<PAGE> 1
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934. For the quarterly period ended June 30,
1997.
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 0-27082
FUISZ TECHNOLOGIES LTD.
(Exact name of registrant as specified in charter)
Delaware 52-1579474
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3810 Concorde Parkway, Suite 100
Chantilly, Virginia 20151
(Address of Principal Executive Offices)
Registrant's telephone number including area code: (703) 803-3260
Indicate by check mark whether the registrant (1) has filed all reports 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 .
---- --
As of July 31, 1997, the Registrant has outstanding 20,892,058 shares of Common
Stock, par value $.01.
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
1
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1997 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,299 $ 5,282
Marketable securities 35,430 55,218
Accounts receivable 2,910 1,997
Inventory 405 -
Other current assets 611 250
--------------- ----------------
Total current assets 46,655 62,747
Buildings 1,037 -
Furniture, fixtures and equipment, net 8,344 4,958
Intangibles, net 7,691 116
Other assets 2,723 1,262
--------------- ----------------
Total assets $ 66,450 $ 69,083
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,730 $ 2,470
Accrued liabilities and other 3,626 1,051
Deferred revenue 663 1,371
--------------- ----------------
Total current liabilities 7,019 4,892
Notes payable 246 -
--------------- ----------------
Total liabilities 7,265 4,892
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 1,000,000
shares; none issued or outstanding - -
Common stock, par value $.01 per share; authorized 50,000,000
shares; issued and outstanding 20,766,558 and 20,684,529
shares at June 30, 1997 and December 31, 1996, respectively 208 207
Additional paid-in capital 93,724 93,419
Deficit accumulated during the development stage (34,722) (29,435)
Cumulative foreign currency translations (25) -
--------------- ----------------
Total stockholders' equity 59,185 64,191
--------------- ----------------
Total liabilities and stockholders' equity $ 66,450 $ 69,083
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative
for the Period
Three Months Ended Six Months Ended June 9, 1988
June 30, June 30, (Inception) to
------------------------- ------------------------- June 30,
1997 1996 1997 1996 1997
---------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Research and development $ 2,002 $ 735 $ 3,572 $ 1,171 $ 9,834
Licensing fees 2,950 2,500 2,980 4,725 13,766
Royalties 210 42 460 42 952
Product sales 733 24 733 24 1,018
---------- ---------- -------- ----------- ------------
Total operating revenues 5,895 3,301 7,745 5,962 25,570
---------- ---------- -------- ----------- ------------
Operating expenses:
Research and development 3,320 1,950 6,327 3,284 28,478
General and administrative 2,962 1,325 4,741 2,282 30,139
Cost of sales 342 - 342 - 342
Depreciation and amortization 324 130 572 246 2,588
Other operating expenses 2,400 - 2,400 - 2,400
---------- ---------- -------- ----------- ------------
Total operating expenses 9,348 3,405 14,382 5,812 63,947
---------- ---------- -------- ----------- ------------
Net operating (loss) income (3,453) (104) (6,637) 150 (38,377)
---------- ---------- -------- ----------- ------------
Other income (expense):
Interest income 586 738 1,366 1,147 5,040
Interest expense (16) - (16) (3) (677)
---------- ---------- -------- ----------- ------------
Total other income (expense) 570 738 1,350 1,144 4,363
---------- ---------- -------- ----------- ------------
Net (loss) income, before cumulative effect of
a change in accounting (2,883) 634 (5,287) 1,294 (34,014)
Cumulative effect of change in accounting for
patent application costs - - - - (708)
---------- ---------- -------- ----------- ------------
Net (loss) income $ (2,883) $ 634 $(5,287) $ 1,294 $ (34,722)
========== ========== ======== =========== ============
Net (loss) income per common share $ (0.14) $ 0.03 $ (0.26) $ 0.06
========== ========== ======== ===========
Weighted average common shares and common
share equivalents outstanding 20,743 21,583 20,719 20,743
========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative
for the Period
June 9, 1988
Six Months Ended (Inception) to
June 30, June 30,
1997 1996 1997
---------------------- ----------------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $(5,287) $ 1,294 $(34,722)
Adjustments to reconcile net (loss) income to net
cash provided by (used by) operating activities, net
of effects of business acquisitions:
Cumulative effect of change in accounting principle - - 708
Depreciation and amortization 572 246 2,588
Noncash compensation expense - 45 3,949
Loss on disposal of leasehold improvements - - 99
Noncash interest expense - - 314
Increase (decrease) in cash resulting from
changes in working capital items:
Accounts receivable and other current assets (713) (472) (3,101)
Accounts payable and other current liabilities 1,059 250 5,427
-------- -------- ---------
Net cash provided by (used by) operating activities (4,369) 1,363 (24,738)
-------- -------- ---------
Investing activities:
Decrease (increase) in marketable securities 19,788 (41,646) (35,430)
Capital expenditures (4,866) (1,536) (11,340)
Acquisitions of businesses (6,059) - (6,059)
Additions to intangibles (100) - (865)
Increase in other assets (1,416) (20) (2,537)
-------- -------- ---------
Net cash provided by (used by) investing activities 7,347 (43,202) (56,231)
-------- -------- ---------
Financing activities:
Net proceeds from sale of preferred stock - - 17,253
Proceeds from issuance of debt - - 4,660
Net proceeds from sale of common stock - 35,823 68,084
Purchases of treasury stock - - (775)
Proceeds from exercise of stock options 150 233 1,100
Proceeds from exercise of stock warrants 156 130 286
Net borrowings under line of credit agreements (686) - (686)
Principal payments under long-term debt (556) (48) (1,629)
-------- -------- ---------
Net cash provided by (used by) financing activities (936) 36,138 88,293
-------- -------- ---------
Effect of exchange rate changes on cash (25) - (25)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 2,017 (5,701) 7,299
Cash and cash equivalents, beginning of period 5,282 22,554 -
-------- -------- ---------
Cash and cash equivalents, end of period 7,299 16,853 7,299
Marketable securities, end of period 35,430 51,813 35,430
-------- -------- ---------
Cash, cash equivalents and marketable securities, end of
period $ 42,729 $ 68,666 $ 42,729
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The Company's activities to date have been primarily the planning and
organization of the Company, initiation and execution of research and
development programs, and securing capital for growth and operations.
Accordingly, the Company is complying with Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises,"
which prescribes requirements in reporting for development stage enterprises.
The accompanying consolidated financial statements include the
accounts of Fuisz Technologies Ltd. and its wholly-owned subsidiaries
(collectively referred to hereafter as the "Company"). All significant
intercompany balances and transactions have been eliminated. The information
at June 30, 1997 and for the six months ended June 30, 1997 and 1996, is
unaudited but includes all adjustments (consisting only of normal recurring
adjustments) which the management of the Company believes necessary for fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of results for a full year. The consolidated financial
statements should be read in conjunction with the audited financial statements
for the year ended December 31, 1996, included in the Company's 1996 Form 10-K.
Earnings (loss) per common and common equivalent share as presented on
the face of the consolidated statements of operations represent primary
earnings per share. Dual presentation of primary and fully diluted earnings
(loss) per share has not been made because the differences are insignificant.
2. ACQUISITIONS
On April 9, 1997, the Company's Fuisz International Holdings Limited
("FIHL") subsidiary completed an acquisition of 100% of the outstanding common
stock of Laboratories Murat, a pharmaceutical sales and distribution company
based in Paris, France. On May 21, 1997, the Company completed a second
acquisition of 100% of the outstanding common stock of Pangea Ltd., a national
network marketer of OTC and nutritional supplements based in Roswell, Georgia.
The aggregate consideration paid in connection with these acquisitions was
approximately $6.1 million which includes the direct costs of acquisition.
These acquisitions were accounted for under the purchase method of accounting.
The results of operations of the acquired companies are included in the
Company's consolidated statements of operations for the period for which they
were owned by the Company.
3. SUBSEQUENT EVENTS
On July 29, 1997, the Company signed definitive agreements with the
Cross Group to acquire all of the issued ordinary share capital of its
subsidiary, Clonmel Healthcare Ltd., a manufacturer of pharmaceutical products
in the Republic of Ireland. The consideration will include one million newly
issued shares of common stock, par value $0.01, of the Company, which shares
will be subject to certain contractual transfer restrictions. In addition, the
Company will issue three non-interest bearing promissory notes, in an
aggregate principal amount of IRpound sterling 8,335,000 (US$12,502,500),
payable in three installments due in 1998, 1999 and 2000. The purchase price
includes payment for services to be provided by the Cross Group to facilitate
the smooth integration of the two companies.
5
<PAGE> 6
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("Statement 128"), which specifies the
computation, presentation, and disclosure requirements for earnings per share.
Statement 128 is effective for financial statements ending after December 15,
1997. The Company does not believe the adoption of Statement 128 will have a
material effect on earnings per share.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The actual future results of Fuisz Technologies Ltd. may
differ materially due to a number of factors, including those discussed below
under "Risk Factors". These and other factors are more fully discussed in the
Company's 1996 annual report on Form 10-K.
OVERVIEW
Since its inception in June 1988, the Company has been in the
development stage, engaged in the development and commercialization of its
proprietary technologies for a wide range of oral drug delivery and food
applications. Substantially all revenues to date have been research and
development fees and license fees. The Company has not been profitable to
date, on a full fiscal year basis, and expects to incur additional losses in
the near term, primarily due to the continuation of its research and
development activities and the start-up of its manufacturing operations. From
its inception in 1988 through December 31, 1996, the Company has incurred net
losses in each year, including net losses of approximately $6.8 million during
the year ended December 31, 1996 and a net loss of approximately $5.3 million
during the six month period ended June 30, 1997. These losses have resulted in
an accumulated deficit of approximately $29.4 million at December 31, 1996 and
$34.7 million at June 30, 1997.
On April 9, 1997, the Company's Fuisz International Holdings Limited
("FIHL") subsidiary completed an acquisition of 100% of the outstanding common
stock of Laboratories Murat, a pharmaceutical sales and distribution company
based in Paris, France. On May 21, 1997, the Company completed a second
acquisition of 100% of the outstanding common stock of Pangea Ltd., a national
network marketer of OTC and nutritional supplements based in Roswell, Georgia.
RESULTS OF OPERATIONS
Operating revenues were $5,895,000 for the quarter ended June 30, 1997
and $7,745,000 for the six months ended June 30, 1997, compared to $3,301,000
for the quarter ended June 30, 1996 and $5,962,000 for the six months ended
June 30, 1996. The increases were primarily due to increases in license and
development fees due to the Company's additional license and development
agreements. The revenue increases were also due to the inclusion of product
sales from two of the Company's subsidiaries, Laboratories Murat and Pangea,
acquired in 1997.
Research and development expenses were $3,320,000 for the quarter
ended June 30, 1997 and $6,327,000 for the six months ended June 30, 1997,
compared to $1,950,000 for the quarter ended June 30, 1996 and $3,284,000 for
the six months ended June 30, 1996. The increases were primarily due to
increases in research personnel and materials and supplies necessary to
support the Company's additional development and license agreements and the
Company's continued emphasis on developing its own product applications.
7
<PAGE> 8
General and administrative expenses were $2,962,000 for the quarter
ended June 30, 1997 and $4,741,000 for the six months ended June 30, 1997,
compared to $1,325,000 for the quarter ended June 30, 1996 and $2,282,000 for
the six months ended June 30, 1996. The increases were primarily due to
increases in personnel and expanded administrative activities primarily
associated with the Laboratories Murat and Pangea operations and the start-up
of the Fuisz International Ltd. activities.
Cost of sales was $342,000 for the quarter and six months ended June
30, 1997, with no corresponding amount for the quarter and six months ended
June 30, 1996. The increase was due to the inclusion of the cost of product
sales by Laboratories Murat and Pangea, which were acquired by the Company
during the quarter ended June 30, 1997.
Other operating expenses were $2,400,000 for the quarter and six months
ended June 30, 1997, with no corresponding amount for the quarter and six
months ended June 30, 1996. This amount is attributable to the impact of a
one-time non-recurring charge of $2,400,000 arising from the settlement of
certain litigation against the Company.
Net interest income was $570,000 for the quarter ended June 30, 1997
and $1,350,000 for the six months ended June 30, 1997, compared to $738,000
for the quarter ended June 30, 1996 and $1,144,000 for the six months ended
June 30, 1996. The decrease in net interest income for the three months ended
June 30, 1997 was primarily due to a decrease in the average balances of funds
available for investment. The increase in net interest income for the six
months ended June 30, 1997 was primarily due to funds generated from a second
registered public offering (the "Secondary Offering") of the Company's common
stock in April 1996 which were available for investment in 1997.
As a result of the foregoing, the net loss was $2,883,000 for the
quarter ended June 30, 1997 and $5,287,000 for the six months ended June 30,
1997, compared to net income of $634,000 for the quarter ended June 30, 1996
and $1,294,000 for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Until December 1995, the Company financed its operations primarily
through private sales of its equity securities, issuances of convertible debt,
and license and development fees. On December 20, 1995, the Company completed
its initial public offering of 4,125,000 shares of common stock (the "IPO") at
a price of $8.00 per share. The Company received net proceeds from the IPO of
approximately $30.2 million. On May 3, 1996, the Company completed a
registered public offering of 3,900,000 shares of common stock (the "Secondary
Offering") at a price of $25.00 per share. Of the 3,900,000 shares of common
stock offered in the Secondary Offering, 1,125,000 shares were sold by the
Company and 2,775,000 shares were sold by certain selling stockholders. The
Company received net proceeds from the Secondary Offering of approximately
$35.8 million.
As of June 30, 1997, the Company's portfolio of cash and marketable
securities totaled $42.7 million, compared to $60.5 million as of December 31,
1996. Major uses of cash during the six months ended June 30, 1997, included
$6.1 million for the acquisitions of two companies (see above), $1.0 million
for the purchase of an administrative office facility in Dublin, Ireland, $3.9
million for the purchase of furniture, fixtures, and equipment, and $6.3
million of research and development expenses.
8
<PAGE> 9
In addition to the acquisitions of Laboratories Murat and Pangea
in the second quarter, on July 29, 1997, the Company signed a definitive
agreement to acquire 100% of the outstanding common stock of Clonmel Healthcare
Ltd., a manufacturer of pharmaceutical products in the Republic of Ireland.
The consideration will include one million newly issued shares of common stock
of the Company and three non-interest bearing promissory notes in an aggregate
principal amount of IRpound sterling 8,335,000 (US$12,502,500), payable in
three installments due in 1998, 1999 and 2000. During the next several years,
the Company will periodically evaluate additional acquisitions of businesses,
products and technologies that extend or enhance the Company's current business
and line of products.
During the next several years, the Company expects to commit a
significant amount of its cash flow to capital expenditures and for research
and development activities at both its present Virginia facilities and its new
international facilities in Ireland. The Company currently estimates that
capital expenditures totaling approximately $15.0 to $17.0 million will be
required in 1997. The Company's current estimate is approximately $2.0 million
lower than the estimate disclosed in the Company's Form 10-Q for the quarter
ended March 31, 1997, reflecting the delay of certain capital expenditures from
1997 into 1998. Such expenditures will be used to continue to upgrade and
significantly expand its research facilities to comply with pharmaceutical Good
Manufacturing Practices ("GMP") standards. Such expenditures will also include
the continued development of GMP pilot-scale and production-scale tablet
production lines and a pilot-scale GMP facility for producing and coating
microspheres. These research and production facilities will be used in
connection with the Company's OTC and controlled release activities. In
addition, the Company expects to utilize capital expenditures to develop a
production-scale facility for producing food products incorporating the
Company's technology.
During June 1997, the Company finalized the execution of a $15.0
million equipment leasing line of credit ("LOC") with an outside group of
lenders. The LOC is available through June 30, 1999, provides equipment
financing under three- or four-year operating leases, and may be utilized to
finance a portion of the 1997 capital expenditures mentioned above. Through
July 31, 1997, the Company has financed approximately $1.6 million of equipment
under this LOC.
The Company expects to continue to incur substantial expenses related
to further research and development of its technologies and products, increased
staffing levels, acquisition and support of patent rights, additional capital
equipment for research and development activities and facility expansion.
In November 1996, the Company's Board of Directors authorized a stock
repurchase program under which the Company is authorized to repurchase up to
1,000,000 shares of the Company's common stock for reissuance upon the exercise
of employee stock options and for other compensation programs utilizing the
Company's stock.
The Company expects to incur additional losses in the near term. The
Company expects that, at least for the near term, its revenues will be derived
principally from development and license fees and product sales and, to a
lesser extent, royalties from collaborative partners. In addition, pending
disbursement for capital expenditures and working capital, the Company expects
to realize income from the investment of the funds generated in its public
offerings. The Company believes that the currently available funds and
internally generated cash flow will be adequate to meet the Company's cash
needs through fiscal year 1998.
9
<PAGE> 10
The Company's capital needs, however, will depend on many factors,
including continued progress in the research and development of the Company's
technologies, the ability of the Company to establish and maintain additional
collaborative agreements with others and the terms thereof, payment received
from collaborative partners under research and development agreements, the cost
involved in filing and enforcing patent claims, and the status of competitive
products and other factors. If the Company's currently available funds and
internally generated cash flow are not sufficient to satisfy its financing
needs, the Company would be required to seek additional funding through other
arrangements with collaborative partners, through bank borrowings and through
public or private sales of its securities, including equity securities. There
can be no assurance that additional funds, if required, will be available to
the Company on favorable terms.
RISK FACTORS
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
effect, the Company's actual results and could cause the Company's actual
results for the remainder of 1997, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred net losses in each year since its inception,
including net losses of approximately $6.8 million during the year ended
December 31, 1996 and a net loss of approximately $2.9 million during the
fiscal quarter ended June 30, 1997. These losses have resulted in an
accumulated deficit of $29.4 million at December 31, 1996 and $34.7 million at
June 30, 1997. The Company expects to incur additional losses in the near
term.
The Company's ability to generate significant revenue and become
profitable will be dependent in large part on the ability of the Company to
enter into additional collaborative agreements and on the ability of the
Company and its collaborators to successfully commercialize products
incorporating the Company's technologies. No assurance can be given that the
Company will ever generate significant revenue or become profitable.
PRODUCTS IN DEVELOPMENT STAGE
To date, only the Company's chewing gum flavoring systems have been
incorporated in commercially available consumer products, and the Company has
not realized significant revenues from product sales or royalties. Most of the
Company's potential product applications are in the research or development
stage. The Company's operating revenue from inception through June 30, 1997 of
approximately $25.6 million has consisted principally of research and
development fees and license fees. To achieve profitable operations, the
Company, alone or with others, must successfully complete development of its
products, obtain necessary regulatory approvals, complete manufacturing
scale-up and introduce and market its products.
10
<PAGE> 11
PRODUCT COMMERCIALIZATION
A major component of the Company's strategy is to leverage its
proprietary technology to develop and commercialize its own products. Such
products include those that are subject to existing development and license
agreements where the Company has retained co-exclusive manufacturing and
marketing rights to the end-user products. The Company intends initially to
formulate and pursue manufacturing and marketing of OTC and prescription
pharmaceutical products. The development of commercial scale manufacturing
facilities and marketing efforts by the Company will require significant
commitments of capital by the Company. The Company has no manufacturing
experience and has no experience with marketing products commercially. There
can be no assurance that the Company can successfully develop such experience,
or that the Company's products will be accepted in the marketplace.
Commercialization efforts by the Company may compete with activities of the
Company's collaborative partners, most of whom have greater financial resources
than the Company. Moreover, there can be no assurance that the Company's
active pursuit of its own efforts to commercialize products using the Company's
proprietary technology will not otherwise adversely affect the Company's
relations with its existing and potential collaborative partners.
LIMITED MANUFACTURING EXPERIENCE; RISK OF MANUFACTURING SCALE-UP
Products incorporating the Company's technology have not been
manufactured by the Company or by its collaborative partners on a commercial
scale, except for the Company's chewing gum flavoring systems. The Company
currently plans to retain rights to manufacture commercial quantities of
pharmaceutical compounds processed using the Company's microsphere technology.
The Company has no experience manufacturing products for commercial purposes.
The Company is currently developing the facilities required for such
manufacturing activities and the Company will be required to substantially
increase its manufacturing capabilities.
There can be no assurance that the Company or its collaborative
partners will be able to successfully develop commercial-scale manufacturing
facilities and develop or design in a timely manner or at a commercially
reasonable cost the equipment necessary to manufacture products utilizing the
Company's technology. Moreover, in connection with the manufacture of
pharmaceuticals and food ingredient products, the Company and its collaborative
partners will be required to adhere to current Good Manufacturing Practice
("GMP") regulations enforced by the U.S. Food and Drug Administration ("FDA")
through its facilities inspection program.
The Company and its collaborative partners also will be required to
comply with manufacturing standards prescribed by various federal, state and
local regulatory agencies in the United States and other countries. There can
be no assurance that manufacturing and control problems will not arise as the
Company or its collaborative partners begin to scale up manufacturing
facilities or that manufacturing can be scaled up in a timely manner or at a
commercially reasonable cost to enable production in sufficient quantities.
11
<PAGE> 12
DEPENDENCE UPON COLLABORATIVE PARTNERS
Although the Company is undertaking development and commercialization
of its own products, an element of the Company's strategy is to enter into
collaborative arrangements with other companies which will market and
manufacture products incorporating the Company's technology. The Company
expects that, at least for the near term, its revenues will be derived
principally from development fees, license fees and royalties from
collaborative partners. The Company's prospects are, therefore, in part
dependent upon the Company's ability to attract and retain collaborative
partners and to develop technologies and products that meet the requirements of
such collaborative partners. There can be no assurance that the Company's
existing or future collaborative arrangements will result in successful product
commercialization. The Company will also be dependent upon the marketing
efforts, manufacturing capabilities and regulatory approval efforts of its
collaborative partners. The Company anticipates that most licensees will be
given the exclusive or co-exclusive right to market products incorporating the
Company's technology for a particular class of products for a particular
territory and, the amount and timing of resources to be devoted by them to
marketing are not within the control of the Company.
NO ASSURANCE OF PRODUCT LICENSES; OTHER RISKS ASSOCIATED WITH COLLABORATIVE
AGREEMENTS
The Company has entered into development agreements with collaborative
partners for products using the Company's technologies. Pursuant to these
agreements, the Company typically agrees to develop product prototypes for the
collaborative partner's evaluation. In many cases, the Company expects that a
definitive license agreement for the manufacture and marketing of a product or
products will be entered into at the same time as the development agreements
relating to such product. In other cases, the collaborative partner may be
granted an option to enter into a license agreement at a later date, and, in
such cases, the collaborative partner will not be obligated to enter into a
license agreement with the Company. In any event, a collaborative partner will
generally have the right to abandon a product, and consequently to terminate
funding, at any time and for any reason without penalty. Collaborative partners
will also generally be free to market products using drug delivery or other
technologies that are competitive with those of the Company. A decision by a
collaborative partner to abandon one or more of its products incorporating the
Company's technology or to adopt a competing technology could adversely affect
the Company's financial condition and results of operations.
The Company's license agreements currently in effect generally
provide, and it is expected that future license agreements will provide, for
the Company to receive a payment at the time of execution of the agreement,
additional scheduled payments or payments upon attainment of certain milestones
and royalty payments based on net sales of products by the licensee. The
timing and amount of such payments will fluctuate, and such fluctuations could
have a material adverse effect on the Company's cash position and results of
operations.
In addition, royalty rates for licenses of the Company's technology
for OTC products are expected, consistent with industry practices, to be lower
than royalty rates for licenses relating to prescription products.
12
<PAGE> 13
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. As of July 31, 1997, the Company has been
granted 58 U.S. patents and has filed a substantial number of applications for
additional U.S. patents, as well as corresponding patent applications outside
the United States, relating to the Company's technology. There can be no
assurance that any of the pending patent applications will be approved, that
the Company will develop additional proprietary products that are patentable,
that any patents issued to the Company will provide the Company with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or, if patents are issued to the Company, design around
the Company's patents. Any of the foregoing results could have a material
adverse effect on the Company.
GOVERNMENT REGULATION AND PRODUCT APPROVAL
Manufacturing and sales of products and potential products by the
Company and its collaborative partners may be subject to extensive regulation
by the FDA and by comparable agencies in foreign countries. Although the
nature and extent of regulation varies by type of product, in general, products
must meet standards regarding safety and efficacy, manufacturing practices,
labeling and purity. In addition, certain products must receive FDA approval
prior to marketing. The FDA has extensive enforcement powers, including the
power to withhold approvals of new products, to initiate product recalls, to
seize products, to delay or prevent product sales and to halt operations.
13
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not a party to any legal proceedings, and
does not know of any threatened legal proceedings, that the Company believes
will have a material adverse effect on the Company's financial position or
results of operations.
In July 1997, the Company reached a settlement of certain litigation
against the Company, which was dismissed with prejudice. See the Company's
Form 10-Q for the quarter ended June 30, 1996 for additional details.
ITEM 2. CHANGES IN SECURITIES
On June 15, 1997, the Company entered into a License Agreement
with ConAgra, Inc. ("ConAgra") pursuant to which the Company is required to
issue to ConAgra a warrant to purchase one million shares of common stock at an
exercise price of $25.00 per share, subject to certain adjustments. The
warrant is exercisable, in whole or part, for a period of ten years beginning
August 11, 1997, unless earlier terminated. The issuance of the warrant was
not registered under the Securities Act of 1933 (the "Securities Act"), in
reliance on the exemption from registration provided under Section 4(2) of the
Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on August 4, 1997
for the purpose of electing two directors to serve two-year terms expiring in
1999 and two directors to serve three-year terms expiring in 2000, to approve
amendments to the Company's Stock Option and Purchase Plans, and to ratify the
appointment of Coopers & Lybrand, L.L.P. as the Company's independent public
accountants for the year ending December 31, 1997. The number of votes cast
for or against each director nominee is as follows:
<TABLE>
<CAPTION>
DIRECTOR NOMINEE TERM EXPIRATION VOTES FOR VOTES WITHHELD
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard C. Fuisz 1999 17,042,057 197,203
Antone J. Lazos 1999 17,029,885 209,375
John R. Fuisz 2000 16,604,444 634,816
Fredrik C. Schreuder 2000 17,043,235 196,025
</TABLE>
Messrs. Donald E. O'Neill, John Pappajohn and Kenneth W. McVey will
continue to serve as Class III directors, until their terms expire at the
Company's 1998 Annual Meeting, and when their successors are elected and
qualified.
14
<PAGE> 15
The proposal to amend the Company's Stock Option and Purchase Plans to
increase the number of shares of common stock available under the Plan from
3,900,000 to 4,900,000 shares, to satisfy the requirements of Section 162(m) of
the Internal Revenue Code of 1986, as amended, and to make other technical
amendments thereto, received 15,663,286 votes for and 888,433 votes against.
There were 687,541 abstentions and broker non-votes.
The proposal to ratify the appointment of Coopers & Lybrand, L.L.P. as
the Company's independent public accountants for the year ending December 31,
1997 received 17,192,929 votes for and 27,756 votes against. There were 18,575
abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statements Regarding Weighted Average Common
and Common Equivalent Shares Used in
Computation of Earnings (Loss) Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K, dated April 25, 1997,
regarding Acquisition of Laboratories Murat and
Appointment of Kenneth W. McVey as President and
Chief Executive Officer.
Current report on Form 8-K, dated May 21, 1997,
regarding Acquisition of Pangea, Ltd.
Current report on Form 8-K, dated July 29, 1997,
regarding Definitive Agreement to Acquire Clonmel
Healthcare Ltd.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FUISZ TECHNOLOGIES LTD.
Date: By: /S/ Patrick D. Scrivens
------------------- --------------------------------
Patrick D. Scrivens
Executive Vice President and
Chief Financial Officer
Date: By: /S/ Lars G. Okeson
------------------- --------------------------------
Lars G. Okeson
Controller
(Principal Accounting Officer)
16
<PAGE> 1
EXHIBIT 11.1
STATEMENTS REGARDING WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES USED IN COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PRIMARY
------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <S> <S> <S>
Net income (loss) $ (2,883) $ 634 $ (5,287) $ 1,294
========= ========== ========= ========
Weighted average common shares
outstanding 20,743 19,350 20,719 18,713
Add shares issuable from assumed
exercise of options and warrants - 2,233 - 2,030
--------- --------- --------- --------
Total weighted average shares 20,743 21,583 20,719 20,743
========= ========== ========= ========
Net income (loss) per common share $ (0.14) $ 0.03 $ (0.26) $ 0.06
========= ========== ========= ========
<CAPTION>
FULLY DILUTED (1)
-----------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1997 1996 1997 1996
--------- --------- --------- -------
<S> <C> <S> <S> <S>
Net income (loss) $ (2,883) $ 634 $ (5,287) $ 1,294
========= ========= ========= =======
Weighted average common shares
outstanding 20,743 19,350 20,719 18,713
Add shares issuable from assumed
exercise of options and warrants - 2,012 - 2,033
--------- --------- --------- -------
Total weighted average shares 20,743 21,362 20,719 20,746
========= ========= ========= =======
Net income (loss) per common share $ (0.14) $ 0.03 $ (0.26) $ 0.06
========= ========= ========= =======
</TABLE>
(1) Earnings per common and common equivalent share as presented on the face
of the consolidated statements of operations represent primary earnings
per share. Dual presentation of primary and fully diluted earnings per
share has not been made on the face of the consolidated statements of
operations because the differences are insignificant.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,299,000
<SECURITIES> 35,430,000
<RECEIVABLES> 2,910,000
<ALLOWANCES> 0
<INVENTORY> 405,000
<CURRENT-ASSETS> 46,655,000
<PP&E> 11,754,000
<DEPRECIATION> 2,373,000
<TOTAL-ASSETS> 66,450,000
<CURRENT-LIABILITIES> 7,019,000
<BONDS> 0
0
0
<COMMON> 208,000
<OTHER-SE> 58,977,000
<TOTAL-LIABILITY-AND-EQUITY> 66,450,000
<SALES> 733,000
<TOTAL-REVENUES> 5,895,000
<CGS> 342,000
<TOTAL-COSTS> 9,348,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> (2,883,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,883,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,883,000)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
