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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-17082
QLT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA N/A
- ---------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
887 GREAT NORTHERN WAY, VANCOUVER, B.C., CANADA V5T 4T5
- ----------------------------------------------- ------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (604) 707-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of August 7, 2003 the registrant had 68,841,102 outstanding common shares and
7,533,445 outstanding stock options.
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QLT INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2003
TABLE OF CONTENTS
ITEM PART I - FINANCIAL INFORMATION PAGE
- ---- ----
1. FINANCIAL STATEMENTS................................................................... 1
Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002.................................................. 1
Consolidated Statements of Income for the three months and six months ended
June 30, 2003 and June 30, 2002...................................................... 2
Consolidated Statements of Cash Flows for the three months and six months ended
June 30, 2003 and June 30, 2002...................................................... 3
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive
Income for the three months and six months ended June 30, 2003....................... 5
Notes to the Consolidated Financial Statements....................................... 6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................... 16
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 26
4. CONTROLS AND PROCEDURES................................................................ 26
PART II - OTHER INFORMATION
1. LEGAL PROCEEDINGS...................................................................... 27
2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 29
3. DEFAULTS UPON SENIOR SECURITIES........................................................ 29
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 29
5. OTHER INFORMATION...................................................................... 29
6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 30
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
QLT INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of United States dollars) JUNE 30, 2003 December 31, 2002
------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 171,861 $ 128,138
Short-term investment securities 96,657 79,797
Accounts receivable (Note 4) 32,512 30,186
Inventories (Note 5) 28,176 23,900
Current portion of deferred income tax assets 14,864 17,092
Other (Note 6) 20,763 13,310
--------- ---------
364,833 292,423
LONG-TERM INVESTMENTS AND ADVANCES 4,173 4,170
PROPERTY AND EQUIPMENT 40,066 35,281
DEFERRED INCOME TAX ASSETS 9,660 13,966
--------- ---------
$ 418,732 $ 345,841
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 7,141 $ 9,960
Accrued restructuring charge (Note 12) 442 2,631
Other accrued liabilities (Note 8) 7,859 7,027
Deferred revenue 10,002 12,678
--------- ---------
25,444 32,296
CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9)
Authorized
500,000,000 common shares without par value
5,000,000 first preference shares without par value, issuable in series
Issued and outstanding
Common shares 394,367 391,716
June 30, 2003 - 68,753,281
December 31, 2002 - 68,407,753
ACCUMULATED DEFICIT (30,203) (52,901)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 29,123 (25,270)
--------- ---------
393,287 313,545
--------- ---------
$ 418,732 $ 345,841
========= =========
See accompanying notes to the consolidated financial statements.
QLT INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
(In thousands of United States dollars except per share
information) 2003 2002 2003 2002
-------- -------- -------- --------
REVENUES
Revenue from Visudyne(R) (Note 10) $ 35,164 $ 23,384 $ 66,609 $ 45,802
Contract research and development (Note 11) 845 1,272 2,371 2,996
-------- -------- -------- --------
$ 36,009 $ 24,656 $ 68,980 $ 48,798
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales 6,058 3,562 11,470 8,553
Research and development 12,087 10,390 22,962 18,870
Selling, general and administrative 3,432 4,899 6,465 8,979
Depreciation 715 796 1,441 1,501
Restructuring (Note 12) (394) -- (394) --
-------- -------- -------- --------
21,898 19,647 41,944 37,903
-------- -------- -------- --------
OPERATING INCOME 14,111 5,009 27,036 10,895
INVESTMENT AND OTHER INCOME
Net foreign exchange gains 381 373 2,914 433
Interest income 2,045 1,069 3,644 1,935
Equity loss in NSQ (Note 2) -- (256) -- (279)
Other -- 202 -- 202
-------- -------- -------- --------
2,426 1,388 6,558 2,291
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 16,537 6,397 33,594 13,186
PROVISION FOR INCOME TAXES (5,378) (2,273) (10,896) (4,669)
======== ======== ======== ========
NET INCOME $ 11,159 $ 4,124 $ 22,698 $ 8,517
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 0.16 $ 0.06 $ 0.33 $ 0.12
Diluted $ 0.16 $ 0.06 $ 0.33 $ 0.12
-------- -------- -------- --------
Weighted average number of common shares outstanding (in
thousands)
Basic 68,705 68,204 68,611 68,153
Diluted 68,933 68,519 68,737 68,555
-------- -------- -------- --------
See accompanying notes to the consolidated financial statements.
Visudyne(R) is a trademark of Novartis Pharma AG.
2
QLT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
--------- --------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 11,159 $ 4,124 $ 22,698 $ 8,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 715 796 1,441 1,501
Unrealized foreign exchange loss 1,401 912 2,099 898
Deferred income taxes 5,378 2,273 10,896 4,669
Restructuring (Note 12) (394) -- (394) --
Equity loss in NSQ (Note 2) -- 256 -- 279
Changes in non-cash operating assets and liabilities:
Accounts receivable (1,310) (857) 1,030 3,598
Inventories (956) 2,448 (291) 5,513
Other assets (266) (2,385) (4,218) (7,006)
Accounts payable (953) (625) (2,322) (3,703)
Accrued restructuring charge (286) -- (2,005) --
Other accrued liabilities 3,645 (2,484) (16) (3,818)
Deferred revenue (4,088) 1,426 (4,598) 5,601
--------- --------- --------- ---------
14,045 5,884 24,320 16,049
--------- --------- --------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Short-term investment securities 18,357 98,627 (1,692) 53,236
Purchase of property and equipment (250) (273) (2,212) (967)
--------- --------- --------- ---------
18,107 98,354 (3,904) 52,269
--------- --------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITY
Issuance of common shares 1,635 744 2,640 2,556
--------- --------- --------- ---------
1,635 744 2,640 2,556
--------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 11,918 4,005 20,667 3,845
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 45,705 108,987 43,723 74,719
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 126,156 35,395 128,138 69,663
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 171,861 $ 144,382 $ 171,861 $ 144,382
========= ========= ========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 184 $ 163 $ 251 $ 636
Income taxes paid -- -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITY:
On February 1, 2002, the Company received 135,735 common shares of Diomed, Inc
and on August 5, 2002 received 696,059 preferred shares of Diomed Holdings, Inc.
as part of the consideration received by the Company from the sale of its
Optiguide(R) FiberOptics business to Diomed, Inc. on November 8, 2000. Under the
terms of the sale, Diomed elected to settle the amount owed in shares. The
Company recorded this investment at a carrying value of $0.7 million and
recorded a loss of $0.4 million on settlement of accounts receivable of $1.2
million.
A standby letter of credit in the amount of CAD $2.5 million was issued under
the second segment of the Company's unsecured credit facility. This letter of
guarantee was security for the final payment of a land purchase and bore
interest at 0.7% per annum. During April 2003, the land purchase was completed
and the letter of guarantee cancelled.
See accompanying notes to the consolidated financial statements.
3
QLT INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Accumulated Other
Common Shares Comprehensive Income
------------------------- ---------------------------
Unrealized
(Losses)
Cumulative Gains on Total
Translation Diomed Accumulated Shareholders'
(In thousands of United States dollars) Shares Amount Adjustment Securities Deficit Equity
---------- ---------- ----------- ---------- ----------- -------------
BALANCE AT DECEMBER 31, 2002 68,407,753 $ 391,716 $ (25,270) $ -- $ (52,901) $ 313,545
EXERCISE OF STOCK OPTIONS AT PRICES
RANGING FROM CAD $9.28 TO CAD $12.25
PER SHARE 171,500 1,004 -- -- -- 1,004
OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustment from
application of U.S. dollar
reporting (Note 3) -- -- 23,110 -- -- 23,110
Unrealized loss on available for
sale securities -- -- -- (428) -- (428)
NET INCOME -- -- -- -- 11,539 11,539
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2003 68,579,253 $ 392,720 $ (2,160) $ (428) $ (41,362) $ 348,770
EXERCISE OF STOCK OPTIONS AT PRICES
RANGING FROM CAD $11.95 TO CAD $13.78
PER SHARE 174,028 1,647 -- -- -- 1,647
OTHER COMPREHENSIVE INCOME:
Translation adjustment from
application of U.S. dollar
reporting (Note 3) -- -- 31,677 -- -- 31,677
Unrealized gain on available for
sale securities -- -- -- 34 -- 34
NET INCOME -- -- -- -- 11,159 11,159
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT JUNE 30, 2003 68,753,281 $ 394,367 $ 29,517 $ (394) $ (30,203) $ 393,287
========== ========== ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements.
4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information as at and for the three and six month periods ended June 30,
2003 and 2002 is unaudited.)
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QLT Inc. ("the Company") is a bio-pharmaceutical company engaged in the
development and commercialization of innovative products that address unmet
medical needs. The Company focuses in the areas of ophthalmology, oncology,
dermatology and other fields in which products can be marketed by a focused
specialty sales and marketing team. The Company is a pioneer in the field
of photodynamic therapy ("PDT"). PDT is a minimally invasive medical
procedure utilizing photosensitizers (light-activated drugs) to treat a
range of diseases associated with rapidly growing tissues.
1. BASIS OF PRESENTATION
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States and pursuant to the rules and regulations of the United States
Securities and Exchange Commission for the presentation of interim
financial information. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles have
been condensed, or omitted, pursuant to such rules and regulations. These
financial statements do not include all disclosures required for annual
financial statements and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto included as
part of the Company's 2002 Annual Report on Form 10-K. All amounts herein
are expressed in United States dollars unless otherwise noted.
In the opinion of management, all adjustments (including reclassifications
and normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at June 30, 2003 and for all
periods presented, have been made. Interim results are not necessarily
indicative of results for a full year.
2. PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated.
The long-term investment in NS & QLT Technologies ("NSQ") in which the
Company exercised joint control was recorded using the equity method
whereby the Company included a pro rata share of NSQ's earnings in the
carrying value of the investment and in the Company's net income. NSQ was
the Company's only investment accounted for using the equity method in
2002. In December 2002, dissolution procedures for NSQ were commenced and
NSQ's remaining assets have been distributed back to its shareholders. The
Company currently does not have any investments recorded using the equity
method.
3. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the following are the most significant
accounting policies used in preparing these financial statements.
Reporting Currency and Foreign Currency Translation
Effective December 31, 2002, the Company changed its reporting currency to
the U.S. dollar from the Canadian dollar in order to provide information on
a more comparable basis with the majority of the companies in the Company's
peer group. The consolidated financial statements of the Company are
translated into U.S. dollars using the current rate method. Assets and
liabilities are translated at the rate of exchange prevailing at the
balance sheet date. Shareholders' equity is translated at the applicable
historical rates. Revenue and expenses are translated at a weighted average
rate of exchange for the respective years. Translation gains and losses are
included as part of the cumulative foreign currency translation adjustment
which is reported as a component of shareholders' equity under accumulated
other comprehensive income (loss). The Company retained the Canadian dollar
as its functional currency.
The financial information for the three and six month periods ended June
30, 2002 is presented in U.S. dollars as if the U.S. dollar had been used
as the reporting currency during that period.
5
Property and Equipment
During the first quarter of 2003, the Company reviewed its intended use of
property and equipment and adopted the straight-line method for all newly
acquired property and equipment beginning in 2003. The Company retains the
declining balance method for all property and equipment acquired prior to
2003.
Property and equipment are recorded at cost and amortized as follows:
Method Rates Method Years
---------------- ----- ------------- -----
Buildings Declining balance 4%
Office furnishings, fixtures and other Declining balance 20% or Straight-line 5
Research and commercial manufacturing equipment
and computer operating system Declining balance 20% or Straight-line 5
Computer hardware Declining balance 30% or Straight-line 3
Revenue Recognition
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, a division of Novartis Pharma AG ("Novartis Ophthalmics"), the
Company is responsible for manufacturing and product supply and Novartis
Ophthalmics is responsible for sales, marketing and distribution of
Visudyne. Our agreement with Novartis Ophthalmics provides that the
calculation of total revenue for the sale of Visudyne be composed of three
components: (1) an advance on the cost of inventory sold to Novartis
Ophthalmics, (2) an amount equal to 50% of the profit that Novartis
Ophthalmics derives from the sale of Visudyne to end-users, and (3) the
reimbursement of other specified costs incurred and paid for by the Company
(See Note 10 - Revenue from Visudyne). The Company recognizes revenue from
the sale of Visudyne when persuasive evidence of an arrangement exists,
delivery to Novartis has occurred, the end selling price of Visudyne is
fixed or determinable, and collectibility is reasonably assured. Under the
calculation of total revenues noted above, this occurs upon "sell through"
to the end user.
Contract research and development revenues consist of non-refundable
research and development funding under collaborative agreements with the
Company's various strategic partners, including (but not limited to)
Novartis Ophthalmics. Contract research and development funding generally
compensates the Company for discovery, preclinical and clinical expenses
related to the collaborative development programs for certain products and
product candidates of the Company, and is recognized as revenue at the time
research and development activities are performed under the terms of the
collaborative agreements. Amounts received under the collaborative
agreements are non-refundable even if the research and development efforts
performed by the Company do not eventually result in a commercial product.
Contract research and development revenues earned in excess of payments
received are classified as contract research and development receivables.
(See Note 4 - Accounts Receivable and Note 10 - Contract Research and
Development).
The Company does not offer rebates or discounts and has not experienced any
material product returns; accordingly, the Company does not provide an
allowance for rebates, discounts, and returns.
Cost of Sales
Cost of sales, consisting of expenses related to the production of bulk
Visudyne sold to Novartis Ophthalmics and royalties on Visudyne sales, are
charged against earnings in the period of the related product sale by
Novartis Ophthalmics to third parties. The Company utilizes a standard
costing system, which includes a reasonable allocation of overhead
expenses, to account for inventory and cost of sales with adjustments being
made periodically to reflect current conditions. Overhead expenses comprise
direct and indirect support activities related to the manufacture of bulk
Visudyne and involve costs associated with activities such as quality
inspection, quality assurance, supply chain management, safety and
regulatory. Overhead expenses are allocated to inventory during each stage
of the manufacturing process under a standard costing system, and
eventually to cost of sales as the related products are sold by Novartis
Ophthalmics to third parties. The Company records a provision for the
non-completion of product inventory based on its history of batch
completion.
Stock-Based Compensation
In accordance with the provisions of SFAS No. 123 "Accounting for
Stock-based Compensation" ("SFAS 123"), the Company applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in the
accounting for employee stock option plans. SFAS 123 requires that all
stock-based awards made to non-employees be measured and recognized using a
fair value based method. The standard encourages the use of a fair value
based method for all awards granted to employees, but only requires the use
of a fair value based method for direct awards of stock, stock appreciation
rights, and awards that call for settlement in cash or other assets. Awards
that a company has the ability to settle in stock are recorded as equity,
whereas awards that the entity is required to or has a practice of settling
in
6
cash are recorded as liabilities. The Company has adopted the disclosure
only provision for stock options granted to employees and directors, as
permitted by SFAS 123.
The following pro forma financial information presents the net income and
net income per common share had the Company recognized stock-based
compensation using a fair value based accounting method:
Three months ending Six months ending
------------------------- --------------------------
(In thousands except per share information) June 30, June 30, June 30, June 30,
(Unaudited) 2003 2002 2003 2002
---------- --------- ---------- ----------
Net Income (Loss) $ 11,159 $ 4,124 $ 22,698 $ 8,517
As reported
Less: Additional employee compensation
expense under the fair value method (5,135) (6,924) (10,385) (12,984)
---------- --------- ---------- ----------
Pro forma $ 6,024 $ (2,800) $ 12,313 $ (4,467)
========== ========= ========== ==========
Basic net income (loss) per common share
As reported $ 0.16 $ 0.06 $ 0.33 $ 0.12
Pro forma $ 0.09 $ (0.04) $ 0.18 $ (0.07)
========== ========= ========== ==========
Diluted net income (loss) per share
As reported $ 0.16 $ 0.06 $ 0.33 $ 0.12
Pro forma $ 0.09 $ (0.04) $ 0.18 $ (0.07)
========== ========= ========== ==========
The pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
The Black-Scholes option pricing model was developed for use in estimating
the value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company uses projected data for expected volatility and expected life of its
stock options based upon historical and other economic data trended into
future years. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the estimate, in management's opinion, the existing valuation models do not
provide a reliable measure of the fair value of the Company's employee stock
options.
The weighted average fair value of stock options granted in the three and
six month periods ended June 30, 2003 were $4.95 and $4.27 whereas the fair
value of stock options granted in the three and six month periods ended June
30, 2002 were $7.76 and $7.76. The Company used the Black-Scholes option
pricing model to estimate the value of the options at each grant date, under
the following weighted average assumptions:
Three months ended Six months ended
June 30, June 30,
2003 2003
------------------ ----------------
Annualized Volatility 70.5% 72.8%
Risk-free Interest Rate 3.6% 4.1%
Expected Life (Years) 2.5 2.5
Research and Development
Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with the
Company's various research and development programs. Overhead expenses
comprise general and administrative support provided to the research and
development programs and involve costs associated with support activities
such as facility maintenance, utilities, office services, information
technology, legal, accounting and human resources. Research and development
costs are expensed as incurred. Patent application, filing and defense
costs are expensed as incurred and included in general and administrative
expenses.
Income Taxes
Income taxes are reported using the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carry
7
forwards using applicable enacted tax rates. An increase or decrease in
these tax rates will increase or decrease the carrying value of deferred
net tax assets resulting in an increase or decrease to net income.
Investment tax credits are included as part of the provision for (recovery
of) income taxes.
Net Income Per Common Share
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
per common share is computed in accordance with the treasury stock method
which uses the weighted average number of common shares outstanding during
the period and also includes the dilutive effect of potentially issuable
common stock from outstanding stock options.
The following table sets forth the computation of basic and diluted net
income per common share:
Three months ending Six months ending
-------------------- --------------------
(In thousands, except per share data) June 30, June 30, June 30, June 30,
(Unaudited) 2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Net Income $11,159 $ 4,124 $22,698 $ 8,517
Denominator:
Weighted-average common shares outstanding 68,705 68,204 68,611 68,153
Effect of dilutive securities:
Stock options 228 315 126 402
------- ------- ------- -------
Diluted weighted-average common shares
outstanding 68,933 68,519 68,737 68,555
======= ======= ======= =======
Basic net income per common share $ 0.16 $ 0.06 $ 0.33 $ 0.12
Diluted net income per common share $ 0.16 $ 0.06 $ 0.33 $ 0.12
Excluded from the calculation of diluted net income per common share for
the three and six month periods ended June 30, 2003 were 6,549,510 shares
(in the three and six month periods ended June 30, 2002 - 7,940,788 shares)
of common stock from stock options because their effect was anti-dilutive.
Reclassification
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. This statement
provides guidance on the recognition and measurement of liabilities
associated with exit and disposal activities. Under SFAS No. 146,
liabilities for costs associated with exit or disposal activities should be
recognized when the liabilities are incurred and measured at fair value.
This statement is effective prospectively for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies, relating to the guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. FIN 45
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. The initial recognition and measurement provisions are effective
for guarantees issued or modified after December 31, 2002. The adoption of
FIN 45 did not have a material impact on the Company's financial position
or its results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on
how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. Revenue
arrangements with multiple deliverables should be divided into separate
units of accounting if the deliverables meet certain criteria, including
whether the fair value of the delivered items can be determined and whether
there is evidence of fair value of the
8
undelivered items. In addition, the consideration should be allocated among
the separate units of accounting based on their fair values, and the
applicable revenue recognition criteria should be considered separately for
each of the separate units of accounting. The provision of Issue 00-21 will
apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not believe that the adoption of
Issue 00-21 will have a material effect on its consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company's consolidated financial statements currently
comply with the disclosure requirements of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a corporation, partnership,
trust, or any other legal structures used for business purposes that either
(a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity
to support its activities. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not believe that the
adoption of FIN 46 will have a material effect on its consolidated
financial position or results of operations.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), Amendment
of SFAS No. 133 on Derivative Instruments and Hedging Activities. The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. In particular, it (1) clarifies
under what circumstances a contract with an initial net investment meets
the characteristic of a derivative as discussed in SFAS No. 133, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to the language used in FASB
Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of others and (4)
amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to
June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities or other securities
that do not yet exist, should be applied to existing contracts as well as
new contracts entered into after June 30, 2003. SFAS No. 149 should be
applied prospectively.
The Company will adopt the provisions of SFAS No. 149 for any contracts
entered into after June 30, 2003 and is not affected by Implementation
Issues that would require earlier adoption. The Company does not expect
that the adoption of this Statement will have a material impact on its
results of operations and financial position.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement requires that three types of financial instruments be
reported as liabilities by their issuers: (1) mandatorily redeemable
instruments; (2) forward purchase contracts, written put options, and other
financial instruments not in the form of shares that either obligate or may
obligate the issuer to repurchase its equity shares and settle its
obligation for cash or by transferring other assets; and (3) certain
financial instruments that include an obligation that may be settled in a
variable number of equity shares, has a fixed or benchmark tied value at
inception, and varies inversely with the fair value of the equity shares.
The provisions of SFAS 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the
beginning of the first interim period that commences after June 15, 2003.
The Company will adopt the provision for pre-existing
9
instruments beginning July 1, 2003. The Company does not expect that the
adoption of this Statement will have a material impact on its results of
operations and financial position.
4. ACCOUNTS RECEIVABLE
(In thousands of United States dollars) June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
Visudyne(R) $31,263 $28,636
Contract research and development 807 1,128
Trade and other 442 422
------- -------
$32,512 $30,186
======= =======
Accounts receivable -Visudyne represents amounts due from Novartis
Ophthalmics and consists of the Company's 50% share of pre-tax profit on
sales of Visudyne, amounts due from the sale of bulk Visudyne to Novartis
Ophthalmics and reimbursement of specified royalty and other costs. The
Company has not, in the past, experienced bad debts. Based on this history
and because the Company's accounts receivable consists primarily of
receivables from its strategic partner, Novartis Ophthalmics, the Company
does not require an allowance for doubtful accounts.
5. INVENTORIES
(In thousands of United States dollars) June 30, 2003 December 31, 2002
------------- ------------------
(Unaudited)
Raw materials and supplies $ 1,632 $ 1,706
Work-in-process 28,779 22,057
Finished goods 42 1,801
Provision for non-completion of product inventory (2,277) (1,664)
-------- --------
$ 28,176 $ 23,900
======== ========
The Company records a provision for non-completion of product inventory to
provide for potential failure of inventory batches in production to pass
quality inspection. The Company has not, in the past, experienced inventory
spoilage. Based on this history, inventory turnover, and expected sales,
the Company believes that at this time the risk of inventory obsolescence
is negligible. Accordingly, the Company has not established any reserve for
obsolescence.
6. OTHER
(In thousands of United States dollars) June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
Inventory in transit (held by Novartis Opthalmics) $12,263 $11,993
Foreign exchange contracts 5,935 --
Prepaid expenses and other 2,565 1,317
------- -------
$20,763 $13,310
======= =======
Inventory in transit comprises finished goods that have been shipped to and
are held by Novartis Ophthalmics. Under the terms of the Company's
collaborative agreement, upon delivery of inventory to Novartis
Ophthalmics, the Company is entitled to an advance equal to the Company's
cost of inventory. Inventory in transit is also included in deferred
revenue at cost, and will be recognized as revenue in the period of the
related product sale and delivery by Novartis Ophthalmics to third parties
where collection is reasonably assured.
10
7. CREDIT FACILITY
The Company maintains a CAD $3.5 million unsecured credit facility
agreement. The first segment of the facility is structured as a CAD $1.0
million revolving demand loan which bears interest at the bank's prime rate
for Canadian dollar drawdowns and the U.S. base rate for U.S. dollar
drawdowns. As at June 30, 2003, no amount was drawn against this portion of
the facility. A standby letter of credit in the amount of CAD $2.5 million
was issued under the second segment of this facility. This letter of
guarantee was security for the final payment of a land purchase and bore
interest at 0.7% per annum. During April 2003, the land purchase was
completed and the letter of guarantee cancelled.
8. OTHER ACCRUED LIABILITIES
(In thousands of United States dollars) June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
Royalties $2,274 $2,025
Compensation 2,947 3,557
Foreign exchange contracts 1,631 706
Manufacturing 810 568
Interest 190 171
Other 7 --
------ ------
$7,859 $7,027
====== ======
9. SHARE CAPITAL
Effective March 17, 2002, the Company adopted a Shareholder Rights Plan,
which was then amended and restated effective April 8, 2002 (the "Rights
Plan"), and approved, as amended, by the shareholders of the Company on
April 25, 2002. The Rights Plan replaced the shareholder rights plan (the
"Initial Rights Plan") that was initially adopted by the Company on March
17, 1992, confirmed by shareholders on April 28, 1992, amended March 31,
1997 and re-confirmed, as amended, by shareholders on May 12, 1997. The
Initial Rights Plan expired on March 17, 2002. The Rights Plan will remain
in effect, unless earlier terminated pursuant to its terms, until the 2005
annual meeting of shareholders, and, if reconfirmed at the 2005 annual
meeting, the Rights Plan will remain in effect until the 2008 annual
meeting of shareholders. Under the Rights Plan, holders of common shares
are entitled to one share purchase right for each common share held.
Generally, if any person or group makes a take-over bid, other than a bid
permitted under the Rights Plan (a "Permitted Bid") or acquires beneficial
ownership of 20% or more of the Company's outstanding common shares without
complying with the Rights Plan, the Rights Plan will entitle these holders
of share purchase rights to purchase, in effect, common shares of the
Company at 50% of the prevailing market price. A take-over bid for the
Company can avoid the dilutive effects of the share purchase rights, and
therefore become a Permitted Bid, if it complies with provisions of the
Rights Plan or if it is expressly approved by the Board of Directors.
On April 25, 2002, at the Annual General Meeting of the Company, the
shareholders passed a resolution approving an amendment to the Company's
2000 Incentive Stock Option Plan by increasing the maximum number of common
shares issuable under the Plan by 2,000,000 common shares from 5,000,000
common shares to 7,000,000 common shares.
11
Stock option activity with respect to all of the Company's stock option
plans is presented below:
Weighted
Number of Exercise Price Range Average
(In Canadian dollars) Shares Per Share Exercise Price
--------- -------------------- --------------
Outstanding at December 31, 2002 7,801,238 $ 9.28 - $108.60 $ 50.85
From January 1 to June 30, 2003:
Granted 994,822 $12.10 - $ 15.75 $ 13.40
Exercised (345,528) $ 9.28 - $ 13.78 $ 11.00
Cancelled (804,201) $ 9.28 - $108.60 $ 53.64
---------- ---------------- -------
Outstanding at June 30, 2003 7,646,331 $11.95 - $108.60 $ 47.48
========= ====== ======= =======
Additional information relating to stock options outstanding as of June 30,
2003 is presented below:
(In Canadian dollars) Options Outstanding Options Exercisable
--------------------------- -----------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Number of Exercise Contractual Number of Exercise
Price Range Shares Price Life (Years) Shares Price
---------------- --------- ---------- ------------ --------- ----------
Under $25 1,956,753 $ 17.38 4.08 522,369 $ 19.08
$25.00 - $37.50 1,549,616 $ 31.37 2.15 1,200,242 $ 31.27
$37.51 - $50.00 2,414,301 $ 41.54 2.48 1,872,914 $ 42.35
Over $50.00 1,725,661 $104.37 1.87 1,700,618 $104.39
--------- ------- ---- --------- -------
7,646,331 5,296,143
========= =========
10. REVENUE FROM VISUDYNE(R)
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, the Company is responsible for manufacturing and product
supply and Novartis Ophthalmics is responsible for sales, marketing and
distribution of Visudyne.
The Company's Revenue from Visudyne was determined as follows:
For the three months ended For the six months ended
June 30, June 30,
------------------------- -------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
--------- --------- --------- ---------
Visudyne(R) sales by Novartis Ophthalmics $ 89,206 $ 71,267 $ 171,260 $ 139,647
Less: Inventory and other costs (7,982) (5,958) (14,248) (11,595)
Less: Sales, marketing and distribution costs (26,433) (30,628) (53,524) (61,476)
--------- --------- --------- ---------
$ 54,791 $ 34,681 $ 103,488 $ 66,576
========= ========= ========= =========
QLT share of remaining revenue on final sale (50%) $ 27,395 $ 17,341 $ 51,744 $ 33,288
Add: Inventory costs reimbursed to QLT 4,293 3,323 8,133 6,448
Add: Other costs reimbursed to QLT 3,476 2,720 6,732 6,066
--------- --------- --------- ---------
Total Revenue from Visudyne(R) as reported by QLT $ 35,164 $ 23,384 $ 66,609 $ 45,802
========= ========= ========= =========
For the three months ended June 30, 2003, approximately 51% of total
Visudyne sales by Novartis Ophthalmics were in the United States with
Europe and other markets responsible for the remaining 49%. For the same
period in 2002, approximately 60% of total Visudyne sales by Novartis
Ophthalmics were in the United States with Europe and other markets
responsible for the remaining 40%.
12
For the six months ended June 30, 2003, approximately 51% of total Visudyne
sales by Novartis Ophthalmics were in the United States with Europe and
other markets responsible for the remaining 49%. For the same period in
2002, approximately 61% of total Visudyne sales by Novartis Ophthalmics
were in the United States with Europe and other markets responsible for the
remaining 39%.
11. CONTRACT RESEARCH AND DEVELOPMENT
The Company receives non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners which is recorded as
contract research and development revenue. Details of the Company's
contract research and development revenue are as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
(In thousands of United States dollars) 2003 2002 2003 2002
------ ------ ------ ------
(Unaudited)
Visudyne(R) ocular programs $ 318 $ 533 $ 771 $1,098
Visudyne(R) dermatology program 527 646 1,054 1,251
Others -- 93 546 647
------ ------ ------ ------
Contract research & development revenue $ 845 $1,272 $2,371 $2,996
====== ====== ====== ======
12. ACCRUED RESTRUCTURING CHARGE
In the fourth quarter of 2002, the Company restructured its operation to
reduce operating expenses and concentrate its resources on key product
development programs and business initiatives. The Company reduced its
overall headcount by 62 people or 17%. The Company provided affected
employees with severance and support to assist with outplacement. As a
result, the Company recorded a $2.9 million restructuring charge in the
fourth quarter of 2002 related to severance and termination costs. During
the quarter ended June 30, 2003, the Company reassessed its restructuring
reserve based on expected remaining cash outlays for severance, termination
benefits and other related costs, and accordingly reduced the reserve by
$0.4 million. At June 30, 2003, after restructuring payments of $2.1
million, and the $0.4 million reduction, the remaining accrued liability
relating to the restructuring was $0.4 million. The Company expects to
complete final activities associated with the restructuring in the second
half of 2003.
Details are as follows:
Reduction of
accrued
(In thousands of U.S. December 31, Cash March 31, restructuring June 30,
dollars) 2002 Payments 2003 Cash Payment charge 2003
------------ -------- --------- ------------ ------------- --------
Severance and termination
benefits accrued $ 1,981 $(1,517) $ 464 $ (197) $ -- $ 267
Other related expenses
accrued 650 (61) 589 (20) (394) 175
------- ------- ------- ------- ------- -------
$ 2,631 $(1,578) $ 1,053 $ (217) $ (394) $ 442
======= ======= ======= ======= ======= =======
The Company estimated that the restructuring will result in annual savings
of $4.4 million. For the three and six months ended June 30, 2003, the
Company realized savings of approximately $1.1 million and $2.2 million,
respectively.
13
13. SEGMENTED INFORMATION
Details of revenues and property and equipment by geographic segments are
as follows:
Revenues(1) Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
(In thousands of United States dollars) 2003 2002 2003 2002
------- ------- ------- -------
(Unaudited)
United States $21,767 $17,185 $40,851 $33,772
Europe 11,727 6,069 22,676 12,527
Canada 1,739 1,305 3,470 2,249
Other 776 97 1,983 250
------- ------- ------- -------
$36,009 $24,656 $68,980 $48,798
======= ======= ======= =======
Property and equipment June 30, December 31
(In thousands of United States dollars) 2003 2002
------- -----------
(Unaudited)
Canada $39,452 $34,608
United States 614 673
------- -------
$40,066 $35,281
======= =======
(1) Revenues are attributable to a geographic segment based on location of
the customer for Revenue from Visudyne and royalties on product sales,
and location of the head office of the funding entity in the case of
revenues from contract research and development and collaborative
arrangements.
14. CONTINGENCIES
(a) Litigation with MEEI
The First MEEI Lawsuit
On April 24, 2000, Massachusetts Eye and Ear Infirmary ("MEEI") filed a
civil suit against the Company in the United States District Court for the
District of Massachusetts seeking to establish exclusive rights for MEEI as
the owner of certain inventions relating to the use of verteporfin as the
photoactive agent in the treatment of certain eye diseases including Age
Related Macular Degeneration ("AMD"). During 2002 the Court granted summary
judgment in favor of QLT, dismissing all counts of MEEI's complaint against
the Company in this lawsuit.
The lawsuit (Civil Action No. 00-10783-JLT) relates, in part, to an ongoing
dispute involving U.S. Patent No. 5,798,349 (the "'349 Patent") which was
issued on August 25, 1998 to the Company, MEEI and Massachusetts General
Hospital ("MGH") as co-owners. The complaint alleged breach of contract,
misappropriation of trade secrets, conversion, misrepresentation, unjust
enrichment, unfair trade practices and related claims and asked that the
Court: (i) declare MEEI the owner of certain inventions claimed in the '349
Patent; (ii) enjoin the Company from infringement of those claims or any
action that would diminish the validity or value of such claims; (iii)
declare that the Company breached an agreement with MEEI to share equitably
in any proceeds derived as a result of collaboration leading to the '349
Patent; (iv) impose a constructive trust upon the Company for any benefit
that the Company has or will derive as a result of the '349 Patent; and (v)
award MEEI monetary relief for misappropriation of trade secrets in an
amount equal to the greater of MEEI's damages or the Company's profits from
any such misappropriation, and double or treble damages under Massachusetts
law.
The Company's counterclaim, filed in 2000 against MEEI and two employees of
MEEI, sought: (i) to correct inventorship on the '349 Patent by adding an
additional MGH researcher as a joint inventor; (ii) a declaration that the
Company and MGH are joint owners of the '349 Patent; (iii) a determination
that MEEI is liable to the Company for conversion and unfair trade
practices under Massachusetts law; (iv) an injunction to prohibit MEEI from
prosecuting any patent application claiming subject matter already claimed
in the '349 Patent; and (v) an award of damages and attorneys' fees.
14
In 2002, QLT moved for summary judgment against MEEI on all counts of
MEEI's complaint in Civil Action No. 00-10783-JLT. The Court granted QLT's
motions, thus dismissing all of MEEI's claims in this lawsuit. Final
judgment of dismissal was entered in April 2003. In May 2003, MEEI filed a
notice of appeal. With respect to QLT's counterclaim requesting correction
of inventorship of the '349 patent to add an additional MGH inventor, the
Court stayed the claim pending the outcome of Civil Action No.
01-10747-EFH, described below. QLT voluntarily dismissed the remainder of
its counterclaims in Civil Action No. 00-10783-JLT without prejudice in
April 2003.
The Second MEEI Lawsuit
On May 1, 2001, the United States Patent Office issued United States Patent
No. 6,225,303 (the "'303 Patent") to MEEI. The '303 Patent is derived from
the same patent family as the '349 Patent and claims a method of treating
unwanted choroidal neovasculature in a shortened treatment time using
verteporfin. The patent application which led to the issuance of the '303
patent was filed and prosecuted by attorneys for MEEI and, in contrast to
the '349 patent, named only MEEI researchers as inventors.
The same day the '303 patent was issued, MEEI commenced a second civil suit
against the Company and Novartis Ophthalmics, Inc. alleging infringement of
the '303 Patent (Civil Action No. 01-10747-EFH). The suit seeks damages and
injunctive relief for patent infringement and unjust enrichment. The
Company has answered the complaint, denying its material allegations and
raising a number of affirmative defenses, and has asserted counterclaims
against MEEI and the two MEEI researchers who are named as inventors on the
'303 patent. The Company's counterclaim seeks to correct inventorship of
the '303 patent by adding QLT and MGH researchers as joint inventors and
asks the court to declare that QLT and MGH are co-owners of the '303
patent. The counterclaim also requests a declaration that QLT does not
infringe, induce infringement, or contribute to infringement of the '303
patent, asserting, among other reasons, that QLT and MGH are rightful
co-owners of the patent and QLT has a license from MGH of MGH's
co-ownership rights under the patent. In addition, the counterclaim seeks a
declaratory judgment that the '303 patent is invalid and unenforceable.
Finally, the Company's counterclaim seeks an award of monetary damages for
breach of material transfer agreements governing MEEI's use of verteporfin,
based upon MEEI's failure to notify QLT of MEEI's intent to file the patent
application that led to the issuance of the '303 patent to MEEI.
In November 2001, MGH sought and was granted leave to intervene in the
action to protect its rights in the '303 patent. MGH's complaint in
intervention, like QLT's counterclaim, asks the court to correct
inventorship of the '303 patent by adding QLT and MGH researchers as joint
inventors of the inventions claimed in the patent and by declaring that MGH
is a joint owner of those inventions.
In April 2003, QLT moved to dismiss MEEI's Count II for unjust enrichment
on the grounds that this claim had been previously decided by a court. The
Court granted QLT's motion on May 28, 2003.
No trial has been scheduled in Civil Action No. 01-10747-EFH, and none is
expected until the first half of 2004 at the earliest.
The Company believes MEEI's claims in both lawsuits are without merit and
intends to vigorously defend against such actions and pursue its
counterclaims. The outcome of these disputes are not presently determinable
or estimatable and there can be no assurance that the matter will be
resolved in favor of the Company. If the lawsuits are not resolved in the
Company's favor, the Company may be obliged to pay damages, to pay an
additional royalty or damages for access to the inventions covered by
claims in issued U.S. patents, may be subject to such equitable relief as a
court may determine (which could include an injunction) or may be subject
to a remedy combining some or all of the foregoing.
(b) The Securities Class Action Lawsuit
In January and February, 2001, seven proposed securities class actions were
filed in the United States District Court for the Southern District of New
York on behalf of purchasers of the Company's common shares between August
1, 2000 and December 14, 2000. On May 3, 2001, the court ordered
consolidation of the seven actions.
The complaints name as defendants: the Company; Julia Levy, former
President, Chief Executive Officer and a current Director of the Company;
and Kenneth Galbraith, the Company's former Executive Vice President, Chief
15
Financial Officer and Corporate Secretary. The plaintiffs allege that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934.
The plaintiffs allege that on December 14, 2000, the Company announced that
it expected to miss its Visudyne sales estimates for the fourth-quarter
2000, and that in response, the Company's common share price dropped
approximately 31%. The plaintiffs claim that the Company's December 14,
2000 statements contradicted prior information issued by the defendants
concerning the demand for Visudyne and the Company's prospects. The
plaintiffs allege that the defendants overstated the demand for Visudyne,
did not properly disclose reimbursement issues relating to Visudyne and
that the defendants had no basis in the months preceding the December
announcement for their projections of fourth-quarter sales. The plaintiffs
further allege that the intent of the individual defendants to mislead
investors can be inferred from their sale of a substantial amount of the
Company's common shares during the months of August and September 2000. The
plaintiffs seek injunctive relief, fees and expenses and compensatory
damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without merit and
intends to vigorously defend against such claims. However, the outcome of
this claim is not presently determinable or estimatable and there can be no
assurance that the matter will be resolved in favor of the Company and the
other defendants. If the lawsuit is not resolved in the Company's favor,
there can be no guarantee that the Company's insurance will be sufficient
to pay for the damages awarded to the plaintiffs.
The effect of a negative judgment or likely loss with respect to one or
both of the above-mentioned claims, if any, will be recorded in the period
it becomes determinable.
15. SUBSEQUENT EVENTS
On August 11, 2003, the Company announced a private placement of $150
million aggregate principal amount of 3% convertible senior notes due 2023.
In connection with the financing, the initial purchasers of the notes were
granted, and subsequently gave notice of their intention to exercise in
full, an option to purchase an additional $22.5 million aggregate principal
amount of notes on the same terms. The notes will bear interest at 3% per
annum, payable semi-annually. The closing of the transaction is expected to
occur on August 15, 2003. Under certain circumstances, the convertible
senior notes will be convertible into common shares of the Company at an
initial conversion rate (subject to adjustment) of 56.1892 common shares
per $1,000 aggregate principal amount of notes. This results in an initial
conversion price of $17.80 per share, representing a conversion premium of
30% over the closing bid price of $13.69 of the Company's common shares on
the Nasdaq National Market on August 11, 2003.
Also on August 11, 2003, the Company announced a share buy-back program.
Commencing August 13, 2003 the Company intends to commence to purchase up
to $50 million of its common shares. The share purchases will be made as a
normal course issuer bid; the Company may purchase for cancellation up to a
maximum of 5,000,000 common shares, being approximately 7.32% of the public
float of 68,338,072 on August 11, 2003. All purchases will be effected in
the open market through the facilities of The Toronto Stock Exchange and
the Nasdaq National Market, in accordance with all regulatory requirements,
and will be effected during the period commencing August 13, 2003 and
ending August 12, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto, which are
prepared in accordance with generally accepted accounting principles ("GAAP") in
the United States ("U.S."). All amounts following are expressed in U.S. dollars
unless otherwise indicated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of financial conditions and results of
operations contains forward-looking statements of the Company, within the
meaning of the Private Securities Litigation Reform Act of 1995, which involve
known and unknown risks, uncertainties and other factors which may cause QLT's
actual results to differ materially from any future results, performance or
achievements expressed or implied by such statements. Forward-looking statements
include, but are not limited to, those with respect to: anticipated levels of
sales of Visudyne(R), including patient and
16
physician demand for Visudyne therapy; anticipated future operating results;
anticipated timing for and receipt of reimbursement approvals for Visudyne
therapy and other QLT products; the anticipated outcome of pending patent and
securities litigation against QLT; the anticipated timing and progress of
clinical trials; the anticipated timing of regulatory submissions for expanded
uses for Visudyne and for QLT's other products; and the anticipated outcome of
our applications for regulatory approvals for expanded uses for Visudyne and for
QLT's other products, the Company's expectation that the recently announced
convertible note offering will be successfully completed consistent with the
described terms, the Company's expectation that it will repurchase its common
shares, and statements with respect to our intentions to expand our pipeline
through strategic product or technology acquisitions. These statements are
predictions only and actual events or our actual results may differ materially.
Factors that could cause such actual events or our actual results to differ
materially from any future results expressed or implied by such forward-looking
statements include, but are not limited to, the ability and efforts of QLT's
alliance partner, Novartis Ophthalmics, to commercialize and market Visudyne,
the outcome of pending patent and securities litigation against QLT, QLT's
ability to maintain and expand its intellectual property position, the timing
and success of planned or existing clinical trials for Visudyne and for QLT's
other products; the outcome of QLT's applications for regulatory approvals for
expanded uses for Visudyne and for QLT's other products, completion of the
convertible note offering is subject to satisfaction of customary closing
conditions, our ability to fund share repurchases pursuant to the Company's
normal course issuer bid, the need to fund our operating activities, potential
acquisitions or investments in businesses, products or technologies, the
successful development or acquisition of complementary or supplementary products
or product candidates, technologies or businesses, as well as the risk factors
described below under the heading Liquidity and Capital Resources - General, and
under "Legal Proceedings", and in the sections outlined in the Company's most
recent Annual Report on Form 10-K under "Business - Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the "Notes to Consolidated Financial Statements".
OVERVIEW
The Company is a biopharmaceutical company engaged in the development and
commercialization of innovative products that address unmet medical needs. The
Company focuses on the areas of ophthalmology, oncology, dermatology and other
fields in which products can be marketed by a focused specialty sales and
marketing team. The Company is a pioneer in the field of photodynamic therapy
("PDT"). PDT is a minimally invasive medical procedure utilizing
photosensitizers (light-activated drugs) to treat a range of diseases associated
with rapidly growing tissue. Visudyne, the Company's commercial product, is a
photosensitizer for the treatment of wet age-related macular degeneration
("AMD"). Wet AMD is the leading cause of severe vision loss in people over the
age of 50 in North America and Europe. Visudyne is marketed through the
Company's alliance with Novartis Ophthalmics. The Company and Novartis
Ophthalmics are currently investigating the use of Visudyne in additional
ophthalmologic indications to expand the existing label. At the same time, the
Company is actively pursuing its development in multiple basal cell carcinoma
("MBCC"), a form of skin cancer. The Company is also pursuing the development of
other clinical candidates in the treatment of benign prostatic hyperplasia
("BPH"), a progressive condition that results from the excessive benign growth
of prostatic tissue, and androgenetic alopecia, or male pattern baldness.
In addition to our own research and development programs, the Company is
actively exploring opportunities to expand its product pipeline by identifying,
evaluating and acquiring rights to potential products and technologies developed
by third parties, beyond PDT and the field of ophthalmology. The Company also
intends to continue to explore strategic collaborations or acquisitions to
facilitate its development and commercialization efforts.
The Company operates in a single reportable segment. The Company's profitability
depends upon the commercial success of Visudyne in major markets worldwide and
the achievement of product development objectives. As of June 30, 2003, the
Company had an accumulated deficit of $30.2 million and total shareholders'
equity of $393.3 million.
DEVELOPMENTS DURING THE QUARTER
In May of 2003 the Company halted its Phase III clinical trials evaluating
tariquidar in combination with chemotherapy in non-small cell lung cancer
following a recommendation of the Data Safety and Monitoring Committee. The
Company also since halted further enrollment in the Phase II study evaluating
tariquidar in combination with chemotherapy in refractory breast cancer. The
Company has no plans for further development of tariquidar at this time.
17
In July of 2003, the Company entered into an agreement with Novartis
Ophthalmics, whereby the Company received back certain rights which it had
previously granted to Novartis Ophthalmics to develop and commercialize Visudyne
(verteporfin) in non-ocular indications. The Company now has full rights to
develop and commercialize Visudyne in multiple basal cell carcinoma ("MBCC") and
will now assume full responsibility for the conduct and funding of the Phase III
clinical trial of Visudyne (verteporfin) in MBCC.
On August 11, 2003, the Company announced a private placement of $150 million
aggregate principal amount of 3% convertible senior notes due 2023. In
connection with the financing, the initial purchasers of the notes were granted,
and subsequently gave notice of their intention to exercise in full, an option
to purchase an additional $22.5 million aggregate principal amount of notes on
the same terms. The notes will bear interest at 3% per annum, payable
semi-annually. The closing of the transaction is expected to occur on August 15,
2003. Under certain circumstances, the convertible senior notes will be
convertible into common shares of the Company at an initial conversion rate
(subject to adjustment) of 56.1892 common shares per $1,000 aggregate principal
amount of notes. This results in an initial conversion price of $17.80 per
share, representing a conversion premium of 30% over the closing bid price of
$13.69 of the Company's common shares on the Nasdaq National Market on August
11, 2003.
Also on August 11, 2003, the Company announced a share buy-back program.
Commencing August 13, 2003 the Company intends to commence to purchase up to $50
million of its common shares. The share purchases will be made as a normal
course issuer bid; the Company may purchase for cancellation up to a maximum of
5,000,000 common shares, being approximately 7.32% of the public float of 68,
338, 072 on August 11, 2003. All purchases will be effected in the open market
through the facilities of The Toronto Stock Exchange and the Nasdaq National
Market, in accordance with all regulatory requirements, and will be effected
during the period commencing August 13, 2003 and ending August 12, 2004.
CRITICAL ACCOUNTING POLICIES
In preparing the Company's consolidated financial statements, management is
required to make certain estimates, judgments and assumptions that the Company
believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Significant estimates are used for, but
not limited to, provisions for non-completion of inventory, assessment of the
net realizable value of long-lived assets, accruals for contract manufacturing
and research and development agreements, allocation of costs to manufacturing
under a standard costing system, taxes and contingencies. 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:
BASIS OF PRESENTATION
Effective December 31, 2002, the Company changed its primary accounting
principles from Canadian GAAP to U.S. GAAP in order to provide information on a
more comparable basis with the majority of the companies in the Company's peer
group. Consequently, the consolidated financial statements of the Company for
the three and six month periods ended June 30, 2003 have been prepared in
accordance with U.S. GAAP and for consistency, all prior period financial
statements and financial information are also prepared in accordance with U.S.
GAAP.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION
Effective December 31, 2002, the Company changed its reporting currency to the
U.S. dollar from the Canadian dollar. The consolidated financial statements of
the Company are translated into U.S. dollars using the current rate method.
Assets and liabilities are translated at the rate of exchange prevailing at the
balance sheet date. Shareholders' equity is translated at the applicable
historical rate. Revenue and expenses are translated at a weighted average rate
of exchange for the respective periods. Translation gains and losses are
included as part of the cumulative foreign currency translation adjustment which
is reported as a component of shareholders' equity under accumulated other
comprehensive income (loss).
The Company adopted the U.S. dollar as its reporting currency in order to
provide information on a more comparable basis with the majority of the
companies in the Company's peer group. The Company retained the Canadian dollar
as its functional currency.
18
The financial information for the three and six month periods ended June 30,
2002 is presented in U.S. dollars as if the U.S. dollar had been used as the
reporting currency during that period. As a result of the translation into U.S.
dollars for reporting purposes, Canadian dollar denominated balance sheet
balances are reflected at current exchange rates. At June 30, 2003, the increase
in the value of the Canadian dollar relative to the U.S. dollar since December
31, 2002, had the impact of increasing assets by $60.4 million, increasing
liabilities by $3.7 million, and increasing the cumulative translation
adjustment (other comprehensive income, in shareholders' equity) from $(25.3)
million at December 31, 2002 to $29.5 million at June 30, 2003. Fluctuations in
the exchange rate of U.S. dollars to Canadian dollars will impact the reported
value of the Company's assets, liabilities and other comprehensive income
(loss). A 1% increase in the value of the U.S. dollar relative to the Canadian
dollar would decrease the Company's reported assets at June 30, 2003 by $4.1
million, decrease liabilities by $0.2 million and decrease other comprehensive
income (loss) by $3.9 million.
REVENUE RECOGNITION
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, the Company is responsible for manufacturing and product supply and
Novartis Ophthalmics is responsible for sales, marketing and distribution of
Visudyne. Our agreement with Novartis Ophthalmics provides that the calculation
of total revenue for the sale of Visudyne be composed of three components: (1)
an advance on the cost of inventory sold to Novartis Ophthalmics, (2) an amount
equal to 50% of the profit that Novartis Ophthalmics derives from the sale of
Visudyne to end-users, and (3) the reimbursement of other specified costs
incurred and paid for by the Company. The Company recognizes revenue from the
sale of Visudyne when persuasive evidence of an arrangement exists, delivery to
Novartis has occurred, the end selling price of Visudyne is fixed or
determinable, and collectibility is reasonably assured. Under the calculation of
total revenues noted above, this occurs upon "sell through" to the end user.
COST OF SALES
Cost of sales, consisting of expenses related to the production of bulk Visudyne
sold to Novartis Ophthalmics, and royalties on Visudyne sales, are charged
against earnings in the period of the related product sale by Novartis
Ophthalmics to third parties. The Company utilizes a standard costing system,
which includes a reasonable allocation of overhead expenses, to account for
inventory and cost of sales, with adjustments being made periodically to reflect
current conditions. Overhead expenses comprise direct and indirect support
activities related to the manufacture of bulk Visudyne and involve costs
associated with activities such as quality inspection, quality assurance, supply
chain management, safety and regulatory. Overhead expenses are allocated to
inventory during each stage of the manufacturing process under a standard
costing system, and eventually to cost of sales as the related products are sold
by Novartis Ophthalmics to third parties. The Company records a provision for
the non-completion of product inventory based on its history of batch
completion.
STOCK-BASED COMPENSATION
In accordance with the provisions of SFAS No. 123 "Accounting for Stock-based
Compensation" ("SFAS 123"), the Company applies Accounting Principles Board
("APB") Opinion No. 25 and related interpretations in the accounting for
employee stock option plans. SFAS 123 requires that all stock-based awards made
to non-employees be measured and recognized using a fair value based method. The
standard encourages the use of a fair value based method for all awards granted
to employees, but only requires the use of a fair value based method for direct
awards of stock, stock appreciation rights, and awards that call for settlement
in cash or other assets. Estimates of fair value are determined using the
Black-Scholes model. The use of this model requires certain assumptions
regarding the volatility, term, and risk free interest rate experienced by the
holder. Awards that a company has the ability to settle in stock are recorded as
equity, whereas awards that the entity is required to settle or has a practice
of settling in cash are recorded as liabilities. The Company has adopted the
disclosure only provision for stock options granted to employees and directors,
consistent with SFAS 123.
RESEARCH AND DEVELOPMENT
Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with the
Company's various research and development programs. Overhead expenses comprise
general and administrative support provided to the research and development
programs and involve costs associated with support activities such as facility
maintenance, utilities, office services, information technology, legal,
accounting and human resources. Research and development costs are expensed as
incurred. Costs related to the acquisition of development rights for which no
alternative use exists are classified as research and development and expensed
as
19
incurred. Patent application, filing and defense costs are expensed as incurred
and included in general and administrative expenses.
INCOME TAXES
Income taxes are reported using the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards using applicable enacted tax rates. An
increase or decrease in these tax rates will increase or decrease the carrying
value of future net tax assets resulting in an increase or decrease to net
income. Income tax credits are included as part of provision for (recovery of)
income taxes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement provides guidance on
the recognition and measurement of liabilities associated with exit and disposal
activities. Under SFAS No. 146, liabilities for costs associated with exit or
disposal activities should be recognized when the liabilities are incurred and
measured at fair value. This statement is effective prospectively for exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS No.
146 did not have a material impact on the Company's consolidated financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies, relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. The initial recognition and
measurement provisions are effective for guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material impact on the
Company's financial position or its results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables should be divided into separate units of accounting if the
deliverables meet certain criteria, including whether the fair value of the
delivered items can be determined and whether there is evidence of fair value of
the undelivered items. In addition, the consideration should be allocated among
the separate units of accounting based on their fair values, and the applicable
revenue recognition criteria should be considered separately for each of the
separate units of accounting. The provision of Issue 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not believe that the adoption of Issue 00-21 will have a material
effect on its consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company's consolidated
financial statements currently comply with the disclosure requirements of SFAS
No. 148.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities". FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. A variable interest entity is
a corporation, partnership, trust, or any other legal structures used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not believe that the adoption of
Issue 00-21 will have a material effect on its consolidated financial position
or results of operations.
20
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), Amendment of
SFAS No. 133 on Derivative Instruments and Hedging Activities. The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In particular, it (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
the language used in FASB Interpretation No. 45, Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of others and (4) amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to existing contracts as well as new contracts entered into after June
30, 2003. SFAS No. 149 should be applied prospectively.
The Company will adopt the provisions of SFAS No. 149 for any contracts entered
into after June 30, 2003 and is not affected by Implementation Issues that would
require earlier adoption. The Company does not expect that the adoption of this
Statement will have a material impact on its results of operations and financial
position.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires that three types of financial instruments be reported as liabilities by
their issuers: (1) Mandatorily redeemable instruments; (2) Forward purchase
contracts, written put options, and other financial instruments not in the form
of shares that either obligate or may obligate the issuer to repurchase its
equity shares and settle its obligation for cash or by transferring other
assets; and (3) Certain financial instruments that include an obligation that
may be settled in a variable number of equity shares, has a fixed or benchmark
tied value at inception, and varies inversely with the fair value of the equity
shares. The provisions of SFAS 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. The Company has not
entered into or modified any of the above mentioned instruments after May 31,
2003, and will adopt the provision for pre-existing instruments beginning July
1, 2003. The Company does not expect that the adoption of this Statement will
have a material impact on its results of operations and financial position.
RESULTS OF OPERATIONS
For the three months ended June 30, 2003, the Company recorded net income of
$11.2 million, or $0.16 per common share as compared to $4.1 million, or $0.06
per common share for the three months ended June 30, 2002. Net income for the
six months ended June 30, 2003 was $22.7 million, or $0.33 per common share as
compared to $8.5 million, or $0.12 per common share for the six months ended
June 30, 2002.
REVENUES
REVENUE FROM VISUDYNE(R)
The Company's Revenue from Visudyne was determined as follows:
21
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
(In thousands) 2003 2002 2003 2002
--------- --------- --------- ---------
Visudyne(R) sales by Novartis Ophthalmics $ 89,206 $ 71,267 $ 171,260 $ 139,647
Less: Inventory and other costs (7,982) (5,958) (14,248) (11,595)
Less: Sales, marketing and distribution costs (26,433) (30,628) (53,524) (61,476)
--------- --------- --------- ---------
$ 54,791 $ 34,681 $ 103,488 $ 66,576
========= ========= ========= =========
QLT share of remaining revenue on final sale (50%) $ 27,395 $ 17,341 $ 51,744 $ 33,288
Add: Inventory costs reimbursed to QLT 4,293 3,323 8,133 6,448
Add: Other costs reimbursed to QLT 3,476 2,720 6,732 6,066
--------- --------- --------- ---------
Revenue from Visudyne(R) as reported by QLT $ 35,164 $ 23,384 $ 66,609 $ 45,802
========= ========= ========= =========
For the three months ended June 30, 2003, Revenue from Visudyne increased by 50%
over the three months ended June 30, 2002. This increase was primarily due to a
25% increase in Visudyne sales, which resulted primarily from higher market
penetration in markets outside the U.S. and favorable exchange rates. Favorable
exchange rates contributed 10 percentage points of the 25% growth in sales. In
addition, lower sales, marketing and distribution costs by Novartis Ophthalmics,
resulting from greater efficiency and a decline in advertising and promotion
spending, also contributed to the increase in the Company's Revenue from
Visudyne.
For the six months ended June 30, 2003, Revenue from Visudyne increased by 45%
over the six months ended June 30, 2002. This increase was primarily due to a
23% increase in Visudyne sales, which resulted primarily from higher market
penetration in markets outside the U.S. and favorable exchange rates. Favorable
exchange rates contributed 9 percentage points of the 23% growth in sales. In
addition, lower sales, marketing and distribution costs by Novartis Ophthalmics,
resulting from greater efficiency and a decline in advertising and promotion
spending, also contributed to the increase in the Company's Revenue from
Visudyne.
For the three and six month periods ended June 30, 2003, approximately 51% of
total Visudyne sales by Novartis Ophthalmics were in the United States, compared
to approximately 60% and 61% in the three and six month periods ended June 30,
2002, respectively.
CONTRACT RESEARCH AND DEVELOPMENT REVENUE
The Company receives non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners, which is recorded as contract
research and development revenue. For the three months ended June 30, 2003,
contract research and development revenue decreased 34% to $0.9 million,
compared to $1.3 million for the same period in 2002. For the six months ended
June 30, 2003, contract research and development revenue decreased 21% to $2.4
million, compared to $3.0 million for the same period in 2002. This decrease is
due mainly to Novartis Ophthalmics assuming a higher proportion of activities on
joint Visudyne programs with the Company.
COSTS AND EXPENSES
COST OF SALES
For the three months ended June 30, 2003, cost of sales increased 70% to $6.1
million compared to $3.6 million for the same period in 2002. Cost of sales for
the six months ended June 30, 2003, increased 34% to $11.5 million compared to
$8.6 million for the same period in 2002. These increases are due primarily to
an increase in Visudyne sales in 2003 and a $1.2 million reduction in the
provision related to non-completion of product inventory in the second quarter
of 2002.
RESEARCH AND DEVELOPMENT COSTS
Research and development ("R&D") expenditures increased 16% to $12.1 million for
the three months ended June 30, 2003, compared to $10.4 million for the three
months ended June 30, 2002. For the six months ended June 30, 2003, R&D
expenditures increased 22% to $23.0 million, compared to $18.9 million for the
same period in 2002. These
22
increases were largely attributable to costs associated with the Phase III
trials for tariquidar in non-small cell lung cancer ("NSCLC") and for Visudyne
in occult AMD. During the second quarter of 2003, the Company halted its Phase
III tariquidar trials. (See "OVERVIEW - Developments during the quarter",
above.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses include overhead expenses
associated with the manufacture of bulk Visudyne. For the three months ended
June 30, 2003, SG&A expenses decreased 30% to $3.4 million compared to $4.9
million for the same period in 2002. For the six months ended June 30, 2003,
SG&A expenses decreased 28% to $6.5 million, compared to $9.0 million for the
same period in 2002. These decreases were attributable to higher absorption of
overhead into inventory, lower legal and consulting fees, and savings from the
workforce reduction in the fourth quarter of fiscal 2002.
DEPRECIATION EXPENSE
Depreciation expense relates to the depreciation of property and equipment. For
the three months ended June 30, 2003, depreciation expense of $0.7 million was
comparable to $0.8 million for the three months ended June 30, 2002.
Depreciation expense of $1.5 million for the six months ended June 30, 2003 was
flat in comparison with $1.5 million for the six months ended June 30, 2002.
RESTRUCTURING
In the fourth quarter of fiscal 2002, the Company restructured its operations to
reduce operating expenses and concentrate its resources on key product
development programs and business initiatives. The Company reduced its overall
headcount by 62 people or 17%. The Company provided affected employees with
severance and support to assist with outplacement. As a result, the Company
recorded a $2.9 million restructuring charge in the fourth quarter of fiscal
2002 related to severance and termination costs. During the quarter the Company
reassessed its restructuring reserve based on expected remaining cash outlays
for severance, termination benefits and other related costs, and accordingly
reduced the reserve by $0.4 million. At June 30, 2003, after restructuring cash
payments of $2.1 million, and the $0.4 million reduction, the remaining accrued
liability relating to the restructuring was $0.4 million. The Company expects to
complete final activities associated with the restructuring in the second half
of 2003. The Company estimated that the restructuring will result in annual
savings of $4.4 million. For the three and six month periods ended June 30,
2003, the Company realized savings of approximately $1.1 million and $2.2
million, respectively.
INVESTMENT AND OTHER INCOME
NET FOREIGN EXCHANGE GAINS
Net foreign exchange gains comprise gains from the impact of foreign exchange
fluctuation on the Company's cash and cash equivalents, derivative financial
instruments, foreign currency receivables and foreign currency payables. For the
three months ended June 30, 2003, the Company recorded net foreign exchange
gains of $0.4 million versus net foreign exchange gains of $0.4 million in the
same period in 2002. Net foreign exchange gains for the six months ended June
30, 2003 were $2.9 million in comparison to $0.4 million for the same period in
2002. The gains in the three and six month periods ended June 30, 2003 were due
to gains on the Company's foreign currency derivative financial instruments
which more than offset losses on cash and foreign currency receivables and
payables. (See Liquidity and Capital Resources - Interest and Foreign Exchange
Rates)
Details of the Company's net foreign exchange gains are as follows:
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
------- ------- ------- -------
Cash and cash equivalents $ (929) $(1,521) $(1,565) $(1,762)
Foreign exchange contracts 3,141 1,913 7,263 2,113
Foreign currency receivables and
payables (1,831) (19) $(2,784) 82
------- ------- ------- -------
Net foreign exchange gains $ 381 $ 373 $ 2,914 $ 433
======= ======= ======= =======
23
INTEREST INCOME
For the three months ended June 30, 2003 interest income increased 91% to $2.0
million compared to $1.1 million for the same period in 2002. Interest income
for the six months ended June 30, 2003 was $3.6 million compared with $1.9
million for the six months ended June 30, 2002, representing an increase of 88%.
This increase was mainly a result of higher cash reserves, coupled with
increased yields on the Company's short-term investments. The Company's treasury
policy is focused on minimizing risk of loss of principal.
OUTLOOK FOR 2003
Based on recent sales results and current trends in Visudyne sales, the Company
announced, on July 23, 2003, that it has updated its forecast range of 2003
Visudyne sales from $320-335 million to a new range of $335-350 million, which
represents projected growth of 17% to 22% over 2002. The Company has also
updated its net income per common share forecast for 2003 to $0.50 to $0.60.
This update in net income per common share forecast reflects the new sales
forecast and incorporates the shift in timing and priorities of the Company's
development pipeline.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed operations, product development and capital
expenditures primarily through the Company's proceeds from the commercialization
of Visudyne, public and private sales of equity securities, licensing and
collaborative funding arrangements with strategic partners, and interest income.
At June 30, 2003, the Company had $268.5 million of available cash resources,
comprising cash, cash equivalents and short-term investment securities, all of
which were invested in liquid, investment-grade securities. On August 11, 2003,
the Company announced a private placement of $150 million aggregate principal
amount of 3% convertible senior notes due 2023. In connection with the
financing, the initial purchasers of the notes were granted, and subsequently
gave notice of their intention to exercise in full, an option to purchase an
additional $22.5 million aggregate principal amount of notes on the same terms.
Upon the completion of this private placement, which is scheduled for August 15,
2003, the Company's cash resources are expected to exceed $435 million. (See
"Developments during the quarter").
For the three months ended June 30, 2003, the Company generated $14.0 million of
cash from operations, $1.6 million from stock option exercises, and used $0.3
million in purchases of property and equipment. This compared with $5.9 million
generated from operations, $0.7 million from stock option exercises, and $0.3
million used in purchases of property and equipment in the same period in 2002.
Cash flow from operations for the three months ended June 30, 2003 increased
from the same period in 2002 as a result of increased net income ($7.0 million),
the utilization of previously benefited tax losses ($3.1 million), decrease in
other assets mostly as a result of lower levels of inventory in transit ($2.1
million), and increase in other accrued liabilities ($6.1 million) due to higher
accruals related to tariquidar clinical trials, manufacturing, and compensation,
offset by the increase in accounts receivable due to higher sales ($0.5
million), increase in inventory level during the quarter as compared to the same
period in 2002 ($3.4 million), and by a reduction in deferred revenue ($5.5
million) on lower levels of inventory held by Novartis for sale. In aggregate,
cash, cash equivalents and short-term investment securities increased by
approximately $36.2 million during the three months ended June 30, 2003. The
effect of changes in foreign exchange rates contributed $22.1 million to this
increase.
For the six months ended June 30, 2003, the Company generated $24.3 million of
cash from operations, $2.6 million from stock option exercises, and used $2.2
million in purchases of property and equipment. This compared with $16.0 million
generated from operations, $2.6 million from stock option exercises, and $1.0
million used in purchases of property and equipment in the same period in 2002.
Cash flow from operations for the six months ended June 30, 2003 increased from
the same period in 2002 as a result of increased net income ($14.2 million), the
utilization of previously benefited tax losses ($6.2 million), decrease in other
assets mostly as a result of lower levels of inventory in transit included in
other assets ($2.8 million), and a higher level of accrued liabilities ($3.8
million) as compared to 2002 when accruals were reduced due to the completion of
the Company's responsibility related to a clinical trial conducted for Axcan
Pharma Inc. This increase was offset by the increase in accounts receivable due
to higher sales ($2.6 million), increase in inventory level during the period as
compared to the same period in 2002 ($5.8 million), payment of severance and
other benefits to terminated employees in 2003 as part of the Company's
restructuring in the fourth quarter of 2002 ($2.0 million), and by a reduction
in deferred revenue ($10.2 million) on lower levels of inventory held by
Novartis for sale. In aggregate, cash, cash equivalents and short-term
investment securities increased by approximately $60.6 million during the six
months ended June 30, 2003. The effect of changes in foreign exchange rates
contributed $38.7 million to this increase.
24
INTEREST AND FOREIGN EXCHANGE RATES
The Company is exposed to market risk related to changes in interest and foreign
currency exchange rates, each of which could adversely affect the value of the
Company's current assets and liabilities. At June 30, 2003, the Company had an
investment portfolio consisting primarily of fixed interest rate Canadian dollar
securities with an average remaining maturity of approximately 49 days. If
market interest rates were to increase immediately and uniformly by 10% of
levels at June 30, 2003, the fair value of the portfolio would decline by an
immaterial amount. The Company believes that its results of operations and cash
flows would not be affected to any significant degree by a sudden change in
market interest rates relative to its investment portfolio, given the Company's
current ability to hold its fixed income investments until maturity.
The Company enters into foreign exchange contracts to manage exposures to
currency rate fluctuations related to its expected future net earnings and cash
flows. The net unrealized gain in respect of such foreign currency contracts, as
at June 30, 2003, was approximately $5.9 million.
At June 30, 2003, the Company had $268.5 million in cash and short-term
investments, primarily denominated in Canadian dollars with approximately $6.9
million denominated in U.S. dollars. If the U.S. dollar were to decrease in
value by 10% against the Canadian dollar, the Company's U.S. dollar denominated
cash and short-term investments will experience an unrealized foreign currency
translation loss of approximately $0.7 million. The Company purchases goods and
services primarily in Canadian dollars and earns a significant portion of its
revenues in U.S. dollars. Foreign exchange risk is also managed by satisfying
foreign denominated expenditures with cash flows or assets denominated in the
same currency.
LONG TERM OBLIGATIONS
The Company's material long-term obligations as of June 30, 2003 comprised the
Visudyne supply agreements with contract manufacturers, clinical and development
agreements, and operating lease commitments for office equipment. Details of
these commitments are described in the Company's 2002 Annual Report on Form 10-K
under the section "Liquidity and Capital Resources - Long Term Obligations".
The Company also has long-term obligations as part of its collaborative
arrangements with various strategic partners for research and development
purposes. The details of these collaborative arrangements are described in the
Company's 2002 Annual Report on Form 10-K under the section "Costs and Expenses
- - Research and Development".
The Company will also have long term obligations in respect of its private
placement of convertible senior notes. On August 11, 2003, the Company announced
a private placement of $150 million aggregate principal amount of 3% convertible
senior notes due 2023. In connection with the financing, the initial purchasers
of the notes were granted, and subsequently gave notice of their intention to
exercise in full, an option to purchase an additional $22.5 million aggregate
principal amount of notes on the same terms. The notes will bear interest at 3%
per annum, payable semi-annually. The closing of the transaction is expected to
occur on August 15, 2003. Under certain circumstances, the convertible senior
notes will be convertible into common shares of the Company at an initial
conversion rate (subject to adjustment) of 56.1892 common shares per $1,000
aggregate principal amount of notes. This results in an initial conversion price
of $17.80 per share, representing a conversion premium of 30% over the closing
bid price of $13.69 of the Company's common shares on the Nasdaq National Market
on August 11, 2003. On or after September 15, 2008, the Company may at its
option redeem the notes, in whole or in part, for cash at a redemption price
equal to 100% of the principal amount of the notes to be redeemed, plus any
accrued and unpaid interest to, but excluding, the redemption date. The Company
will also have the option at any time to redeem for cash all, but not less than
all, of the notes at 100% of their principal amount, plus any accrued and unpaid
interest to, but excluding, the redemption date, in the event of certain changes
to Canadian withholding tax requirements. On each of September 15, 2008, 2013
and 2018, holders of the notes may require the Company to purchase all or a
portion of their notes for cash at a purchase price equal to 100% of the
principal amount of the notes, plus accrued and unpaid interest to, but
excluding that date. On certain events, such as a change in control or
termination of trading, holders of the notes may require the Company to
repurchase all or a portion of their notes for cash at a price equal to the
principal amount plus accrued unpaid interest to, but excluding, the repurchase
date. The notes also become immediately due and payable upon certain events of
default by the Company.
GENERAL
The Company believes that its available cash resources and working capital, and
its cash generating capabilities, should be more than sufficient to satisfy the
funding of product development programs, and other operating and capital
requirements for the reasonably foreseeable future. Depending on the overall
structure of current and future strategic alliances, the Company may have
additional capital requirements related to the further development, marketing
and distribution of existing or future products.
The Company's working capital and capital requirements will depend upon numerous
factors, including: the progress of the Company's preclinical and clinical
testing; fluctuating or increasing manufacturing requirements and R&D programs;
the timing and cost of obtaining regulatory approvals; the levels of resources
that the Company devotes to the development of manufacturing, marketing and
support capabilities; technological advances; the status of competitors; the
cost of filing, prosecuting and enforcing the Company's patent claims and other
intellectual property rights; the ability of the Company to establish
collaborative arrangements with other organizations; and the outcome of legal
proceedings.
The Company may require additional capital in the future to fund clinical and
product development costs for certain product applications or other technology
opportunities, and strategic acquisitions of products, product candidates,
technologies or other businesses. Accordingly, the Company may seek funding from
a combination of sources, including product licensing, joint development and new
collaborative arrangements, additional equity and debt financing or from other
sources. No assurance can be given that additional funding will be available or,
if available, on terms acceptable to the Company. If adequate capital is not
available, the Company's business can be materially and adversely affected.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed in filings made pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Our principal executive and financial
officers have evaluated our disclosure controls and procedures as of the end of
the period covered by this report and have determined that such disclosure
controls and procedures are effective. No changes were made to the Company's
internal controls over financial reporting in connection with this evaluation
that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
26
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in Note 13 to
the unaudited consolidated financial statements, "Contingencies". While the
Company believes these proceedings are without merit and intends to vigorously
defend against these claims, it is impossible to predict accurately or determine
the eventual outcome of these proceedings.
MEEI LITIGATION
(a) The First MEEI Lawsuit
On April 24, 2000, Massachusetts Eye and Ear Infirmary ("MEEI") filed a civil
suit against the Company in the United States District Court for the District of
Massachusetts seeking to establish exclusive rights for MEEI as the owner of
certain inventions relating to the use of verteporfin as the photoactive agent
in the treatment of certain eye diseases including Age Related Macular
Degeneration ("AMD"). During 2002 the Court granted summary judgment in favor of
QLT, dismissing all counts of MEEI's complaint against the Company in this
lawsuit.
The lawsuit (Civil Action No. 00-10783-JLT) relates, in part, to an ongoing
dispute involving U.S. Patent No. 5,798,349 (the " '349 Patent") which was
issued on August 25, 1998 to the Company, MEEI and Massachusetts General
Hospital ("MGH") as co-owners. The complaint alleged breach of contract,
misappropriation of trade secrets, conversion, misrepresentation, unjust
enrichment, unfair trade practices and related claims and asked that the Court:
(i) declare MEEI the owner of certain inventions claimed in the '349 Patent;
(ii) enjoin the Company from infringement of those claims or any action that
would diminish the validity or value of such claims; (iii) declare that the
Company breached an agreement with MEEI to share equitably in any proceeds
derived as a result of collaboration leading to the '349 Patent; (iv) impose a
constructive trust upon the Company for any benefit that the Company has or will
derive as a result of the '349 Patent; and (v) award MEEI monetary relief for
misappropriation of trade secrets in an amount equal to the greater of MEEI's
damages or the Company's profits from any such misappropriation, and double or
treble damages under Massachusetts law.
The Company's counterclaim, filed in 2000 against MEEI and two employees of
MEEI, sought: (i) to correct inventorship on the '349 Patent by adding an
additional MGH researcher as a joint inventor; (ii) a declaration that the
Company and MGH are joint owners of the '349 Patent; (iii) a determination that
MEEI is liable to the Company for conversion and unfair trade practices under
Massachusetts law; (iv) an injunction to prohibit MEEI from prosecuting any
patent application claiming subject matter already claimed in the '349 Patent;
and (v) an award of damages and attorneys' fees.
In 2002, QLT moved for summary judgment against MEEI on all counts of MEEI's
complaint in Civil Action No. 00-10783-JLT. The Court granted QLT's motions,
thus dismissing all of MEEI's claims in this lawsuit. Final judgment of
dismissal was entered in April 2003. In May 2003, MEEI filed a notice of appeal.
With respect to QLT's counterclaim requesting correction of inventorship of the
'349 patent to add an additional MGH inventor, the Court stayed the claim
pending the outcome of Civil Action No. 01-10747-EFH, described below. QLT
voluntarily dismissed the remainder of its counterclaims in Civil Action No.
00-10783-JLT without prejudice in April 2003.
(b) The Second MEEI Lawsuit
On May 1, 2001, the United States Patent Office issued United States Patent No.
6,225,303 (the "'303 Patent") to MEEI. The '303 Patent is derived from the same
patent family as the '349 Patent and claims a method of treating unwanted
choroidal neovasculature in a shortened treatment time using verteporfin. The
patent application which led to the issuance of the '303 patent was filed and
prosecuted by attorneys for MEEI and, in contrast to the '349 patent, named only
MEEI researchers as inventors.
The same day the '303 patent was issued, MEEI commenced a second civil suit
against the Company and Novartis Ophthalmics, Inc. alleging infringement of the
'303 Patent (Civil Action No. 01-10747-EFH). The suit seeks damages and
injunctive relief for patent infringement and unjust enrichment. The Company has
answered the complaint, denying its material allegations and raising a number of
affirmative defenses, and has asserted counterclaims against MEEI and the two
MEEI researchers who are named as inventors on the '303 patent. The Company's
counterclaim seeks to correct inventorship of the '303 patent by adding QLT and
MGH researchers as joint inventors and asks the court to
27
declare that QLT and MGH are co-owners of the '303 patent. The counterclaim also
requests a declaration that QLT does not infringe, induce infringement, or
contribute to infringement of the '303 patent, asserting, among other reasons,
that QLT and MGH are rightful co-owners of the patent and QLT has a license from
MGH of MGH's co-ownership rights under the patent. In addition, the counterclaim
seeks a declaratory judgment that the '303 patent is invalid and unenforceable.
Finally, the Company's counterclaim seeks an award of monetary damages for
breach of material transfer agreements governing MEEI's use of verteporfin,
based upon MEEI's failure to notify QLT of MEEI's intent to file the patent
application that led to the issuance of the '303 patent to MEEI.
In November 2001, MGH sought and was granted leave to intervene in the action to
protect its rights in the '303 patent. MGH's complaint in intervention, like
QLT's counterclaim, asks the court to correct inventorship of the '303 patent by
adding QLT and MGH researchers as joint inventors of the inventions claimed in
the patent and by declaring that MGH is a joint owner of those inventions.
In April 2003, QLT moved to dismiss MEEI's Count II for unjust enrichment on the
grounds that this claim has been previously decided by a court. The Court
granted QLT's motion on May 28, 2003.
No trial has been scheduled in Civil Action No. 01-10747-EFH, and none is
expected until the first half of 2004 at the earliest.
The Company believes MEEI's claims in both lawsuits are without merit and
intends to vigorously defend against such actions and pursue its counterclaims.
The outcome of these disputes are not presently determinable or estimatable and
there can be no assurance that the matter will be resolved in favor of the
Company. If the lawsuits are not resolved in the Company's favor, the Company
may be obliged to pay damages, to pay an additional royalty or damages for
access to the inventions covered by claims in issued U.S. patents, may be
subject to such equitable relief as a court may determine (which could include
an injunction) or may be subject to a remedy combining some or all of the
foregoing.
SECURITIES CLASS ACTION LAWSUIT
In January and February 2001, seven proposed securities class actions were filed
in the United States District Court for the Southern District of New York on
behalf of purchasers of the Company's common shares between August 1, 2000 and
December 14, 2000. On May 3, 2001, the court ordered consolidation of the seven
actions.
The complaints name as defendants: the Company; Julia Levy, former President,
Chief Executive Officer and a current Director of the Company; and Kenneth
Galbraith, the Company's former Executive Vice President, Chief Financial
Officer and Corporate Secretary. The plaintiffs allege that the defendants
violated Sections 10(b) and 20(a) of the Exchange Act.
The plaintiffs allege that on December 14, 2000, the Company announced that it
expected to miss its Visudyne sales estimates for the fourth quarter 2000, and
that in response, the Company's common share price dropped approximately 31%.
The plaintiffs claim that the Company's December 14, 2000 statements
contradicted prior information issued by the defendants concerning the demand
for Visudyne and the Company's prospects. The plaintiffs allege that the
defendants overstated the demand for Visudyne, did not properly disclose
reimbursement issues relating to Visudyne and that the defendants had no basis
in the months preceding the December announcement for their projections of
fourth-quarter sales. The plaintiffs further allege that the intent of the
individual defendants to mislead investors can be inferred from their sale of a
substantial amount of the Company's common shares during the months of August
and September 2000. The plaintiffs seek injunctive relief, fees and expenses and
compensatory damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without merit and intends
to vigorously defend against such claims. However, the outcome of this claim is
not presently determinable or estimable and there can be no assurance that the
matter will be resolved in favor of the Company and the other defendants. If the
lawsuit is not resolved in the Company's favor, there can be no guarantee that
the Company's insurance will be sufficient to pay for the damages awarded to the
plaintiffs.
28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company (the "Meeting") was
held on May 22, 2003. All nominees to the Board of Directors identified
and described in the Company's proxy circular and proxy statement dated
April 17, 2003 were elected at the Meeting. The resolutions voted on at
the Meeting, and the outcome, was as follows:
(i) to appoint Deloitte & Touche LLP as independent auditors for the
Company for the ensuing year and to authorize the Directors to fix the
remuneration to be paid to the auditors.
The proxies received by the Company for the Meeting and votes cast at
the Meeting, were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For Shares Against Shares Withheld Abstentions Broker Non-Votes
---------- -------------- --------------- ----------- ----------------
36,114,009 0 18,883 0 0
(ii) to fix the number of Directors for the ensuing year at seven.
The proxies received by the Company for the Meeting and votes cast at
the Meeting were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For Shares Against Shares Withheld Abstentions Broker Non-Votes
---------- -------------- --------------- ----------- ----------------
36,107,573 15,839 0 0 0
(iii) to elect Directors for the ensuing year.
The proxies received by the Company for the Meeting and votes cast at
the Meeting were voted as follows on the resolution electing the seven
directors, and each of the directors was declared elected:
Directors Shares For Shares Against Shares Withheld Abstentions
--------- ---------- -------------- --------------- -----------
E. Duff Scott 36,109,107 0 29,122 0
Paul J. Hastings 34,118,227 0 2,020,002 0
Julia G. Levy 36,109,642 0 28,587 0
Peter A. Crossgrove 36,105,767 0 32,462 0
Ronald D. Henriksen 36,107,857 0 30,372 0
Alan C. Mendelson 36,106,057 0 32,172 0
Jack L. Wood 36,107,107 0 32,122 0
There were no broker non-votes with respect to the foregoing resolution
on the election of directors.
ITEM 5. OTHER INFORMATION
None
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.77 Amending agreement between Novartis Ophthalmics, a division
of Novartis Pharma AG (formerly Novartis Ophthalmics AG) and
QLT Inc. dated as of May 31, 2003.
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
(i) On April 15, 2003, the Company reported, under "Item 5 - Other
Events", the at its alliance partner, Novartis, announced
global Visudyne (verteporfin) sales of approximately US$82.1
million for the quarter ended March 31, 2003. This represents
an increase of 20% over sales in the first quarter of 2002.
(ii) On April 24, 2003, pursuant to Securities and Exchange
Commission Release No. 33-8216 dated March 27, 2003, and
pursuant to Item 12, "Disclosure of Results of Operations and
Financial Conditions", the Company furnished its financial
results for the quarter ended March 31, 2003. The full text of
the press release announcing the Company's financial results
for the quarter ended March 31, 2003 was filed as Exhibit 99.4
to this Current Report on Form 8-K.
(iii) On May 6, 2003, the Company reported, under "Item 5 - Other
Events", that new data presented at the Association for
Research in Vision and Ophthalmology annual meeting suggested
that Visudyne therapy reduces the risk of vision loss in wet
age-related macular degeneration (AMD) patients with minimally
classic lesions, a form of wet AMD previously considered
untreatable.
(iv) On May 9, 2003, pursuant to Securities and Exchange Commission
Release No. 33-8216 dated March 27, 2003, and pursuant to Item
12, "Disclosure of Results of Operations and Financial
Conditions", the Company furnished Condensed Consolidated
Statements of Income Data Reconciliation for the three month
periods ending March 31, June 30, September 30 and December
31, 2002, presenting such information in U.S. dollars and in
accordance with U.S. GAAP.
(v) On May 12, 2003, the Company reported, under "Item 5 - Other
Events", that it will discontinue its two Phase III trials of
tariquidar in the treatment of non-small cell lung cancer,
following a recommendation of the independent Data Safety and
Monitoring Committee which completed the interim analysis of
unblinded data for both trials.
(vi) On May 20, 2003, the Company reported, under "Item 5 - Other
Events", that it strengthened its development organization
with the addition of Maurice Wolin, MD, as Vice President,
Clinical Research and Medical Affairs. Dr. Wolin will report
to Mohammad Azab, MD, who has been promoted to Executive Vice
President, Research and Chief Medical Officer.
30
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.
QLT INC.
------------------------------------------
(Registrant)
Date: August 14, 2003 By: /s/ Paul J. Hastings
-------------------- -------------------------------------
Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2003 By: /s/ Michael J. Doty
-------------------- -------------------------------------
Michael J. Doty
Senior Vice-President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.77 Amending agreement between Novartis Ophthalmics, a division of
Novartis Pharma AG (formerly Novartis Ophthalmics AG) and QLT Inc.
dated as of May 31, 2003
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
32