<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 March 31, 1999.
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 at Lakeside
Chantilly, Virginia 20151
(Address of Principal Executive Offices),
Registrant's telephone number including area code: (703) 995-2400
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 April 30, 1999, the Registrant has outstanding 21,925,723 shares of Common
Stock, par value $.01.
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<PAGE> 2
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>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 8,529 $ 9,238
Marketable securities......................................................... 13,563 19,678
Accounts receivable, net...................................................... 17,992 13,889
Inventory..................................................................... 4,777 5,072
Other current assets.......................................................... 2,407 1,621
-------------- -------------
Total current assets..................................................... 47,268 49,498
Restricted cash.................................................................... 10,138 10,971
Property, plant and equipment, net................................................. 25,714 26,554
Intangibles, net................................................................... 50,885 55,550
Other assets....................................................................... 4,940 3,163
-------------- -------------
Total assets................................................................ $ 138,945 $ 145,736
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................................ $ 155 $ 633
Current portion of notes payable............................................... 2,053 2,266
Accounts payable............................................................... 6,783 8,159
Accrued and other liabilities.................................................. 6,113 5,192
Deferred revenue............................................................... 2,183 2,664
------------- -------------
Total current liabilities................................................... 17,287 18,914
Notes payable...................................................................... 89,470 90,639
Other liabilities.................................................................. 1,446 1,735
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Total liabilities........................................................... 108,203 111,288
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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 22,563,923 and 22,541,638 shares, respectively; and outstanding
21,925,723 and 21,903,438 shares, respectively................................ 225 225
Additional paid-in capital....................................................... 111,272 111,163
Accumulated deficit.............................................................. (74,044) (72,658)
Accumulated other comprehensive income (loss).................................... (1,146) 1,283
Treasury stock, at cost; 638,200 shares in 1999 and 1998......................... (5,565) (5,565)
------------- -------------
Total stockholders' equity.................................................... 30,742 34,448
------------- -------------
Total liabilities and stockholders' equity.................................... $ 138,945 $ 145,736
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating revenues:
Product sales.......................................... $ 9,972 $ 11,847
Research and development............................... 701 1,682
Licensing fees and other............................... 9,947 474
------------ ------------
Total operating revenues.......................... 20,620 14,003
------------ ------------
Operating expenses:
Cost of sales.......................................... 5,908 7,332
Research and development............................... 6,234 5,407
Selling, general and administrative.................... 6,873 6,983
------------ ------------
Total operating expenses.......................... 19,015 19,722
------------ ------------
Net operating income (loss)................................. 1,605 (5,719)
------------ ------------
Other income (expense):
Interest income........................................ 325 1,074
Interest expense....................................... (1,710) (1,859)
Foreign currency loss, net............................. (1,762) -
------------ ------------
Total other income (expense)...................... (3,147) (785)
------------ ------------
Net loss before income taxes................................ (1,542) (6,504)
Income tax benefit.......................................... 156 -
------------ ------------
Net loss.................................................... $ (1,386) $ (6,504)
============ ============
Net loss per share (basic and diluted)...................... $ (0.06) $ (0.29)
============ ============
Weighted average shares outstanding
(basic and diluted)..................................... 21,924 22,220
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operating activities:
Net loss....................................................................... $ (1,386) $ (6,504)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization............................................. 2,394 2,061
Amortization of deferred financing costs.................................. 110 106
Amortization of discount on notes payable................................. 70 330
Increase (decrease) in cash resulting from changes in working capital
items:
Accounts receivable and other current assets........................... (6,305) (1,384)
Accounts payable and other liabilities................................. (427) 1,623
------------ -----------
Net cash used by operating activities..................................... (5,544) (3,768)
------------ -----------
Investing activities:
Decrease in marketable securities.............................................. 6,033 28,973
Capital expenditures .......................................................... (954) (2,568)
Acquisitions of businesses, net of acquired cash............................... - (19,340)
Additions to intangibles....................................................... (33) (13)
(Increase) decrease in other assets............................................ (1,460) 94
------------ -----------
Net cash provided by investing activities................................. 3,586 7,146
------------ -----------
Financing activities:
Proceeds from exercise of stock options........................................ 109 389
Redemption of preference shares of subsidiary.................................. - (206)
Net borrowings under line of credit agreements................................. (444) 241
Payments of debt obligations................................................... (54) (495)
------------ -----------
Net cash used by financing activities..................................... (389) (71)
------------ -----------
Effect of exchange rate changes on cash............................................. 1,638 (43)
------------ -----------
Net increase (decrease) in cash and cash equivalents................................ (709) 3,264
Cash and cash equivalents, beginning of period...................................... 9,238 5,548
------------ -----------
Cash and cash equivalents, end of period............................................ 8,529 8,812
Marketable securities and restricted cash, end of period............................ 23,701 53,727
------------ -----------
Cash, cash equivalents, marketable securities and
restricted cash, end of period.................................................. $ 32,230 $ 62,539
============ ===========
</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 COMPREHENSIVE LOSS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss.................................................... $ (1,386) $ (6,504)
Other comprehensive loss.................................... (2,429) (1,451)
=========== ===========
Comprehensive loss.......................................... $ (3,815) $ (7,955)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Fuisz Technologies Ltd., a Delaware corporation, was formed on June 9, 1988
(Fuisz Technologies Ltd., together with its wholly owned subsidiaries, is
referred to collectively herein as the "Company"). The Company is engaged in the
development, manufacture and commercialization of a wide variety of
pharmaceutical and consumer healthcare products and technologies. The Company
uses its unique drug delivery technologies, including its CEFORM(TM) and
Shearform(TM) technologies, to conduct research and development activities on
behalf of pharmaceutical and consumer healthcare companies. Products flowing
from these research and development efforts include drug and consumer healthcare
formulations using the Company's innovative Flash Dose(R), EZ Chew(R), soft chew
and Spoon Dose(R) formats.
The accompanying consolidated financial statements include the accounts of
Fuisz Technologies Ltd. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The information at
March 31, 1999 and for the three months ended March 31, 1999 and 1998, 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, 1998, included in the Company's 1998 Annual
Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. ACCUMULATED OTHER COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income," requires unrealized gains
and losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive loss. Components
of other comprehensive loss, which is included as a separate component of
stockholders' equity, consists of foreign currency translation adjustments of
$2,429,000 and $1,451,000 for the three months ended March 31, 1999 and 1998,
respectively.
3. INVENTORY
Inventory consists of the following at March 31, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Raw materials................................. $ 2,272 $ 2,088
Work in process............................... 581 694
Finished goods................................ 1,924 2,290
-------------- --------------
$ 4,777 $ 5,072
============== ==============
</TABLE>
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, marketable securities, accounts
receivable, accounts payable, accrued liabilities, term loans and installment
notes, approximates fair value due to the relatively short maturity of these
instruments. As of March 31, 1999, the fair value of the $75.0 million aggregate
principal amount of 7% Convertible Subordinated Debentures due October 15, 2004,
was approximately $52.1 million.
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5. SEGMENT INFORMATION
The Company is engaged in the development, manufacture and
commercialization of a wide variety of pharmaceutical and consumer healthcare
products. To achieve these objectives, the Company has three reportable
segments: Pharmaceutical Operations, Pharmaceutical Research and Development and
Consumer Healthcare.
PHARMACEUTICAL OPERATIONS. This segment includes the selling and distribution of
a wide variety of pharmaceutical products through five of the Company's
subsidiaries: Laboratoires Murat ("Murat"), Pangea, Ltd. ("Pangea"), Clonmel
Healthcare Limited ("Clonmel"), Istoria Farmaceutici ("Istoria") and Dr.
Rentschler GmbH & Co. Medizin KG ("Fuisz Pharma KG"). These companies operate as
pharmaceutical marketing and distribution companies and sell various
pharmaceutical products for which they own product marketing rights through
their distribution channels. This segment also includes the Company's
manufacturing operations, which through March 31, 1999, have principally taken
place at the manufacturing facilities of Clonmel. The products sold by this
segment are either manufactured by Clonmel or by third parties contracted by the
Company.
PHARMACEUTICAL RESEARCH AND DEVELOPMENT. This segment includes research and
development efforts focused on developing pharmaceutical products for the
Company's collaborative partners as well as Company-funded products for future
collaboration. The Company's collaborative arrangements typically provide for a
customer-funded development project and contemplate a licensing arrangement
under which, if a product is commercialized by the collaborative partner, the
Company would receive license fees, royalty payments from product sales and
manufacturing revenue.
CONSUMER HEALTHCARE. This segment includes product research and development
efforts primarily focused on developing consumer healthcare products for the
Company's collaborative partners as well as the manufacture and sale of such
products through conventional distribution channels. The Company's collaborative
arrangements are structured similarly to those of the Pharmaceutical Research
and Development segment.
Segment information for the three months ended March 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------
PHARMACEUTICAL
FOR THE QUARTER PHARMACEUTICAL RESEARCH AND CONSUMER
ENDED MARCH 31, OPERATIONS DEVELOPMENT HEALTHCARE TOTAL
- ------------------------------- ----------------- -------------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
1999 $ 9,064 $ 10,477 $ 1,079 $ 20,620
1998 11,847 2,080 76 14,003
- ------------------------------------------------------------------------------------------------------------------------------
Net operating income (loss):
1999 (730) 3,082 (747) 1,605
1998 (198) (4,380) (1,141) (5,719)
- ------------------------------------------------------------------------------------------------------------------------------
Identifiable assets (1):
1999 74,860 64,085 - 138,945
1998 81,725 83,527 - 165,252
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</TABLE>
(1) Asset information for the Consumer Healthcare segment is aggregated with the
Pharmaceutical Research and Development segment since the Company does not
produce such information internally by segment.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company will be required to adopt this new accounting standard beginning
with the quarter ended March 31, 2000. The Company believes that the effect of
adoption of SFAS No. 133 will not be significant.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q containing the words "expects," "expected"
and "will," among others, are forward-looking statements that involve risks and
uncertainties that are subject to events outside of the Company's control.
Actual results and developments in the future may vary materially from these
statements. Factors that may cause these developments and the Company's results
of operations and financial position to differ materially include, but are not
limited to, dependence on collaborative partners, capital requirements, risk of
manufacturing scale-up, product commercialization including delays of
introductions of new products or enhancements, size and timing of individual
orders, rapid technological changes, acquisitions of marketing and sales
distribution organizations, market acceptance of new products, regulatory
approvals, and future competition. The Company's dependence on license and
milestone payments from its collaborative partners and the timing relating
thereto, plus any delays in concluding new license agreements with partners or
achieving certain milestones of any ongoing collaborations, may cause the
Company to continue to report additional losses in the near term. These and
other factors are more fully discussed in the Company's 1998 Form 10-K in the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
OVERVIEW
Fuisz Technologies Ltd., a Delaware corporation, was formed on June 9,
1988 (Fuisz Technologies Ltd., together with its wholly owned subsidiaries, is
referred to collectively herein as the "Company"). The Company is engaged in the
development, manufacture and commercialization of a wide variety of
pharmaceutical and consumer healthcare products and technologies. The Company
uses its unique drug delivery technologies, including its CEFORM(TM) and
Shearform(TM) technologies to conduct research and development activities on
behalf of pharmaceutical and consumer healthcare companies. Products flowing
from these research and development efforts include drug and consumer healthcare
formulations using the Company's innovative Flash Dose(R), EZ Chew(R), soft chew
and Spoon Dose(R) formats.
During 1998 and 1997, the Company acquired five companies, each of which
has been accounted for as a purchase and, accordingly, their operating results
have been included in the Company's consolidated financial statements since the
respective dates of acquisition. The five business acquisitions consisted of
Laboratoires Murat ("Murat"), Pangea, Ltd. ("Pangea"), Clonmel Healthcare
Limited ("Clonmel"), Istoria Farmaceutici ("Istoria") and Dr. Rentschler GmbH &
Co. Medizin KG ("Fuisz Pharma KG"), which are collectively referred to herein
as the "Acquired Companies." Four of the Acquired Companies provide a
substantial portion of their products and services in Europe. Consequently, the
Company derives a significant portion of its consolidated revenues from its
European operations.
7
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RESULTS OF OPERATIONS
Operating revenues were $20,620,000 for the quarter ended March 31, 1999,
compared to $14,003,000 for the quarter ended March 31, 1998, an increase of
$6,617,000, or 47%. The overall operating revenue increase was primarily due to
an increase in revenues generated in the Company's Pharmaceutical Research and
Development division, primarily licensing revenues. Additionally, the Company's
operating revenues increased due to approximately $900,000 of product sales by
the Company's Consumer Healthcare division. The operating revenue increases were
offset by a $2,783,000 decrease in pharmaceutical product sales in the Company's
Pharmaceutical Operations division, primarily relating to a decrease in
Clonmel's antibiotic product sales. The decrease in antibiotic sales was due to
soft demand in the U.S. market as well as a significant decline in orders from a
key distributor due to a change in its inventory management. The Company does
not expect this first quarter revenue shortfall to significantly affect the
remainder of 1999. Since Fuisz Pharma KG was acquired effective February 1,
1998, the operating results in the Pharmaceutical Operations division only
include two months of product sales in the quarter ended March 31, 1998.
In March 1999, the Company settled its pending litigation with Elan
Corporation, plc ("Elan") terminating a suit brought against Elan by the Company
in February 1999. In connection with the settlement, the Company entered into
license and manufacturing agreements with Elan, whereby Elan will manufacture
certain products for the Company at its Athlone facility in Ireland. The
Company will receive certain fees from Elan under the license agreement, the
first portion of which was recognized in the quarter ended March 31, 1999.
Cost of sales was $5,908,000 for the quarter ended March 31, 1999,
compared to $7,332,000 for the quarter ended March 31, 1998, a decrease of
$1,424,000. Cost of sales decreased primarily due to the decrease in product
sales in the Company's Pharmaceutical Operations division offset by the product
sales increase in the Consumer Healthcare division as discussed above. The
Company's overall gross margin improved from 38% to 41% which is primarily
due to a change in the product mix which favored higher margin products in the
first quarter of 1999, primarily at Fuisz Pharma KG.
Research and development expenses were $6,234,000 for the quarter ended
March 31, 1999, compared to $5,407,000 for the quarter ended March 31, 1998, an
increase of $827,000, or 15%. The increase was primarily due to additional
facility and equipment costs, including depreciation, in both the Pharmaceutical
Operations and Pharmaceutical Research and Development divisions.
Selling, general and administrative expenses were $6,873,000 for the
quarter ended March 31, 1999, compared to $6,983,000 for the quarter ended March
31, 1998, a decrease of $110,000, or 2%. The decrease was primarily due to
decreases in administrative expenses relating to the Acquired Companies.
Other expense was $3,147,000 for the quarter ended March 31, 1999,
compared to $785,000 for the quarter ended March 31, 1998, an increase in net
expense of $2,362,000. The increase in other expense was primarily due to a
decrease in interest income resulting from a decrease in the average balance of
funds available for investment as well as a net foreign currency loss of
$1,762,000. The net foreign currency loss primarily relates to the effect of the
8% appreciation of the U.S. dollar against the Euro on certain loans to the
Company's foreign subsidiaries and neither affects current cash flow or overall
operations. However, going forward, the effects of these foreign currency
fluctuations will be recorded as other comprehensive income in stockholders'
equity rather than as a component of net income in the statement of operations
as was the case in the current quarter.
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As a result of the foregoing, the net loss was $1,386,000 for the quarter
ended March 31, 1999, compared to a net loss of $6,504,000 for the quarter ended
March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's portfolio of cash and marketable
securities totaled $32.2 million (including $10.1 million which is pledged as
collateral for the term loan issued to finance the installment notes for the
purchase of Clonmel), compared to $39.9 million as of December 31, 1998. Major
uses of cash during the three months ended March 31, 1999 included approximately
$1.0 million in capital expenditures, $500,000 in repayment of term loan and
line of credit obligations and $5.5 million on Company-funded research and
development for internal and partner projects.
The Company entered a stock purchase agreement on December 31, 1998 to sell
all of the issued and outstanding share capital of its wholly-owned subsidiary,
FuiszDrugstore.com Ltd., to a corporation owned by Dr. Richard C. Fuisz (the
"Subsidiary"). In connection with this agreement, in February 1999, the Company
and the Subsidiary concluded a 20 year license agreement (the "License
Agreement"), which grants the Subsidiary the non-exclusive right to sell
Licensed Products (as that term is defined in the License Agreement) through the
Internet. The license covers all existing products of the Company as well as
certain additional products developed by the Company over the next four years.
In consideration for the license, the Company received a non-interest bearing
promissory note for $2.4 million, payable by the Subsidiary in four annual
installments commencing on December 31, 1999. During the first quarter of 1999,
the Company recognized approximately $2.0 million in licensing revenues relating
to this License Agreement.
During 1999, the Company anticipates capital expenditures ranging from $5.0
to $10.0 million, some of which may be financed with the Equipment LOC discussed
below. Such expenditures will primarily be used to further expand and improve
the Company's laboratory and production facilities in both Virginia and Ireland.
The Company has an $18.0 million equipment leasing line of credit (the
"Equipment LOC") with an outside group of lenders. The Equipment LOC is
available through June 30, 2000, provides equipment financing under three or
four year operating leases, and may be utilized to finance a portion of the
capital expenditures planned for 1999. Through March 31, 1999, the Company has
financed a total of approximately $11.2 million of equipment under the Equipment
LOC.
The Company's long-term debt totals $91.5 million as of March 31, 1999 and
includes $75.0 million related to the Company's 7% Convertible Subordinated
Debentures (the "Debentures") due October 15, 2004. The Debentures were
privately placed on October 22, 1997 and the Company received net proceeds of
approximately $72.8 million related to the sale thereof. The Debentures are
subordinated to the Company's present and future Senior Indebtedness (as
defined) and interest is payable semiannually. In addition, long-term debt
includes $13.0 million related to term loans, $2.7 million related to
installment notes, and $800,000 related to capital leases. Maturities of
long-term debt during the next twelve months will be approximately $2.1 million.
The Company also has available international banking lines of credit totaling
approximately $3.2 million for short-term financing, of which approximately
$155,000 had been drawn down as of March 31,1999.
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 common stock. During 1996, the Company repurchased 100,000 shares at a
9
<PAGE> 11
cost of $775,000 under this program. In December 1996, the 100,000 repurchased
shares were reissued to an officer/director of the Company in connection with an
employment agreement. During 1998, the Company repurchased 638,200 shares for
$5,565,000. No repurchases were made during the first quarter of 1999.
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 and facility expansion. The Company expects that, at least for the
near term, its cash flow will be derived principally from product sales and
development and license fees from collaborative partners. The Company believes
that the currently available funds and internally generated cash flow will be
adequate to meet the Company's cash needs through the first quarter of 2000.
The Company's capital needs, however, will depend on many factors,
including revenues from product sales, continued progress in the research and
development of the Company's technologies, the ability of the Company to
establish and maintain additional collaborative agreements 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 the sale
of certain Company assets, 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, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company will be required to adopt this new accounting standard beginning
with the quarter ended March 31, 2000. The Company believes that the effect of
adoption of SFAS No. 133 will not be significant.
IMPACT OF YEAR 2000
The Company has reviewed the software systems and related applications used
in each of its operating business segments and geographic regions to assess its
requirements regarding the "Year 2000 Issue," which generally refers to the
inability of system hardware and software to correctly identify two-digit
references to specific calendar years, beginning with 2000. The Year 2000 Issue
can affect a company directly (i.e., in its internal database operations or
processing) or indirectly (e.g., if its suppliers' and customers' systems are
not "Year 2000 compliant"). As a result of its review, the Company has
established an internal project team that has developed a plan of action to i)
assess the potential impact of the Year 2000 Issue, including an evaluation of
third parties with which the Company has a material relationship, ii) renovate,
upgrade or replace hardware and/or software systems, where necessary, with
systems certified to be Year 2000 compliant, iii) test and validate the new
and/or updated systems and iv) establish contingency plans for the failure of
critical systems.
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<PAGE> 12
Several of the Company's systems have been confirmed as Year 2000
compliant. However, the Company is still in the process of completing the effort
to identify and correct any non-compliant software or systems that would cause a
significant detrimental effect on the Company. This program is expected to be
complete by July 31, 1999. The Company has identified its Year 2000 risk in
three categories: internal administrative software; internal operational
software and imbedded chip technology; and external noncompliance by customers
and suppliers.
INTERNAL ADMINISTRATIVE SOFTWARE. Substantially all of the Company's
internal administrative software is "off-the-shelf" commercially available
software. The Company is currently gathering data to assess the impact of the
Year 2000 Issue on its administrative systems such as the accounting, legal and
human resources systems, with Year 2000 compliance scheduled for July 31, 1999.
Based on this schedule, the Company expects to be in full compliance with its
internal administrative systems before the Year 2000. However, if due to
unforeseen circumstances, the implementation is not completed on a timely basis,
the Year 2000 Issue could have a material impact on the operations of the
Company. Contingency plans are being developed where the Company feels there
exists a material risk that a compliant system cannot be implemented before the
Year 2000.
INTERNAL OPERATIONAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The Company
is currently gathering data to assess the impact of the Year 2000 Issue on its
operational systems, such as the manufacturing and laboratory systems, with Year
2000 compliance scheduled for July 31, 1999. The Company believes it can achieve
compliance in this timeframe because most of the key systems involved were
acquired over the past two years and are commercially available packages that
can be replaced by alternatives in a short timeframe. The Company does not, at
this time, have sufficient data to estimate the cost of achieving Year 2000
compliance for its operational systems. While the Company does not believe there
is any material non-compliance in the manufacturing and laboratory systems, the
Company is still in the process of completing its assessment.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company has
identified several third parties with which it has a material relationship and
is in the process of contacting them to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remedy their own Year 2000 issues. It is expected that full identification and
an evaluation of such third parties' vulnerability to Year 2000 issues will be
completed by July 31, 1999. To the extent that responses to Year 2000 readiness
are unsatisfactory, the Company intends to evaluate whether to change suppliers,
service providers or contractors to those who have demonstrated Year 2000
readiness. The Company cannot be assured that it will be successful in finding
such alternative suppliers, service providers and contractors. The Company does
not currently have any formal information concerning the Year 2000 compliance
status of its customers but has received indications that most of its customers
are working on Year 2000 compliance. In the event that any of the Company's
significant suppliers, service providers or contractors do not successfully and
timely achieve Year 2000 compliance, and the Company is unable to replace them
with new or alternate suppliers, service providers or contractors, the Company's
business or operation could be adversely affected.
All costs associated with the Year 2000 project to date have been
expensed as incurred. The Company will incur costs that include internal
resources, external consulting, software and certain equipment upgrades. Most of
these costs are expected to relate to testing and validation of the new and/or
updated systems. However, since many of the Company's critical systems are
already Year 2000 compliant, including the administrative, manufacturing and
laboratory systems, these costs are not expected to be significant. The Company
is still in the process of evaluating the external systems
11
<PAGE> 13
for compliance and will make modifications as necessary. The Company believes
that the remaining cost to gain company-wide compliance will not be material.
To date, the Company has not completed a formal contingency plan for
non-compliance, but continues to develop such plans based on internally
generated information and information obtained from the third parties with which
it has a material relationship and the completion of the evaluation of its own
systems.
The foregoing discussion regarding the Year 2000 project's timing,
effectiveness, implementation, and cost, contains forward-looking statements,
which are based on management's best estimates, derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those contemplated estimates. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties and
remediation success of the Company's customers and suppliers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that there has not been a material change in its
exposure to market risk related to changes in interest rates and foreign
currency exchange rates in its cash, debt and foreign currency transactions as
disclosed in Item 7A of the Company's 1998 Form 10-K.
12
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1999, the Company settled its pending litigation with Elan
Corporation, plc ("Elan") terminating a suit brought against Elan by the Company
in February 1999. In connection with the settlement, the Company entered into
license and manufacturing agreements with Elan, whereby Elan will manufacture
certain products for the Company at its Athlone facility in Ireland.
ITEM 2. CHANGES IN SECURITIES
None
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
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K, dated February 17, 1999,
regarding filing of lawsuit against Elan Corporation, plc
for breach of contract and the financial impact to the
Company resulting from this breached agreement.
Current report on Form 8-K, dated April 13, 1999, regarding
the settlement of the litigation and the license and
manufacturing agreements entered into by the Company with
Elan Corporation, plc ("Elan"), whereby Elan will
manufacture certain products for the Company at its Athlone
facility in Ireland.
13
<PAGE> 15
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: May 14, 1999 By: /S/ Stephen H. Willard
------------- -------------------------
Stephen H. Willard
Executive Vice President and
General Counsel
Date: May 14, 1999 By: /S/ Lars G. Okeson
---------------- -------------------------
Lars G. Okeson
Corporate Controller and
Principal Accounting Officer
14
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