FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the second quarter of 2004
AETERNA ZENTARIS INC.
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(Formerly named AEterna Laboratories Inc.)
1405, boul. du Parc-Technologique
Quebec, Quebec
Canada, G1P 4P5
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F Form 40-F X
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-
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DOCUMENTS INDEX
DOCUMENTS DESCRIPTION
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1. AEterna's Interim Report 2004 - Second Quarter (Q2)
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August 11, 2004
To our stockholders,
During the second quarter of 2004, we delivered a solid financial performance
while also achieving our strategic objectives.
In addition to across-the-board strong financial performance from all our
sectors of activity, we continued to advance our product pipeline and reported
positive results on perifosine (cancer) and cetrorelix (endometriosis, uterine
myoma, benign prostate hyperplasia), which support the ongoing and planned
clinical development of these drug candidates in their respective indications.
To that end, we are planning the initiation of Phase II trials on perifosine in
combination with radiotherapy, while further clinical development of cetrorelix
in endocrine therapy is being planned with our partner Solvay Pharmaceuticals.
We believe that our accomplishments in the recent months have established a
solid foundation for us to continue to grow our business and to achieve our
objectives for the remainder of 2004.
SECOND QUARTER 2004 HIGHLIGHTS
o POSITIVE PHASE II RESULTS FOR CETRORELIX IN ENDOMETRIOSIS, UTERINE MYOMA
AND BENIGN PROSTATE HYPERPLASIA - Favorable data continues to support the
ongoing and planned clinical development of cetrorelix
o POSITIVE PHASE I RESULTS FOR PERIFOSINE IN COMBINATION WITH RADIOTHERAPY IN
CANCER - Results support the planned initiation of Phase II trials on
perifosine in combination with radiotherapy
o NEW AGREEMENT WITH ARDANA BIOSCIENCE FOR LHRH ANTAGONIST TEVERELIX IN
PROSTATE CANCER
o NAME CHANGE TOAETERNA ZENTARIS AND ADDITION TO THE NASDAQ BIOTECH INDEX
o ATRIUM REVENUES OF $47 MILLION, AN INCREASE OF 90% AND NET EARNINGS OF $4.1
MILLION, AN INCREASE OF 154.3%
OUTLOOK
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The Company's specific goals for the remainder of 2004 include:
o Initiate Phase II trials on perifosine in combination with radiotherapy
o Report preliminary Phase II data on perifosine from multiple North American
trials
o Develop new perifosine analogs
o Advance one or more preclinical compounds into Phase I trials
o Advance clinical development of cetrorelix with Solvay
o Pending marketing approval for Cetrotide(R) in Japan for IN VITRO
fertilization
On behalf of my colleagues and our Board of Directors, I thank you for your
continued interest and support.
Sincerely,
/s/ GILLES GAGNON
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Gilles Gagnon, MSc, MBA
President and Chief Executive Officer
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SECOND QUARTER 2004
QUARTERLY REPORT
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS EXPLAINS THE VARIATIONS IN THE COMPANY'S RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOW. THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE INFORMATION CONTAINED INAETERNA ZENTARIS INC.'S INTERIM
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE SIX-MONTH PERIOD
ENDED ON JUNE 30, 2004 AND 2003. ALL FIGURES ARE IN CANADIAN DOLLARS.
COMPANY OVERVIEW
AEterna Zentaris Inc. ("AEterna" or "the Company"), formerly AEterna
Laboratories Inc., is a biopharmaceutical company focused in oncology and
endocrine therapy. Its extensive portfolio, from drug discovery to marketed
products, includes perifosine, an orally-active AKT inhibitor in several Phase
II trials for multiple cancers, and cetrorelix, an LHRH antagonist already
marketed for IN VITRO fertilization under the brand name Cetrotide(R), and also
in advanced clinical development for the treatment of uterine myoma,
endometriosis and benign prostatic hyperplasia prostate (BPH). The Company also
owns 62% of its subsidiary Atrium Biotechnologies Inc. ("Atrium") which develops
and markets active ingredients and speciality fine chemicals in the health and
personal care industry for the cosmetics, chemical, pharmaceutical and
nutritional industries.
The Company operates in three segments of operations: biopharmaceutical,
cosmetics-nutrition and distribution segments. AEterna, along with its
wholly-owned subsidiary Zentaris GmbH, represent the biopharmaceutical segment.
The cosmetics and nutrition segment is dedicated to the development,
manufacturing and marketing of cosmetics, active ingredients and nutritional
products. On the other hand, the distribution segment specializes in value-added
services by supporting innovation, importing and distributing raw materials and
high-end brand-name activities. These two segments are operated by Atrium and
its subsidiaries.
AEterna seeks to ensure continued growth of its activities by acquiring
companies and/or products, as well as by fulfilling its existing pipeline from
its drug discovery platform and continuing to sign agreements with strategic
worldwide partners.
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SECOND QUARTER HIGHLIGHTS
Consolidated results-at-a-glance
(expressed in thousands of Canadian dollars)
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
UNAUDITED 2004 2003 2004 2003
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REVENUES $ 65,840 $ 38,875 $ 124,289 $ 79,688
OPERATING INCOME (LOSS) 9,177 (1,128) 10,761 (2,449)
NET EARNINGS (LOSS) 1,330 (4,668) (1,220) (9,558)
In the biopharmaceutical segment, we entered into an expanded agreement on April
2, 2004 for the LHRH antagonist, teverelix, with Ardana Bioscience, a specialty
pharmaceutical company located in Edinburgh, Scotland. Ardana acquired full
worldwide rights to the teverelix compound and the underlying microcrystalline
suspension technology, including all related intellectual property. In return,
the Company is eligible to receive upfront and guaranteed payments totalling
E12 million until 2006, as well as potential future royalties on sales of
teverelix or any other LHRH antagonist that could be combined with the
microcrystalline suspension technology.
On April 29, 2004, we also announced statistically significant positive results
from recently completed Phase II clinical program designed to evaluate
cetrorelix, a luteinizing hormone releasing hormone (LHRH) antagonist, in three
different indications: endometriosis, presurgical treatment of uterine myoma and
benign prostatic hyperplasia (BPH). These results showed that patients can
benefit from a targeted and controlled decrease in sex hormones, including
estrogen and testosterone. The positive results of six Phase II trials, which
also demonstrated good tolerability in all these indications, will form the
basis for further development of cetrorelix in different indications with Solvay
Pharmaceuticals, the Company's worldwide (ex-Japan) exclusive development and
marketing partner for cetrorelix for the above indications. This major
achievement generated E4 million of milestone payments from Solvay.
Furthermore, on June 10, 2004, we announced that our product, perifosine, an
orally-active AKT inhibitor for the treatment of cancer, showed encouraging
results in a Phase I trial in combination with radiotherapy. We also mentioned
our intention to initiate a clinical program for perifosine through the ongoing
collaboration with the Netherlands Cancer Institute of Amsterdam. Our North
American partner, Keryx Biopharmaceuticals (NASDAQ: KERX), located in the United
States, also intends to initiate several single-agent and combination studies
testing perifosine as a treatment for various forms of cancer.
In the cosmetics and nutrition segment, the ongoing integration of
newly-acquired Pure Encapsulations Inc. ("Pure") in March 2004 is going very
well. Pure is a company based in Sudbury, Massachusetts, in the United States,
which focuses mainly on the development, manufacturing and marketing of
nutritional supplements geared toward physicians and other healthcare
professionals. Pure acquisition complements Atrium's actual products in the
nutrition
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segment. Pure revenues reached over $25 million in 2003. This acquisition and
the acquisition of Chimiray/Interchemical in 2003, combined with Atrium's
internal growth has enabled our subsidiary to increase its net earnings by 154%
to $4.1 million for the second quarter in comparison with $1.6 million with the
same quarter last year.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with the Canadian Generally
Accepted Accounting Principles ("GAAP"), and access to a summary of differences
between Canadian and US GAAP is possible by consulting note 23 of our annual
2003 financial statements. These accounting principles require that management
make estimates that could have an impact on assets and liabilities in the
financial statements. The significant accounting policies which the Company
believes are the most critical to aid in fully understanding and evaluating its
reported financial results include the following:
REVENUE RECOGNITION AND DEFERRED REVENUES
In the biopharmaceutical segment, in which there are existing agreements with
strategic partners, revenues increased significantly in 2003. The existing
cooperation and royalty agreements usually provide for upfront, codevelopment
and milestone payments, as well as royalties on sales made by the partners.
Finally, with regard to certain agreements, the Company has to provide
manufacturing of the products and, therefore, generate product sales.
Payments received at the beginning of research cooperation agreements (upfront
payments) are not recorded as revenue when received, but are amortized based on
the progress of the research and development work concerned. Milestone payments
are recognized when appropriate development results are achieved and agreed by
the customer. Royalty receipts for marketing products are only to be paid by
commercial partners when product revenues are actually achieved and are
accordingly first recorded as revenues by the Company at such time.
Revenue from product sales is recognized net of sales discounts, allowances,
returns, rebates and chargebacks. Amounts received from customers as prepayments
for products to be shipped in the future are reported as deferred revenues.
RESEARCH AND DEVELOPMENT COSTS
All research and development ("R&D") costs, which do not meet generally accepted
criteria for deferral, are expensed as incurred. Development costs, which meet
generally accepted criteria for deferral, are capitalized and amortized against
earnings over the estimated period of benefit. To date, no costs have been
deferred. Acquired in-process R&D having no alternative future uses is written
off at the time of acquisition.
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VALUATION OF GOODWILL AND INTANGIBLE ASSETS
We account for our business acquisitions under the purchase method of
accounting. The total cost of an acquisition is allocated to the underlying net
assets based on their respective estimated fair values. As part of this
allocation process, we must identify and attribute values and estimated lives to
the intangible assets acquired. While we may employ experts to assists us with
these matters, such determination involve considerable judgment, and often
involve the use of significant estimates and assumptions, including those
respect to future cash inflows and outflows, discount rates and asset lives.
These determinations will affect the amount of amortization expense recognized
in future periods.
On January 1, 2002, we adopted the new recommendations of the Canadian Institute
of Chartered Accountants ("CICA") and discontinued the amortization of goodwill
accordingly. Prior to this date, goodwill was amortized on a straight-line basis
over its expected useful life of fifteen and twenty years. We review the
carrying values of goodwill and intangible assets when conditions arise that
indicate that any impairment may have occurred. Examples of these conditions
include significant underperformance relative to historical or expected future
results, significant changes in the manner of our use of the acquired assets or
our strategy, significant negative industry or economic trends, or significant
decline in our share price or market capitalization.
Goodwill is tested annually for impairment in relation to the fair value of each
reporting unit to which goodwill applies. An impairment charge is recorded for
any goodwill that is considered impaired. Based on the impairment test performed
as of June 30, 2004, we concluded that no goodwill impairment charge was
required.
Intangible assets consist mainly of patents, trademarks, licenses, and
distribution agreements. They are amortized on a straight-line basis over their
estimated useful lives of eight to fifteen years. Intangible assets with
definite lives are reviewed for impairment when events or circumstances indicate
that costs may not be recoverable. As at June 30, 2004, there were no events or
circumstances indicating that the carrying value may not be recoverable.
ACCOUNTING FOR INCOME TAXES
We operate in multiple jurisdictions, and our profits are taxed pursuant to the
tax laws of these jurisdictions. Our effective tax rate may be affected by the
changes in, or interpretations of, tax laws in any given jurisdiction,
utilization of net operating losses and tax credit carry forwards, changes in
geographical mix of income and expense, and changes in management's assessment
of matters, such as the ability to realize future tax assets. As a result of
these considerations, we must estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual
current tax exposure, together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in future tax assets and liabilities, which are included in
our consolidated balance sheet. We must then assess the likelihood that our
future tax assets will be recovered from future taxable income and establish a
valuation allowance for any amounts we believe will
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not be recoverable. Establishing or increasing a valuation allowance increases
our income tax expense.
Significant management judgment is required in determining our provision for
income taxes, our income tax assets and liabilities, and any valuation allowance
recorded against our net income tax assets. We recorded a valuation allowance as
at June 30, 2004, due to uncertainties related to our ability to utilize some of
our income tax assets before they expire. The valuation allowance was based on
our estimates of taxable income by jurisdiction in which we operate and the
period over which our income tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these estimates in
future periods, we may need to amend our valuation allowance, which could
materially impact our financial position and results of operations.
STOCK-BASED COMPENSATION PLANS
On January 1, 2002, AEterna adopted the recommendations issued by the CICA and,
at that time, we had chosen not to use the fair value method to account for the
stock-based compensation costs arising from awards to employees. The fair value
method was only used for stock-based payments made in exchange for goods and
services. Starting on January 1, 2004, we have to use the fair value method to
account for stock-based compensation costs. We decided to use the prospective
method as transitional method, as permitted under the amendments made to the
recommendations during 2003. According to this method, all stock-based
compensations granted during 2003 and beyond will be recorded in the
corresponding period without restatement of prior years. However, AEterna is
still required to provide pro forma disclosures relating to net loss and net
loss per share as if stock-based compensation costs had been recognized in the
financial statements using the fair value method for options granted to
employees in 2002.
The following points detail the changes in critical accounting policies that
have occurred since our most recent annual report:
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In July 2003, the CICA issued new Handbook Section 1100 "Generally Accepted
Accounting Principles" ("GAAP"), which is effective for fiscal years beginning
on or after October 1, 2003. This new section defines GAAP, establishes the
relative authority of various types of CICA Accounting Standards Board
pronouncements, says what to do when the Handbook does not cover a particular
situation and clarifies the role of "industry practice" in setting GAAP. The
Company adopted this new standard on January 1, 2004 without having any
significant effect on the Company's financial statements.
GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION
In July 2003, the CICA issued new Handbook Section 1400 "General Standards of
Financial Statement Presentation" which is effective for fiscal years beginning
on or after October 1, 2003. This new section confirms that the financial
statements of an entity must present fairly in accordance with Canadian
Generally Accepted Accounting Principles its financial position,
5
results of operations and cash flows. The Company adopted this new standard on
January 1, 2004 without having any significant impact on the Company's financial
statements.
HEDGING RELATIONSHIPS
The CICA has issued Accounting Guideline 13 "Hedging Relationships", which
establishes certain conditions regarding when hedge accounting may be applied
and which is effective for fiscal years beginning on or after January 1, 2004.
AcG 13 addresses the identification, designation, documentation, and
effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying or discontinuing hedge
accounting. Under this new guideline, the Company is also required to document
its hedging transactions and explicitly demonstrate that the hedges are
sufficiently effective in order to continue hedge accounting for positions
hedged with derivatives. Any derivative instrument that does not qualify for
hedge accounting will be reported on a mark-to-market basis in earnings. The
Company adopted this guideline as at January 1, 2004 without having any
significant impact on the Company's financial statements.
REVENUE RELATED RECOGNITION
In December 2003, the CICA Emerging Issues Committee (EIC) issued Abstracts No.
141 "Revenue Recognition" and No. 142 "Revenue Arrangements with Multiple
Deliverables". The latter is based on Issue No. 00-21 entitled "Revenue
Arrangements with Multiple Deliverables" issued in May 2003 by the Emerging
Issues Task Force of the Financial Accounting Standards Board ("FASB") in the
United States. EIC's 141 and 142 provide clarification guidelines for
determining when revenue from the sale of goods must be recognized. The Company
prospectively adopted these guidelines for contracts signed after January 1,
2004 and do not believe EIC 141 and 142 will have any significant impact on the
Company.
RESULTS OF OPERATIONS
Consolidated
NET EARNINGS for the second quarter of 2004 was $1.3 million or $0.03 of basic
and diluted income per share, compared to a net loss $4.7 million or $0.11 per
basic and diluted loss per share. This improvement in the results of operation
is the reflect of higher net earnings from our cosmetics-nutrition and
distribution segments, of a non-recurring milestone payment from one of our
partners in the biopharmaceutical segment, as well as the realignment of the
clinical development program initiated in December 2003. For the six-month
period ended June 30, 2004, the net loss decreased by $8.4 million, from $9.6
million to $1.2 million.
The weighted average number of shares outstanding used to calculate the basic
net income per share for the second quarter of 2004 was 45.6 million shares as
compared to 40.7 million shares for the same period in 2003. This increase of
4.9 million shares primarily reflects the issuance of 4.5 million subordinate
voting shares for a bought deal closed on July 24, 2003. The weighted average
number of shares outstanding used to calculate the diluted net income per share
for the second quarter of 2004 was 46.5 million shares. For the comparative
period, we did not include
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the dilutive effect of stock options and convertible term loans in the
calculation, otherwise, the effect would have been antidilutive.
Segment results-at-a-glance
(expressed in thousands of Canadian dollars)
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
UNAUDITED 2004 2003 2004 2003
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Biopharmaceutical $ (1,210) $ (5,667) $ (5,962) $ (11,560)
Cosmetics and nutrition 1,614 507 2,749 1,208
Distribution 949 446 1,994 847
Consolidation adjustments (23) 46 (1) (53)
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NET EARNINGS (LOSS) 1,330 (4,668) (1,220) (9,558)
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BASIC AND DILUTED NET EARNINGS (LOSS) PER
SHARE 0.03 (0.11) (0.03) (0.23)
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Biopharmaceutical Segment
REVENUES
For the three-month period ended June 30, 2004, biopharmaceutical segment
revenue was $18.8 million, an increase of $4.6 million, compared to $14.2
million for the same period last year. For the six-month period ended June 30,
2004, the segment revenues totalized $31.4 million in comparison to $26.7
million last year. Revenue is derived from sales and royalties on Cetrotide(R)
(cetrorelix) and Impavido(R) (miltefosine), as well as milestone payments, R&D
contract fees and amortization of upfront payments received to date. Revenue
from R&D contract fees and from the amortization of upfront payments is derived
mainly from the ongoing development of cetrorelix and teverelix under existing
collaboration agreements with our licensing partners Solvay and Ardana
respectively. The revenue increase in the quarter and in the six-month period is
mainly attributable to a one-time non-recurring milestone payment gained from
our partner Solvay for cetrorelix.
Going forward into 2004, we expect to see an increase in revenue from R&D
contract fees and amortization of upfront payments, since the Company has
received additional upfront payments from other partnerships which are amortized
based on the progress of the research and development concerned.
OPERATING EXPENSES
For the quarter ended June 30, 2004, COST OF SALES was $2.3 million, an increase
of $0.1 million compared to $2.2 million for the same period last year. For the
six-month period ended June 30, 2004, cost of sales was $6.1 million, an
increase $2.7 million in comparison to $3.4 million for the same period last
year. Manufacturing costs for Cetrotide(R) (cetrorelix) have increased, due to
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growing sales of this product generated by our partner Serono, and are expected
to continue to increase in 2004 and beyond. Sales and royalties generated by
Cetrotide(R) (cetrorelix) were $6.0 million in the second quarter of 2004
compared to $6.8 million in the same period last year and $13.4 million for the
six-month period ended June 30, 2004 compared to $11.6 million for the same
period last year. This leaves a gross margin of $3.7 million in the three-month
period ended June 30, 2004 compared to $4.6 million for the same period last
year and $7.3 million in comparison to $8.2 million for the six-month periods
ended June 30, 2004 and 2003. Decrease in margin is due to the product mix in
manufacturing costs. We do not expect any significant changes in the cost of
sales, as percentage of corresponding sales and royalties, for the next quarter.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES for the three-month period
ended June 30, 2004 were $4.3 million, a decrease of $0.2 million compared to
$4.5 million for the same period in 2003. For the six-month period ended June
30, 2004, SG&A expenses increased to $7.9 million from $7.1 million for the same
period last year. The increase in SG&A expenses in 2004 was primarily due to
increased insurance costs, stock-based compensation costs and non-recurring
expenses related to employee lay-off announced at the end of 2003, and the
Company name change. We do not expect any additional fluctuations in SG&A costs
for the remainder of 2004.
R&D EXPENSES for the three-month period ended June 30, 2004 were $8.8 million, a
decrease of $1.4 million compared to $10.2 million for the same period in 2003,
reflecting the realignment of the clinical development program initiated in
December 2003, including the focusing of the R&D on perifosine, cetrorelix and
the earlier stage products. For the six-month period ended June 30, 2004, R&D
expenses decreased from $21.5 million to $16.5 million for the same reasons
mentioned above. We expect R&D expenses to remain steady for the remainder of
2004.
DEPRECIATION AND AMORTIZATION for the three-month period ended June 30, 2004 was
$2.0 million, a decrease of $0.1 million compared to $1.9 million for the same
period last year. For the six-month period ended June 30, 2004, depreciation and
amortization also decreased by $0.2 million, from $4.2 million to $4.0 million.
The decrease was primarily attributable to the reallocation of a portion of the
purchase price of Zentaris, which was finalized in the second quarter of 2003,
from intangible assets to goodwill. We do not expect any major fluctuations in
depreciation and amortization in the next two quarters.
INTEREST INCOME for the three-month period ended June 30, 2004 was approximately
$0.5 million, an increase of $0.3 million compared to $0.2 million for the same
period in 2003. For the six-month period ended June 30, 2004, interest income
totalled $0.9 million compared to $1.0 million for the same period in 2003. Cash
and short-term investment are comparable to the level of last year.
INTEREST AND FINANCIAL EXPENSE for the three-month period ended June 30, 2004
was $1.4 million in comparison to $1.2 million in the same period last year and
consisted mainly of financing costs on the convertible term loans. For the
six-month period ended June 30, 2004, interest and financial expense increased
by $0.7 million, mainly due to the expense related to the convertible term loans
that were issued in the second quarter of 2003 only. In addition, the Company
decided
8
during the quarter to capitalize $3.0 million unpaid accrued interest on
convertible term loans as permitted in these agreements. Because of this
capitalization and since the debt portion of the convertible term loans are
accounted for as discounted loans and are increasing in accretion, we expect
that our interest expense will continue to increase in the next quarters of
2004.
INCOME TAXES for the six-month period ended June 30, 2004 was $1.9 million in
comparison to $1.2 million for the same period last year. We recorded an income
tax expense related to earnings generated by Zentaris from our operations in
Germany. For our Canadian operations, we have to establish a valuation allowance
against future income tax assets as it is more likely than not that some or all
of the future income tax assets will not be realized.
Cosmetics and Nutrition Segment
REVENUE
Revenue in this segment for the second quarter ended June 30, 2004 were $12.2
million compared to $3.7 million for the same period last year. For the
six-month period ended June 30, 2004, the revenues reached $19.7 million
compared to $6.9 million in 2003. The increases for the quarter and for the
first half of the year come from the recent acquisition of Pure Encapsulations
in March 2004, the acquisition of Siricie at the end of 2003, as well as through
the organic growth. We expect a similar increase in revenue for this segment in
the coming quarters, compared to corresponding quarters in 2003, as a result of
the March 2004 acquisition of Pure Encapsulations.
OPERATING EXPENSES
COST OF SALES was $4.1 million for the three-month period ended June 30, 2004,
compared to $0.7 million for the same quarter in 2003. For the six-month period
ended June 30, 2004, the cost of sales has gone up from $1.3 million to $6.0
million. These costs consist mainly of raw materials and manufacturing costs
related to and are proportional to sales of respective products. The recent
acquisitions of Pure Encapsulations and Siricie combined with a negative
currency fluctuation has led to an increase in the cost of sales, as a
percentage of sales, from 18.3% in the first half of 2003 to 30.6% for the same
period in 2004. We expect the cost of sales, as a percentage of sales, to remain
about the same as for the second quarter of 2004.
SG&A EXPENSES for the second quarter ended June 30, 2004 were $3.3 million
compared to $1.0 million for the same period of 2003. For the six-month period
ended June 30, 2004, the SG&A expenses have gone up from $2.0 million to $5.7
million primarily reflecting recent acquisitions of companies.
INTEREST AND FINANCIAL EXPENSE for the three-month period ended June 30, 2004
was $0.7 million. This expense consisted of financing costs on the new debts
contracted for the acquisition of Pure Encapsulations. For the six-month period
ended June 30, 2004, interest and financial expense reached $1.0 million. There
was no interest and financial expense for the corresponding period and for the
six-month period last year. We expect that our interest expense will remain as
it was in the second quarter for the next quarters of 2004.
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FOREIGN EXCHANGE GAIN was $0.1 million in the three-month period ended June 30,
2004, compared with a $0.5 million loss in the same period last year. For the
first half of 2004, foreign exchange gain was $0.2 million compared to a loss of
$0.7 million for the same period last year. The foreign exchange loss in 2003
was attributable to the impact of a stronger Canadian dollar on our US
short-term investments and working capital denominated in US dollars. We did not
have significant gain or loss in the first half of 2004 due to no significant
fluctuations in the US dollar during the first half of 2004.
Distribution Segment
REVENUE
Revenue in this segment is derived from the distribution of raw materials and
brand-name active ingredients to multinational companies in the cosmetics,
industrial chemicals, fine chemicals, pharmaceutical and nutrition sectors. In
the second quarter of 2004, revenues were $35.1 million, an increase of $14.0
million or 67%, compared with $21.1 million for the same period in 2003. For the
first half of 2004, revenues were $73.4 million compared to 46.3 million for the
same period last year. These increases primarily reflect the acquisition of
Chimiray/Interchemical in August 2003, which will still have an impact in the
next quarter.
OPERATING EXPENSES
COST OF SALES was $28.7 million in the three-month period ended June 30, 2004,
an increase of $11.1 million compared with $17.6 million for the same period in
2003. For the first half of 2004, cost of sales was $60.2 million compared to
$39.1 million for the same period in 2003. Cost of sales is directly
proportional and related to sales of respective products. In 2004, the gross
margin, as a percentage of revenues, was 18.0%, compared to 15.5% for the same
period in 2003, reflecting the contribution of high-margin products from ADF
Chimie S.A. and Chimiray/Interchemical, as well as improved margins for
existing products from Unipex. We expect gross margin to remain stable for the
next quarters of 2004.
SG&A EXPENSES were $3.1 million in the second quarter of 2004, an increase of
$1.2 million compared to $1.9 million in the same period in 2003. For the first
half of 2004, SG&A were $6.7 million compared to $3.8 million in 2003. Again,
these increases primarily reflect the acquisition of Chimiray/Interchemical in
August 2003.
FOREIGN EXCHANGE LOSS for the first half of 2003 was $0.4 million compared to
almost no gain or loss in 2004 for the same period reflecting the impact of
foreign currency fluctuations on working capital denominated in foreign
currency. This impact is mostly related to the fluctuation on the US dollars in
comparison to Euro which is more significant for the first half of 2003 compared
to the same period in 2004.
10
CONSOLIDATED
Total Assets
Total assets, which was $295.8 million as at December 31, 2003, reached $366
million as at June 30, 2004. This $70.2 million increase is mainly attributable
to the acquisition of Pure Encapsulations in March 2004. Detail of segment
assets is provided in note 8 of the interim consolidated financial statements.
Liquidity, Cash Flows and Capital Resources
Our operations and our capital expenditures are mainly financed through cash
flows from operating activities, the use of our liquidity, as well as the
issuance of debt and common shares.
As of June 30, 2004, the Company had cash, cash equivalents and short-term
investments of approximately $64.4 million, the same as at December 31, 2003.
The Company believes these liquidities, combined with our unused lines of
credit, totalling $6.6 million, and the funds provided by operations will be
adequate to meet operating cash requirements for the foreseeable future.
However, possible additional operating losses and/or possible investment in or
acquisition of complementary businesses or products may require additional
financing.
The variation of our liquidity by activities is explained below, on a
consolidated basis.
OPERATING ACTIVITIES
Cash flow generated by our operations was $13.5 million during the second
quarter of 2004. This cash inflow is mainly attributable to amounts received
from new agreements signed with our partners in the biopharmaceutical segment.
For the six-month period ended June 30, 2004, cash flow generated by our
operations was $8.4 million. In the next quarters, we will continue to contain
the variation in the working capital accounts, as well as to continue to
generate increased operating income from our cosmetics-nutrition and
distribution segments.
FINANCING ACTIVITIES
For the three-month period ended June 30, 2004, cash flow used in financing
activities was $0.6 million which is comparable to what we used for the same
period last year. Following the exercise of stock options, $0.9 million was
generated by the issuance of common shares during this quarter and $1.4 million
was used for repayment of long-term debt. For the six-month period ended June
30, 2004, an amount of $40.3 million in long-term debt was contracted and $1.3
million was generated by the issuance of common shares. In addition, $2.6
million was used as repayment of long-term debt and balance of purchase price.
In the corresponding period last year, the repayment of the interim financing
for the acquisition of Zentaris and the payment of a balance of purchase price
totalling $45.5 million, offset by the proceeds of the $24.4 million convertible
term loans mainly explain the outflow.
11
INVESTING ACTIVITIES
Cash flow used in investing activities (excluding change in short-term
investments) was $0.6 million for this second quarter. For the six-month period
ended June 30, 2004, an amount of $47.3 million was used in investing activities
mainly for acquiring companies. For the same period last year, cash flow used in
investing activities was $3.6 million (excluding change in short-term
investments), primarily to increase our share in one of our French-based
subsidiaries.
We have certain contractual obligations and commercial commitments. The
following table indicates our cash requirements to respect these obligations:
(in thousands of Canadian dollars) PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
Remainder of
Total 2004 2005-2007 2008-2009
-----------------------------------------------------------------------
$ $ $ $
LONG-TERM DEBT 57,846 7,678 36,707 13,461
CONVERTIBLE TERM LOANS 28,000 - 28,000 -
OPERATING LEASES 10,063 1,298 5,373 3,392
COMMERCIAL COMMITMENTS 4,486 1,552 2,934 -
-----------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS 100,395 10,528 73,014 16,853
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Outstanding Share Data
Effective May 26, 2004, the Company repealed the subordinate voting shares and
multiple voting shares to create a new class of common shares. All existing
subordinate voting shares at that time were converted into common shares.
As of August 11, 2004, there were 45,565,884 common shares issued and
outstanding for a total of $189 million and there were 2,722,842 stock options
outstanding. In addition, the convertible term loans can be converted into
common shares of the Company at a conversion price of $5.05 per common share up
to a maximum of 6,955,089 shares.
12
QUARTERLY SUMMARY FINANCIAL INFORMATION (Unaudited)
(expressed in thousands of Canadian dollars,except per share data)
Quarter ended Quarter ended
Quarter ended Quarter ended December 31, September 30,
June 30, 2004 March 31, 2004 2003 2003
$ $ $ $
-----------------------------------------------------------------
-----------------------------------------------------------------
Revenues 65,840 58,449 48,896 37,829
Operating income (loss) 9,177 1,584 (6,684) (5,303)
Net earnings (loss) 1,330 (2,550) (9,504) (9,238)
Basic and diluted net earnings (loss) per
share 0.03 (0.06) (0.21) (0.20)
Quarter ended Quarter ended
Quarter ended Quarter ended December 31, September 30,
June 30, 2003 March 31, 2003 2002 2002
$ $ $ $
-----------------------------------------------------------------
-----------------------------------------------------------------
Revenues 38,875 40,813 28,008 24,407
Operating loss (1,128) (1,321) (6,602) (5,529)
Net loss (4,668) (4,890) (8,009) (6,222)
Basic and diluted net loss per share (0.11) (0.12) (0.20) (0.15)
FINANCIAL AND OTHER INSTRUMENTS
Foreign Currency Risk
Since the Company operates on an international scale, it is exposed to currency
risks as a result of potential exchange rate fluctuations. As of June 30, 2004,
there were no significant outstanding forward exchange contracts.
Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are maintained
with high-credit quality financial institutions. Short-term investments consist
primarily of bonds issued by high-credit quality corporations and institutions.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and short-term investments to be minimal.
13
Interest Rate Risk
We are exposed to market risk relating to changes in interest rates relating to
our variable rate debts. We have, as at June 30, 2004, $31.2 million of
long-term debts which, in effect, bear interest at floating rates.
RELATED PARTY TRANSACTIONS AND OFF BALANCE SHEET ARRANGEMENTS
There were no related party transactions other than those eliminated during the
consolidation process and no off balance sheet arrangements.
OUTLOOK
Biopharmaceutical Segment
We expect that Cetrotide(R) (cetrorelix), which is sold by Serono, to continue
to generate significant revenue in the remainder of 2004. Furthermore,
Cetrotide(R) (cetrorelix) is pending approval in Japan and, should authorization
be successful, we would receive a milestone payment from our partner Shionogi.
We expect to continue to benefit from the support of existing partners for our
R&D activities and as part of our growth strategy, we intend to pursue
additional partnerships, as well as acquisition of additional technologies
and/or companies.
Cosmetic and Nutrition Segment and Distribution Segment
Integration of the newly-acquired companies will be ongoing and we expect to
continue to achieve organic and acquisition growth during the next quarters.
RISK FACTORS
Economic and sector related risks are the same as those identified in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Company's 2003 Annual Report.
Copies of the Company's public disclosure documents are available on our website
at www.aeternazentaris.com and on SEDAR website at www.sedar.com.
----------------------- -------------
14
SAFE HARBOUR STATEMENT
Except for historical data, this report contains statements that, by their very
nature, are projections involving time periods, risks and other factors, known
or unknown, which are beyond the Company's control.
Each of these factors may produce results or performances that differ
significantly from expectations. For example, the results of current clinical
trials cannot be foreseen, nor can changes in policy or actions taken by such
regulatory authorities as the U.S. Food and Drug Administration and the
Therapeutic Products Directorate of Health Canada, or any other organization
responsible for enforcing regulations in the pharmaceutical industry.
On behalf of management,
/s/ DENNIS TURPIN
-------------------------------------------
Dennis Turpin, CA
Vice President and Chief Financial Officer
August 11, 2004
15
AETERNA ZENTARIS INC.
(FORMERLY AETERNA LABORATORIES INC. (NOTE 1))
INTERIM CONSOLIDATED BALANCE SHEETS
(expressed in thousands of Canadian dollars)
AS AT AS AT
JUNE 30, DECEMBER 31,
2004 2003
---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33,809 $ 22,414
Short-term investments 30,583 41,953
Accounts receivable 59,642 48,191
Inventory 21,567 16,169
Prepaid expenses and deferred charges 3,488 3,314
Future income tax assets 4,331 2,604
---------------------------------------------------------------------------------------------------------------------------
153,420 134,645
PROPERTY, PLANT AND EQUIPMENT 20,263 19,599
DEFERRED CHARGES AND OTHER LONG-TERM ASSETS 9,316 1,322
INTANGIBLE ASSETS 62,713 65,513
GOODWILL (note 3) 105,083 61,184
FUTURE INCOME TAX ASSETS 15,221 13,516
---------------------------------------------------------------------------------------------------------------------------
$ 366,016 $ 295,779
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 53,164 53,062
Income taxes 10,698 3,490
Balance of purchase price 3,174 1,113
Current portion of long-term debt 10,133 3,777
---------------------------------------------------------------------------------------------------------------------------
77,169 61,442
DEFERRED REVENUES 25,403 10,563
CONVERTIBLE TERM LOANS 23,853 19,920
LONG-TERM DEBT 47,713 15,132
EMPLOYEE FUTURE BENEFITS (note 5) 6,692 6,658
FUTURE INCOME TAX LIABILITIES 24,787 25,991
NON-CONTROLLING INTEREST 33,627 29,952
---------------------------------------------------------------------------------------------------------------------------
239,244 169,658
---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 6) 188,992 187,601
OTHER CAPITAL 8,064 7,486
DEFICIT (74,231) (73,011)
CUMULATIVE TRANSLATION ADJUSTMENT 3,947 4,045
---------------------------------------------------------------------------------------------------------------------------
126,772 126,121
---------------------------------------------------------------------------------------------------------------------------
$ 366,016 $ 295,779
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
UNAUDITED 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 65,840 $ 38,875 $ 124,289 $ 79,688
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 34,922 20,393 72,050 43,613
Selling, general and administrative 10,712 7,030 20,333 12,942
Research and development costs 9,125 10,889 17,103 21,868
R&D tax credits and grants (394) (323) (419) (803)
Depreciation and amortization
Property, plant and equipment 821 862 1,577 1,722
Intangible assets 1,477 1,152 2,884 2,795
-----------------------------------------------------------------------------------------------------------------------------------
56,663 40,003 113,528 82,137
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 9,177 (1,128) 10,761 (2,449)
Interest income 288 226 782 1,163
Interest and financial expenses (2,095) (1,295) (3,732) (2,088)
Foreign exchange gain (loss) 227 (971) 644 (1,358)
-----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE FOLLOWING 7,597 (3,168) 8,455 (4,732)
-----------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE
Current (8,484) (1,474) (10,908) (2,105)
Future 4,160 816 4,944 (1,054)
-----------------------------------------------------------------------------------------------------------------------------------
(4,324) (658) (5,964) (3,159)
-----------------------------------------------------------------------------------------------------------------------------------
3,273 (3,826) 2,491 (7,891)
NON-CONTROLLING INTEREST (1,943) (842) (3,711) (1,667)
-----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE PERIOD $ 1,330 $ (4,668) $ (1,220) $ (9,558)
-----------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.11) $ (0.03) $ (0.23)
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 7)
Basic 45,594,326 40,695,527 45,565,884 40,696,277
Diluted 46,457,409 40,955,007 46,115,205 40,829,575
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars)
SIX MONTHS ENDED JUNE 30,
UNAUDITED 2004 2003
------------------------------------------------------------------------------------------------------------------------------
BALANCE - BEGINNING OF PERIOD $ 73,011 $ 44,864
Net loss for the period $ 1,220 9,558
------------------------------------------------------------------------------------------------------------------------------
Balance - End of period $ 74,231 $ 54,422
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars)
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
UNAUDITED 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the period $ 1,330 $ (4,668) $ (1,220) $ (9,558)
Items not affecting cash and cash equivalents
Depreciation and amortization 2,298 2,014 4,461 4,517
Future income taxes (4,170) (816) (4,944) 1,053
Deferred charges and long-term asset (7,209) 131 (7,064) 226
Deferred revenues 16,310 1,736 20,112 1,569
Accretion on convertible loans 518 415 933 415
Employee future benefits 30 88 90 182
Non-controlling interest 1,943 842 3,711 1,667
Stock-based compensation 357 97 645 153
Foreign exchange loss on long term item denominated
in foreign currency 81 - (49) -
Change in non-cash operating working capital items (note 5) 2,053 (1,353) (8,295) (7,683)
-----------------------------------------------------------------------------------------------------------------------------------
13,541 (1,514) 8,380 (7,459)
-----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of promissory note - - - (43,000)
Convertible term loans - (585) - 24,415
Payment of balance of purchase price (100) - (1,101) (2,358)
Increase in long-term debt - - 40,251 -
Repayment of long-term debt (1,432) (29) (1,514) (59)
Issuance of share capital, net of related expenses 894 (15) 1,336 (66)
-----------------------------------------------------------------------------------------------------------------------------------
(638) (629) 38,972 (21,068)
-----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (7,104) (11,531) (7,104) (15,491)
Proceeds from short-term investments 8,971 6,527 18,474 65,905
Purchase of long-term investment - - (825) -
Business acquisition (note 3) - (250) (45,682) (2,589)
Purchase of a product line - - (10) -
Purchase of property, plant and equipment (529) (500) (720) (750)
Additions to intangible assets (47) (213) (82) (265)
-----------------------------------------------------------------------------------------------------------------------------------
1,291 (5,967) (35,949) 46,810
-----------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 14,194 (8,110) 11,403 18,283
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 76 (118) (8) (248)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 19,539 38,757 22,414 12,494
-----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 33,809 $ 30,529 $ 33,809 $ 30,529
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
Interest paid $ 159 $ 33 $ 185 $ 154
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 2,371 $ 783 $ 2,665 $ 1,942
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
--------------------------------------------------------------------------------
1 BASIS OF PRESENTATION AND STATUTORY CHANGE
These interim financial statements as at June 30, 2004 and for the periods ended
June 30, 2004 and 2003, are unaudited. They have been prepared by the Company in
accordance with Canadian generally accepted accounting principles (GAAP) for
interim financial information. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
cash flows for these periods have been included.
The accounting policies and methods of computation adopted in these financial
statements are the same as those used in the preparation of the Company's most
recent annual consolidated financial statements. All disclosures required for
annual financial statements have not been included in these financial
statements. These consolidated financial statements should be read in
conjunction with the Company's most recent annual consolidated financial
statements. These interim results of operations are not necessarily indicative
of the results for the full year.
On May 26, 2004, the Company changed its corporate name to AEterna Zentaris
Inc. fromAEterna Laboratories Inc.
2 NEW ACCOUNTING STANDARDS
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In July 2003, the CICA issued new Handbook Section 1100 "Generally Accepted
Accounting Principles" ("GAAP"), which is effective for fiscal years beginning
on or after October 1, 2003. This new section defines GAAP, establishes the
relative authority of various types of CICA Accounting Standards Board
pronouncements, says what to do when the Handbook does not cover a particular
situation and clarifies the role of "industry practice" in setting GAAP. The
Company adopted this new standard on January 1, 2004 without having any
significant effect on the Company's financial statements.
GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION
In July 2003, the CICA issued new Handbook Section 1400 "General Standards of
Financial Statement Presentation" which is effective for fiscal years beginning
on or after October 1, 2003. This new section confirms that the financial
statements of an entity must present fairly in accordance with Canadian
generally accepted accounting principles its financial position, results of
operations and cash flows. The Company adopted this new standard on January 1,
2004 without having any significant impact on the Company's financial
statements.
HEDGING RELATIONSHIPS
The CICA has issued Accounting Guideline 13 "Hedging Relationships", which
establishes certain conditions regarding when hedge accounting may be applied
and which is effective for fiscal years beginning on or after January 1, 2004.
AcG 13 addresses the identification, designation, documentation, and
effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying or discontinuing hedge
accounting. Under this new guideline, the Company is also required to document
its hedging transactions and explicitly demonstrate that the hedges are
sufficiently effective in order to continue hedge accounting for positions
hedged with derivatives. Any derivative instrument that does not qualify for
hedge accounting will be reported on a mark-to-market basis in earnings. The
company adopted this guideline as at January 1, 2004 without having any
significant impact on the Company's financial statements.
3 BUSINESS ACQUISITION
PURE ENCAPSULATIONS, INC.
On March 3, 2004, our subsidiary Atrium completed through its new
incorporated subsidiary, Atrium Pureco, Inc, the acquisition of all operating
assets of Pure Encapsulations, Inc. for a total consideration of $49,676,167
of which an amount of $45,681,982 was paid cash, net of cash and cash
equivalent acquired of $1,242,518 and $2,751,667 as a balance of purchase
price. This company, based in the United States is focused mainly on the
development, manufacturing and marketing of nutritional supplements geared
towards physicians and other healthcare professionals.
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
--------------------------------------------------------------------------------
The financing of the transaction resulted from the issuance of a senior debt
of $27,000,000 and a subordinate debt in the amount of $13,407,000. The
senior debt, for which a moveable hypothec on all Atrium's North American
moveable assets has been given as security, is lended in the form of bankers'
acceptances. The debt bears interest at a rate based on the market rate plus
an applicable margin calculated quarterly on Atrium's North American
operations. As at June 30, 2004, the actual interest rate for this debt was
3.9%. The principal is payable in quarterly instalments of $1,350,000. The
subordinate debt, without any security granted, bears interest at a rate of
9% for the first year and 10% for the following years. Interest is payable in
monthly instalments and the principal is payable in accretion annually
starting in March 2005.
The acquisition has been accounted for using the purchase method and the results
of operations have been included in the statement of operations from the date of
acquisition. The purchase price allocation shown below is preliminary and is
based on the Company's estimates of fair value. The final allocation is expected
to be completed within the next six months and may result in a portion of the
purchase price being allocated from goodwill to identifiable intangible assets.
The allocated values of the net assets acquired are as follows:
$
-------------------------
Assets
Current assets 6,322
Property, plant and equipment 1,522
---------------------------------------------------------------------------------------------
7,844
---------------------------------------------------------------------------------------------
Liabilities
Current liabilities 2,261
Future income taxes 134
---------------------------------------------------------------------------------------------
2,395
---------------------------------------------------------------------------------------------
Net identifiable assets acquired 5,449
Goodwill 44,228
---------------------------------------------------------------------------------------------
Purchase price 49,677
Consideration
Cash and cash equivalents acquired (1,243)
Balance of purchase price (2,752)
---------------------------------------------------------------------------------------------
Net cash paid for the acquisition 45,682
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
The goodwill is deductible for income tax purposes.
SIRICIE S.A.
The purchase price allocation of Siricie S.A., acquired in November 2003, was
finalized during the second quarter of 2004 and did not result in any change
from the original purchase price allocation.
4 COMPANY'S STOCK OPTION PLAN
The Company has chosen to use the fair value method to account for stock-based
compensation costs arising from awards granted to employees after December 31,
2002. As part of the adoption of this standard, we had to restate 2003 quarters
to take into account the decision taken in the fourth quarter of 2003 to use the
prospective method of accounting. Consequently, additionnal charges of
approximately $97,000 and $153,000 are recorded in the statement of operation
for the second quarter and six-months period ended June 30, 2003, without having
any effect on the basic and diluted net earningns (loss) per share. We also have
to disclose pro-forma information relating to net earnings (loss) and earnings
(loss) per share as if the fair value method of accounting had been used for
awards granted to employees before January 1, 2003.
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
--------------------------------------------------------------------------------
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
---------------------------------- -------------------------------
Net earnings (loss) for the period $ 1,330 $ (4,668) $ (1,220) $ (9,558)
Pro-forma adjustment for stock-based compensation costs 6 (406) 13 (915)
---------------------------------- -------------------------------
Pro-forma net earnings (loss) for the period $ 1,336 $ (5,074) $ (1,207) (10,473)
---------------------------------- -------------------------------
---------------------------------- -------------------------------
Basic and diluted net earnings (loss) per share $ 0.03 $ (0.11) $ (0.03) $ (0.23)
---------------------------------- -------------------------------
---------------------------------- -------------------------------
Pro-forma basic and diluted net earnings (loss) per share $ 0.03 $ (0.12) $ (0.03) (0.26)
---------------------------------- -------------------------------
---------------------------------- -------------------------------
The pro-forma amounts may not be representation of future disclosure as the
estimated fair value of stock options is amortized to expense over the vesting
period and additional options may be granted in future periods.
5. STATEMENTS OF CASH FLOWS AND ADDITIONAL INFORMATION
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
-------------------------------------------------------------------------
CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Accounts receivable (1,058) 975 (11,775) (3,569)
Inventory (390) 206 (1,468) 652
Prepaid expenses and deferred charges 1,471 653 (19) (711)
Accounts payable and accrued liabilities (4,225) (3,410) (2,249) (3,944)
Income taxes 6,255 223 7,216 (111)
-------------------------------------------------------------------------------------------------------------------------------
2,053 (1,353) (8,295) (7,683)
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE FUTURE BENEFIT EXPENSE 76,042 151,845 181,808 309,802
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
6 SHARE CAPITAL
Autorized
Unlimited number of shares of the following classes:
Common: Voting and participating, one votes per share
Preferred: First and second ranking, issuable in series, with rights and
privileges specific to each class.
Issued AS AT AS AT
JUNE 30, DECEMBER 31,
2004 2003
-------------------------------------------------
(UNAUDITED)
45,633,159 common shares (45,330,992 as at December 31, 2003) $ 188,992 $ 187,601
-------------------------------------------------
-------------------------------------------------
Effective May 26, 2004, the Company repealed the subordinate voting shares and
multiple voting shares to create a new class of common shares. All existing
subordinate voting shares at that time were converted into common shares.
Pursuant to the exercice of stock options, the company issued 302,167 common
shares for a total proceed of $1,496,899
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
--------------------------------------------------------------------------------
Instruments convertible into shares
As at June 30, 2004, the Company has 2,722,842 outstanding stock options. In
addition, the convertible term loans can be converted into common shares of the
Company at a conversion price of $5.05 per common shares up to a maximum of
6,955,089 shares.
Shareholder rights plan
On March 29, 2004, the Company has adopted a shareholder rights plan (the
"Rights Plan"). The rights issued to the shareholders under the Rights Plan will
be exercisable, under certain conditions, only when a person or entity,
including any related party(ies), acquires or announces its intention to acquire
more than twenty (20) percent of the outstanding common shares of AEterna
Zentaris (as such shares may be redesignated or reclassified) without complying
with the "permitted bid" provisions of the Rights Plan or without approval of
AEterna Zentaris's Board of Directors. Should such an acquisition occur, each
right would, upon exercise, entitle a holder, other than the person pursuing the
acquisition together with its related party(ies), to purchase common shares of
AEterna Zentaris at a fifty (50) percent discount to the market price of AEterna
Zentaris's shares at the time.
7 NET EARNINGS (LOSS) PER SHARE
The following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number for shares
outstanding used in the diluted earnings per share calculation
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
---------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 45,594,326 40,695,527 45,565,884 40,696,277
Effect of dilutive stock options 863,083 259,480 549,321 133,298
---------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUSTANDING 46,457,409 40,955,007 46,115,205 40,829,575
---------------------------------------------------------------------------
---------------------------------------------------------------------------
ITEMS EXCLUDED FROM THE CALCULATION OF DILUTED NET LOSS PER SHARE BECAUSE THE
EXERCICE PRICE WAS GREATER THAN THE AVERAGE MARKET PRICE OF THE COMMON
SHARE OR THEIR ANTI-DILUTIVE EFFECT.
Stock options 259,917 1,388,572 627,188 2,012,826
Common shares which would be issued following
the conversion of the convertible term loans 5,544,554 1,237,624 5,544,554 1,237,624
For the quarter ended June 30, 2003 and six-month periods ended June 30, 2003
and 2004, the diluted net loss per share were the same as the basic net loss per
share since the dilutive effect of stock options and convertible term loans was
not included in the calculation; otherwise, the effect would have been
anti-dilutive. Accordingly, the diluted net loss per share for those periods
were calculated using the basic weighted average number of shares outstanding.
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
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8 SEGMENT INFORMATION
The company manages its business and evaluates performance based on three
operating segments, which are the biopharmaceutical segment, the cosmetics and
nutrition segment and the distribution segment. The accounting principles used
for these three segments are consistent with those used in the preparation of
these consolidated financial statements.
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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2004 2003 2004 2003
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REVENUES
Biopharmaceutical $ 18,831 14,185 $ 31,446 $ 26,730
Cosmetics and nutrition 12,185 3,654 19,666 6,950
Distribution 35,088 21,063 73,441 46,262
Consolidated adjustments (264) (27) (264) (254)
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$ 65,840 38,875 $ 124,289 $ 79,688
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NET EARNINGS (LOSS) FOR THE PERIOD
Biopharmaceutical $ (1,210) (5,667) $ (5,962) $ (11,560)
Cosmetics and nutrition 1,614 507 2,749 1,208
Distribution 949 446 1,994 847
Consolidated adjustments (23) 46 (1) (53)
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$ 1,330 (4,668) $ (1,220) $ (9,558)
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AS AT As at
JUNE 30, December 31,
2004 2003
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SEGMENT ASSETS
Biopharmaceutical $ 193,756 $ 179,882
Cosmetics and nutrition 69,282 15,565
Distribution 103,448 100,434
Consolidated adjustments (470) (102)
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$ 366,016 $ 295,779
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9 COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the current
year presentation.
SIGNATURE
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.
AETERNA ZENTARIS INC.
DATE: AUGUST 13, 2004 By: /s/ MARIO PARADIS
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Mario Paradis
Senior Director, Finance and
Corporate Secretary