<PAGE> 1
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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 September 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)
14555 Avion Parkway, Suite 250
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 October 31, 1997, the Registrant has outstanding 22,093,956 shares of
Common Stock, par value $.01.
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1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
---------------- ---------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,726 $ 5,282
Marketable securities 10,266 55,218
Restricted marketable securities 7,270 -
Accounts receivable 7,570 1,997
Inventory 4,369 -
Other current assets 2,206 250
---------------- ---------------
Total current assets 38,407 62,747
Buildings 4,717 -
Furniture, fixtures and equipment, net 13,131 4,958
Intangibles, net 21,485 116
Restricted marketable securities 9,252 -
Other assets 4,054 1,262
---------------- ---------------
Total assets $ 91,046 $ 69,083
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,557 $ -
Current portion of notes payable 4,898 -
Accounts payable 8,274 2,470
Accrued liabilities and other 1,984 1,051
Deferred revenue 615 1,371
---------------- ---------------
Total current liabilities 17,328 4,892
Long-term debt:
Notes payable 7,712 -
Deferred revenue 1,183 -
Other liabilities 239 -
---------------- ---------------
Total long-term debt 9,134 -
---------------- ---------------
Total liabilities 26,462 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 22,093,956 and 20,684,529
shares at September 30, 1997 and December 31, 1996, respectively 221 207
Additional paid-in capital 108,047 93,419
Deficit accumulated during the development stage (43,492) (29,435)
Cumulative foreign currency translations (192) -
---------------- ---------------
Total stockholders' equity 64,584 64,191
---------------- ---------------
Total liabilities and stockholders' equity $ 91,046 $ 69,083
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Operating revenues:
Product sales $ 2,567 $ - $ 3,300 $ 24
Research and development 649 477 4,221 1,648
Licensing fees - 265 2,980 4,990
Royalties (250) 125 210 167
------------- ------------ ----------- --------------
Total operating revenues 2,966 867 10,711 6,829
------------- ------------ ----------- --------------
Operating expenses:
Cost of sales 1,718 - 2,060 -
Research and development 4,315 2,566 10,642 5,850
General and administrative 3,169 1,246 7,910 3,528
Depreciation and amortization 718 166 1,290 412
Other operating expenses 2,294 - 4,694 -
------------- ------------ ----------- --------------
Total operating expenses 12,214 3,978 26,596 9,790
------------- ------------ ----------- --------------
Net operating loss (9,248) (3,111) (15,885) (2,961)
------------- ------------ ----------- --------------
Other income (expense):
Interest income 554 910 1,920 2,057
Interest expense (76) (1) (92) (4)
------------- ------------ ----------- --------------
Total other income (expense) 478 909 1,828 2,053
------------- ------------ ----------- --------------
Net loss $ (8,770) $ (2,202) $(14,057) $ (908)
============= ============ =========== ==============
Net loss per common share $ (0.41) $ (0.11) $ (0.67) $ (0.05)
============= ============ =========== ==============
Weighted average common shares and common
share equivalents outstanding 21,308 20,205 20,949 19,211
============= ============ =========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
------------ -----------
<S> <C> <C>
Operating activities:
Net loss $(14,057) $ (908)
Adjustments to reconcile net loss to net cash used by operating
activities, net of effects of business acquisitions:
Cumulative effect of change in accounting principle - -
Depreciation and amortization 1,290 412
Noncash compensation expense - 68
Loss on disposal of leasehold improvements - -
Noncash interest expense - -
Noncash warrant issuance expense 2,294 -
Increase (decrease) in cash resulting from changes
in working capital items:
Accounts receivable and other current assets (605) (414)
Accounts payable and other current liabilities (1,421) 761
------------ -----------
Net cash used by operating activities (12,499) (81)
------------ -----------
Investing activities:
Decrease (increase) in marketable securities 28,543 (44,418)
Capital expenditures (7,589) (3,424)
Payments for business acquisitions (6,182) -
Additions to intangibles - -
Increase in other assets (2,100) (447)
------------ -----------
Net cash provided by (used by) investing activities 12,672 (48,289)
------------ -----------
Financing activities:
Net proceeds from sale of preferred stock - -
Proceeds from issuance of debt - -
Net proceeds from sale of common stock - 35,823
Purchases of treasury stock - -
Proceeds from exercise of stock options 701 613
Proceeds from exercise of stock warrants 997 130
Net borrowings under line of credit agreements 1,131 -
Principal payments under long-term debt (1,331) (51)
Decrease in other long-term liabilities (35) -
------------ -----------
Net cash provided by (used by) financing activities 1,463 36,515
------------ -----------
Effect of exchange rate changes on cash (192) -
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,444 (11,855)
Cash and cash equivalents, beginning of period 5,282 22,554
------------ -----------
Cash and cash equivalents, end of period 6,726 10,699
Marketable securities, end of period 26,788 54,585
------------ ----------
Cash, cash equivalents and marketable securities, end of period $ 33,514 $ 65,284
============ ==========
</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 is engaged in the development, manufacture and
commercialization of its proprietary technologies for a wide range of
pharmaceutical, nutraceutical and food applications. Prior to the quarter
ended September 30, 1997, the Company did not have significant commercial
revenues and its efforts had been principally devoted to research and
development; therefore, the Company was considered to be in the development
stage. However, as a result of the Company's 1997 business acquisitions (see
below) and the launch of its Soft Chew calcium supplements, the Company's
operating revenues for the quarter ended September 30, 1997, include product
sales of $2,567,000, or 87% of total operating revenues. Commencing with the
quarter ended September 30, 1997, the Company is no longer considered to be in
the development stage.
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 September 30, 1997 and for the nine months ended September 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 Annual Report on 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. The
excess of the aggregate purchase price over the fair value of the net tangible
assets acquired of $6.5 million was allocated to goodwill and is expected to be
amortized over its estimated useful life of 10 years.
On September 1, 1997, the Company completed the acquisition of 100% of
the outstanding common stock (other than qualifying shares held by a nominee)
of Clonmel Healthcare Ltd., a manufacturer of pharmaceutical products in the
Republic of Ireland.
5
<PAGE> 6
The total consideration for the acquisition (including amounts payable under a
consulting services agreement) consisted of i) one million newly issued shares
of the Company's common stock, valued at $10.65 per share, and ii) three
non-interest bearing promissory notes in an aggregate principal amount of IR
Pound Sterling 8,335,000 (US$ 12,500,000), payable in three installments due in
1998, 1999 and 2000. Pursuant to the acquisition agreement, the recipients of
such shares have agreed that no such shares may be sold, transferred,
encumbered or otherwise disposed of prior to September 1, 1998, and that no
more than 500,000 of such shares may be sold, transferred, encumbered or
otherwise disposed of prior to September 1, 1999. In addition, $500,000 of
contingent consideration is payable to the seller if Clonmel executes certain
contracts for the manufacture and supply of various pharmaceutical products.
The excess of the purchase price over the fair value of the net tangible assets
acquired of $13.5 million was allocated to goodwill and is expected to be
amortized over its estimated useful life of 20 years.
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. The final allocation of the purchase price is
subject to the completion of management's due diligence, however, that
allocation is not expected to differ materially from the initial allocation.
3. SUBSEQUENT EVENTS
On October 17, 1997 the Company completed the acquisition of
substantially all of the issued ordinary share capital of privately-held Istoria
Farmaceutici SpA, a pharmaceutical sales and distribution company based in
Padova, Italy. The total consideration for the acquisition was approximately
$3.5 million, half of which was paid in cash and half of which will be paid in
the form of newly issued shares of the Company's common stock, as defined.
On October 22, 1997, the Company issued $75.0 million aggregate
principal amount of 7.0% Convertible Subordinated Debentures (the "Notes") due
October 15, 2004 under Rule 144A and Regulation S of the Securities Act of 1933,
and received net proceeds of approximately $72.8 million related to the sale of
the Notes. The Notes are convertible into shares of common stock, par value
$0.01, of the Company by the holders at a conversion price of $13.25 per share.
The Notes are unsecured obligations of the Company and are subordinate to all
present and future Senior Indebtedness (as defined) of the Company.
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 adoption of Statement 128 will not 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
The Company is engaged in the development, manufacture and
commercialization of its proprietary technologies for a wide range of
pharmaceutical, nutraceutical and food applications. Prior to the quarter
ended September 30, 1997, the Company did not have significant commercial
revenues and its efforts had been principally devoted to research and
development, therefore, the Company was considered to be in the development
stage. However, as a result of the Company's 1997 business acquisitions (see
below) and the launch of its Soft Chew calcium supplements, the Company's
operating revenues for the quarter ended September 30, 1997, include product
sales of $2,567,000, or 87% of total operating revenues. Commencing with the
quarter ended September 30, 1997, the Company is no longer considered to be in
the development stage.
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
expansion of its manufacturing operations.
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 ("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.
("Pangea"), a national network marketer of OTC and nutritional supplements
based in Roswell, Georgia. On September 1, 1997, the Company completed a third
acquisition of 100% of the outstanding common stock (other than qualifying
shares held by a nominee) of Clonmel Healthcare, Ltd. ("Clonmel"), a
manufacturer of pharmaceutical products in the Republic of Ireland.
RESULTS OF OPERATIONS
Operating revenues were $2,966,000 for the quarter ended September 30,
1997 and $10,711,000 for the nine months ended September 30, 1997, compared to
$867,000 for the quarter ended September 30, 1996 and $6,829,000 for the nine
months ended September 30, 1996. The revenue increases were primarily due to
the inclusion of $2,567,000 of product sales from three of the Company's
subsidiaries, Clonmel, Murat and Pangea, acquired in 1997.
7
<PAGE> 8
Since each of the acquisitions was accounted for under the purchase method of
accounting, the revenues from product sales only reflect those sales occurring
after the respective dates of acquisition. However, product sales account for
approximately $5.5 million of the total accounts receivable balance as of
September 30, 1997, since the accounts receivable balance reflects year-to-date
amounts. Operating revenues also reflect increases in development fees due to
the Company's additional development agreements.
Research and development expenses were $4,315,000 for the quarter
ended September 30, 1997 and $10,642,000 for the nine months ended September
30, 1997, compared to $2,566,000 for the quarter ended September 30, 1996 and
$5,850,000 for the nine months ended September 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.
General and administrative expenses were $3,169,000 for the quarter
ended September 30, 1997 and $7,910,000 for the nine months ended September 30,
1997, compared to $1,246,000 for the quarter ended September 30, 1996 and
$3,528,000 for the nine months ended September 30, 1996. The increases were
primarily due to increases in personnel and expanded administrative activities
primarily associated with the Clonmel, Murat and Pangea operations and the
start-up of the Fuisz International Ltd. activities.
Cost of sales was $1,718,000 for the quarter ended September 30, 1997
and $2,060,000 for the nine months ended September 30, 1997, with no
corresponding amount for the quarter and nine months ended September 30, 1996.
The increase was due to the inclusion of the cost of product sales by Clonmel,
Murat and Pangea, which were acquired by the Company during 1997.
Other operating expenses were $2,294,000 for the quarter ended
September 30, 1997 and $4,694,000 for the nine months ended September 30, 1997,
with no corresponding amount for the quarter and nine months ended September
30, 1996. The amount incurred in the quarter ended September 30, 1997 is
attributable to a one-time noncash charge of $2,249,000 relating to certain
stock warrants exercisable at $25 per share and issued pursuant to the
Company's collaborative agreement with ConAgra. The year-to-date amount
includes 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 $478,000 for the quarter ended September 30,
1997 and $1,828,000 for the nine months ended September 30, 1997, compared to
$909,000 for the quarter ended September 30, 1996 and $2,053,000 for the nine
months ended September 30, 1996. The decrease in net interest income for the
quarter and nine months ended September 30, 1997 was primarily due to a
decrease in the average balances of funds available for investment.
As a result of the foregoing, the net loss was $8,770,000 for the
quarter ended September 30, 1997 and $14,057,000 for the nine months ended
September 30, 1997, compared to a net loss of $2,202,000 for the quarter ended
September 30, 1996 and $908,000 for the nine months ended September 30, 1996.
8
<PAGE> 9
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 $29.8 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.
On October 22, 1997, the Company issued $75.0 million aggregate
principal amount of 7.0% Convertible Subordinated Debentures (the "Notes") due
October 15, 2004 under Rule 144A and Regulation S of the Securities Act of
1933, and received net proceeds of approximately $72.8 million related to the
sale of the Notes. The Notes are convertible into shares of common stock, par
value $0.01, of the Company by the holders at a conversion price of $13.25 per
share. The Notes are unsecured obligations of the Company and are subordinate
to all present and future Senior Indebtedness (as defined) of the Company. The
Company intends to use the net proceeds from the sale of the Notes for
acquisitions of businesses, products and marketing and distribution
capabilities, and the funding of capital expenditures, working capital (which
may include interest payments on the Notes) and general corporate purposes.
As of September 30, 1997, the Company's portfolio of cash and
marketable securities totaled $33.5 million (including $16.5 million which is
pledged as collateral for the installment notes issued in connection with the
purchase of Clonmel), compared to $60.5 million as of December 31, 1996. Major
uses of cash during the nine months ended September 30, 1997, included $6.2
million for the Company's acquisitions (see above), $1.0 million for the
purchase of an administrative office facility in Dublin, Ireland, $5.6 million
for the purchase of furniture, fixtures, and equipment, and $10.6 million of
research and development expenses.
In addition to the acquisitions of Murat and Pangea in the second
quarter of 1997, on September 1, 1997, the Company completed the acquisition of
all of the outstanding common stock of Clonmel (other than qualifying shares
held by a nominee). The total consideration for the acquisition (including
amounts payable under a consulting services agreement) consisted of i) one
million newly issued shares of the Company's common stock, valued at $10.65 per
share, and ii) three non-interest bearing promissory notes in an aggregate
principal amount of IR Pound Sterling 8.3 million (US$12.5 million), payable in
three installments due in 1998, 1999 and 2000. Pursuant to the acquisition
agreement, the recipients of such shares have agreed that no such shares may be
sold, transferred, encumbered or otherwise disposed of prior to September 1,
1998, and that no more than 500,000 of such shares may be sold, transferred,
encumbered or otherwise disposed of prior to September 1, 1999. In addition,
$500,000 of contingent consideration is payable to the seller if Clonmel
executes certain contracts for the manufacture and supply of various
pharmaceutical products.
9
<PAGE> 10
On October 17, 1997, the Company also completed the acquisition of
Istoria Farmaceutici ("Istoria"), a pharmaceutical sales and distribution
company based in Padova, Italy. The Company has also executed two non-binding
letters of intent to acquire certain product licenses and distribution channels
in continental Europe. 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 million will be required in
1997, of which $7.6 million had been expended as of September 30, 1997. Such
expenditures will be used to (i) continue to upgrade and significantly expand
the Company's research facilities to comply with current Good Manufacturing
Practice ("cGMP"), (ii) to continue development of cGMP pilot-scale and
production-scale tablet production lines and facilities for producing and
coating microspheres, and (iii) to develop a production-scale facility for
producing food products incorporating the Company's technology. The Company
currently estimates that capital expenditures totaling approximately $15.0
million will be required in 1998.
During June 1997, the Company executed 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 and 1998 capital expenditures mentioned above. Through September 30,
1997, the Company has financed approximately $2.0 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.
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 and
recent private 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.
10
<PAGE> 11
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, payments 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 $8.8 million during the
fiscal quarter ended September 30, 1997. These losses have resulted in an
accumulated deficit of $29.4 million at December 31, 1996 and $43.5 million at
September 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 manufacture and commercialize
products incorporating the Company's technologies. To date, the Company has
not received any significant revenue from sales of, or royalties from, products
incorporating its proprietary technologies. No assurance can be given that the
Company will ever generate significant revenue or become profitable.
PRODUCTS IN DEVELOPMENT STAGE
Currently, the Company's Soft Chew calcium supplements are the only
commercially available products utilizing the Company's proprietary technology,
and the Company has not realized significant revenues from sales or royalties
of products incorporating its proprietary technologies. Most of the Company's
potential product applications are in the research or development stage. To
achieve profitable operations utilizing its proprietary technology, the
Company, alone or with others, must successfully complete development of its
products, obtain any necessary regulatory approvals, complete manufacturing
scale-up and introduce and market its products.
11
<PAGE> 12
PRODUCT COMMERCIALIZATION
A component of the Company's strategy is to leverage its proprietary
technology to develop, manufacture 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 and others that are the subject of
self-funded development programs of the Company. The development of commercial
scale manufacturing facilities and marketing efforts by the Company will
require significant commitments of capital by the Company. Although several of
the businesses recently acquired by the Company have manufacturing and
marketing experience, prior to such acquisitions, the Company has had limited
manufacturing experience and no marketing experience. There can be no
assurance that the Company can successfully develop or capitalize on 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 which have greater financial
resources than the Company. Moreover, there can be no assurance that the
Company's active pursuit of its own efforts to develop and commercialize
products using the Company's proprietary technology will not otherwise
adversely affect the Company's relations with its existing and potential
collaborative partners.
ACQUISITION RISKS
One element of the Company's strategy is to capitalize on retained
co-marketing rights by acquiring marketing and distribution organizations with
existing product sales that the Company believes have been or in the near term
will be financially self-sufficient and which it believes will serve as a
platform to sell products incorporating the Company's proprietary technologies.
The Company has consummated four acquisitions in 1997, has entered into two
non-binding letters of intent and is exploring additional transactions. There
can be no assurance that the proposed transactions will be completed, that
completed acquisitions will be successfully integrated or that, once
integrated, such acquisitions will achieve levels of revenue, profitability or
productivity comparable to those historically achieved by such acquired
businesses or products or otherwise perform as expected. Acquisitions involve
special risks, including risks associated with unanticipated liabilities and
contingencies, diversion of management attention and possible adverse effects
on earnings resulting from increased goodwill amortization, increased interest
costs, the issuance of additional securities and difficulties related to the
integration of the acquired business or products. There can be no assurance
that acquired entities will generate positive cash flows and/or profits.
Foreign acquisitions may subject the Company to the further risks of
assimilating differences in foreign business practices, hiring and retaining
qualified personnel, overcoming language barriers, limiting asset transfers,
changes in foreign regulations and political turmoil. In addition, the
Company's financial results could be adversely affected by fluctuations in
foreign exchange rates. There can be no assurance that the Company will be
able successfully to identify additional suitable acquisition candidates,
complete additional acquisitions or successfully integrate acquired businesses
into its operations. The failure to integrate acquired businesses into its
operations could have a material adverse effect on the Company's business,
financial condition and results of operations, including cash flow.
12
<PAGE> 13
LIMITED MANUFACTURING EXPERIENCE; RISK OF MANUFACTURING SCALE-UP
Products incorporating the Company's CEFORM or Shearform technology
have not been manufactured by the Company or by its collaborative partners on a
commercial scale and, to date, the Company has had limited commercial
experience with its nutraceutical products, which have been manufactured by
third parties in limited quantities. The Company currently plans to retain
rights to manufacture commercial quantities of pharmaceutical compounds
processed using the Company's CEFORM microsphere technology and to conduct
other manufacturing operations. Prior to the Company's recent acquisition of
Clonmel, the Company had limited experience manufacturing products for
commercial purposes. The Company intends to use Clonmel's facilities in
Ireland for manufacturing activities and is currently taking steps to expand
this facility so that it may be used to manufacture products employing the
Company's proprietary technology. In addition, a full-scale cGMP manufacturing
facility is under construction in Chantilly, Virginia. There can be no
assurance that manufacturing and control problems will not arise as the Company
begins 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. Failure by the Company to successfully develop
commercial-scale manufacturing facilities and develop in a timely manner or at
a commercially reasonable cost the facilities necessary to manufacture products
utilizing the Company's technology will have a material adverse effect on the
Company. If such manufacturing or control problems arise or if the Company is
not able to successfully scale-up manufacturing in a timely or cost effective
manner for any reason, the Company's business could be materially adversely
affected.
In connection with the manufacture of pharmaceuticals and food
ingredient products, the Company will be required to adhere to cGMP regulations
enforced by the U.S. Food and Drug Administration ("FDA") through its
facilities inspection program. The Company 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.
DEPENDENCE UPON COLLABORATIVE PARTNERS
Although the Company intends to develop and commercialize certain of
its own products, the Company also has and anticipates that it will continue to
enter into collaborative arrangements with other companies, which will market
and manufacture products incorporating the Company's technologies. The
Company's prospects are, therefore, in part dependent upon the Company's
ability to attract and retain collaborative partners and to develop products
and manufacturing processes 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 testing, regulatory approval and
marketing efforts and, in certain cases, the manufacturing capabilities 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 technologies 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.
13
<PAGE> 14
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 has agreed to develop product prototypes for
the collaborative partner's evaluation. A definitive license agreement for the
manufacture and marketing of a product or products may be entered into at the
same time as the development agreement relating to such product, or at a later
date. In any event, under the Company's existing collaborative agreements,
collaborative partners generally have the right to abandon a product, and
consequently to terminate funding, at any time and for any reason without
penalty. Collaborative partners are also generally 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 delay introduction or
abandon one or more of its products incorporating the Company's technology or
to adopt a competing technology could adversely affect the Company's business,
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 based on the 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 technologies
for OTC products are expected, consistent with industry practices, to be lower
than royalty rates for licenses relating to prescription products.
LIMITED MARKETING AND SALES EXPERIENCE
Prior to the Company's recent acquisitions of Clonmel, Pangea, Murat
and Istoria, the Company had no marketing and sales experience. To date, the
only commercially available product incorporating the Company's proprietary
technology is a Soft Chew calcium supplement which is currently being
distributed by Pangea. There can be no assurance that the Company will be able
to successfully integrate the sales and marketing resources of its subsidiaries
into its current operations. Pangea's sales and marketing system involves
independent sales representatives who purchase products from the Company. The
Company, therefore, has limited control over actual sales activities. There
can be no assurance that Pangea or the Company's other recently acquired
subsidiaries will provide adequate sales and distribution networks for the
Company's products. The Company may require additional capital and/or third
party commitments to effectively sell and market the Company's products.
14
<PAGE> 15
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 October 31, 1997, the Company has
been granted 62 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 technologies. 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 technologies. 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.
15
<PAGE> 16
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.
ITEM 2. CHANGES IN SECURITIES
Pursuant to a Purchase Agreement exercised on October 17, 1997,
between the Company and Smith Barney Inc., Credit Suisse First Boston and
Lehman Brothers as Initial Purchasers, on October 22, 1997, the Company issued
$75.0 million aggregate principal amount of 7.0% Convertible Subordinated
Debentures (the "Notes") due October 15, 2004 under Rule 144A and Regulation S
of the Securities Act of 1933, and received net proceeds of approximately
$72.8 million related to the sale of the Notes.
The Notes are convertible into shares of common stock, par value
$0.01, of the Company by the holders at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $13.25 per share,
subject to certain adjustments. The Notes are not redeemable by the Company
until October 19, 2000. Thereafter, the Notes will be redeemable, at any time,
upon not less nor more than 60 days' notice at the option of the Company, in
whole or in part, at the redemption prices set for the in the Indenture dated
October 22, 1997, in each case, together with accrued interest. The Notes are
unsecured and subordinated in right of payment in full to all existing and
future Senior Indebtedness.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
16
<PAGE> 17
(b) Reports on Form 8-K
Current report on Form 8-K, dated September 3, 1997,
regarding Acquisition of all of the issued ordinary
share capital of Clonmel Healthcare Ltd.
Current report on Form 8-K, dated September 3, 1997,
regarding Amendment of Acquisition of all of the
issued ordinary share capital of Clonmel Healthcare
Ltd.
Current report on Form 8-K, dated September 11, 1997,
regarding Definitive purchase agreement to acquire
privately-held Istoria Farmaceutici.
Current report on Form 8-K, dated October 20, 1997,
regarding Acquisition of Istoria Farmaceutici.
Current report on Form 8-K, dated October 23, 1997,
regarding Private Placement of $75 million aggregate
principal amount of its 7% Convertible Subordinated
Debentures due 2004.
17
<PAGE> 18
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)
18
<PAGE> 1
EXHIBIT 11.1
STATEMENT 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (8,770) $ (2,202) $ (14,057) $ (908)
============= ============= ============== ============
Weighted average common shares
outstanding 21,308 20,205 20,949 19,211
Add shares issuable from assumed
exercise of options and warrants - - - -
------------- ------------- -------------- ------------
Total weighted average shares 21,308 20,205 20,949 19,211
============= ============= ============== ============
Net income (loss) per common share $ (0.41) $ (0.11) $ (0.67) $ (0.05)
============= ============= ============== ============
</TABLE>
<TABLE>
<CAPTION>
FULLY DILUTED (1)
--------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- --------------------------------------
1997 1996 1997 1996
------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (8,770) $ (2,202) $ (14,057) $ (908)
============= ============= ============== =============
Weighted average common shares
outstanding 21,308 20,205 20,949 19,211
Add shares issuable from assumed
exercise of options and warrants - - - -
------------- ------------- ---------------- -------------
Total weighted average shares 21,308 20,205 20,949 19,211
============= ============= ============== =============
Net income (loss) per common share $ (0.41) $ (0.11) $ (0.67) $ (0.05)
============= ============= ============== =============
</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.
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,726,000
<SECURITIES> 26,788,000
<RECEIVABLES> 7,570,000
<ALLOWANCES> 0
<INVENTORY> 4,369,000
<CURRENT-ASSETS> 38,407,000
<PP&E> 26,128,000
<DEPRECIATION> 8,280,000
<TOTAL-ASSETS> 91,046,000
<CURRENT-LIABILITIES> 17,328,000
<BONDS> 0
0
0
<COMMON> 221,000
<OTHER-SE> 64,363,000
<TOTAL-LIABILITY-AND-EQUITY> 91,046,000
<SALES> 2,567,000
<TOTAL-REVENUES> 2,966,000
<CGS> 1,718,000
<TOTAL-COSTS> 12,214,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,000
<INCOME-PRETAX> (8,770,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,770,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,770,000)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
