1998 -- -- -- -- --
Clinical Development 1997 109,486 -- -- 50,000 1,503
- ----------------------------
Lawrence J. Hineline 1999 149,800 10,000 (5) -- -- 4,921
Vice President - Finance 1998 140,000 -- -- 25,000 4,823
1997 140,000 -- -- -- 4,778
- ----------------------------
Arthur Y. Elliott, Ph.D. 1999 173,823 (7) -- -- 137,500 (8) 155,206
Former Senior Vice 1998 283,000 -- -- 37,500 5,623
President - Operations & 1997 283,000 -- -- 37,500 5,374
Chief Operating Officer
- ----------------------------
Daniel J. Abdun-Nabi 1999 189,608 (9) -- -- -- 4,123
Former Senior Vice 1998 224,100 -- -- 25,000 5,623
President - Legal 1997 224,100 -- -- 37,500 (10) 5,374
Affairs & General Counsel
- ----------------------------
</TABLE>
96
<PAGE>
(1) For 1999, 1998 and 1997 the aggregate amount of perquisites, and
other personal benefits, securities or property for each Named
Officer is not reportable under SEC rules because such amount is the
lesser of either $50,000 or 10% of the total annual salary for each
such Named Officer.
(2) Amounts of All Other Compensation for 1999 includes (i) matching
contributions made by the Company in fiscal 1999 to the Named
Officer's retirement account under the North American Vaccine, Inc.
Retirement and Savings 401(k) Plan and Trust ($5,000 for Drs. Chase,
Keith, Morges, $2,850 for Dr. White, $4,494 for Mr. Hineline, $2,500
for Dr. Elliott and $3,750 for Mr. Abdun-Nabi), (ii) the Company's
cost allocation of supplemental term life insurance ($427 for Drs.
Chase, Keith, Morges and Elliott and Mr. Hineline, $323 for Dr.
White, and $373 for Mr. Abdun-Nabi), and (iii) $152,279 in severance
pay for Dr. Elliott. The matching 401(k) contributions were made in
the form of the Company's Common Stock through September 1999 and are
included in the table in Item 12 - Security Ownership of Certain
Beneficial Owners and Management.
(3) Dr. Chase was first employed by the Company in November 1998.
(4) Includes $80,000 performance bonus paid in 1999, as well as $75,000
paid in 1999 under a retention package for Dr. Chase, which provides
for $50,000 upon signing of the Share Exchange Agreement, $25,000 per
month for the months of December 1999 through April 2000 and
$175,000 upon completion of the arrangement.
(5) Represents payments made in 1999 under retention agreements made with
14 key employees, including officers (other than the Chief Executive
Officer), for bonus payments equal to $690,000 in the aggregate.
$140,000 of these payments were made upon signing of the Share
Exchange Agreement, $180,000 will be paid upon completion of the
arrangement and $370,000 is payable upon the first anniversary of the
signing of the Share Exchange Agreement, in each case contingent upon
continued employment, satisfactory performance, successful completion
of key milestones and other customary conditions.
(6) Dr. White was first employed with the Company from February 1997 to
September 1997, and then she rejoined the Company in February 1999.
See Item 10 - Directors and Executive Officers of Registrant -
Executive Officers.
(7) Dr. Elliott retired from the Company in June 1999 and received
retirement payments equal to 6-months' salary, all payable in 1999.
(8) In connection with his retirement, Dr. Elliott was granted extensions
of three previously granted options to purchase a total of 137,500
shares of the Company's Common Stock. Also, the vesting schedule for
one of those options was amended. No other terms of the options were
changed. The extension was effective as of June 16, 1999. See
"Compensation of Executive Officers - Option Grants in Last Fiscal
Year."
(9) Mr. Abdun-Nabi resigned from the Company in September 1999.
(10) In addition to the grant of a new option to purchase 37,500 shares of
the Company's Common Stock under the Company's 1995 Share Option
Plan, Mr. Abdun-Nabi was granted a five-year extension of a
previously granted option to purchase 150,000 shares of the Company's
Common Stock under the Company's former Share Option Plan, which
option was originally scheduled to expire on March 18, 1997. No other
terms of the option were changed. The extension was effective as of
March 6, 1997.
97
<PAGE>
The Company has entered into retention agreements with 14 key employees,
including officers (other than the Chief Executive Officer), for bonus payments
equal to $690,000 in the aggregate. $140,000 of these payments were made upon
the signing of the Share Exchange Agreement, $180,000 will be paid upon
completion of the arrangement and $370,000 is payable upon the first anniversary
of the signing of the Share Exchange Agreement, in each case contingent upon
continued employment, satisfactory performance, successful completion of key
milestones and other customary conditions. Randal Chase, the Chief Executive
Officer and President of the Company, has a retention package with the Company
that provides for payments of $50,000 upon signing of the Share Exchange
Agreement, $25,000 per month for the months of December 1999 through April 2000,
and $175,000 upon completion of the arrangement.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants and extensions of stock options made to the Named Officers during the
year ended December 31, 1999. The Company has not granted any stock appreciation
rights ("SARs").
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
--------------------------------------------- AT ASSUMED ANNUAL RATES OF
STOCK APPRECIATION FOR
OPTION TERM(2)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION
NAME GRANTED FISCAL YEAR BASE PRICE(1) DATE 5% 10%
- ---- ---------- ------------ ------------- ---- ---------------------------
# (%) ($/SH)
<S> <C> <C> <C> <C> <C> <C>
C. Jo White 50,000(3)(4) 21.0% $ 7.56 3/1/2009 $ 237,722 $ 602,435
Arthur Elliott 75,000(5) 31.5% $13.88 6/30/2002 164,088 344,571
25,000(5) 10.5% $20.25 6/30/2002 79,798 167,569
37,500(5)(6) 15.7% $ 8.75 6/30/2002 51,721 108,609
------ ----- ------ -------
137,500 57.7% 295,607 620,749
</TABLE>
(1) All of these options are out-of-the-money based on the $7.00 aggregate
purchase price offered by Baxter under the Share Exchange Agreement.
(2) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only, based on the per share market price on the date of
grant and an annual appreciation at the rate stated through the expiration
date of the option. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Company's Common Stock, overall
market conditions and the optionholder's continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
(3) This option was granted under the Company's 1997 Share Option Plan at fair
market value and vest in three equal annual installments commencing one
year after the date of grant.
(4) In the event of a change of control of the Company, the exercisability of
each option shall be automatically accelerated so that each such option
outstanding shall, immediately prior to the specified effective date of a
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change of control, become fully exercisable for all shares subject to the
option. The events that trigger an acceleration of the options'
exercisability are: (i) a third party acquires direct or indirect
ownership of fifty percent (50%) or more of the combined voting power of
the Company's then outstanding securities of the Company; (ii) any
election has occurred of persons to the Board of Directors of the Company
that causes two-thirds of the Company's Board of Directors to consist of
persons other than (A) persons who were members of the Company's Board of
Directors on January 1, 1997 and (B) persons who were nominated by the
Company's Board of Directors for election as members of the Company's
Board of Directors at a time when two-thirds of the Company's Board of
Directors consisted of persons who were members of the Company's Board of
Directors on January 1, 1997; provided, however, that any person nominated
for election by the Board of Directors of the Company at least two-thirds
of whom constituted persons described in clauses (A) and/or (B) above or
by persons who were themselves nominated by such Board shall, for this
purpose, be deemed to have been nominated by a Board composed of persons
described in clause (A) above; or (iii) the shareholders of the Company
approve (A) any statutory consolidation, merger or amalgamation of the
Company in which the Company is not the surviving corporation (other than
a merger or amalgamation of the Company in which the holders of shares of
Common Stock immediately prior to the merger or amalgamation have the same
proportionate ownership of the surviving corporation immediately after the
merger or amalgamation), or (B) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company to an entity that is
not a wholly-owned subsidiary of the Company.
(5) In connection with his retirement, Dr. Elliott was granted a 24-month
extension of the period for exercising two previously granted, vested
options under the Company's 1995 Share Option Plan, which options were
originally scheduled to expire on June 30, 2000, 12 months after Dr.
Elliott's retirement. No other terms of the options were changed. The
extensions were effective as of June 16, 1999.
(6) In connection with his retirement, Dr. Elliott was also granted a 33-month
extension of the period for exercising a previously granted, unvested
option to purchase 37,500 shares of Common Stock under the Company's 1997
Share Option Plan, which option was originally scheduled to expire on
September 30, 1999, three months after Dr. Elliott's retirement. The
vesting schedule was also amended so that options now vest as follows:
12,500 shares as of June 16, 1999, 12,500 shares as of December 9, 2000
and 12,500 shares as of December 9, 2001. No other terms of the option
were changed. The changes were effective as of June 16, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table summarizes the value realized by any of the Named
Officers who exercised options under the Company's former Share Option Plan in
fiscal 1999, as well as the number and value of unexercised options held by
each Named Officer as of December 31, 1999. As the Company has not issued any
SARs, no SARs were exercised.
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<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
ON VALUE -------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
(#) ($) (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Randal Chase -- -- 83,333 166,667 -- --
Stephen Keith -- -- 94,999 25,001 -- --
Wayne Morges -- -- 49,999 25,001 -- --
C. Jo White -- -- -- 50,000 -- --
Lawrence Hineline -- -- 23,333 16,667 -- --
Arthur Elliott -- -- 112,500 25,000 -- --
Daniel Abdun-Nabi -- -- 75,000 -- -- --
</TABLE>
(1) Values based only on (i) the number of options for which the exercise
price was equal to or less than $4.50 (the closing price of the Company's
Common Stock on the AMEX on December 31, 1999) and (ii) the difference
between such closing price and such options' exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee for the Company's Board
of Directors are Jonathan Deitcher (Chairman), Alain Cousineau and Denis Dionne.
No member of the Compensation Committee is a current employee or a former or
current officer of the Company or any of its subsidiaries. Denis Dionne is the
president of Sofinov, which purchased the aggregate principal amount of $6.25
million of the 4.5% Convertible Secured Notes in the Company's $25 million
financing completed in November 1998. See Item 13 - Certain Relationships and
Related Transactions.
COMPENSATION OF DIRECTORS
Employee directors do not receive additional compensation for serving on
the Board of Directors. Non-employee directors received no cash compensation for
their service as directors, except as described below. Directors receive
reimbursement for the expenses that they incur in performing their services as
directors.
Non-employee directors have automatically received annual grants of stock
options on January 1 of each year under the 1995 Non-Employee Director and
Senior Executive Stock Option Plan (the "1995 SESOP"). Accordingly, on January
1, 1999, each non-employee director received an option to acquire: (i) 20,000
shares of the Company's Common Stock where the non-employee director was the
Chairman of the Board or Vice Chairman of the Board; (ii) 5,000 shares of the
Company's Common Stock for all other non-employee directors; and (iii) 5,000
shares of Company's Common Stock for each committee of the Board of Directors on
which non-employee directors (other than the Chairman and Vice Chairman of the
Board) serve. These options were all granted to such non-employee directors at
an exercise price of $8.875 per share, the fair market value of the Company's
Common Stock on January 1, 1999, the date of grant. These options will vest in
three equal annual installments commencing on the January 1st following the date
of the grant. No current executive officer has received, or is entitled to
receive, options under the 1995 SESOP. The 1995 SESOP has been succeeded by the
1999 SESOP, which was approved by the Company's shareholders at the 1999 Annual
Meeting of Shareholders. However, in connection with the acquisition of the
Company by Baxter pursuant to the Share Exchange Agreement, the 1999 SESOP was
suspended indefinitely pending the transaction. Accordingly, there were no
automatic grants of options to non-employee directors on January 1, 2000.
Neil Flanzraich, the Chairman of the Board, received a total of $100,000 for the
1999 calendar year for his duties performed in that capacity.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information provided to the Company
or contained in filings with the Securities and Exchange Commission (the "SEC")
regarding the beneficial ownership of shares of the Company's Common Stock as of
January 31, 2000 by (i) each person who is known by the Company to own
beneficially, or exercise control or direction over, more than 5% of the
outstanding shares of the Company's Common Stock, (ii) all current directors of
the Company, (iii) the chief executive officer and four most highly compensated
executive officers of the Company, and (iv) all current directors and executive
officers of the Company as a group. Unless otherwise indicated, each person has
sole voting and investment power with respect to the shares specified opposite
such person's name.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
<S> <C> <C>
BioChem Pharma Inc......................... 14,326,418 (1) 39.1%
275 Armand-Frappier Blvd.
Laval, Quebec H7V 4A7
Frost-Nevada, Limited Partnership.......... 4,546,732 (2) 12.9%
c/o Phillip Frost, M.D.
IVAX Corporation
4400 Biscayne Blvd.
Miami, Florida 33137
Phillip Frost, M.D. (3) ................... 6,342,898 (2)(4) 17.9%
c/o IVAX Corporation
4400 Biscayne Blvd.
Miami, Florida 33137
Delphi Asset Management.................... 2,277,700 (5) 6.9%
485 Madison Avenue
New York, New York 10022
Baxter International Inc................... 13,254,344 (15) 29.2%
Neil W. Flanzraich (3)..................... 261,560 (4) *
Francesco Bellini, Ph.D. (3)............... 105,198 (4)(6)(7) *
Randal Chase, Ph.D. (3)(10)................ 84,929 (4) *
Alain Cousineau (3)........................ 39,999 (4) *
Jonathan Deitcher (3)...................... 74,999 (4) *
Denis Dionne (3)........................... 761,797 (4)(8) *
Gervais Dionne, Ph.D. (3).................. 3,333 (4)(6) *
Lyle Kasprick (3).......................... 446,269 (4) 1.4%
Francois Legault (3)....................... 19,999 (4)(6) *
Richard C. Pfenniger, Jr. (3).............. 74,685 (4)(9) *
Stephen N. Keith, M.D., MSPH (10).......... 96,423 (4)(11) *
Wayne Morges, Ph.D. (10)................... 52,044 (4)(11) *
C. Jo White, M.D. (10)..................... 16,864 (4)(11) *
Lawrence J. Hineline (10).................. 25,621 (4)(11) *
Arthur Y. Elliott, Ph.D. (12).............. 114,539 (11)(13) *
Daniel J. Abdun-Nabi (12).................. 78,374 (11)(14) *
All directors and executive officers as
a group (16 persons).................... 8,644,595 (2)(4)(7)
(8)(9)(11) 23.4%
</TABLE>
- --------------------------------------------
* Indicates less than one percent
(1) As reported in BioChem's Amendment No. 11 to its Schedule 13D dated
November 23, 1999, the amount shown includes: 1,000,000 shares of
the Company's Series A Preferred Stock, which are convertible into
2,000,000 shares of the Company's Common Stock, $9,000,000 aggregate
principal amount of 4.5% Convertible Secured Notes, which are
convertible into 1,053,790 shares of the Company's Common Stock, and
warrants to purchase up to 750,000 shares of the Company's Common
Stock. See note 15 with respect to certain voting rights granted to
the Board of Directors of Baxter. See Item 13 - Certain
Relationships and Related Transactions.
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(2) As reported in Amendment No. 3 to Schedule 13D dated December 17,
1999, 2,049,109 of these shares are held by Frost-Nevada, Limited
Partnership ("Frost-Nevada"), which has sole voting and dispositive
power with respect to such shares. Also includes 1,000,000 shares of
the Company's Series A Preferred Stock, which are convertible into
2,000,000 shares of the Company's Common Stock, held by Frost-Nevada
and $4,250,000 aggregate principal amount of 4.5% Convertible
Secured Notes, which are convertible into 497,623 shares of the
Company's Common Stock, held by Frost-Nevada. As of January 31,
2000, 281,250 additional shares are held by Frost-Nevada, which has
sole voting and dispositive power with respect to such shares. See
Item 13 - Certain Relationships and Related Transactions. Dr. Frost
is the sole shareholder of Frost-Nevada Corporation, the general
partner of Frost-Nevada, and is the sole limited partner of
Frost-Nevada. Consequently, Dr. Frost may be deemed to be the
beneficial owner of all such shares held by Frost-Nevada. See note
15 with respect to certain voting rights granted to the Board of
Directors of Baxter.
(3) A director of the Company.
(4) Includes, where applicable, shares that may be purchased upon the
exercise of stock options presently exercisable or exercisable
within 60 days of January 31, 2000 as follows: 59,999 shares with
respect to Drs. Frost and Bellini and Mr. Flanzraich; 29,999 shares
with respect to each of Messrs. Cousineau, Deitcher, Denis Dionne,
Kasprick and Pfenniger; 19,999 shares with respect to Mr. Legault;
3,333 shares with respect to Dr. Gervais Dionne; 83,333 shares with
respect to Dr. Chase; 94,999 with respect to Dr. Keith; 49,999 with
respect to Dr. Morges; 16,666 shares with respect to Dr. White;
23,333 shares with respect to Mr. Hineline; and 43,333 shares with
respect to one unnamed executive officer.
(5) Reflects aggregate beneficial ownership of the Company's Common
Stock held by Delphi Asset Management ("Delphi") in its capacity as
investment advisor, according to its Schedule 13G dated February 11,
2000. Delphi reports that it has sole voting power over 1,622,300
shares of the Company's Common Stock and sole dispositive power over
2,277,700 shares of the Company's Common Stock.
(6) Although a director and/or officer of BioChem, the named individual
disclaims beneficial ownership of the Company's Common Stock
beneficially owned by BioChem.
(7) Includes 8,000 shares held by Dr. Bellini's wife and 1,000 shares
each held by two sons.
(8) 10,000 stock options are subject to a prior agreement between Mr.
Denis Dionne and his former employer, whereby Mr. Dionne must
exercise these options at his former employer's direction and then
transfer the underlying shares of the Company's Common Stock to his
former employer at cost (exercise price). Although an officer of
Sofinov, Mr. Denis Dionne disclaims beneficial ownership of the
shares of the Company's Common Stock beneficially owned by Sofinov.
Sofinov holds $6,250,000 aggregate principal amount of 4.5%
Convertible Secured Notes, which are convertible into 731,798 shares
of the Company's Common Stock. See Item 13 - Certain Relationships
and Related Transactions.
(9) Includes 19,686 shares held jointly by Mr. Pfenniger and his wife.
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(10) Chief executive officer or one of the four most highly compensated
executive officers of the Company.
(11) Includes, where applicable, approximately 596, 1,424, 2,045, 198,
2,288 and 1,742 shares issued under the Company's 401(k) Plan and
Trust as a matching contribution by the Company to the retirement
accounts of Drs. Chase, Keith, Morges and White, Mr. Hineline and
one unnamed executive officer, respectively.
(12) Dr. Elliott retired from the Company in June 1999, and Mr.
Abdun-Nabi resigned from the Company in September 1999.
(13) Includes 112,500 shares that may be purchased by Dr. Elliott upon
the exercise of stock options presently exercisable or exercisable
within 60 days of January 31, 2000 and includes approximately 2,039
shares issued under the Company's 401(k) Plan and Trust as a
matching contribution by the Company to the retirement account of
Dr. Elliott.
(14) Includes 75,000 shares that may be purchased by Mr. Abdun-Nabi upon
the exercise of stock options presently exercisable or exercisable
within 60 days of January 31, 2000 and includes approximately 3,374
shares issued under the Company's 401(k) Plan and Trust as a
matching contribution by the Company to the retirement account of
Mr. Abdun-Nabi.
(15) Reflects aggregate beneficial ownership of the Company's Common
Stock held by Baxter according to its Schedule 13D dated November
29, 1999. Baxter reports that it has sole voting and dispositive
power over 714,286 shares and shared voting power over 12,540,058
shares of the Company's Common Stock. Pursuant to an irrevocable
proxy granted by Phillip Frost, BioChem, and Frost-Nevada to the
Board of Directors of Baxter, such Board is entitled to vote all
such shares of the Company's Common Stock in favor of the adoption
of the Share Exchange Agreement and related matters.
On November 17, 1999, the Company entered into a Share Exchange Agreement
with Baxter and a newly formed Canadian subsidiary of Baxter providing for the
acquisition by Baxter of all of the Company's outstanding Common Stock by means
of an arrangement under Section 192 of the Canada Business Corporation Act (the
"Arrangement"). In connection with the execution of the Share Exchange
Agreement, Dr. Frost, Frost-Nevada, Limited Partnership and IVAX Corporation
(collectively, the "Frost Group") and BioChem entered into a Shareholder
Agreement dated as of November 17, 1999 with Baxter (the "Baxter Shareholder
Agreement"), pursuant to which BioChem and the Frost Group agreed to vote their
respective shares of the Common Stock in favor of the Arrangement. See Item 13 -
Certain Relationships and Related Transactions.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
ORGANIZATION OF COMPANY
The transaction, whereby certain vaccine technologies of BioChem and
American Vaccine Corporation, the predecessor to the Company ("American
Vaccine"), were combined into the Company, was consummated on February 28, 1990
(the "Merger"). As a result of the Merger, BioChem currently holds Common Stock
of the Company, and Series A Preferred Stock of the Company. In the Merger,
BioChem issued shares to the Company, together with cash and certain vaccine
technologies. In the Merger, the Company and BioChem granted to each other a
one-time demand registration right (with expenses to be paid by the party
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<PAGE>
exercising the registration right) and certain piggy-back registration rights.
The piggy-back registration rights expired on January 17, 1995 and the demand
registration right, which was scheduled to expire as of January 17, 1998, was
amended in January 1998 to extend that right until January 17, 2001.
A shareholders' agreement (the "Original Shareholders' Agreement") was
executed between Dr. Frost, Frost-Nevada and IVAX (collectively, the "Frost
Group") and BioChem as part of the Merger. The Original Shareholders' Agreement
terminated on February 28, 2000. Under the Original Shareholders' Agreement,
both the Frost Group and BioChem agreed to nominate an equal number of directors
for election to the Board of Directors of the Company, and such nominees then
select one additional nominee satisfactory to both groups of nominees. The Frost
Group and BioChem agreed to vote all of their respective shares of the Company's
Common Stock to elect to the Board of Directors all of the nominees so selected.
The combination of the voting power of the Frost Group and BioChem under the
Original Shareholders' Agreement gave them effective control of the Company and
enabled them to determine the policies and direct the operations of the Company.
The Original Shareholders' Agreement also granted the Frost Group and BioChem
mutual rights of first refusal with respect to the sale, transfer or other
similar disposition of any of their shares of the Company's Common Stock, the
Company's Series A Preferred Stock or other securities of the Company held
directly or indirectly by either of them. Such rights of first refusal did not
apply, however, to transfers of such securities by the Frost Group or BioChem to
their respective affiliates.
In connection with the Merger, Frost-Nevada, IVAX and a former officer
(collectively, the "Indemnitees"), all of whom beneficially owned, at the time,
more than 5% of the outstanding capital stock of American Vaccine, entered into
an Indemnification Agreement with the Company (the "Indemnification Agreement"),
pursuant to which the Company agreed to indemnify the Indemnitees against any
United States federal, state and local income tax liabilities that may arise
under prescribed "gain recognition agreements" that the Indemnitees were
required to file with the United States Internal Revenue Service and that would
require the Indemnitees to recognize gain upon the occurrence of certain events.
Such gain recognition agreements generally would require that the Indemnitees
recognize gain (and file amended tax returns) if the Company sells American
Vaccine stock that it acquired as a result of the Merger or if American Vaccine
sells all or substantially all of its assets (other than in the ordinary course
of business) during the period commencing on the date of consummation of the
Merger and ending December 31, 2000. Under the Indemnification Agreement, the
Company agreed to (i) lend the Indemnitees on an interest-free and after-tax
basis, an amount equal to the taxes to be paid with the amended tax returns, and
(ii) pay the Indemnitees, on an after-tax basis, any interest and penalties with
respect to the taxes to be paid with the amended returns. However, repayment of
these loans will only be required at the time and to the extent that the
Indemnitees receive benefit from the resulting increase in the tax basis of
their Common Stock or Series A Preferred Stock. There can be no assurance that
any such benefit will be received. Under the Indemnification Agreement, the
Company's directors nominated by the Frost Group, with the exception of Dr.
Frost, will not be precluded from voting upon a transaction that could give rise
to the Company's indemnification obligations to the Indemnitees. The affirmative
vote of 75% of all of the Company's directors, excluding Dr. Frost, will be
required to approve any transaction that could require the payment of any
indemnity pursuant to the Indemnification Agreement. No payments would be
triggered under the Indemnification Agreement arising out of a tender offer for,
or a business combination involving, all of the Company's Common Stock. The
acquisition of the Company by Baxter pursuant to the Share Exchange Agreement is
not expected to trigger any gain under the gain recognition agreement and,
therefore, would not trigger the indemnity pursuant to the Indemnification
Agreement. Under the terms of the Share Exchange Agreement, Dr. Frost and
Frost-Nevada will enter into an agreement to file tax returns consistent with
the position that the gain recognition agreement has terminated and is no longer
in effect as a result of the taxable sale of the Company to Baxter. Baxter will
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<PAGE>
indemnify Dr. Frost and Frost-Nevada for any penalties or addition to tax if the
sale of the Company to Baxter is determined to trigger the gain recognition
agreement.
PRIVATE PLACEMENT OF CONVERTIBLE SECURED NOTES
In November 1998, the Company completed a $25 million financing through
the private placement of 4.5% Convertible Secured Notes ("4.5% Notes"). BioChem
and Dr. Frost, affiliates of the Company, purchased 4.5% Notes in the aggregate
principal amount of $9 million and $4.25 million, respectively. In addition,
Sofinov 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.
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 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 a conversion price of
approximately $8.54 per share. The conversion price was set based on the average
closing price of the Company's Common Stock for the twenty (20) trading days
preceding the date of the announcement of the agreement-in-principle between the
Company and prospective purchasers. The measurement period for determining the
conversion price began on August 26, 1998 and terminated on September 23, 1998.
The closing prices of the Company's Common Stock during that period ranged from
a low of $6.875 and a high of $11.25. 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. Upon a change in control, the Company is 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 interest. The repurchase price will be payable in
cash or, at the option of the Company, in shares of the Company's Common Stock
(valued at 95% of the average closing prices of the Common Stock for a specified
period prior to the repurchase date). Under the Share Exchange Agreement, Baxter
will purchase, as promptly as practicable after the closing of the transaction,
the 4.5% Notes pursuant to the terms of their indenture. See "Share Exchange
Agreement with Baxter" below.
The 4.5% Notes are not registered under the 1933 Act or any applicable
state or foreign securities laws, and were sold in reliance on prescribed
exemptions from registrations under the 1933 Act and other applicable state or
foreign securities laws.
GUARANTEE OF LINE OF CREDIT
In July 1999, the Company obtained from a commercial bank a $6 million
revolving line of credit, which currently matures May 31, 2000. BioChem, an
affiliate of the Company, has provided the guarantee of the line of credit,
which will remain in place for a maximum of two years, unless there is a change
of control such as the contemplated acquisition by Baxter. The interest rate on
borrowings under the line of credit is LIBOR plus 265 basis points. 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 "BioChem Warrants"). The BioChem Warrants were issued by the Company
ratably as it drew down under the line of credit such that BioChem received a
warrant for 125,000 shares of Common Stock for each $1 million drawn down by the
Company. Each warrant has a term of two years from the date of issuance. The per
share exercise price under the BioChem Warrants 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 registrations rights
among other provisions. The Company drew down $4 million and $2 million in the
third and fourth quarters of 1999, respectively, under the revolving line of
credit and accordingly issued the BioChem Warrants to purchase 750,000 shares of
Common Stock.
As part of the Baxter transaction, BioChem has agreed to maintain in
effect and not to terminate in any respect its guaranty until the effective date
for closing on the transaction and to loan the Company up to $5,000,000 on
commercially reasonable terms if the line of credit becomes due prior to the
effective date on the closing of the transaction.
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SHARE EXCHANGE AGREEMENT WITH BAXTER
The Company has entered into the Share Exchange Agreement to be acquired
by 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. Under the Share Exchange Agreement, the Company's shareholders
will receive $7 per common share, comprised of $6.97 of Baxter common stock and
$0.03 in cash. BioChem and the Frost Group, as the holders of the Company's
Series A Preferred Stock, will also receive $7.00, comprised of $6.97 of Baxter
common stock and $0.03 in cash, for each share of Common Stock issuable upon
conversion of the preferred stock. The number of Baxter shares to be issued to
the Company's shareholders under the Share Exchange Agreement 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 of the transaction, the outstanding 6.5% Notes and
all of the 4.5% Notes pursuant to the terms of their respective indentures. See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation for a more complete description of the transaction.
Baxter, the Company and BioChem entered into a warrant termination letter
concurrent with the Share Exchange Agreement pursuant to which BioChem agreed
that the BioChem Warrants to purchase 750,000 shares of the Company's Common
Stock would be terminated at the effective time of the Arrangement in exchange
for a cash payment by Baxter to BioChem in an amount equal to the difference
between $7.00 and $5.14, the exercise price of these warrants, for each share of
the Company's Common Stock issuable upon exercise of the BioChem Warrants, equal
to approximately $1,400,000 in the aggregate.
In order to induce Baxter to enter into the Share Exchange Agreement,
BioChem and the Frost Group entered a shareholders' agreement with Baxter (the
"Baxter Shareholders' Agreement"). Pursuant to the Baxter Shareholders'
Agreement, each of BioChem and the Frost Group has agreed to vote their
respective shares of Common Stock in favor of the Arrangement. In addition, each
of BioChem and the Frost Group has agreed to timely deliver to Baxter an
irrevocable proxy (each a "Proxy") which Proxy will cover all shares of Common
Stock owned by such shareholder and entitled to vote at each meeting of
shareholders of the Company (including, without limitation, each written consent
in lieu of meeting) (the "Proxy Shares") and will entitle Baxter's Board to vote
such shares of common stock in favor of the adoption of the Share Exchange
Agreement and related matters. Each Proxy will serve to irrevocably appoint the
members of the Board of Directors of Baxter to vote the Proxy Shares. BioChem
and the Frost Group retain the right to vote the Proxy Shares in their
discretion on all other matters. Each Proxy and the Baxter Shareholders'
Agreement will terminate upon the earliest to occur of (i) such date and time as
the Arrangement shall become effective in accordance with terms and provisions
of the Share Exchange Agreement, (ii) the date of termination of the Share
Exchange Agreement, (iii) a material breach by Baxter of any agreement with such
party and (iv) May 31, 2000 (such earliest date, the "Expiration Date"). Until
the Expiration Date, the shareholder parties have agreed not to (and to use
reasonable efforts to cause the Company, its affiliates, officers, directors and
employees and any investment banker, attorney, accountant or other agent
retained by any of such shareholder parties, the Company or any of the same, not
to, except to the extent otherwise permitted under the Share Exchange
Agreement): (i) solicit, initiate or encourage (including by way of furnishing,
or disclosing nonpublic information) any inquiries or the making of any proposal
or offer (including, without limitation, any proposal or offer to any
shareholders of the Company) that constitutes or may reasonably be expected to
lead to, any Company Competing Transaction (as such term is defined in the Share
Exchange Agreement); or (ii) knowingly encourage or otherwise enter into or
maintain or continue discussions or negotiate with any person with respect to
such inquiries or to obtain a Company Competing Transaction, or agree to or
endorse any agreement, arrangement or understanding with respect to any Company
Competing Transaction. If the shareholder parties become aware of any Company
Competing Transaction subsequent to November 17, 1999, each of such shareholder
parties has agreed to promptly inform Baxter as to any such matter and the
details thereof to the extent possible without breaching any other agreement to
which such shareholder is a party or violating its fiduciary duties.
BioChem and Baxter also entered into a stock purchase agreement pursuant
to which Baxter purchased on December 1, 1999, 714,286 shares of Common Stock
from BioChem for $7.00 in cash per share, or an aggregate of $5,000,002.
OTHER MATTERS
In March 2000, the Company settled a claim filed by its former president.
The Company has agreed not to disclose the terms of the settlement. The
settlement will not have a materially adverse impact on the Company's financial
position or results of operations.
106
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
a) Documents Filed as Part of Form 10-K.
The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements: Page:
-------------------- ----
Report of Independent Public Accountants 59
Consolidated Balance Sheets as of
December 31, 1999 and 1998 60
Consolidated Statements of Operations for the
Years Ended December 31, 1999, 1998 and 1997 61
Consolidated Statements of Shareholders' (Deficit) Equity
for the Years Ended December 31, 1999, 1998 and 1997 62
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 63
Notes to Consolidated Financial Statements 65
2. Financial Statement Schedules:
-----------------------------
None Required.
3. Exhibits: See Exhibit Index on page 109.
--------
B) REPORTS ON FORM 8-K.
-------------------
The following reports on Form 8-K were filed during the three months ended
December 31, 1999:
(1) On November 29, 1999, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K under Item 5
reporting that the Company had signed the Share Exchange Agreement,
whereby the Company would be acquired by 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.
107
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, North American Vaccine, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH AMERICAN VACCINE, INC.
Dated: March 30, 2000 By: /s/ Randal Chase
----------------------
Randal Chase, Ph.D.
Chief Executive Officer & President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of North
American Vaccine, Inc. in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ Randal Chase March 30, 2000
- ----------------
Randal Chase, Ph.D.
Chief Executive Officer & President
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Lawrence J. Hineline March 30, 2000
- ------------------------
Lawrence J. Hineline
Vice President-Finance
<TABLE>
<CAPTION>
A MAJORITY OF THE BOARD OF DIRECTORS:
<S> <C> <C> <C>
/s/ Neil W. Flanzraich March 30, 2000
- ---------------------- -------------- ----------------------
Francesco Bellini, Ph.D Neil W. Flanzraich
/s/ Alain Cousineau March 30, 2000
- ---------------------- ---------------------- --------------
Alain Cousineau Phillip Frost, M.D.
/s/ Randal Chase March 30, 2000 /s/ Lyle Kasprick March 30, 2000
- ---------------------- -----------------------
Randal Chase, Ph.D. Lyle Kasprick
/s/ Jonathan Deitcher March 30, 2000 /s/ Francois Legault March 29, 2000
- ---------------------- -----------------------
Jonathan Deitcher Francois Legault
/s/ Denis Dionne March 23, 2000 /s/ Richard C. Pfenniger, Jr. March 30, 2000
- ---------------------- -----------------------
Denis Dionne Richard C. Pfenniger, Jr.
/s/ Gervais Dionne March 27, 2000
- ----------------------
Gervais Dionne, Ph.D.
</TABLE>
108
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- --- -----------
2.1 Master Agreement, dated October 25, 1989, among North American
Vaccine, Inc. ("NAV"), American Vaccine Corporation ("American
Vaccine") and IAF BioChem International, Inc. ("BioChem"). (1)
2.2 Agreement and Plan of Merger, dated as of October 25, 1989, among
NAV, American Vaccine and NAVA Acquiring Corp. (1)
2.3 Share Purchase Agreement, dated January 17, 1990, between NAV and
BioChem. (1)
2.4 Technology Transfer Agreement, dated January 17, 1990, between NAV
and BioChem. (1)
2.5 Amendment to Share Purchase Agreement dated as of January 8, 1998
between NAV and BioChem. (2)
2.6 Share Exchange Agreement dated as of November 17, 1999 among Baxter
International Inc. ("Baxter"), NAV and Neptune Acquisition Corp. (23)
3.1 Articles of Incorporation of NAV, as amended. (1)(6)
3.2 Restated Bylaws of NAV. (3)
9.1 Shareholders' Agreement, dated January 17, 1990, among BioChem,
Phillip Frost, M.D., IVAX Corporation ("IVAX") and Frost-Nevada,
Limited Partnership ("Frost-Nevada"). (1)
9.2 Shareholders' Agreement dated as of November 17, 1999 among Baxter,
BioChem, Phillip Frost, Frost-Nevada and IVAX. (24)
10.1 License Agreement, dated July 27, 1987, between Canadian Patents and
Development Limited ("CPDL") and BioChem [with certain confidential
information deleted therefrom]. (1)
10.2 License Agreement, dated June 27, 1988, between CPDL and BioChem
[with certain confidential information deleted therefrom]. (1)
10.3 Agreement, dated April 6, 1989, between AMVAX, Inc. ("AMVAX") and
the National Institute of Child Health and Human Development
("NICHD"). (1)
10.4 License Agreement, dated March 25, 1988, between National Technical
Information Service ("NTIS") and Selcore Laboratories, Inc.,
predecessor to AMVAX ("Selcore") [with certain confidential
information deleted therefrom]. (1)
10.5 Second Amended and Restated Patent License Agreement, dated March
12, 1992, between Ronald D. Sekura, Ph.D., and AMVAX [with certain
confidential information deleted therefrom]. (6)
109
<PAGE>
EXHIBIT
NO. DESCRIPTION
- --- -----------
10.6* North American Vaccine, Inc. Share Option Plan, as amended. (7)
10.9 Form of Indemnification Agreement among NAV, American Vaccine, IVAX,
Frost-Nevada and Ronald D. Sekura, Ph.D. (1)
10.12 Lease Agreement dated December 31, 1987, as amended, between Selcore
and Indian Creek Holding Associates Limited Partnership. (1)
10.14 Supply Agreement between AMVAX and Statens Seruminstitut dated March
26, 1991 [with certain confidential information deleted therefrom].
(4)
10.16 Supply Agreement between AMVAX and Statens Seruminstitut dated March
26, 1991 [with certain confidential information deleted therefrom].
(4)
10.17 Research, Development and License Agreement between AMVAX and Statens
Seruminstitut dated March 26, 1991 [with certain confidential
information deleted therefrom]. (4)
10.18* Non-Employee Director and Senior Executive Stock Option Plan, as
amended. (7)
10.22 Amended and restated master agreement dated June 20, 1994 among NAV,
BioChem, IVAX, D&N Holding Company, Frost-Nevada and Phillip Frost.
(9)
10.23 Share exchange agreement dated April 20, 1994 between NAV and
BioChem. (8)
10.25* North American Vaccine, Inc. 1995 Share Option Plan. (10)
10.26* North American Vaccine, Inc. 1995 Non-Employee Director and Senior
Executive Stock Option Plan. (11)
10.27 Clinical Development Agreement dated December 22, 1995 between NAV
and Pasteur Merieux Serums et Vaccins ("PMSV") [with certain
confidential information deleted therefrom]. (12)
10.28 License Agreement dated December 22, 1995 between NAV and PMSV [with
certain confidential information deleted therefrom]. (12)
10.29 Indenture dated May 7, 1996 between NAV and Marine Midland Bank. (13)
10.30 Registration Rights Agreement dated May 1, 1996 between NAV,
Goldman, Sachs & Co. and UBS Securities LLC. (13)
10.32 Stock Purchase Agreement dated October 11, 1996 between Abbott
Laboratories and NAV. (14)
10.33 Assets Purchase Agreement dated October 17, 1996 among NAV, Cephalon
Property Management, Inc. ("CPMI") and Cephalon, Inc. [with certain
confidential information deleted therefrom]. (14)
110
<PAGE>
EXHIBIT
NO. DESCRIPTION
- --- -----------
10.34 Assignment and Assumption of Leases dated November 12, 1996 between
CPMI and NAV. (15)
10.35 Master Agreement dated November 1, 1996 between NAV and General
Electric Capital Corporation [with certain confidential information
deleted therefrom]. (15)
10.36* North American Vaccine, Inc. 1997 Share Option Plan. (16)
10.37 Lease Agreement dated as of March 25, 1998 between ARE-10150 Old
Columbia, LLC and NAV [with certain confidential information deleted
therefrom]. (17)
10.38 Indenture dated November 12, 1998 by and between NAV and Bankers
Trust Company, as Trustee. (18)
10.39 Security and Pledge Agreement dated November 12, 1998 by and between
NAV and Bankers Trust Company, as Trustee. (18)
10.40* North American Vaccine, Inc. 1999 Non-Employee Director and Senior
Executive Stock Option Plan. (19)
10.41 First Amendment to the Lease Agreement dated as of January 21, 1999,
between Liberty Property Limited Partnership and AMVAX, Inc. f/k/a
Selcore Laboratories, Inc. (19)
10.42 Common Stock Purchase Warrant dated July 21, 1999 issued to BioChem.
(20)
10.43 Letter Agreement dated July 1, 1999 between NAV and BioChem. (20)
10.44 Line of Credit Agreement dated July 12, 1999. (20)
10.45 Common Stock Purchase Warrant No. W-2 dated August 26, 1999. (21)
10.46 Common Stock Purchase Warrant No. W-3 dated October 28, 1999. (21)
10.47 Revolving Credit Facility Letter Agreement dated November 1, 1999 by
and between Bank of America, N.A. and NAV. (22)
10.48 Fee Letter Agreement dated November 1, 1999. (22)
10.49 Security Agreement dated as of November 1, 1999 by and between NAV
and Bank of America, N.A. (22)
10.50 Security Agreement dated as of November 1, 1999. (22)
10.51 Patent and Trademark Assignment and Security Agreement dated as of
November 1, 1999 by and between NAV and Bank of America, N.A. (22)
10.52 Patent and Trademark Assignment and Security Agreement dated as of
November 1, 1999. (22)
111
<PAGE>
EXHIBIT
NO. DESCRIPTION
- --- -----------
10.53 Guaranty Agreement dated November 1, 1999. (22)
10.54 Reimbursement Agreement dated as of November 1, 1999 (with certain
confidential information deleted therefrom). (22)
10.55 Warrant Termination Letter dated November 17, 1999. (25)
10.56 Affiliate Letters dated November 17, 1999. (26)
10.57 Stock Purchase Agreement dated November 17, 1999 between Baxter and
BioChem. (27)
10.58 Amendment to Loan Agreement dated November 17, 1999 among Bank of
America, N.A., NAV and Baxter. (28)
10.59 Amendment dated December 14, 1999 to credit facility between NAV and
Royal Bank of Canada.
21 Subsidiaries.
27 Financial Data Schedule.
- --------------------------
* Management contract or compensatory plan or arrangement.
(1) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form S-4 Registration Statement (File No.
33-31512) filed with the SEC and declared effective on January 24, 1990.
(2) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Current Report on Form 8-K filed with the SEC on
January 29, 1998 (File No. 1-10451).
(3) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
June 30, 1990 (File No. 1-10451).
(4) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1990 (File No. 1-10451).
(5) This exhibit is incorporated herein by this reference to Exhibit 22 in the
Company's Form 10-K Annual Report for the Year Ended December 31, 1990
(File No. 1-10451).
(6) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1991 (File No. 1-10451).
112
<PAGE>
(7) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1992 (File No. 1-10451).
(8) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
March 31, 1994 (File No. 1-10451).
(9) This exhibit is incorporated herein by this reference to Exhibit 99.1 in
the Company's Registration Statement on Form S-3 (Registration No.
33-78002) filed with the SEC and withdrawn from registration on November
23, 1994.
(10) This exhibit is incorporated herein by this reference to Exhibit 4.1 in
the Company's Registration Statement on Form S-8 (Registration No.
33-80479) filed with the SEC and effective as of December 15, 1995.
(11) This exhibit is incorporated herein by this reference to Exhibit 4.2 in
the Company's Registration Statement on Form S-8 (Registration No.
33-80479) filed with the SEC and effective as of December 15, 1995.
(12) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1995 (File No. 1-10451).
(13) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
March 31, 1996 (File No. 1-10451).
(14) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
September 30, 1996 (File No. 1-10451).
(15) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1996 (File No. 1-10451).
(16) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1997 (File No. 1-10451).
(17) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
March 31, 1998 (File No. 1-10451).
(18) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Current Report on Form 8-K filed with the SEC on
November 20, 1998 (File No. 1-10451).
(19) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-K Annual Report for the Year Ended
December 31, 1998 (File No. 1-10451).
(20) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
June 30, 1999 (File No. 1-10451).
(21) This exhibit is incorporated herein by this reference to the corresponding
exhibit in the Company's Form 10-Q Quarterly Report for the Quarter Ended
September 30, 1999 (File No. 1-10451).
(22) This exhibit is incorporated herein by reference to the corresponding
exhibit in amendment No. 1 to the Company's Form 10-Q Quarterly Report for
the Quarter Ended September 30, 1999 (File No. 1-10451).
(23) This exhibit is incorporated herein by this reference to Exhibit 99.1 in
the Company's Current Report on Form 8-K filed with the SEC on November
29, 1999 (File No. 1-10451).
113
<PAGE>
(24) This exhibit is incorporated herein by this reference to Exhibit 99.2 in
the Company's Current Report on Form 8-K filed with the SEC on November
29, 1999 (File No. 1-10451).
(25) This exhibit is incorporated herein by this reference to Exhibit 99.3 in
the Company's Current Report on Form 8-K filed with the SEC on November
29, 1999 (File No. 1-10451).
(26) This exhibit is incorporated herein by this reference to Exhibit 99.4 in
the Company's Current Report on Form 8-K filed with the SEC on November
29, 1999 (File No. 1-10451).
(27) This exhibit is incorporated herein by this reference to Exhibit 99.5 in
the Company's Current Report on Form 8-K filed with the SEC on November
29, 1999 (File No. 1-10451).
(28) This exhibit is incorporated herein by this reference to Exhibit 99.6 in
the Company's Current Report on Form 8-K filed with the SEC on November
29, 1999 (File No. 1-10451).
114
Francis Lienhard ROYAL BANK
Senior Account Manager [ICON](REGISTERED)
Royal Bank of Canada
Corporate Banking - Quebec
8th Floor, West Wing
1 Place Ville Marie
Montreal, Quebec H3C3A9
Tel: (514) 874-2811
December 14, 1999 Fax: (514) 874-5315
Mr. Lawrence J. Hineline
Vice President - Finance
NORTH AMERICAN VACCINE INC.
10150 Old Columbia Road
Columbia, MD 21046-2358
Subject: US$6,000,000 Credit Facilities - July 12, 1999.
- ---------------------------------------------------------
Dear Larry:
Pursuant to your request, we hereby confirm that we agree to extend the above
Credit Facilities up to May 31, 2000 subject the following amendments:
o For clarity, the loan financing of US$30,000,000 received from Baxter
International Inc. shall not be included in the definition of Mandatory
Repayment.
o Extension Fee of US$12,500 payable upon acceptance of this extension.
All other terms and conditions of the Credit Facilities remain applicable.
Please confirm acceptance of this extension of the Credit Facilities by signing
and returning copy of this letter.
Yours truly,
/s/ F. Lienhard
FL/ed
Read and accepted on this 20 day of December 1999.
NORTH AMERICAN VACCINE INC.
By: /s/ Lawrence J. Hineline By: /s/ Randal Chase
-------------------------- ---------------------
Name: Lawrence J. Hineline Name: Randal Chase
-------------------------- ---------------------
Title: Vice President, Finance Title: President & CEO
-------------------------- ---------------------
Acknowledged on this 22nd day of December 1999.
BIOCHEM PHARMA INC.
By: /s/ F. Andrew By: /s/ C. Tessier
-------------------------- ---------------------
Name: F. Andrew Name: C. Tessier
-------------------------- ---------------------
Title: Chief Financial Officer Title: Vice President, Legal
-------------------------- ---------------------
BIOCHEM PHARMA HOLDINGS INC.
By: /s/ F. Andrew By: /s/ Guy Lord
-------------------------- ---------------------
Name: F. Andrew Name: Guy Lord
-------------------------- ---------------------
Title: Treasurer Title: Secretary
-------------------------- ---------------------
SUBSIDIARIES
------------
Name Jurisdiction of Organization
- ---- ----------------------------
American Vaccine Corporation Delaware
North American Vaccine (UK) Limited England
AMVAX, Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000856573
<NAME> NORTH AMERICAN VACCINE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 563
<SECURITIES> 0
<RECEIVABLES> 3,537
<ALLOWANCES> 0
<INVENTORY> 3,285
<CURRENT-ASSETS> 8,138
<PP&E> 59,825
<DEPRECIATION> 40,157
<TOTAL-ASSETS> 33,591
<CURRENT-LIABILITIES> 15,064
<BONDS> 100,326
0
6,538
<COMMON> 90,473
<OTHER-SE> (195,198)
<TOTAL-LIABILITY-AND-EQUITY> 33,591
<SALES> 5,049
<TOTAL-REVENUES> 10,958
<CGS> 0
<TOTAL-COSTS> 52,029
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 9,967
<INCOME-PRETAX> (49,573)
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<INCOME-CONTINUING> (49,573)
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<NET-INCOME> (49,573)
<EPS-BASIC> (1.52)
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