Item 6. Directors,
Senior Management and Employees
A. Directors and senior management.
The following table sets
forth information about our directors and senior officers as of March 7,
2008.
Name and Place of Residence
|
|
Position
with Aeterna Zentaris
|
|
|
|
Marcel Aubut
|
|
Director
|
Quebec, Canada
|
|
|
|
|
|
Paul Blake
|
|
Senior Vice President and
Chief Medical Officer
|
Pennsylvania, U.S.A.
|
|
|
|
|
|
Martha Byorum
|
|
Director
|
New York, U.S.A.
|
|
|
|
|
|
José
P. Dorais
|
|
Director
|
Quebec,
Canada
|
|
|
|
|
|
Jürgen Engel
|
|
Executive Vice President
and Chief Scientific Officer
|
Frankfurt, Germany
|
|
and Director
|
|
|
|
Juergen Ernst
|
|
Chairman of the Board and
Director
|
Brussels,
Belgium
|
|
|
|
|
|
Pierre
Laurin
|
|
Director
|
Quebec,
Canada
|
|
|
|
|
|
Gérard Limoges
|
|
Director
|
Quebec, Canada
|
|
|
|
|
|
Pierre MacDonald
|
|
Director
|
Quebec, Canada
|
|
|
|
|
|
Ellen McDonald
|
|
Senior Vice President,
Business Operations and
|
New Jersey, U.S.A.
|
|
Chief Business Officer
|
|
|
|
Gerald J. Martin
|
|
Director
|
California, U.S.A.
|
|
|
|
|
|
David J. Mazzo
|
|
President and Chief
Executive Officer and Director
|
New Jersey, U.S.A.
|
|
|
|
|
|
Mario Paradis
|
|
Senior Vice President,
Administrative and Legal
|
Quebec, Canada
|
|
Affairs and Corporate
Secretary
|
|
|
|
Nicholas Pelliccione
|
|
Senior Vice President,
Regulatory Affairs and
|
New York, U.S.A.
|
|
Quality Assurance
|
|
|
|
Dennis Turpin
|
|
Senior Vice President and
Chief Financial Officer
|
New Jersey, U.S.A.
|
|
|
60
The following is a brief
biography of each of our directors and senior officers.
Marcel Aubut
has served as a director on our Board
since 1996.
A key figure in Canadian
business and an icon in the world of sports, Marcel Aubut, O.C., O.Q., Q.C.,
has been a corporate lawyer for more than thirty years. A partner with Heenan
Blaikie Aubut, he is a member of the firms National Management Committee and
its Executive Committee. In 1983, Mr. Aubut founded the firm of Aubut
Chabot. He was President and Chief Executive Officer of
Productions Trans-Amérique Ltée
, as well
as founding president and chief executive officer of
Parc technologique du Québec métropolitain
. Many companies
have called on Mr. Aubut to be a director, including such high-profile
ones as Atomic Energy Canada, Cinar, Hydro-Québec, The Laurentian Group,
Investors Group of Mutual Funds, Sodic Québec Inc., International Continental
Insurers Ltd, the National Hockey League Pension Society, Cabano Transport,
Desmarais et Frères, La Fondation Nordiques and Purolator Courier.
Paul Blake
was appointed as our Senior Vice President
and Chief Medical Officer on August 5, 2007. Prior to joining us, Dr. Blake
was Chief Medical Officer of Avigenics, Inc. since January 2007. In
2005, he was Senior Vice President, Clinical Research and Regulatory Affairs at
Cephalon, Inc. before being promoted to Executive Vice President,
Worldwide Medical & Regulatory Operations. From 1992 to 1998, he held
the position of Senior Vice President and Medical Director, Clinical Research
and Development at SmithKline Beecham Pharmaceuticals (now GSK). Dr. Blake
earned a medical degree from the London University, Royal Free Hospital. He was
elected Fellow of the American College of Clinical Pharmacology, Fellow of the
Faculty of Pharmaceutical Medicine, Royal College of Physicians in the UK, and
is a Fellow of the Royal College of Physicians in the UK.
Martha
Byorum
has served as a director on our Board since 2001. Ms. Byorum
is currently Senior Managing Director of Stephens Cori Capital Advisors, a
division of Stephens, Inc., U.S.-based investment bank and financial
services company. Before 1996, Ms. Byorum held various positions at
Citicorp. Ms. Byorum holds a Masters of Business Administration (MBA)
degree from the University of Pennsylvania.
José P. Dorais
has
served as a director on our Board since 2006. Mr. Dorais is a partner of
the firm of Miller Thomson Pouliot LLP where he mainly practices
administrative, corporate, business and international trade law. Over his
35-year career, he has worked in both the private and public sectors; in the
latter he acted as Secretary to the Minister of Justice and as Secretary of the
consulting committee on the Free Trade Agreement for the Quebec Provincial
Government. Mr. Dorais has been a member of numerous Boards, including the
Société des Alcools du Québec, Biochem Pharma and St-Luc Hospital in Montreal.
He holds a law degree from the University of Ottawa and is a member of the
Quebec Bar.
Jürgen
Engel
was appointed Senior Vice President and became a
director on our Board in 2003. Dr. Engel
has been Chief Executive Officer of Zentaris GmbH since the beginning of 2001.
Before that, he was in charge of all research activities of ASTA Medica AG,
after having held several executive positions within that company, including
Director of Research Coordination and Director of the Medical Chemical
Department. Over a period of 25 years, he has supervised more than 700
scientists and clinical professionals. Dr. Engel holds a doctorate in
organic chemistry and is an adjunct full professor at Regensburg University,
School of Pharmacy. He is also honorary professor at the Dresden Technical
University. In 1995, he received the Galenus-von-Pergamon prize for having
developed alkylphospholipids as a new class of anti-tumor agents. Dr. Engel
is the author of more than 250 scientific articles, several books and has
applied for more than 100 patent applications.
Juergen
Ernst
was appointed Chairman of the Board of Director on August 13,
2007 and has served as a director on our Board since 2005. A seasoned executive
with more than 20 years of pharmaceutical industry expertise mainly in the
field of corporate development and pharmaceutical product marketing, Mr. Ernst
was worldwide General Manager, Pharmaceutical Sector of Solvay S.A., before
retiring in 2004.
Pierre
Laurin
has served as a director on our Board
since 1998, Mr. Laurin has
been Director of the Hautes Études Commerciales Business School in Montreal
since January 1999. He was elected Chairman of the Board of
Directors of our former subsidiary, Atrium, in February 2001. From
1969 to 1982, Mr. Laurin held successively the positions of teacher and
General Manager with the Hautes Études Commerciales. Since then, he has
acted as Vice President, General Manager, Planning and Administration for
Alcan. During this term, he was the founding President and CEO of Soccrent, a
venture capital firm in Saguenay-Lac-St-Jean. He has also spent 13 years
as Vice Chairman of the Board and President for Quebec of Merrill Lynch. Mr. Laurin
is a member of several boards of
61
directors
of corporations including Quebecor Inc., Microcell Telecommunications Inc.,
Æterna Zentaris and the Fondation J.-Armand Bombardier. Mr. Laurin
holds a PhD degree in business from Harvard University, a Licence ès Sciences
Commerciales from the Hautes Études Commerciales Business School, and Bachelors
degree ès Art from the Séminaire de Philosophie de Montréal. He also
holds a Doctorate Honoris Causa from Concordia University.
Gérard
Limoges
has served as a director on our Board since 2004. Mr. Limoges
served as the Deputy Chairman of Ernst & Young LLP Canada until his retirement
in September 1999. After a career of 37 years with Ernst & Young,
Mr. Limoges has been devoting his time as a director of a number of
companies. Mr. Limoges began his career with Ernst & Young in
Montreal in 1962. After graduating from the Management Faculty of Université de
Montréal (HEC Montréal) in 1966, he became a chartered accountant and partner
of Ernst & Young in 1971.
Pierre MacDonald
has served as a
director on our Board since 2000. From
1974 until 1977, Mr. MacDonald was Vice President of James Bay Energy
Corporation where he was responsible for administration, finance, internal
audit and information systems. He subsequently was the Senior Vice President
for Eastern Canada for Bank of Montreal, a position which involved the review
and evaluation of the financial statements and creditworthiness of borrowers in
a wide variety of industries. He then became Vice Chairman of the Treasury
Board of the Government of Quebec. Mr. MacDonald served as the Chairman of
the Audit Committee of Teleglobe Inc. for six years. He recently completed a
term of six years as Chairman of the Risk Management Committee and member of
the Audit Committee of the Export Development Corporation. Mr. MacDonald
received Bachelor of Arts, Bachelor of Commerce and Masters of Commerce degrees
from Laval University in Quebec.
Gerald J. Martin
has served as a
director on our Board since 2006. F
ormer Vice President, Corporate Licensing and
Technology Alliances at Abbott Laboratories, Mr. Martin is currently Board
Member of Life Sciences Information Technology Global Institute, a
not-for-profit public benefit corporation chartered to identify and develop
Good Informatics Practices (GIP) with a focus on the establishment of GIP in
drug development. Until recently, he was Chairman of the Board of Milkahaus
Laboratory based in Providence, Rhode Island, a biotechnology company
specialized mainly in male health. During his career in the biopharmaceutical
and pharmaceutical sectors, Mr. Martin, in addition to his general
management functions, developed a strong expertise in sales and marketing,
business development, as well as in clinical development.
Ellen McDonald
was appointed our Senior Vice President,
Business Operations and Chief Business Officer on May 2, 2007. Ms. McDonald
has 18 years experience in the biopharmaceutical industry. She is a proven
executive with broad technical and managerial skills. As former Senior Vice
President, Business Operations at Chugai Pharma U.S.A., Ms. McDonald led
all company business operations with specific responsibility and focus on
Business Development, Finance, Marketing, and Corporate Planning. From 2005
until 2007, Ms. McDonald was
Senior Vice President, Cardiovascular Marketing and Medical at Bristol Myers
Squibb and held positions of increasing responsibilities within the Johnson and
Johnson, Inc. pharmaceutical sector. Her last position at J&J was Vice
President, Oncology Franchise at Ortho Biotech, Inc. Ms. McDonald
holds a B.S. in General Engineering with a minor in International Relations
from the United States Military Academy, West Point New York and an MBA,
Executive Program from Columbia University, New York.
David J. Mazzo
was appointed our President and Chief Executive Officer on March 27,
2007 and was appointed to our Board on August 14, 2007. Prior to joining
Æterna Zentaris, Dr. Mazzo spent more than 20 years in the
pharmaceutical industry, and he previously served as President and CEO of
Chugai Pharma U.S.A. from April 2003 until March 2007. He also held
positions of increasing responsibility with Merck, Baxter, Rhône-Poulenc Rorer,
Hoechst Marion Roussel and Schering-Plough. Dr. Mazzo holds a B.A. in
Honors (Interdisciplinary Humanities) and a B.S. in Chemistry from Villanova
University, as well as an M.S. in Chemistry and a Ph.D. in Analytical Chemistry
from the University of Massachusetts (Amherst). He further complemented his
American education as a Research Fellow at the Ecole Polytechnique Fédérale de
Lausanne, Switzerland.
Mario Paradis
was appointed Senior Vice President, administration and Legal affairs on
May 2, 2007. Mr. Paradis joined Æterna Zentaris in June 1999 as
Director of Finance. He then acted as our Senior Director, Finance and
Corporate Secretary before being appointed Vice President, Finance &
Administration and Corporate Secretary in 2006. Mr. Paradis was a Senior
Director at PricewaterhouseCoopers within the Audit and Assurance Group. Mr. Paradis
earned his Bachelors degree in Accounting from the Université du Québec à
Trois-Rivières.
62
On February 29, 2008, we announced that Mr. Paradis
would be resigning as Senior Vice President, Administrative and Legal Affairs,
and Corporate Secretary effective April 4, 2008.
Nicholas J. Pellicionne
was appointed our Senior Vice President,
Regulatory Affairs and Quality Assurance on May 7, 2007. Dr. Pelliccione
has demonstrated the ability to be a multi-faceted leader in the areas of
global Regulatory Affairs, Quality Assurance and Pharmaceutical Development for
more than 20 years. In previous roles, Dr. Pelliccione has been
responsible for the clinical/preclinical and CMC regulatory aspects of new
drugs in the oncology, anti-infectives, cytokines and cardiovascular therapy
areas, leading to several approvals. He also served as Senior Vice President,
Regulatory and Pharmaceutical Sciences at Chugai Pharma U.S.A. Prior to his
experience at Chugai, Dr. Pelliccione spent more than 15 years at Schering
Plough Corporation holding positions with increasing responsibility from Manager
of Regulatory Affairs, Oncology to, prior to his departure, Vice President,
Global Regulatory Affairs, Chemistry, Manufacturing and Controls. Dr. Pelliccione
holds a Ph.D. in Biochemistry from Mount Sinai School of Medicine, New York and
a BS in Chemistry from Polytechnic University.
Dennis Turpin
was appointed our Senior Vice President and
Chief Financial Officer on August 16, 2007. Mr. Turpin joined Æterna
Zentaris in August 1996 as Director of Finance. Prior to that, he was
Director in the tax department at Coopers Lybrand, now PricewaterhouseCoopers,
from 1988 to 1996 and worked as an auditor from 1985 to 1988. Mr. Turpin
earned his Bachelors degree in Accounting from Laval University in Quebec.
B. Compensation.
A.
Compensation of Outside Directors
The following
describes the compensation paid to the members of the Corporations Board and
committees up until December 31, 2007. Each outside director received an
annual base remuneration of C$25,000. In December 2007, the Corporation
also granted to each of its outside directors options to purchase 25,000 Common
Shares that will vest over a period of three years. The outside directors also
received an attendance fee of C$2,000 for each Board and committee meeting
attended and a daily compensation of C$1,500 for special work designated by the
Board of Directors, if any. Attendance fees are reduced to C$1,000 per meeting
for a director participating in a Board or committee meeting by telephone,
teleconference or any other telecommunications device. The Chairman of the
Board and the Chairs of the Audit Committee and the Corporate Governance,
Nominating and Human Resources Committee receive additional annual retainers of
C$50,000, C$20,000 and C$15,000, respectively. The committee members received
an additional annual base remuneration of C$5,000 for the Audit Committee and
C$2,500 for the Corporate Governance, Nominating and Human Resources Committee.
The foregoing compensation scheme for directors will remain in place for 2008.
During the
financial year ended December 31, 2007, the Corporation paid an aggregate
amount of C$570,536 (US$531,226) to all of its outside directors for services
rendered. Outside directors are paid in their home countrys currency and are
reimbursed for travel and other out-of-pocket expenses incurred while attending
Board or committee meetings.
B.
Compensation of Executive
Officers
The following table
sets forth detailed information on the compensation of (i) our President
and Chief Executive Officer, (ii) our Senior Vice President and Chief
Financial Officer, (iii) our three other most highly compensated executive
officers and (iv) one additional executive officer for whom disclosure
would have been provided under (iii) except that the individual did not
serve as an executive officer of Æterna Zentaris for the entirety of the
financial year ended December 31, 2007 (collectively, the Named Executive
Officers), for services rendered in all capacities during the financial years
ended December 31, 2007, 2006 and 2005.
63
SUMMARY
COMPENSATION TABLE
|
|
|
|
Annual Compensation
|
|
Long-term Compensation
|
|
|
|
|
|
|
|
(all amounts are in
Canadian dollars)
|
|
Awards
|
|
Payouts
|
|
|
|
Name and principal occupation
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Other Annual
Compensation
(1)
|
|
Securities
under
Options
Granted
|
|
Shares or
Units
Subject to
Resale
Restrictions
|
|
LTIP
Payouts
|
|
All Other
Benefits
|
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
J. Mazzo(2)(3)
President and Chief
Executive Officer
|
|
2007
2006
2005
|
|
353,346
|
|
268,500
|
|
|
|
550,000
|
|
|
|
|
|
107,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gilles
Gagnon(4)
President and Chief
Executive Officer
|
|
2007
2006
2005
|
|
88,850
300,000
300,000
|
|
100,000
112,500
|
|
|
|
60,000
75,000
|
|
|
|
|
|
891,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
Turpin(2)
Senior Vice President
and Chief Financial Officer
|
|
2007
2006
2005
|
|
303,643
175,000
175,000
|
|
87,263
100,000
75,000
|
|
|
|
100,000
50,000
|
|
|
|
|
|
17,647
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
Blake(2)(6)
Senior Vice President
and Chief
Medical Officer
|
|
2007
2006
2005
|
|
152,508
|
|
56,385
|
|
|
|
95,000
|
|
|
|
|
|
55,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jürgen
Engel(7)
Executive Vice
President and Chief
Scientific Officer
|
|
2007
2006
2005
|
|
367,100
320,333
339,705
|
|
110,130
106,778
84,926
|
|
|
|
100,000
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ellen
McDonald(2)(8)
Senior Vice President,
Business Operations
and Chief Business
Officer
|
|
2007
|
|
233,595
|
|
82,161
|
|
|
|
75,000
|
|
|
|
|
|
15,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mario
Paradis(2)
Senior Vice President,
Administrative &
Legal Affairs and
Corporate Secretary
|
|
2007
2006
2005
|
|
285,643
161,866
145,600
|
|
107,577
75,000
54,000
|
|
|
|
100,000
30,000
40,000
|
|
|
|
|
|
|
|
64
(1)
Perquisites and other personal benefits that do not
exceed the lesser of C$50,000 or 10% of annual salary and bonuses are not
included in this column.
(2)
Amounts actually paid to David J. Mazzo, Paul Blake
and Ellen McDonald in U.S. dollars and converted to Canadian dollars at an
average exchange rate of C$1.00 to US$0.9311 for 2007. For Messrs. Turpin
and Paradis, amounts were paid in U.S. dollars commencing on May 2, 2007.
(3)
Dr. Mazzo was appointed President and Chief
Executive Officer of the Corporation on March 23, 2007 and his annual
salary for 2007 was C$483,300 (US$450,000). As per the terms of his employment
contract, he received an incentive payment upon signature of his contract
amounting to C$107,400 (US$100,000).
(4)
Mr. Gilles Gagnon served as President and Chief
Executive Officer until March 23, 2007 and his annual salary was C$300,000
(US$289,185). Under the terms of a termination agreement, he received a severance
package of C$891,700 (US$
830,262).
All 60,000 options granted to Mr. Gagnon
in 2007 were cancelled shortly following his departure from the Corporation. In
addition, as part of his termination agreement, Mr. Gagnon is entitled to
retain 415,000 options, all of which expire on or before March 23, 2012.
(5)
Represents an incentive payment received by Mr. Turpin
in connection with his relocation to the United States. In addition to the
foregoing, we also reimbursed Mr. Turpins out-of-pocket moving expenses
that amounted to C$52,223 (US$48,625).
(6)
Dr. Paul Blake was appointed Senior Vice
President and Chief Medical Officer of the Corporation on August 5, 2007
and his annual salary for 2007 was C$375,899 (US$350,000). As per the terms of
his employment contract, he received an incentive payment upon signature of his
contract amounting to C$55,655 (US$51,820).
(7)
Amounts actually paid to Dr. Engel in Euros and
converted to Canadian dollars at an average exchange rate of C$1.00 to 0.6810
for 2007, 0.7024 for 2006 and 0.6623 for 2005.
(8)
Ms. Ellen McDonald was appointed Senior Vice
President, Business Operations and Chief Business Officer on May 2, 2007
and her annual salary for 2007 was C$349,050 (US$325,000). As per the terms of
her employment contract, she received an incentive payment upon signature of
her contract amounting to C$15,618 (US$14,542).
During the financial year ended December 31,
2007, we paid an aggregate amount of C$3,026,300 (US$2,817,788) and granted an
aggregate number of 1,095,000 stock options to all of our executive officers
(excluding Mr. Gilles Gagnon and outside directors).
C.
Employment agreements
We and/or our
subsidiaries have entered into employment agreements (the Employment
Agreements) with each of the Named Executive Officers. The Employment
Agreements provide that we will pay the executives a base salary, an annual
bonus and stock options which will be reviewed annually in accordance with our
policies. The Employment Agreements have an indefinite term, except for Dr. Engel,
whose employment agreement is for a term of 32 months expiring in August 2010.
In addition, each of the Employment Agreements, except for Dr. Engels,
provides that, if we terminate the employment of a Named Executive Officer
without cause, then the executive will be entitled to receive a lump-sum
payment, less statutory deductions, of the equivalent of 24 months in the case
of Dr. Mazzo, 18 months in the case of Messrs. Turpin and Paradis and
12 months in the case of Dr. Blake and Ms. McDonald.
As part of the Employment Agreements, we have also entered into change
of control agreements (the Change of Control Agreements) with the Named
Executive Officers, except for Dr. Engel. Under such agreements, if a
change of control (as defined in the Change of Control Agreements) occurs and
we terminate the employment of the executive without cause, or if the executive
terminates his employment for good reason, then the executive will be entitled
to receive a lump-sum payment, less statutory deductions, of the equivalent of
24 months in the case of Dr. Mazzo and 18 months in the case of Mr. Turpin,
Dr. Blake, Ms. McDonald and Mr. Paradis of (i) their annual
base salary, (ii) the maximum amount of their bonus, and (iii) the
benefits, calculated on a yearly basis, including car allowances, but excluding
operating costs and excluding any stock options which were held by such
executive at the time of termination of employment.
D.
Executive Compensation Policy
An executive
compensation policy has been established to acknowledge and reward the
contributions of the executive officers to our success and to ensure
competitive compensation, in order that we may benefit from the expertise
required to pursue our objectives.
In accordance with this policy, the compensation of the our executive
officers is based on three principal elements: (i) basic salary; (ii) performance
bonuses; and (iii) the award of stock options. Each component is
established with reference in part to comparable companies in the North
American biopharmaceutical industry with which we compete for executive talent.
In addition, the policy is intended to align the executives interests with
65
those of our
shareholders and rewards superior performance. Incentive-based compensation is
granted on the basis of criteria approved by the Corporate Governance,
Nominating and Human Resources Committee.
Basic Salary
Basic salary is established according to the criteria set forth above
and is intended to align with the median of those paid in the comparator group.
They are reviewed annually by the Corporate Governance, Nominating and Human
Resources Committee.
Short-term Incentive Compensation
The short-term incentive plan sets out the allocation of incentive
awards based on the financial results, the achievement of our product
development and strategic objectives, and our return on investment. These
objectives are set at the beginning of each financial year as part of the annual
review of corporate strategies.
In the case of executive officers, a program is designed to maximize
corporate and individual performance by establishing specific operational and
financial goals and to provide financial incentives to executive officers based
on their level of achievement of these goals. The granting of cash incentives
require approval of both the Corporate Governance, Nominating and Human
Resources Committee and our Board and are based upon an assessment of each
individuals performance, as well as our performance.
Long-term
Compensation of Executive Officers
The long-term component of the compensation of our
executive officers is based mainly on our Stock Option Plan, which permits the
granting of a number of options that varies in accordance with the contribution
of the officers and their responsibilities. To encourage retention and focus
management on developing and successfully implementing our continuing growth
strategy, stock options generally vest over a period of three years. Stock
options are usually granted to executive officers in December of each
year. See Item E, Stock Option Plan Information below.
Compensation of the
President and Chief Executive Officer
The compensation of the President and Chief Executive Officer is along
the lines of our policy on management compensation. The President and Chief
Executive Officers employment agreement also contains a non-competition clause
but does not provide for any specific terms or modalities of remuneration.
In 2007, the President and Chief Executive Officer received a bonus
pursuant to our short-term incentive plan. The annual bonus paid to the Chief
Executive Officer in 2007 reflected his performance in the context of our
objectives, which were reviewed by the Committee for the Chief Executive
Officer and our senior executive management for the 2007 fiscal year. The
annual bonus paid in 2007 reflected the advancement of our product pipeline as
well as our performance in relation to strategic objectives, business
development, return on investment and budgetary objectives established by the
Corporate Governance, Nominating and Human Resources Committee for the Chief
Executive Officer and the senior executive management team for the 2007 fiscal
year.
E.
Stock
Option Plan Information
We have established a stock
option plan for our directors, executive officers, employees and persons
providing continuous services to us (the Stock Option Plan) in order to
attract and retain such persons, who will be motivated to work towards ensuring
our success. Our Board has full and complete authority to interpret the Stock
Option Plan, to establish applicable rules and regulations applying to it
and to make all other determinations it deems necessary or useful for the
administration of the Stock Option Plan, provided that such interpretations,
rules, regulations and determinations are consistent with the rules of all
stock exchanges and quotation systems on which our securities are then traded
and with all relevant securities legislation. Individuals eligible to
participate under the Stock Option Plan will be determined by our Board of
Directors or the Corporate Governance, Nominating and Human Resources
Committee, as the case may be.
66
Options granted under the Stock Option Plan may be exercised at any time
within a maximum period of ten years following the date of their grant (the Outside
Expiry Date). Our Board of Directors or the Corporate Governance, Nominating
and Human Resources Committee, as the case may be, designates, at its
discretion, the individuals to whom stock options are granted under the Stock
Option Plan and determines the number of common shares covered by each of such
options, the grant date, the exercise price of each option, the expiry date,
the vesting schedule and any other matter relating thereto, in each case in
accordance with the applicable rules and regulations of the regulatory
authorities. The price at which the common shares may be purchased may not be
lower than the greater of the closing prices of common shares on the TSX and
the NASDAQ on the last trading day preceding the date of grant of the option.
Options granted under the Stock Option Plan generally vest in equal tranches
over a three-year period (one-third each year, starting on the first
anniversary of the grant date) or as otherwise determined by the Board of
Directors or the Corporate Governance, Nominating and Human Resources
Committee, as the case may be.
Unless our Board of Directors or the Corporate Governance, Nominating and
Human Resources Committee decides otherwise, option holders cease to be
entitled to exercise their options under the Stock Option Plan (each, an Early
Expiry Date): (i) immediately, in the event an option holder who is an
officer or employee resigns or voluntarily leaves his or her employment with
the Company or one of our subsidiaries or the employment with the Company or
one of our subsidiaries is terminated with cause and, in the case of an
optionee who is a non-employee director of the Company or one of
our
subsidiaries,
the date on which such optionee ceases to be a member of the relevant Board; (ii) six
months following the date on which employment is terminated as a result of the
death of an option holder who is an officer or employee and, in the case of an
optionee who is a non-employee director of the Company or one of
our
subsidiaries,
six months following the date on which such optionee ceases to be a member of
the relevant Board by reason of death; (iii) 30 days following the date on
which an option holders employment with the Company or any of
our
subsidiaries
is terminated for a reason other than those mentioned in (i) or (ii) above
including, without limitation, upon the disability, long-term illness, retirement
or early retirement of the option holder; and (iv) where the option holder
is a service supplier, 30 days following the date on which such option holder
ceases to act as such, for any cause or reason.
The Stock Option Plan also provides that, if the expiry date of an option(s) (whether
an Early Expiry Date or an Outside Expiry Date) occurs during a blackout
period or within the seven business days immediately after a blackout period
imposed by us, the expiry date will be automatically extended to the date that
is seven business days after the last day of the blackout period. For the
purposes of the foregoing, blackout period means the period during which
trading in our securities is restricted in accordance with our corporate
policies.
Option holders
may not assign their options (nor any interest therein) other than by will or
in accordance with the applicable laws of estates and succession.
In the event
that, at any time, an offer to purchase is made to holders of all common
shares, notice of such offer shall be given by us to each optionee and all
unexercised options will become exercisable immediately at their respective
exercise prices, but only to the extent necessary to enable optionees to tender
their common shares in response to such offer.
The Stock
Option Plan currently provides that the following amendments may be made to the
Stock Option Plan upon approval of each of the Board of Directors and our
shareholders as well as receipt of all required regulatory approvals:
·
any amendment to Section 3.2
of the Stock Option Plan (which sets forth the limit on the number of options
that may be granted to insiders) that would have the effect of permitting,
without having to obtain shareholder approval on a disinterested vote at a
duly convened shareholders meeting, the grant of any option(s) under the
Stock Option Plan otherwise prohibited by Section 3.2;
·
any amendment to
the number of securities issuable under the Stock Option Plan (except for
certain permitted adjustments, such as in the case of stock splits,
consolidations or reclassifications);
·
any amendment which
would permit any option granted under the Stock Option Plan to be transferable
or assignable other than by will or in accordance with the applicable laws of
estates and succession;
67
·
the addition of a
cashless exercise feature, payable in cash or securities, which does not
provide for a full deduction of the number of underlying securities from the Stock
Option Plan reserve;
·
the addition of a
deferred or restricted share unit or any other provision which results in
employees receiving securities while no cash consideration is received by us;
·
with respect to an
option holder who is an insider,
·
any
reduction in the exercise price of any option after the option has been
granted, or
·
any
cancellation of an option and the re-grant of that option under different
terms, except if such re-grant occurs at least three months after the related
cancellation,
·
except in respect
of certain permitted adjustments, such as in the case of stock splits,
consolidations or reclassifications;
·
any
extension to the term of an option beyond its Outside Expiry Date to an option
holder who is an insider (except for extensions made in the context of a blackout
period),
·
any
amendment to the method of determining the exercise price of an option granted
pursuant to the Stock Option Plan,
·
the
addition of any form of financial assistance or any amendment to a financial
assistance provision which is more favourable to employees, and
·
any amendment to
the foregoing amending provisions requiring Board, shareholder and regulatory
approvals.
The Stock Option
Plan further currently provides that the following amendments may be made to
the Stock Option Plan upon approval of the Board of Directors and upon receipt
of all required regulatory approvals, but without shareholder approval:
·
amendments of a housekeeping
or clerical nature or to clarify the provisions of the
Stock Option Plan
;
·
amendments
regarding any vesting period of an option;
·
amendments
regarding the extension of an option beyond an Early Expiry Date in respect of
any option holder, or the extension of an option beyond the Outside Expiry Date
in respect of any option holder who is a non-insider of the Corporation;
·
with respect to any
option holder who is a non-insider, amendments to the terms of an option to
reduce the exercise price of such option after the option has been granted, or
to cancel an option and re-grant that option under different terms;
·
adjustments to the
number of issuable common shares underlying, or the exercise price of,
outstanding options resulting from a split or a consolidation of the common
shares, a reclassification, the payment of a stock dividend, the payment of a
special cash or non-cash distribution to our shareholders on a pro rata basis
provided such distribution is approved by our shareholders in accordance with
applicable law, a recapitalization, a reorganization or any other event which
necessitates an equitable adjustment to the outstanding options in proportion
with corresponding adjustments made to all outstanding common shares;
·
discontinuing or
terminating the Stock Option Plan; and
·
any other amendment
which does not require shareholder approval under the terms of the Stock Option
Plan.
Certain
changes to the amending provisions of the Stock Option Plan described above
have been adopted by the Board of Directors and are being submitted to
shareholders for their consideration and approval at our annual meeting of
shareholders to be held on May 7, 2008. See below.
68
The maximum
number of common shares that may be issued under the Stock Option Plan is
currently 5,318,740 (of which 5,309,947 Common Shares are reserved for listing
on the TSX), which, as at March 7, 2008, represented approximately 10% of
all issued and outstanding Common Shares. The maximum number of common shares
issuable under the Stock Option Plan is fixed at 10% of the issued and
outstanding common shares at any given time. Under the Stock Option Plan, (i) the
number of securities issued to insiders, at any time, or issuable within any
one-year period, under all of our security-based compensation arrangements,
cannot exceed 10% of our issued and outstanding securities and (ii) no
single option holder may hold options to purchase, from time to time, more than
5% of our issued and outstanding Common Shares.
On March 4, 2008, our Board of Directors approved, subject to
receiving the approvals of the TSX and our shareholders, an increase in the
maximum number of Common Shares issuable under the Stock Option Plan from 10%
to 11.4%. The TSX has approved these amendments to the Stock Option Plan and
shareholders will be asked at
our annual meeting of shareholders to be held on May 7,
2008
to adopt a resolution approving such increase. The
Board of Directors also approved, on March 4, 2008, certain amendments to
the Stock Option Plan of a housekeeping or clerical nature, as well as
certain other amendments in order to comply with good governance practices.
These amendments have been approved by the TSX.
Apart from the housekeeping or clerical amendments adopted by our Board
of Directors, the principal amendments made to the Stock Option Plan that are
not subject to shareholder approval consist of the addition of two limitations
on the aggregate number and value of option grants to our non-employee
directors. First, the Stock Option Plan has been modified so that: (i) the
aggregate fair value of options granted under all of our security-based
compensation arrangements to any one non-employee director, within any one-year
period, cannot exceed US$100,000 valued on a Black-Scholes basis and as
determined by the Corporate Governance, Nominating and Human Resources Committee;
and (ii) the aggregate number of securities issuable to all non-employee
directors, within any one-year period, under all of our security-based
compensation arrangements, cannot exceed 1% of
our
issued and
outstanding securities. A second limitation on option grants to our
non-employee directors was also added to the Stock Option Plan, namely
non-employee directors are now eligible only to receive grants of up to 40,000
options upon or in connection with their election or appointment to our Board and
are now eligible only to receive grants of up to 20,000 options for each and
every year thereafter. These options will vest over a period of three years in
equal thirds with the first third becoming vested on the first anniversary of
the grant date, the second third becoming vested on the second anniversary of
the grant date and the final third becoming vested on the third anniversary of
the grant date. The specific number of options to be granted to non-employee
directors in accordance with the foregoing shall be determined by our Board
upon recommendation of the Corporate Governance, Nominating and Human Resources
Committee.
Options granted during the most
recently completed financial year
An aggregate
of 1,080,000 options were granted to our Named Executive Officers during the
financial year ended December 31, 2007, of which an aggregate of 210,000
options were granted on January 4, 2007 instead of during December 2006
due to the payment of the special distribution of subordinate voting shares of
the capital of Atrium Innovations Inc. (formerly Atrium Biotechnologies Inc.)
to our shareholders on January 2, 2007. The aggregate number of common
shares covered by options granted to our directors, officers and employees
other than the Named Executives Officers during such period was 605,000 at
prices varying from C$1.68 to C$4.65 per common share, establishing at
5,006,092 the total number of common shares covered by options granted and
outstanding pursuant to the Stock Option Plan as at December 31, 2007, which
represented 9.4% of the total number of issued and outstanding common shares at
year-end.
69
|
|
|
|
|
|
|
|
Market value
|
|
|
|
|
|
Common Shares
|
|
% of total options
|
|
Exercise price or
|
|
of Common Shares
|
|
|
|
|
|
under
|
|
granted during
|
|
basic price
|
|
underlying options on
|
|
|
|
|
|
options granted
|
|
financial year
|
|
per Common Share
|
|
the date of grant
|
|
|
|
Name
|
|
(#)
|
|
(%)
|
|
($ / security)
|
|
($ / security)
|
|
Expiration date
|
|
David J. Mazzo
|
|
400,000
|
|
23.7
|
|
US3.54
|
|
US3.54
|
|
March 22, 2017
|
|
|
|
150,000
|
|
8.9
|
|
US1.82
|
|
US1.82
|
|
Dec. 10, 2017
|
|
Gilles Gagnon(1)
|
|
60,000
|
|
3.6
|
|
C4.65
|
|
C4.65
|
|
N/A
|
|
Dennis Turpin
|
|
50,000
|
|
3.0
|
|
C4.65
|
|
C4.65
|
|
Jan. 3, 2017
|
|
|
|
50,000
|
|
3.0
|
|
C1.82
|
|
C1.82
|
|
Dec. 10, 2017
|
|
Paul Blake
|
|
45,000
|
|
2.7
|
|
US3.05
|
|
US3.05
|
|
July 26, 2017
|
|
|
|
50,000
|
|
3.0
|
|
US1.82
|
|
US1.82
|
|
Dec. 10, 2017
|
|
Jürgen Engel
|
|
50,000
|
|
3.0
|
|
C4.65
|
|
C4.65
|
|
Jan. 3, 2017
|
|
|
|
50,000
|
|
3.0
|
|
C1.82
|
|
C1.82
|
|
Dec. 10, 2017
|
|
Ellen McDonald
|
|
25,000
|
|
1.5
|
|
US3.63
|
|
US3.63
|
|
April 30, 2017
|
|
|
|
50,000
|
|
3.0
|
|
US1.82
|
|
US1.82
|
|
Dec. 10, 2017
|
|
Mario Paradis
|
|
50,000
|
|
3.0
|
|
C4.65
|
|
C4.65
|
|
Jan. 3, 2017
|
|
|
|
50,000
|
|
3.0
|
|
C1.82
|
|
C1.82
|
|
Dec. 10, 2017
|
|
(1)
All 60,000 options granted to Mr. Gagnon in
2007 were cancelled shortly following his departure from the Company.
Options exercised during the most
recently completed financial year and financial year-end option values
The following table summarizes
for each of the Named Executive Officers the number of common shares acquired
on options exercised, if any, during the financial year ended December 31, 2007,
the aggregate value realized upon exercise, the total number of common shares
covered by unexercised options, if any, held at December 31, 2007, and the
value of such unexercised options as at the same date. During the financial
year ended December 31, 2007, an aggregate of 18,000 options were
exercised at prices varying from C$1.74 to C$3.68 by all option holders under
the Stock Option Plan.
|
|
|
|
|
|
|
|
Value of Unexercised
|
|
|
|
|
|
|
|
Unexercised Options at
|
|
In-the-Money Options
|
|
|
|
Common Shares
|
|
|
|
FY-end 2007
|
|
at FY-end 2007 (1)
|
|
|
|
Acquired on
|
|
Aggregate Value
|
|
(#)
|
|
($)
|
|
|
|
Exercise
|
|
Realized
|
|
Exercisable/
|
|
Exercisable/
|
|
Name
|
|
(#)
|
|
($)
|
|
Unexercisable
|
|
Unexercisable
|
|
David J. Mazzo
|
|
|
|
|
|
/ 550,000
|
|
/
|
|
Gilles Gagnon(2)
|
|
|
|
|
|
390,000/ 25,000
|
|
/
|
|
Dennis Turpin
|
|
|
|
|
|
370,000 / 100,000
|
|
/
|
|
Paul Blake
|
|
|
|
|
|
/ 95,000
|
|
/
|
|
Jürgen Engel
|
|
|
|
|
|
270,000 / 100,000
|
|
/
|
|
Ellen McDonald
|
|
|
|
|
|
/ 75,000
|
|
/
|
|
Mario Paradis
|
|
|
|
|
|
155,333 / 116,667
|
|
/
|
|
(1)
|
|
The value of an
unexercised in-the-money option at financial year-end is the difference
between the exercise price of the option and the closing price of a common
share on the TSX and on NASDAQ on December 31, 2007, which were C$1.52
and US$1.54, respectively.
|
(2)
|
|
As
part of his termination agreement, Mr. Gagnon is entitled to retain
415,000 options, all of which expire on or before March 23, 2012.
|
70
C. Board practices.
Our Articles provide that our Board of Directors (the Board) shall be
composed of a minimum of five and a maximum of fifteen directors. Directors are
elected annually by our shareholders, but the directors may from time to time
appoint one or more directors, provided that the total number of directors so
appointed does not exceed one third of the number of directors elected at the
last annual meeting of shareholders. Each elected director will remain in
office until termination of the next annual meeting of the shareholders or
until his or her successor is duly elected or appointed, unless his or her post
is vacated earlier.
Under the terms of
contractual agreements among the Company and SGF Santé Inc. concerning, among
other matters, the election of directors, provided that SGF Santé Inc. holds at
least 5% of our issued and outstanding voting shares, the Company will propose
for election as a director at each annual meeting of the shareholders, one
candidate designated by SGF Santé Inc., provided that the candidate receives a
favourable recommendation from the Corporate Governance, Nominating and Human
Resources Committee. In this respect and in accordance with the agreements
mentioned above, Mr. José P. Dorais is the director currently designated
by SGF Santé Inc.
Committee of the Board of
Directors
Our
Board of Directors has established an Audit Committee and a Corporate
Governance, Nominating and Human Resources Committee.
The Audit Committee assists the Board of Directors in
fulfilling its oversight responsibilities. The Audit Committee reviews the
financial reporting process, the system of internal control, the audit process,
and the companys process for monitoring compliance with laws and regulations
and with our Code of Ethical Conduct. In performing its duties, the Audit
Committee will maintain effective working relationships with the Board of
Directors, management, and the external auditors. To effectively perform his or
her role, each committee member will obtain an understanding of the detailed
responsibilities of committee membership as well as the Companys business,
operations, and risks.
The function of the Audit
Committee is oversight and while it has the responsibilities and powers set
forth in this charter, it is neither the duty of the Committee to plan or to
conduct audits or to determine that the companys financial statements are
complete, accurate and in accordance with generally accepted accounting
principles, nor to maintain internal controls and procedures.
The current members of the
Audit Committee are Martha Byorum, Gérard Limoges and Pierre MacDonald.
The mandate of the Corporate Governance, Nominating and Human Resources
Committee is to (i) assist the Board in developing the Company approach to
corporate governance issues, (ii) propose new Board nominees, and (iii) assess
the effectiveness of the Board and its committees, their respective chairs and
individual directors. This committee also assists the Board in discharging its
responsibilities relating to executive and other human resources hiring,
assessment, compensation and succession planning matters.
The current members of the Corporate Governance, Nominating and Human
Resources Committee are Juergen Ernst, Pierre Laurin and Pierre MacDonald.
D. Employees.
As of March 1, 2008, we
had a total of 131 employees, of which 101 are based in Frankfurt, Germany, 18
in New Jersey, U.S.A., and 12 in Quebec City. Sixty-six are involved in
discovery, preclinical and pharmaceutical development, 24 are involved in
medical and regulatory affairs, quality assurance and intellectual property,
and 41 in business operations, investors relations, communications, finances,
human resources and legal affairs. We have agreements with all of our employees
covering confidentiality and loyalty, non-competition, and assignment to the
Company of all intellectual property rights developed during the employment
period.
Some of our employees based in Frankfurt, Germany are
represented by the Chemical Union of Germany. As such, their compensation is
largely driven by the outcome of the negotiations between the Chemical Union
and the Association of Employers for the
71
chemical industry which is then binding for
all German companies in the industry. With the former Tarifvertrag having
expired by February 29, 2008, the negotiations for the re-newed contract
have just been initiated. The respective outcome particularly with regard
to term of the renewed contract and salary adjustments applicable to these
employees is beyond the control of the Company. We have never
experienced a work stoppage and we believe that relations with our
employees are generally good.
E. Share ownership.
The following table presents
information regarding the ownership of common shares, exercisable options which
are all out-the-money and the beneficial ownership of our share capital as of
March 14, 2008 by our Chief Executive Officer, Chief Financial Officer,
our directors, our three other most highly compensated executive officers, our
other executive officers as a group, all of our directors and executive
officers as a group and one other executive officer of the Company who would
have been included within the three most highly compensated executive officers
had he been in the employ of the Company, or a subsidiary, at year-end.
|
|
|
|
|
|
|
|
Currently
|
|
|
|
|
|
|
|
|
|
exercisable
|
|
|
|
Currently owned
|
|
|
|
Stock options
|
|
options owned as of
|
|
Name
|
|
shares
|
|
Percent
|
|
owned
|
|
March 14, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Marcel Aubut
|
|
57,500
|
|
*
|
|
110,000
|
|
80,000
|
|
Paul Blake
|
|
30,000
|
|
*
|
|
95,000
|
|
|
|
Martha Byorum
|
|
12,000
|
|
*
|
|
110,000
|
|
80,000
|
|
José P. Dorais
|
|
|
|
*
|
|
|
|
|
|
Jürgen Engel
|
|
42,779
|
|
*
|
|
370,000
|
|
270,000
|
|
Juergen Ernst
|
|
18,850
|
|
*
|
|
60,000
|
|
25,000
|
|
Pierre Laurin
|
|
22,200
|
|
*
|
|
122,000
|
|
92,000
|
|
Gérard Limoges
|
|
9,000
|
|
*
|
|
60,000
|
|
30,000
|
|
Pierre MacDonald
|
|
26,500
|
|
*
|
|
119,000
|
|
89,000
|
|
Gerald J. Martin
|
|
4,000
|
|
*
|
|
45,000
|
|
15,000
|
|
David J. Mazzo
|
|
36,500
|
|
*
|
|
550,000
|
|
|
|
Ellen McDonald
|
|
10,000
|
|
*
|
|
75,000
|
|
|
|
Mario Paradis
|
|
6,220
|
|
*
|
|
272,000
|
|
155,333
|
|
Nicholas J. Pelliccione
|
|
20,000
|
|
*
|
|
75,000
|
|
|
|
Dennis Turpin
|
|
7,250
|
|
*
|
|
470,000
|
|
370,000
|
|
|
|
|
|
|
|
|
|
|
|
All
of our directors and senior
officers
as a group
|
|
302,799
|
|
0.57
|
%
|
2,533,000
|
|
1,206,333
|
|
*: Less than 1%
72
|
|
Common Shares
|
|
|
|
|
|
|
|
Under Options
|
|
|
|
|
|
Name
|
|
Granted
|
|
Exercise Price
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
Marcel Aubut
|
|
5,000
|
|
C$ 6.18
|
|
Dec. 31, 2011
|
|
|
|
15,000
|
|
C$ 3.68
|
|
Dec. 15, 2012
|
|
|
|
30,000
|
|
C$
1.74
|
|
Dec. 11, 2013
|
|
|
|
15,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
15,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Paul Blake
|
|
45,000
|
|
US
$
3.05
|
|
Jul. 26, 2017
|
|
|
|
50,000
|
|
US
$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Martha Byorum
|
|
5,000
|
|
C$
6.18
|
|
Dec. 31, 2011
|
|
|
|
15,000
|
|
C$
3.68
|
|
Dec. 15, 2012
|
|
|
|
30,000
|
|
C$
1.74
|
|
Dec. 11, 2013
|
|
|
|
15,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
15,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$ 1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Jürgen Engel
|
|
60,000
|
|
C$
2.43
|
|
Dec. 31, 2012
|
|
|
|
60,000
|
|
C$
1.74
|
|
Dec. 11, 2013
|
|
|
|
100,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
50,000
|
|
C$ 3.53
|
|
Dec. 12, 2015
|
|
|
|
50,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
50,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Juergen Ernst
|
|
15,000
|
|
C$
5.09
|
|
Fev. 24, 2015
|
|
|
|
15,000
|
|
C$ 3.53
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$ 4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Pierre Laurin
|
|
5,000
|
|
C$
6.18
|
|
Dec. 31, 2011
|
|
|
|
24,000
|
|
C$
3.68
|
|
Dec. 15, 2012
|
|
|
|
30,000
|
|
C$ 1.74
|
|
Dec. 11, 2013
|
|
|
|
3,000
|
|
C$
6.26
|
|
March 28, 2014
|
|
|
|
15,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
15,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Gérard Limoges
|
|
15,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
15,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$ 4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Pierre MacDonald
|
|
5,000
|
|
C$
6.18
|
|
Dec. 31, 2011
|
|
|
|
24,000
|
|
C$
3.68
|
|
Dec. 15, 2012
|
|
|
|
30,000
|
|
C$ 1.74
|
|
Dec. 11, 2013
|
|
|
|
15,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
15,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Gerald J. Martin
|
|
15,000
|
|
C$
5.04
|
|
Dec. 12, 2015
|
|
|
|
5,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
25,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
73
David J. Mazzo
|
|
400,000
|
|
US
$
3.54
|
|
March 22, 2017
|
|
|
|
150,000
|
|
US
$ 1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Ellen McDonald
|
|
25,000
|
|
US
$
3.63
|
|
April 30, 2017
|
|
|
|
50,000
|
|
US
$
1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Mario Paradis
|
|
15,000
|
|
C$
6.18
|
|
Dec. 4, 2011
|
|
|
|
12,000
|
|
C$
3.68
|
|
Dec. 15, 2012
|
|
|
|
30,000
|
|
C$
1.74
|
|
Dec. 11, 2013
|
|
|
|
45,000
|
|
C$
5.83
|
|
Dec. 13, 2014
|
|
|
|
40,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
30,000
|
|
C$
4.07
|
|
May 1, 2016
|
|
|
|
50,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
50,000
|
|
C$ 1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Nicholas J. Pelliccione
|
|
25,000
|
|
US
$ 3.96
|
|
May, 6, 2017
|
|
|
|
50,000
|
|
US
$ 1.82
|
|
Dec. 10, 2017
|
|
|
|
|
|
|
|
|
|
Dennis Turpin
|
|
30,000
|
|
C$
6.18
|
|
Dec. 4, 2011
|
|
|
|
90,000
|
|
C$
3.94
|
|
Oct. 31, 2012
|
|
|
|
50,000
|
|
C$
3.68
|
|
Dec. 15, 2012
|
|
|
|
60,000
|
|
C$ 1.74
|
|
Dec. 11, 2013
|
|
|
|
90,000
|
|
C$
5.83
|
|
Dec. 1
3,
2014
|
|
|
|
50,000
|
|
C$
3.53
|
|
Dec. 12, 2015
|
|
|
|
50,000
|
|
C$
4.65
|
|
Jan. 3, 2017
|
|
|
|
50,000
|
|
C$
1.82
|
|
Dec. 10, 2017
|
|
Item 7. Major
Shareholders and Related Party Transactions
A. Major shareholders.
We are not directly or indirectly owned or
controlled by another corporation or by any foreign government.
Based on filings with the Securities and
Exchange Commission and the Canadian securities regulartory authorities, as of March 14,
2008, set out below are the only persons/entities who beneficially owned,
directly or indirectly, or exercised control or direction over our common
shares carrying more than 5% of the voting rights attached to all our common
shares. As used in the table below, beneficial
ownership means sole or shared power to vote or direct the voting of the
security, or the sole or shared investment power with respect to a security
(i.e., the power to dispose, or direct a disposition, of a security). A person
is deemed at any date to have beneficial ownership of any security that the
person has a right to acquire within 60 days. More than one person may be
deemed to have beneficial ownership of the same securities.
Name of shareholder
|
|
Common Shares
|
|
Total Percentage
of Voting Rights
|
|
|
|
(#)
|
|
(%)
|
|
Solidarity Fund (QFL)
|
|
9,922,069
|
|
18.65
|
|
|
|
|
|
|
|
SGF Santé Inc.
|
|
8,810,878
|
|
16.57
|
|
|
|
|
|
|
|
Eric Dupont
|
|
3,767,413
|
|
7.08
|
|
74
None of the shareholders set
out above has different voting rights from the other shareholders.
B. Related party transactions.
None
C. Interests of experts and counsel.
Not applicable.
Item 8. Financial
Information
A. Consolidated statements and other
financial information.
The financial statements filed as part of this
annual report are filed under Item 18.
Valuation and qualifying accounts
are as follows (in thousands of US dollars):
Valuation allowance on future
income tax assets
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Balance - Beginning of year
|
|
$
|
13,337
|
|
$
|
35,719
|
|
$
|
29,068
|
|
Change in valuation allowance
|
|
6,963
|
|
(22,644
|
)
|
5,403
|
|
Foreign currency transation adjustment
|
|
2,989
|
|
262
|
|
1,248
|
|
|
|
|
|
|
|
|
|
Balance - End of year
|
|
$
|
23,289
|
|
$
|
13,337
|
|
$
|
35,719
|
|
Export Sales
Export and domestic sales in thousands of US
dollars and as percentage of total sales as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export Sales
|
|
$
|
41,668
|
|
99.05
|
%
|
$
|
38,774
|
|
99.93
|
%
|
$
|
44,710
|
|
99.77
|
%
|
Domestic Sales
|
|
$
|
400
|
|
0.95
|
%
|
$
|
25
|
|
0.07
|
%
|
$
|
103
|
|
0.23
|
%
|
|
|
$
|
42,068
|
|
100.00
|
%
|
$
|
38,799
|
|
100.00
|
%
|
$
|
44,813
|
|
100.00
|
%
|
75
B. Dividend Policy
Since our incorporation, we have not paid any dividends and we do not
anticipate paying any dividends in the foreseeable future.
C. Significant changes.
No significant changes
occurred since the date of our annual consolidated financial statements
included elsewhere in this annual report.
Item 9. The
Offering and Listing.
A. Offer and listing details.
Not Applicable, except for
Item 9A(4)
|
|
NASDAQ(US$)
|
|
TSX (C$)
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
7.39
|
|
2.44
|
|
10.00
|
|
3.52
|
|
2004
|
|
8.42
|
|
3.17
|
|
11.5
|
|
4.12
|
|
2005
|
|
6.47
|
|
4.00
|
|
7.89
|
|
4.85
|
|
2006
|
|
7.55
|
|
3.93
|
|
8.79
|
|
4.51
|
|
2007
|
|
4.40
|
|
1.33
|
|
5.21
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ (US$)
|
|
TSX (C$)
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
6.69
|
|
5.05
|
|
7.80
|
|
5.85
|
|
Second
quarter
|
|
7.55
|
|
5.40
|
|
8.79
|
|
6.01
|
|
Third
quarter
|
|
6.09
|
|
4.90
|
|
6.67
|
|
5.52
|
|
Fourth
quarter
|
|
6.18
|
|
3.93
|
|
7.11
|
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
4.40
|
|
2.90
|
|
5.21
|
|
3.41
|
|
Second
quarter
|
|
4.18
|
|
3.25
|
|
4.75
|
|
3.45
|
|
Third
quarter
|
|
3.65
|
|
2.27
|
|
3.90
|
|
2.40
|
|
Fourth
quarter
|
|
2.73
|
|
1.33
|
|
2.74
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
Last six months
|
|
|
|
|
|
|
|
|
|
Sept-07
|
|
2.96
|
|
2.36
|
|
3.10
|
|
2.41
|
|
Oct-07
|
|
2.73
|
|
1.84
|
|
2.74
|
|
1.75
|
|
Nov-07
|
|
2.05
|
|
1.50
|
|
1.91
|
|
1.42
|
|
Dec-07
|
|
1.93
|
|
1.33
|
|
1.93
|
|
1.37
|
|
Jan-08
|
|
1.80
|
|
1.44
|
|
1.80
|
|
1.47
|
|
Feb-08
|
|
1.68
|
|
1.32
|
|
1.69
|
|
1.28
|
|
76
B. Plan of distribution.
Not applicable.
C. Markets.
Our common shares are listed
and posted for trading on the TSX and are quoted on the NASDAQ.
D. Selling shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the issuer.
Not applicable.
Item 10. Additional
Information
A. Share capital.
Not applicable.
B. Memorandum and articles of
association.
The Company is governed by its restated articles of
incorporation (the Restated Articles of Incorporation) under the
Canada Business Corporations Act
(the CBCA)
and by its bylaws (the bylaws). The Companys Restated Articles of
Incorporation are on file with the Corporations Directorate of Industry Canada
under Corporation Number 264271-9. The Restated Articles of Incorporation do
not include a stated purpose and do not place any restrictions on the business
that the Company may carry on.
Inspection Rights of Shareholders
Under the CBCA, shareholders are entitled to be
provided with a copy of the list of registered shareholders of the Company. In
order to obtain the shareholder list, the Company must be provided with an
affidavit including,
77
among other things, a statement that the list will only be used for the
purposes permitted by the CBCA. These permitted purposes include an effort to
influence the voting of shareholders of the Company, an offer to acquire
securities of the Company and any other matter relating to the affairs of the
Company. The Company is entitled to charge a reasonable fee for the provision
of the shareholder list and must deliver that list no more than ten days after
receipt of the affidavit described above.
Under the CBCA, shareholders of the Company have the
right to inspect certain corporate records, including its Restated Articles of
Incorporation and bylaws and minutes of meetings and resolutions of the
shareholders. Shareholders have no statutory right to inspect minutes of
meetings and resolutions of directors of the Company. Shareholders of the
Company have the right to certain financial information respecting the Company.
In addition to the annual and quarterly financial statements required to be
filed under applicable securities laws, under the CBCA the Company is required
to place before every annual meeting of shareholders its audited comparative
annual financial statements. In addition, shareholders have the right to
examine the financial statements of each of its subsidiaries and any other
corporate entity whose accounts are consolidated in the financial statements of
the Company.
Directors
The minimum number of directors of the Company is five
and the maximum number is fifteen. In accordance with the Companys bylaws and
the CBCA, a majority of its directors must be residents of Canada. In order to
serve as a director, a person must be a natural person at least 18 years of
age, of sound mind, not bankrupt, and must not be prohibited by any court from
holding the office of director. For as long as the Company is a company that
publicly distributes its securities, at least two-thirds of its directors must
not be officers or employees of the Company or its subsidiaries. Neither the
Restated Articles of Incorporation, bylaws, nor the Act, impose any mandatory
retirement requirements for directors.
The directors are elected by a majority of the votes
cast at the annual meeting at which an election of directors is required, to
hold office until the election of their successors except in the case of
resignations or if their offices become vacant by death or otherwise. Subject
to the provisions of the Companys bylaws, all directors may, if still
qualified to serve as directors, stand for re-election. The Board of Directors
is not replaced at staggered intervals but is elected annually.
Under the Companys bylaws and the Restated Articles
of Incorporation, a director of the Company need not be a shareholder.
The directors are entitled to remuneration as shall
from time to time be determined by the Board of Directors or by a committee to
which the Board of Directors may delegate the power to do so. Under the mandate
of the Companys Corporate Governance, Nominating and Human Resources
Committee, such committee, comprised of a majority of independent directors, is
tasked
with making recommendations to the Board of Directors concerning director
remuneration.
The Companys bylaws provide that a director shall
promptly disclose to the Company any interest he or she has in any undertaking
or association that is likely to place him or her in a situation of conflict of
interest, as well as the rights he or she may assert thereagainst, indicating,
should such be the case, the nature and value thereof. Likewise, the CBCA and
the Companys bylaws provide that a director who is a party to, or who is a
director or officer of, or has a material interest in, any person who is a
party to a material contract or transaction or proposed material contract or
transaction with the Company must disclose to the Company the nature and extent
of his or her interest at the time and in the manner provided by the CBCA, or
request that same be entered in the minutes of the meetings of the Board of
Directors, even if such contract, in connection with the normal business
activity of the Company, does not require the approval of either the directors
or the shareholders. At the request of the president or any director, the
director placed in a situation of conflict of interest must leave the meeting
while the Board of Directors discusses the matter. The CBCA and the Companys
bylaws prohibit such a director from voting on any resolution to approve the
contract or transaction unless the contract or transaction:
·
relates
primarily to his or her remuneration as a director, officer, employee or agent
of the Company or an affiliate;
78
·
is for
indemnity or insurance for directors liability as permitted by the CBCA; or
·
is
with an affiliate of the Company.
The CBCA provides that the Board of Directors may, on behalf
of the Company and without authorization of its shareholders:
·
borrow
money upon the credit of the Company;
·
issue,
reissue, sell or pledge debt obligations of the Company;
·
give a
guarantee on behalf of the Company to secure performance of an obligation of
any person; and
·
mortgage,
hypothecate, pledge or otherwise create a security interest in all or any
property of the Company, owned or subsequently acquired, to secure any
obligation of the Company.
The shareholders have the ability to restrict such
powers through the Companys Restated Articles of Incorporation or bylaws (or
through a unanimous shareholder agreement), but no such restrictions are in
place.
In addition, the Companys bylaws provide that the
Board of Directors may:
·
subject
to the provisions of the Companys Restated Articles of Incorporation, accept
subscriptions, allot, issue all or part of the unissued shares of the Company,
grant options in respect of such shares or otherwise dispose thereof to such
persons, on such terms and conditions and for such consideration and in such
manner not contrary to the CBCA or the Restated Articles of Incorporation of
the Company as the directors think fit; and
·
from
time to time as it may deem advisable and to the extent permitted by the CBCA,
declare and pay to the shareholders, according to their rights, dividends in
money or property or in the form of shares of the Company.
The CBCA prohibits the giving of a guarantee to any
shareholder, director, officer or employee of the Company or of an affiliated
corporation or to an associate of any such person for any purpose or to any
person for the purpose of or in connection with a purchase of a share issued or
to be issued by the Company or its affiliates, where there are reasonable
grounds for believing that the Company is or, after giving the guarantee, would
be unable to pay its liabilities as they become due, or the realizable value of
the Companys assets in the form of assets pledged or encumbered to secure a
guarantee, after giving the guarantee, would be less than the aggregate of the
Companys liabilities and stated capital of all classes. These borrowing powers
may be varied by the Companys bylaws or its Restated Articles of
Incorporation. However, the Companys bylaws and Restated Articles of
Incorporation do not contain any restrictions on or variations of these
borrowing powers.
Pursuant to the Companys bylaws, the directors of the
Company manage and administer the business and affairs of the Company and
exercise all such powers and authority as the Company is authorized to exercise
pursuant to the Act, the Restated Articles of Incorporation and the bylaws. The
general duties of a director or officer of the Company under the CBCA are to
act honestly and in good faith with a view to the best interests of the Company
and to exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances. Any breach of these duties may lead
to liability to the Company and its shareholders for breach of fiduciary duty.
In addition, a breach of certain provisions of the CBCA, including the improper
payment of dividends or the improper purchase or redemption of shares, will render
the directors who authorized such action liable to account to the Company for
any amounts improperly paid or distributed.
The Companys bylaws provide that the Board of
Directors may, from time to time, appoint from amongst their number committees
of the Board of Directors, and delegate to any such committee any of the powers
of the Board of Directors except those which pursuant to the CBCA a committee
of the Board of Directors has no authority to exercise. As such, the Board of
Directors has two standing committees: the Audit Committee and the Corporate
Governance, Nominating and Human Resources Committee.
Subject to the limitations provided by the CBCA, the
Company must indemnify a director or an officer of the Company, a former
director or officer of the Company or a person who acts or acted at the Companys
request as a director or officer of a body corporate of which the Company is or
was a shareholder or creditor, and his or her heirs
79
and legal representatives, against all costs, losses, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by
reason of having been a director or officer of the Company or such body
corporate, provided:
(a)
|
|
he or she acted in good faith in the best interests of the Company;
and
|
|
|
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(b)
|
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in the case of a criminal or an administrative action or proceeding
that is enforced by a monetary penalty, he or she had reasonable grounds to
believe that his or her conduct was lawful.
|
The directors of the Company
are authorized to indemnify from time to time any director or other person who
has assumed or is about to assume in the normal course of business any
liability for the Company or for any corporation controlled by the Company, and
to secure such director or other person against any loss by the pledge of all
or part of the movable or immovable property of the Company through the
creation of a hypothec or any other real right in all or part of such property
or in any other manner.
Share Capitalization
The Companys Restated Articles of Incorporation
authorize the issuance of an unlimited number of Common Shares and an unlimited
number of Preferred Shares. All classes are without nominal or par value. The
Restated Articles of Incorporation do not authorize the issuance of any other
class of shares. On
March 14
, 2008, there were 53,187,470
Common Shares and no Preferred Shares issued and outstanding.
Common Shares
: The
holders of the Common Shares are entitled to one vote for each Common Share
held by them at all meetings of shareholders, except meetings at which only
shareholders of a specified class of shares are entitled to vote. In addition,
the holders are entitled to receive dividends if, as and when declared by the
Board of Directors on the Common Shares. Finally, the holders of the Common
Shares are entitled to receive the remaining property of the Company upon any
liquidation, dissolution or winding-up of the affairs of the Company, whether
voluntary or involuntary. Shareholders have no liability to further capital
calls as all shares issued and outstanding are fully paid and non-assessable.
Preferred Shares
: The
First and Second Preferred Shares are issuable in series with rights and
privileges specific to each class. The holders of Preferred Shares are not
entitled to receive notice of or to attend or vote at meetings of shareholders.
No Preferred Shares of the Company have been issued to date.
The holders of First Preferred Shares are entitled to
preference and priority to any participation of holders of Second Preferred
Shares, Common Shares or shares of any other class of shares of the share
capital of the Company ranking junior to the First Preferred Shares in regards
to dividends and, in the event of the liquidation of the Company, the
distribution of its property upon its dissolution or winding-up, or the
distribution of all or part of its assets among the shareholders, to an amount
equal to the value of the consideration paid in respect of such shares
outstanding, as credited to the issued and paid-up share capital of the
Company, on an equal basis, in proportion to the amount of their respective
claims in regard to such shares held by them. The holders of Second Preferred
Shares are entitled to preference and priority to any participation of holders
of Common Shares or shares of any other class of shares of the share capital of
the Company ranking junior to the Second Preferred Shares in regards to
dividends and, in the event of the liquidation of the Company, the distribution
of its property upon its dissolution or winding-up, or the distribution of all
or part of its assets among the shareholders, to an amount equal to the value
of the consideration paid in respect of such shares outstanding, as credited to
the issued and paid-up share capital of the Company, on an equal basis, in
proportion to the amount of their respective claims in regard to such shares
held by them.
The Board of Directors may, from time to time, provide
for series of Preferred Shares to be created and issued, but the issuance of
any Preferred Share is subject to the general duties of the directors under the
CBCA to act honestly and in good faith with a view to the best interests of the
Company and to exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances. The issuance of any
Preferred Shares in the face of a take-over bid for the Company would be
examined in light of these duties of the directors and other applicable case
law.
80
Shareholder
Actions
The CBCA provides that shareholders of the Company may,
with leave of a court, bring an action in the name of and on behalf of the
Company for the purpose of prosecuting, defending or discontinuing an action on
behalf of the Company. In order to grant leave to permit such an action, the
CBCA provides that the court must be satisfied that the directors of the
Company were given adequate notice of the application, the shareholder is
acting in good faith and that it appears to be in the Companys best interests
that the action be brought.
Shareholder Rights Plan
Objectives and Background of the
Shareholder Rights Plan
The fundamental objectives of the Companys
Shareholder Rights Plan (the Rights Plan) are to provide adequate time for
the Companys Board of Directors and shareholders to assess an unsolicited take-over
bid for the Company, to provide the Board of Directors with sufficient time to
explore and develop alternatives for maximizing shareholder value if a
take-over bid is made, and to provide shareholders with an equal opportunity to
participate in a take-over bid.
The Rights Plan encourages a potential acquiror who
makes a take-over bid to proceed either by way of a Permitted Bid, which
requires a take-over bid to satisfy certain minimum standards designed to
promote fairness, or with the concurrence of the Companys Board of Directors.
If a take-over bid fails to meet these minimum standards and the Rights Plan is
not waived by the Board of Directors, the Rights Plan provides that holders of
Common Shares, other than the potential acquiror, will be able to purchase
additional Common Shares at a significant discount to market, thus exposing the
potential acquiror of Common Shares to substantial dilution of its holdings.
Summary of the Rights Plan
The following is a summary of the principal terms of
the Rights Plan, which summary is qualified in its entirety by reference to the
terms thereof. The Rights Plan is filed as an exhibit to this annual report on Form 20-F.
Operation of the Rights Plan
Pursuant to the terms of the Rights Plan, one right was
issued in respect of each Common Share outstanding as at the close of business
on March 29, 2004 (the Record Time). In addition, one right will be
issued for each additional Common Share issued after the Record Time and prior
to the earlier of the Expiration Time and the Separation Time (as defined
below). The rights have an initial exercise price equal to the Market Price (as
defined below) of the Common Shares as determined at the Separation Time,
multiplied by five, subject to certain adjustments, and they are not
exercisable until the Separation Time. Upon the occurrence of a Flip-in Event
(as defined below), each right will entitle the holder thereof, other than an
Acquiring Person (as defined below), to purchase from the Company one Common
Share upon payment to the Company of 50% of the Market Price of the Common
Shares on the Toronto Stock Exchange on the date of consummation or occurrence
of such Flip-in Event, subject to certain anti-dilution adjustments.
Trading of Rights
Until the Separation Time, the rights trade with the
Common Shares and are represented by the same share certificates as the Common
Shares or an entry in the Companys securities register in respect of any
outstanding Common Shares. From and after the Separation Time and prior to the
Expiration Time, the rights are evidenced by rights certificates and trade
separately from the Common Shares. The rights do not carry any of the rights
attaching to the Common Shares such as voting or dividend rights.
81
Separation Time
The rights will separate from the Common Shares to
which they are attached and become exercisable at the time (the Separation
Time) of the close of business on the eighth business day after the earliest
to occur of:
·
the
first date (the Stock Acquisition Date) of a public announcement of facts
indicating that a person has become an Acquiring Person (as defined below);
·
the
date of the commencement of, or first public announcement of the intention of
any person (other than the Company or any of its subsidiaries) to commence a
take-over bid or a share exchange bid for more than 20% of the outstanding
Common Shares of the Company other than a Permitted Bid or a Competing
Permitted Bid (as defined below); and
·
the date
upon which a Permitted Bid or a Competing Permitted Bid ceases to be a
Permitted Bid or a Competing Permitted Bid, as the case may be.
The Separation Time can also be such later time as may
from time to time be determined by the Board of Directors.
Flip-in Event
The acquisition by a person (an Acquiring Person),
including others acting jointly or in concert with such person, of more than
20% of the outstanding Common Shares, other than by way of a Permitted Bid, a
Competing Permitted Bid or in certain other limited circumstances described in
the Rights Plan, is referred to as a Flip-in Event.
Definition of Market Price
Market Price is generally defined in the Rights Plan,
on any given day on which a determination must be made, as the average of the
daily closing prices per Common Share on each of the 20 consecutive Trading
Days (as defined below) through and including the Trading Day immediately
preceding such date of determination; subject to certain exceptions. Trading
Day is generally defined as the day on which the principal Canadian or United
States stock exchange (as determined by the Board of Directors acting in good
faith) on which the Common Shares are listed or admitted to trading is open for
the transaction of business.
Exercise of Rights
Upon the Separation Time or the effective date of the
Flip-in Event, whichever occurs first, each right (other than those held by the
Acquiring Person) will entitle the holder thereof to purchase from the Company
one Common Share upon payment to the Company of 50% of the Market Price of the
Common Shares of the Company on the Stock Acquisition Date subject to certain
anti-dilution adjustments.
Permitted Bid Requirements
The requirements of a Permitted Bid include the
following:
(1)
the
take-over bid must be made by means of a take-over bid circular;
(2)
the
take-over bid must be made to all holders of Common Shares wherever resident,
on identical terms and conditions, other than the bidder;
(3)
the
take-over bid must not permit Common Shares tendered pursuant to the bid to be
taken up or paid for:
a)
prior
to the close of business on a date which is not less than 60 days following the
date of the bid, and
82
b)
then
only if at such date more than 50% of the then outstanding Common Shares held
by shareholders other than any other Acquiring Person, the bidder, the bidders
affiliates or associates, persons acting jointly or in concert with the bidder
and any employee benefit plan, deferred profit-sharing plan, stock
participation plan or trust for the benefit of employees of the Company or any
of its subsidiaries, unless the beneficiaries of such plan or trust direct the
manner in which the Common Shares are to be voted or direct whether the Common
Shares are to be tendered to a take-over bid (the Independent Shareholders),
have been deposited or tendered to the take-over bid and not withdrawn;
(4)
the
take-over bid must allow Common Shares to be deposited, unless the take-over
bid is withdrawn, at any time up to the close of business on the date that the
Common Shares are to be first taken up and paid for;
(5)
the
take-over bid must allow Common Shares to be withdrawn until taken up and paid
for; and
(6)
if
more than 50% of the then outstanding Common Shares held by Independent
Shareholders are deposited or tendered to the take-over bid and not withdrawn,
the bidder must make a public announcement of that fact and the take-over bid
must remain open for deposits and tenders of Common Shares for not less than 10
days from the date of such public announcement.
The Rights Plan allows a competing Permitted Bid (a Competing
Permitted Bid) to be made while a Permitted Bid is in existence. A Competing
Permitted Bid must satisfy all the requirements of a Permitted Bid other than
the requirements set out in clauses (3) and (6) above and must not
permit Common Shares tendered or deposited pursuant to the bid to be taken up
or paid for (a) prior to the close of business on a date which is not
earlier than the latter of the last day on which the bid must be open for
acceptance after the date of the bid under applicable Canadian provincial
securities legislation and the earliest date on which Common Shares of the
Company may be taken up and paid for under any earlier Permitted Bid or
Competing Permitted Bid that is then in existence, and (b) then only if at
such date more than 50% of the then outstanding Common Shares held by the
Independent Shareholders have been deposited or tendered to the take-over bid
and not withdrawn. In the event that the requirement set forth in (b) of
this paragraph is satisfied, the competing bidder must make a public
announcement of the fact and the take-over bid must remain open for deposits
and tenders of Common Shares for not less than 10 days from the date of such
public announcement.
Waiver and Redemption
The Board of Directors may, prior to the occurrence of
a Flip-in Event, waive the dilutive effects of the Rights Plan in respect of,
among other things, a particular Flip-in Event resulting from a take-over bid
made by way of a take-over bid circular to all holders of Common Shares of the
Company. In such an event, such waiver shall also be deemed to be a waiver in
respect of any other Flip-in Event occurring under a take-over bid made by way
of a take-over bid circular to all holders of Common Shares prior to the expiry
of the first mentioned take-over bid. The Board of Directors may, at any time
prior to the Separation Time, elect to redeem all but not less than all of the
outstanding rights at a price of C$0.00001 each.
Amendment to the Rights Plan
The Rights Plan may be amended to correct any clerical
or typographical error or to make such changes as are required to maintain the
validity of the Rights Plan as a result of any change in any applicable
legislation, regulations or rules thereunder, without the approval of the
holders of the Common Shares or rights. Prior to the Separation Time, the
Company may, with the prior consent of the holders of Common Shares, amend,
vary or delete any of the provisions of the Rights Plan in order to effect any
changes which the Board of Directors, acting in good faith, considers necessary
or desirable. The Company may, with the prior consent of the holders of rights,
at any time after the Separation Time and before the Expiration Time, amend,
vary or delete any of the provisions of the Rights Plan. The Rights Plan,
including the amendments thereto and the restatement thereof, was approved by
the Board of Directors on March 2, 2007, was signed on March 5, 2007
and was ratified and confirmed by the Companys shareholders on May 2,
2007.
83
Fiduciary Duty of Board
The Rights Plan will not detract from or lessen the
duty of the Board of Directors to act honestly and in good faith with a view to
the best interests of the Company and its shareholders. The Board of Directors
will continue to have the duty and power to take such actions and make such
recommendations to the Companys shareholders as are considered appropriate.
Exemptions for Investment Advisors
Fund managers, investment advisors (for fully-managed
accounts), trust companies (acting in their capacities as trustees and
administrators), statutory bodies whose business includes the management of
funds, and administrators of registered pension plans are exempt under the
Rights Plan from triggering a Flip-in Event, provided that they are not making,
or are not part of a group making, a take-over bid.
Action Necessary to Change Rights of Shareholders
In order to change the rights of its shareholders, the
Company would need to amend its Restated Articles of Incorporation to effect
the change. Such an amendment would require the approval of holders of
two-thirds of the issued and outstanding shares cast at a duly called special
meeting. For certain amendments such as those creating a class of Preferred
Shares, a shareholder is entitled under the CBCA to dissent in respect of such
a resolution amending the Restated Articles of Incorporation and, if the
resolution is adopted and the Company implements such changes, demand payment
of the fair value of its shares.
Disclosure of Share Ownership
In general, under applicable securities regulation in
Canada, a person or company who beneficially owns, directly or indirectly,
voting securities of an issuer or who exercises control or direction over
voting securities of an issuer or a combination of both, carrying more than ten
percent of the voting rights attached to all the issuers outstanding voting
securities is an insider and must, within ten days of becoming an insider, file
a report in the required form effective the date on which the person became an
insider, disclosing any direct or indirect beneficial ownership of, or control
or direction over, securities of the reporting issuer.
Additionally, securities regulation in Canada provides
for the filing of a report by an insider of a reporting issuer whose holdings
change, which report must be filed within ten days from the day on which the
change takes place.
Section 13 of the
United
States
Securities Exchange Act
of 1934
(the Exchange Act) imposes reporting requirements on
persons who acquire beneficial ownership (as such term is defined in the Rule 13d-3
under the Exchange Act) of more than five percent of a class of an equity
security registered under Section 12 of the Exchange Act. The Companys
Common Shares are so registered. In general, such persons must file, within ten
days after such acquisition, a report of beneficial ownership with the SEC
containing the information prescribed by the regulations under Section 13
of the Exchange Act. This information is also required to be sent to the issuer
of the securities and to each exchange where the securities are traded.
Meeting of Shareholders
An annual meeting of shareholders is held each year
for the purpose of considering the financial statements and reports, electing
directors, appointing auditors and fixing or authorizing the Board of Directors
to fix their remuneration and for the transaction of other business as may
properly come before a meeting of shareholders. Any annual meeting may also
constitute a special meeting to take cognizance and dispose of any matter of
which a special meeting may take cognizance and dispose. Under the bylaws, the
president of the Company has the power to call a meeting of shareholders.
While the bylaws provide that one or more shareholders
who hold at least 20% of the outstanding voting shares of the Company may
requisition the directors of the Company to call a meeting of shareholders for
the purpose
84
stated in the requisition, the CBCA provides that the holders of not
less than 5% of the outstanding voting shares of the Company may so requisition
the directors of the Company. Except in limited circumstances, including where
a meeting of shareholders has already been called and a notice of meeting already
given or where it is clear that the primary purpose of the requisition is to
redress a personal grievance against the Company or its directors, officers or
shareholders, the directors of the Company, on receipt of such requisition,
must call a meeting of shareholders. If the directors fail to call a meeting of
shareholders within twenty-one days after receiving the requisition, any
shareholder who signed the requisition may call the meeting of shareholders
and, unless the shareholders resolve otherwise at the meeting, the Company
shall reimburse the shareholders for the expenses reasonably incurred by them
in requisitioning, calling and holding the meeting of shareholders.
The CBCA also provides that, except in limited
circumstances, a resolution in writing signed by all of the shareholders
entitled to vote on that resolution at a meeting of shareholders is as valid as
if it had been passed at a meeting of shareholders.
A quorum of shareholders is present at an annual or
special meeting of shareholders, regardless of the number of persons present in
person at the meeting, if the holder or holders of shares representing at least
twenty percent of the outstanding voting shares at such meeting are present in
person or represented in accordance with the Companys bylaws. In the case
where the CBCA, the Restated Articles of Incorporation or the bylaws of the
Company require or permit the vote by class of holders of a given class of
shares of the share capital of the Company, the quorum at any meeting will be
one or more persons representing twenty percent of the outstanding shares of
such class.
Notice of the time and place of each annual or special
meeting of shareholders must be given not less than twenty-one days, nor more
than fifty days, before the date of each meeting to each director, to the
auditor and to each shareholder entitled to vote thereat. If the address of any
shareholder, director or auditor does not appear in the books of the Company,
the notice may be sent to such address as the person sending the notice may
consider to be most likely to reach such shareholder, director or auditor
promptly. Every person who, by operation of the CBCA, transfers or by any other
means whatsoever, becomes entitled to any share, shall be bound by every notice
given in respect of such share which, prior to the entry of his or her name and
address on the register of the Company, is given to the person whose name
appears on the register at the time such notice is sent. Notice of meeting of
shareholders called for any other purpose other than consideration of the
financial statements and auditors report, election of directors and
reappointment of the incumbent auditor, must state the nature of the business
in sufficient detail to permit the shareholder to form a reasoned judgment on
and must state the text of any special resolution or bylaw to be submitted to
the meeting.
Limitations on Right to Own Securities
Neither Canadian law nor the Companys Restated
Articles of Incorporation or bylaws limit the right of a non-resident to hold
or vote Common Shares of the Company, other than as provided in the Investment
Canada Act (the Investment Act). The Investment Act prohibits implementation
of certain direct reviewable investments by an individual, government or agency
thereof, corporation, partnership, trust or joint venture that is not a Canadian,
as defined in the Investment Act (a non-Canadian), unless, after review, the
minister responsible for the Investment Act is satisfied or is deemed to be
satisfied that the investment is likely to be of net benefit to Canada. An
investment in the Common Shares of the Company by a non-Canadian (other than a WTO
Investor, as defined below) would be reviewable under the Investment Act if it
were an investment to acquire direct control of the Company, and the book value
of the assets of the Company were C$5.0 million or more (provided that
immediately prior to the implementation of the investment the Company was not
controlled by WTO Investors). An investment in Common Shares of the Company by
a WTO Investor (or by a non-Canadian other than a WTO Investor if, immediately
prior to the implementation of the investment, the Company was controlled by
WTO Investors) would be reviewable under the Investment Act if it were an investment
to acquire direct control of the Company and the value of the assets of the
Company equaled or exceeded C$295 million (for 2008). A non-Canadian, whether a
WTO Investor or otherwise, would be deemed to acquire control of the Company
for purposes of the Investment Act if he or she acquired a majority of the
Common Shares of the Company. The acquisition of less than a majority, but at
least one-third of the shares, would be presumed to be an acquisition of
control of the Company, unless it could be established that the Company was not
controlled in fact by the acquirer through the ownership of the shares. In
general, an individual is a WTO Investor if he or she is a national of a
country (other than Canada) that is a
85
member of the World Trade Organization (WTO Member) or has a right of
permanent residence in a WTO Member. A corporation or other entity will be a WTO
Investor if it is a WTO Investor-controlled entity, pursuant to detailed rules set
out in the Investment Act. The United States is a WTO Member. Certain
transactions involving the Companys Common Shares would be exempt from the
Investment Act, including: (a) an acquisition of the shares if the
acquisition were made in the ordinary course of that persons business as a
trader or dealer in securities; (b) an acquisition of control of the
Company in connection with the realization of a security interest granted for a
loan or other financial assistance and not for any purpose related to the
provisions of the Investment Act; and (c) an acquisition of control of the
Company by reason of an amalgamation, merger, consolidation or corporate
reorganization, following which the ultimate direct or indirect control in fact
of the Company, through the ownership of voting interests, remains unchanged.
C. Material contracts.
Other than as
disclosed herein under Shareholder Rights Plan, and except for contracts
entered into in the ordinary course of business, there are no material
contracts to which the Company or any of its subsidiaries is a party other than
the employment agreements and change of control agreements with our executive
officers as described below.
The Company and/or its subsidiaries have entered into employment
agreements (the Employment Agreements) with each of the named Executive
Officers. The Employment Agreements provide that the Company will pay the
executives a base salary, an annual bonus and stock options which will be
reviewed annually in accordance with the Companys policies. The Employment
Agreements have an indefinite term, except for Dr. Engel, whose employment
agreement is for a term of 32 months expiring in August 2010. In addition,
each of the Employment Agreements, except for Dr. Engels, provides that,
if the Company terminates the employment of a Named Executive Officer without
cause, then the executive will be entitled to receive a lump-sum payment, less
statutory deductions, of the equivalent of 24 months in the case of Dr. Mazzo,
18 months in the case of Messrs. Turpin and Paradis and 12 months in the
case of Dr. Blake and Ms. McDonald.
The Company has also entered into change of control agreements (the Change
of Control Agreements) with each of the Named Executive Officers, except for Dr. Engel.
Under such agreements, if a change of control (as defined in the Change of
Control Agreements) occurs and the Company terminates the employment of the
executive without cause, or if the executive terminates his employment for good
reason, then the executive will be entitled to receive a lump-sum payment, less
statutory deductions, of the equivalent of twenty-four (24) months in the case
of Dr. Mazzo and eighteen (18) months in the case of Mr. Turpin, Dr. Blake,
Ms. McDonald and Mr. Paradis of (i) their annual base salary, (ii) the
maximum amount of their bonus, and (iii) the benefits, calculated on a
yearly basis, including car allowances, but excluding operating costs and
excluding any stock options which were held by such executive at the time of
termination of employment.
D. Exchange controls.
Canada has no system of exchange controls. There are
no exchange restrictions on borrowing from foreign countries or on the
remittance of dividends, interest, royalties and similar payments, management
fees, loan repayments, settlement of trade debts or the repatriation of
capital. There are no limits on the rights of non-Canadians to exercise voting
rights on their Common Shares of the Company.
86
E. Taxation.
THE FOLLOWING SUMMARY
IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER. CONSEQUENTLY, HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS FOR ADVICE AS TO THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE COMMON SHARES HAVING REGARD TO THEIR PARTICULAR CIRCUMSTANCES.
The following summary describes the principal Canadian
federal income tax consequences to a purchaser who acquires Common Shares (a
holder) who, for the purposes of the Canadian federal Income Tax Act, R.S.C.
1985, as amended (The Tax Act), deals at arms length with, and is not
affiliated with, the Corporation and holds Common Shares as capital
property. The Common Shares will generally
be considered to be capital property for this purpose unless either the holder
holds such Common Shares in the course of carrying on a business, or the holder
has held or acquired such Common Shares in a transaction or transactions
considered to be an adventure in the nature of trade.
This summary is not applicable to a holder an interest
in which is a tax shelter investment as defined in the Tax Act, or to a
holder which is a financial institution as defined in the Tax Act subject to
the mark-to-market rules set out therein.
Such holders should consult their own tax advisors.
This summary is based upon the current provisions of
the Tax Act and the regulations thereunder and the Companys understanding of
the current published administrative practices and policies of the Canada Revenue
Agency (CRA). It also takes into
account all proposed amendments to the Tax Act and the regulations publicly
released by the Minister of Finance (Canada) (Tax Proposals), and assumes
that all such Tax Proposals will be enacted as currently proposed. No assurance can be given that the Tax
Proposals will be enacted in the form proposed or at all. This summary does not otherwise take into
account or anticipate any changes in law, whether by way of legislative,
judicial or administrative action or interpretation, nor does it address any
provincial, territorial or foreign tax considerations.
The current published policy of the CRA is that
certain entities (including most limited liability companies (LLCs)) that
are treated as being fiscally transparent for United States federal income tax
purposes do not qualify as residents of the United States and therefore are not
entitled to relief from Canadian tax under the provisions of the Canada-United
States Income Tax Convention (the Convention). However, on September 21, 2007, Canada and
the United States jointly released the fifth protocol revising the Convention
(the Protocol). Although not yet in
force, the Protocol provides,
inter alia
, for the extension
of treaty benefits to LLCs in certain circumstances.
Prospective investors
should consult their own tax advisors to determine their entitlement to relief
under the Convention based on their particular circumstances.
Holders
Not Resident in Canada
The following discussion applies to a holder of Common
Shares who, at all relevant times, for purposes of the Tax Act and any
applicable income tax treaty or convention, is neither resident nor deemed to
be resident in Canada and does not, and is not deemed to, use or hold Common
Shares, in carrying on a business or part of a business in Canada (a
Non-Resident holder). In addition,
this discussion does not apply to an insurer who carries on an insurance
business in Canada and elsewhere or to an authorized foreign bank (as defined
in the Tax Act).
Disposition of Common Shares
A Non-Resident holder will not be subject to tax under
the Tax Act in respect of any capital gain realized by such Non-Resident holder
on a disposition of Common Shares unless the Common Shares constitute taxable
Canadian property (as defined in the Tax Act) of the Non-Resident holder at
the time of disposition and the holder is not entitled to relief under the
applicable income tax treaty or convention.
As long as the Common Shares are then listed on a designated stock exchange
(which currently includes the NASDAQ and the TSX), the Common Shares generally
will not constitute taxable Canadian property of a Non-Resident holder, unless
at any time during the 60-month period immediately preceding the disposition,
the Non-Resident holder, persons with whom the Non-Resident holder did not deal
at arms length, or the Non-Resident holder together with all such persons,
owned 25% or more of the issued shares of any class or series of shares of the
capital stock of the Corporation. As
long as the Common Shares are listed on the NASDAQ, the TSX or another
recognized stock exchange, a Non-Resident
87
holder who disposes of Common Shares that are taxable Canadian property
will not be required to fulfill the requirements of section 116 of the Tax Act.
Taxation of Dividends on Common Shares
Dividends paid or credited or deemed to be paid or
credited on the Common Shares to a Non-Resident holder will be subject to a
Canadian withholding tax in the amount of 25%.
Such withholding tax may be reduced by virtue of the provisions of an
income tax treaty or convention between Canada and the country of which the
Non-Resident holder is a resident. Under
the Convention, the rate of withholding tax in respect of dividends or deemed
dividends beneficially owned by a resident of the United States is generally
reduced to 15%.
Holders
Resident in Canada
The following discussion applies to a holder of Common
Shares who, at all relevant times, for purposes of the Tax Act and any
applicable income tax treaty or convention, is resident in Canada (a Canadian
holder). Certain Canadian holders whose
Common Shares might not otherwise qualify as capital property may, in certain
circumstances, treat the Common Shares and other Canadian securities as
defined in the Tax Act, as capital property by making an irrevocable election
provided by subsection 39(4) of the Tax Act.
Taxation of Dividends on Common Shares
Dividends received or deemed to be received on the
Common Shares will be included in a Canadian holders income for purposes of
the Tax Act. Such dividends received or
deemed to be received by a Canadian holder that is an individual (other than
certain trusts) will be subject to the gross-up and dividend tax credit rules
generally applicable under the Tax Act in respect of dividends received on
shares of taxable Canadian corporations.
Generally, a dividend will be eligible to the enhanced gross-up and dividend
tax credit if the recipient receives written notice from the corporation
designating the dividend as an eligible dividend (within the meaning of the
Tax Act). There may be limitations on
the ability of the Corporation to designate dividends as eligible
dividends. A Canadian holder that is a
corporation will include such dividends in computing its income and will
generally be entitled to deduct the amount of such dividends in computing its
taxable income. A Canadian holder that
is a private corporation or a subject corporation (as such terms are
defined in the Tax Act), may be liable under Part IV of the Tax Act to pay a
refundable tax of 33
1
/
3
% on dividends received or deemed to be received on
the Common Shares to the extent such dividends are deductible in computing the
holders taxable income.
Disposition of Common Shares
A disposition, or a deemed disposition, of a Common
Share by a Canadian holder will generally give rise to a capital gain (or a
capital loss) equal to the amount by which the proceeds of disposition of the
share, net of any reasonable costs of disposition, exceed (or are less than)
the adjusted cost base of the share to the holder. Such capital gain (or capital loss) will be
subject to the treatment described below under Taxation of Capital Gains and
Capital Losses.
Additional Refundable Tax
A Canadian holder that is a Canadian-controlled
private corporation (as such term is defined in the Tax Act) may be liable to
pay an additional refundable tax of 6
2
/
3
% on certain
investment income including amounts in respect of
Taxable Capital Gains, as defined below.
Taxation of Capital Gains and Capital Losses
In general, one half of any capital gain (a Taxable
Capital Gain) realized by a Canadian holder in a taxation year will be
included in the holders income in the year.
Subject to and in accordance with the provisions of the Tax Act, one
half of any capital loss (an Allowable Capital Loss) realized by a Canadian
holder in a taxation year must be deducted from Taxable Capital Gains realized
by the holder in the year and Allowable Capital Losses in excess of Taxable
Capital Gains may be carried back and deducted in any of the three preceding
taxation years or carried forward and deducted in any subsequent taxation year
against net taxable capital gains realized in such years. The amount of any capital loss realized by a
Canadian holder that is a corporation on the disposition of a Common Share
88
may be reduced by the amount of dividends received or
deemed to be received by it on such Common Share (or on a share for which the
Common Share has been substituted) to the extent and under the circumstances
prescribed by the Tax Act. Similar rules
may apply where a corporation is a member of a partnership or a beneficiary of
a trust that owns Common Shares, directly or indirectly, through a partnership
or a trust. A Taxable Capital Gain
realized by a Canadian holder who is an individual may give rise to liability
for alternative minimum tax.
Certain
U.S. Federal Income Tax Considerations
The
following discussion is a summary of certain U.S. federal income tax
consequences applicable to the ownership and disposition of Common Shares (Shares)
by a U.S. Holder (as defined below), but does not purport to be a complete
analysis of all potential U.S. federal income tax effects. This summary is
based on the Internal Revenue Code of 1986, as amended (the Code), U.S.
Treasury regulations promulgated thereunder, Internal Revenue Service (IRS)
rulings and judicial decisions in effect on the date hereof. All of these are
subject to change, possibly with retroactive effect, or different
interpretations.
This
summary does not address all aspects of U.S. federal income taxation that may
be relevant to particular U.S. Holders in light of their specific circumstances
(for example, U.S. Holders subject to the alternative minimum tax provisions of
the Code) or to holders that may be subject to special rules under U.S.
federal income tax law.
This
summary also does not discuss any aspect of state, local or foreign law, or
U.S. federal estate or gift tax law as applicable to U.S. Holders. In addition,
this discussion is limited to U.S. Holders holding Shares as capital assets.
For purposes of this summary, U.S. Holder means a beneficial holder of Shares
who or that for U.S. federal income tax purposes is:
·
an individual citizen or resident of the United States;
·
a corporation or other entity classified as a corporation for U.S.
federal income tax purposes created or organized in or under the laws of the
United States, any state thereof or the District of Columbia;
·
an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
·
a trust, if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more U.S.
persons (within the meaning of the Code) have the authority to control all
substantial decisions of the trust, or if a valid election is in effect to be
treated as a U.S. person.
If
a partnership or other entity or arrangement classified as a partnership for
U.S. federal income tax purposes holds Shares, the U.S. federal income tax
treatment of a partner generally will depend on the status of the partner and
the activities of the partnership. Such a partner should consult its own tax
advisor as to the tax consequences of the partnership owning and disposing of
Shares.
Dividends
Subject to the passive foreign investment company (PFIC)
rules discussed below, distributions paid by the Company out of current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes), before reduction for any Canadian withholding tax paid with respect
thereto, will generally be taxable to a U.S. Holder as foreign source dividend
income, and will not be eligible for the dividends received deduction
89
generally
allowed to corporations. Distributions in excess of current and accumulated
earnings and profits will be treated as a non-taxable return of capital to the
extent of the U.S. Holders adjusted tax basis in the Shares and thereafter as
capital gain. However, the Company does not maintain calculations of its
earnings and profits in accordance with U.S. federal income tax accounting
principles. U.S. Holders should therefore assume that any distribution by the
Company with respect to Shares will constitute ordinary dividend income. U.S.
Holders should consult their own tax advisors with respect to the appropriate
U.S. federal income tax treatment of any distribution received from the
Company.
For taxable years beginning before January 1,
2011, dividends paid by the Company should be taxable to a non-corporate U.S.
Holder at the special reduced rate normally applicable to long term capital
gains, provided that certain conditions are satisfied. A U.S. Holder will not
be able to claim the reduced rate for any year in which the Company is treated
as a PFIC. See Passive Foreign Investment Company Considerations below.
Under current law payments of dividends by
the Company to non-Canadian investors are generally subject to a 25 percent
Canadian withholding tax. The rate of withholding tax applicable to U.S.
Holders that are eligible for benefits under the C
anada-United
States Tax Convention
(1980) (the Treaty)
is reduced to a maximum of 15 percent.
Dividends paid in Canadian dollars will be
included in income in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the day the dividends are received by the U.S.
Holder, regardless of whether the Canadian dollars are converted into U.S.
dollars at that time. If dividends received in Canadian dollars are converted into U.S. dollars on the day
they are received, the U.S. Holder generally will not be required to recognise
foreign currency gain or loss in respect of the dividend income.
A U.S. Holder will generally be entitled,
subject to certain limitations, to a credit against its U.S. federal income tax
liability, or a deduction in computing its U.S. federal taxable income, for
Canadian income taxes withheld by the Company. U.S. Holders should consult
their tax advisors concerning the foreign tax credit implications of the
payment of Canadian taxes.
Sale or Other Taxable Disposition
Subject to the PFIC rules discussed
below, upon a sale or other taxable disposition of Shares, a U.S. Holder
generally will recognize capital gain or loss for U.S. federal income tax
purposes equal to the difference, if any, between the amount realized on the
sale or other taxable disposition and the U.S. Holders adjusted tax basis in
the Shares.
This capital gain or loss will be
long-term capital gain or loss if the U.S. Holders holding period in the
Shares exceeds one year. Long-term capital gains of non-corporate U.S. Holders
are currently eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations. Any gain or loss will generally be
U.S. source for U.S. foreign tax credit purposes.
Passive Foreign Investment Company
Considerations
A foreign corporation will be classified
as a PFIC for any taxable year in which,
after taking into account the income and assets of the corporation and certain
subsidiaries pursuant to applicable look-through rules, either (i) at
least 75 percent of its gross income is passive income or (ii) at least
50 percent of the average value of its assets is attributable to assets which
produce passive income or are held for the production of passive income.
If the Company is classified as a PFIC for
any taxable year during which a U.S. Holder owns Shares, the U.S. Holder,
absent certain elections (including a mark-to-market election), will generally
be subject to adverse rules (regardless of whether the Company continues
to be classified as a PFIC) with respect to (i) any excess distributions
(generally, any distributions received by the U.S. Holder on the Shares in a
taxable year that are greater than 125 percent of the average annual
distributions received by the U.S. Holder in the three preceding taxable years
or, if shorter, the U.S. Holders holding period for the Shares) and (ii) any
gain realized on the sale or other disposition of Shares.
Under these adverse rules (a) the
excess distribution or gain will be allocated rateably over the U.S. Holders
holding period, (b) the amount allocated to the current taxable year and
any taxable year prior to the first taxable year in which the Company is
classified as a PFIC will be taxed as ordinary income, and (c) the amount
90
allocated
to each of the other taxable years during which the Company was classified as a
PFIC will be subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year and an interest charge will be
imposed with respect to the resulting tax attributable to each such other
taxable year.
The Company believes it was not a PFIC for
the 2007 taxable year. However,
since the fair market value of
the Companys assets may be determined in large part by the market price of the
Shares, which is likely to fluctuate, and the composition of the Companys
income and assets will be affected by how, and how quickly, the Company spends
any cash that is raised in any financing transaction, no assurance can be
provided that the Company would not be classified as a PFIC for the 2008
taxable year and for any future taxable year.
U.S. Holders
should consult their tax advisors regarding the potential application of the
PFIC regime.
Information Reporting and Backup Withholding
The proceeds of a sale or other
disposition, as well as dividends paid with respect to Shares by a U.S. payor,
generally will be reported to the IRS and to the U.S. Holder as required under
applicable regulations. Backup withholding tax may apply to these payments if
the U.S. Holder fails to timely provide an accurate taxpayer identification
number or otherwise fails to comply with, or establish an exemption from, such
backup withholding tax requirements. Certain U.S. Holders (including, among
others, corporations) are not subject to the information reporting or backup
withholding tax requirements described herein. U.S. Holders should consult
their tax advisors as to their qualification for exemption from backup withholding
tax and the procedure for obtaining an exemption.
F. Dividends and paying agents.
Not applicable.
G. Statement by experts.
Not applicable.
H. Documents on display.
We are subject
to the information requirements of the Securities Exchange Act of 1934, as
amended. In accordance with these requirements, we file reports and other
information with the United States Securities and Exchange Commission. These
materials, including this annual report on Form 20-F and the exhibits
thereto, may be inspected and copied at the Commissions Public Reference Room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may
obtain information on the operation of the Commissions Public Reference Room by
calling the Commission in the United States at 1-800-SEC-0330. The Commission
also maintains a website at www.sec.gov that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. The Companys annual reports and some of the other information
submitted by the Company to the Commission may be accessed through this
website. In addition, material filed by the Company can be inspected on the
Canadian Securities Administrators electronic filing system, SEDAR, accessible
at the website www.sedar.com. This material includes the Companys Management
Information Circular for its annual meeting to be held on
May 7
,
2008 to be furnished to the SEC on Form 6-K, which provides information
including directors and officers, remuneration and indebtedness, principal
holders of securities and securities authorized for issuance under equity
compensation plans. Additional financial information is provided in our annual
financial statements for the year ended December 31, 2007 and our
Managements Discussion and Analysis relating to these statements. These
documents are also accessible on SEDAR (www.sedar.com).
I. Subsidiary information.
The subsidiaries of the
Company are set forth under Item 4C Organizational Structure.
91
Item 11. Quantitative
and Qualitative Disclosures About Market Risk
Foreign
Currency Risk
Since
the Company operates on an international scale, it is exposed to currency risks
as a result of potential exchange rate fluctuations. For the year ended December 31,
2007, there were no significant operations using forward-exchange contracts and
no significant forward-exchange contract is outstanding as of today.
Credit
Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents, short-term investments
and accounts receivable. Cash and cash equivalents are maintained with
high-credit quality financial institutions. Short-term investments consist
primarily of bonds issued by high-credit quality corporations and institutions.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and investments to be minimal.
Generally,
we do not require collateral or other security from customers for trade
accounts receivable; however, credit is extended following an evaluation of
creditworthiness. In addition, we perform ongoing credit reviews of all our
customers and establish an allowance for doubtful accounts when accounts are
determined to be uncollectible.
Interest
Rate Risk
We are exposed to market
risk relating to changes in interest rates with regard to our short-term
investments.
Item 12. Description
of Securities Other than Equity Securities
A. Debt securities.
Not applicable.
B. Warrants and rights.
Not applicable.
C. Other securities.
Not applicable.
D. American depositary shares.
Not applicable.
PART II
Item 13. Defaults,
Dividend Arrearages and Delinquencies
None.
Item 14.
Material Modification to the Rights of Security Holders and Use of
Proceeds
None.
Item 15. Controls
and Procedures
92
The Registrants management,
including the Registrants Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended), as of December 31, 2007.
Based on that evaluation, as of December 31, 2007, the Registrants Chief
Executive Officer and Chief Financial Officer concluded that the Registrants
disclosure controls and procedures are effective
to ensure that
information required to be disclosed by the Registrant in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange
Commission rules and forms and is accumulated and communicated to
management, including the Registrants Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Managements Report on Internal Control over
Financial Reporting
The Registrants management is responsible for
establishing and maintaining adequate internal control over financial
reporting. The Registrants internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in
Canada.(1)
(1) Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada (Canadian GAAP) and
significant differences in measurement and disclosure from generally accepted
accounting principles in United States (U.S. GAAP) are set out in Note 24 to
our consolidated financial statements included in Item 18 to this report.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
The Registrants management, with the participation
of the Registrants Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Registrants internal control over financial
reporting based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, the Registrants management has concluded
that, as of December 31, 2007, the Registrants internal control over
financial reporting was effective.
The effectiveness of the
Registrants internal control over financial reporting as of December 31,
2007 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which is included in
Item 18 of this Annual Report on Form 20-F.
Changes in Internal Control over Financial
Reporting
There
has been no change in the Registrants internal control over financial
reporting that occurred during the year ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, the
Registrants internal control over financial reporting.
Item 16. [Reserved]
Item 16A.
Audit Committee Financial Expert
The Board of Directors of the Registrant has
determined that the Registrant has at least one audit committee financial
expert (as defined in paragraph 16(b) of General Instruction B to Form 20-F).
The name of the audit committee financial expert of the Registrant is Mr. Gérard Limoges,
FCA, the Audit Committees Chairman. The Commission has indicated that the
designation of Mr. Limoges as the audit committee financial expert of the
Registrant does not: (i) make Mr. Limoges an expert for any
purpose, including without limitation for purposes of Section 11 of the
Securities Act of 1933, as amended, as a result of this designation; (ii) impose
any duties, obligations or liability on Mr. Limoges that are greater than
those imposed on him as a member of the Audit
93
Committee and the Board of Directors in the absence of such designation;
or (iii) affect the duties, obligations or liability of any other member
of the Audit Committee or the Board of Directors. The other members of the
Audit committee are Ms. Martha Byorum and Mr. Pierre MacDonald who
are all independent. For a description of their respective education and
experience, please refer to Item 6A.
Item 16B.
Code of Ethics
On March 29, 2004, the Board of Directors
adopted a Code of Ethical Conduct, which was amended by the Board of
Directors on November 3, 2004, December 13, 2005 and March 2,
2007. The December 13, 2005 amendment incorporates changes to the duty to
report violations consistent with applicable laws. The Registrant has selected
an independent third party supplier to provide a confidential and anonymous
communication channel for reporting concerns about possible violations to the
Registrants Code of Ethical Conduct as well as financial and/or accounting
irregularities or fraud. A copy of the Code of Ethical Conduct, as amended, is
attached as Exhibit 11.1
to
this annual report on Form 20-F and is also available on the Registrants
Web site at www.aeternazentaris.com in Investors/Governance. The Code of
Ethical Conduct is a
code of ethics as defined in paragraph (16)(b) of
General Instruction B to Form 20-F. The Code of Ethical Conduct applies to
all of the Registrants employees, directors and officers, including the
Registrants principal executive officer, principal financial officer, and
principal accounting officer or controller, or persons performing similar
functions, and includes specific provisions dealing with integrity in
accounting matters, conflicts of interest and compliance with applicable laws
and regulations. The Registrant will provide this document without charge to
any person or company upon request to the Corporate Secretary of the
Registrant, at its head office at 1405 du Parc-Technologique Boulevard, Quebec
City, Quebec, G1P 4P5, Canada.
Item 16C.
Principal Accountant Fees and Services
(All amounts are in US
dollars)
A Audit Fees
During the financial years
ended December 31, 2007 and 2006, our principal accountant, PricewaterhouseCoopers
LLP, billed us aggregate amounts of $284,973 and $253,587 respectively for the
audit of our annual consolidated financial statements and services in
connection with statutory and regulatory filings.
B Audit-related Fees
During the financial years
ended December 31, 2007 and 2006, our principal accountant,
PricewaterhouseCoopers LLP, billed us aggregate amounts of $306,804 and
$204,555 respectively for audit or attest services not required by statute or
regulation, employee benefit plan audits, due diligence services, and
accounting consultations on proposed transactions, including the review of
prospectuses and the delivery of customary consent and comfort letters in
connection therewith.
C Tax Fees
During the financial years
ended December 31, 2007 and 2006, our principal accountant,
PricewaterhouseCoopers LLP, billed us aggregate amounts of $43,182 and $29,084
respectively for services related to tax compliance, tax planning and tax
advice.
D All Other Fees
During the financial years ended
December 31, 2007 and 2006, our principal accountant, Pricewatherhouse
Coopers LLP, billed us aggregate amounts of $4,508 and $568 respectively for
services not included in audit fees, audit-related fees and tax fees.
94
E Audit Committee Pre-Approval
Policies and Procedures
Under applicable Canadian securities
regulations,
we are required to disclose whether our Audit
Committee has adopted specific policies and procedures for the engagement of
non-audit services and to prepare a summary of these policies and procedures.
The Audit Committee Charter (attached as Exhibit 11.6 to this annual
report) provides that it is such committees responsibility to approve all
audit engagement fees and terms as well as reviewing policies for the provision
of non-audit services by the external auditors and, when required, the
framework for pre-approval of such services. The Audit Committee delegates to
its Chairman the pre-approval of such non-audit fees. The pre-approval by the
Chairman is then presented to the Audit Committee at its first scheduled
meeting following such pre-approval.
For each of the years
ended December 31, 2006 and 2007, none of the non-audit services
provided by our external auditor were
approved by the Audit Committee pursuant to the de minimis exception to the
pre-approval requirement for non-audit services.
During the financial year
ended on December 31, 2007, only full-time permanent employees of our
principal accountant, PricewaterhouseCoopers LLP, performed work to audit our
financial statements.
Item 16D.
Exemptions from the Listing Standards for Audit Committees
None.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
PART III
Item 17. Financial Statements
We have elected to provide
financial statements pursuant to Item 18.
Item 18. Financial Statements
The financial statements
appear on pages 96 through 155.
95
Æterna
Zentaris Inc.
Consolidated
Financial Statements
December 31,
2007, 2006 and 2005
(expressed in
thousands of US dollars)
96
Report
of Independent Registered Public Accounting Firm
To the Shareholders of
Æterna Zentaris Inc.
We have completed an integrated audit of the
consolidated financial statements and internal control over financial reporting
of Æterna Zentaris Inc. as at December 31, 2007 and audits of its 2006 and
2005 consolidated financial statements. Our opinions, based on our audits, are
presented below.
Consolidated
financial statements
We have audited
the accompanying consolidated balance sheets of Æterna Zentaris Inc. as at December 31,
2007 and December 31, 2006, and the related consolidated statements of
earnings, comprehensive income, changes in shareholders equity and cash flows
for each of the years in the three-year period ended December 31, 2007. We
have also audited the financial statement schedule on the change in the valuation
allowance on future income tax assets included in Form 20-F. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits
in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. A financial statement audit also includes assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company as at December 31, 2007 and December 31, 2006
and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 2007 in accordance with Canadian
generally accepted accounting principles. Furthermore, in our opinion, the
financial statement schedule on the change in the valuation allowance on future
income tax assets included in Form 20-F
presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
Internal
control over financial reporting
We have also
audited Æterna Zentaris Inc.s internal control over financial reporting as at December 31,
2007, based on criteria established in
Internal Control -
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the annual report under the title Managements Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on
our audit.
We conducted
our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over
financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
97
A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as at December 31, 2007 based on criteria
established in
Internal Control Integrated Framework
issued by the COSO.
Chartered Accountants
Quebec,
Quebec, Canada
March 4,
2008
Comments
by Auditors for U.S. Readers on Canada-U.S. Reporting Differences
In the United
States of America, reporting standards for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when there are changes
in accounting principles that have a material effect on the comparability of
the Companys financial statements, such as the changes described in note 3 to
the consolidated financial statements. Our report to the Shareholders dated March 4,
2008 is expressed in accordance with Canadian reporting standards which do not
require a reference to such changes in accounting principles in the auditors
report when the changes are properly accounted for and adequately disclosed in
the financial statements.
Chartered Accountants
Quebec,
Quebec, Canada
March 4,
2008
98
Æterna
Zentaris Inc.
Consolidated
Balance Sheets
(expressed in thousands of US dollars)
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
10,272
|
|
8,939
|
|
Short-term investments (note 22)
|
|
31,115
|
|
51,550
|
|
Accounts receivable
|
|
|
|
|
|
Trade
|
|
6,170
|
|
6,795
|
|
Other (note 7)
|
|
3,044
|
|
2,733
|
|
Income taxes
|
|
|
|
931
|
|
Inventory (note 8)
|
|
5,406
|
|
5,044
|
|
Prepaid expenses
|
|
3,573
|
|
2,631
|
|
Future income tax assets (note 18)
|
|
|
|
21,953
|
|
Current assets of discontinued operations (note 5)
|
|
|
|
1,147
|
|
|
|
59,580
|
|
101,723
|
|
Investment
in an affiliated company
(note 4)
|
|
|
|
57,128
|
|
|
|
|
|
|
|
Property,
plant and equipment
(note 10)
|
|
7,460
|
|
13,001
|
|
|
|
|
|
|
|
Long-lived
assets held for sale
(note 6)
|
|
13,999
|
|
|
|
|
|
|
|
|
|
Deferred
charges and other long-term assets
(note
9)
|
|
1,441
|
|
1,354
|
|
|
|
|
|
|
|
Intangible
assets
(note
11)
|
|
30,391
|
|
37,351
|
|
|
|
|
|
|
|
Goodwill
(note 12)
|
|
10,492
|
|
9,509
|
|
|
|
|
|
|
|
Non-current assets of discontinued
operations
(note 5)
|
|
|
|
3,425
|
|
|
|
|
|
|
|
|
|
123,363
|
|
223,491
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Accounts payable and accrued liabilities (note 13)
|
|
16,084
|
|
9,735
|
|
Income taxes
|
|
23
|
|
|
|
Deferred revenues
|
|
5,373
|
|
5,570
|
|
Current portion of long-term debt
|
|
775
|
|
686
|
|
Current liabilities of discontinued operations
(note 5)
|
|
|
|
319
|
|
|
|
22,255
|
|
16,310
|
|
|
|
|
|
|
|
Deferred
revenues
|
|
3,333
|
|
8,468
|
|
|
|
|
|
|
|
Long-term
debt
(note 14)
|
|
|
|
687
|
|
|
|
|
|
|
|
Employee
future benefits
(note 15)
|
|
9,184
|
|
8,167
|
|
|
|
|
|
|
|
Future
income tax liabilities
(note 18)
|
|
|
|
10,365
|
|
|
|
|
|
|
|
Non-current
liabilities of discontinued operations
(note 5)
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
34,772
|
|
44,612
|
|
Commitments and contingencies
(note
23)
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Share
capital
(note 16)
|
|
30,566
|
|
168,466
|
|
|
|
|
|
|
|
Other
capital
|
|
79,306
|
|
6,226
|
|
|
|
|
|
|
|
Deficit
|
|
(42,997
|
)
|
(10,114
|
)
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
21,716
|
|
14,301
|
|
|
|
|
|
|
|
|
|
88,591
|
|
178,879
|
|
|
|
|
|
|
|
|
|
123,363
|
|
223,491
|
|
Basis of presentation (note 2)
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
Approved by the Board of Directors
|
Director
|
|
Director
|
Jürgen Ernst, MBA
|
Gérard Limoges, FCA
|
99
Æterna Zentaris Inc.
Consolidated
Statements of Changes in Shareholders Equity
For
the years ended December 31,
(tabular amounts in thousands of US dollars, except common shares data)
|
|
Common
shares
(number of)
|
|
Share
capital
|
|
Other
capital
|
|
Deficit
|
|
Accumulated
other
comprehensive
income
|
|
Total
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Balance December 31,
2004
|
|
45,670,909
|
|
127,585
|
|
6,059
|
|
(53,795
|
)
|
20,227
|
|
100,076
|
|
Net earnings for the year
|
|
|
|
|
|
|
|
10,571
|
|
|
|
10,571
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
(8,290
|
)
|
(8,290
|
)
|
Issued pursuant to the stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
25,000
|
|
130
|
|
|
|
|
|
|
|
130
|
|
Conversion option related to convertible term
loans
|
|
|
|
|
|
2,129
|
|
|
|
|
|
2,129
|
|
Issued shares pursuant to acquisition of Echelon
|
|
443,905
|
|
2,737
|
|
|
|
|
|
|
|
2,737
|
|
Share issue expenses
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
Stock based compensation costs
|
|
|
|
|
|
2,286
|
|
|
|
|
|
2,286
|
|
Balance December 31,
2005
|
|
46,139,814
|
|
130,344
|
|
10,474
|
|
(43,224
|
)
|
11,937
|
|
109,531
|
|
Net earnings for the year
|
|
|
|
|
|
|
|
33,390
|
|
|
|
33,390
|
|
Conversion of convertible term loans
|
|
6,955,088
|
|
37,786
|
|
(6,339
|
)
|
(280
|
)
|
|
|
31,167
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
4,007
|
|
4,007
|
|
Foreign currency translation adjustment related to
disposal of Atrium
|
|
|
|
|
|
|
|
|
|
(1,643
|
)
|
(1,643
|
)
|
Issued pursuant to the stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
22,000
|
|
81
|
|
|
|
|
|
|
|
81
|
|
Ascribed value from Other capital
|
|
|
|
29
|
|
(29
|
)
|
|
|
|
|
|
|
Issued pursuant to acquisition of Echelon
|
|
23,789
|
|
163
|
|
|
|
|
|
|
|
163
|
|
Issued pursuant to acquisition of a patent from a
senior officer (note 21)
|
|
28,779
|
|
175
|
|
|
|
|
|
|
|
175
|
|
Share issue expenses
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
(112
|
)
|
Stock based compensation costs
|
|
|
|
|
|
2,120
|
|
|
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
53,169,470
|
|
168,466
|
|
6,226
|
|
(10,114
|
)
|
14,301
|
|
178,879
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
100
|
|
Common
shares
(number of)
|
|
Share
capital
|
|
Other
capital
|
|
Deficit
|
|
Accumulated
other
comprehensive
income
|
|
Total
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
Balance December 31,
2006
|
|
53,169,470
|
|
168,466
|
|
6,226
|
|
(10,114
|
)
|
14,301
|
|
178,879
|
|
Effect of the application of new accounting
standards (note 3)
|
|
|
|
|
|
|
|
(587
|
)
|
(41
|
)
|
(628
|
)
|
Distribution of Atrium (note 4)
|
|
|
|
(137,959
|
)
|
71,122
|
|
|
|
(5,624
|
)
|
(72,461
|
)
|
Net (loss) for the period
|
|
|
|
|
|
|
|
(32,296
|
)
|
|
|
(32,296
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
13,783
|
|
13,783
|
|
Variation in the fair value of short-term
investments, net of income taxes
|
|
|
|
|
|
|
|
|
|
51
|
|
51
|
|
Issued pursuant to the stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
18,000
|
|
33
|
|
|
|
|
|
|
|
33
|
|
Ascribed value from Other capital
|
|
|
|
26
|
|
(26
|
)
|
|
|
|
|
|
|
Disposal of Shares of Echelon
(note 5)
|
|
|
|
|
|
|
|
|
|
(754
|
)
|
(754
|
)
|
Stock based compensation costs
|
|
|
|
|
|
1,984
|
|
|
|
|
|
1,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
53,187,470
|
|
30,566
|
|
79,306
|
|
(42,997
|
)
|
21,716
|
|
88,591
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
101
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Accumulated Other Comprehensive Income,
|
|
|
|
|
|
|
|
Consisting of the following:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
21,706
|
|
14,301
|
|
11,937
|
|
Variation in fair market value of short-term
investments, net of income taxes
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive income
|
|
21,716
|
|
14,301
|
|
11,937
|
|
Deficit
|
|
(42,997
|
)
|
(10,114
|
)
|
(43,224
|
)
|
|
|
|
|
|
|
|
|
Total Accumulated Other Comprehensive Income and
Deficit
|
|
(21,281
|
)
|
4,187
|
|
(31,287
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
102
Æterna
Zentaris Inc.
Consolidated Statements of Earnings
For the years ended December 31,
(expressed in thousands of US dollars, except shares and per share data)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
42,068
|
|
38,799
|
|
44,813
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and
amortization
|
|
12,930
|
|
11,270
|
|
8,250
|
|
Selling, general and administrative
|
|
20,403
|
|
16,478
|
|
14,403
|
|
Research and development costs
|
|
39,248
|
|
27,422
|
|
25,544
|
|
Research and development tax credits and grants
|
|
(2,060
|
)
|
(1,564
|
)
|
(317
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
1,562
|
|
2,816
|
|
1,665
|
|
Intangible assets
|
|
4,004
|
|
6,148
|
|
4,279
|
|
Impairment of long-lived asset held for sale (note
6)
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,822
|
|
62,570
|
|
53,824
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(34,754
|
)
|
(23,771
|
)
|
(9,011
|
)
|
|
|
|
|
|
|
|
|
Other revenues (expenses)
|
|
|
|
|
|
|
|
Interest income
|
|
1,904
|
|
1,441
|
|
1,235
|
|
Interest expense
|
|
|
|
|
|
|
|
Long-term debt and convertible term loans
|
|
(85
|
)
|
(1,270
|
)
|
(6,979
|
)
|
Other
|
|
|
|
(163
|
)
|
(31
|
)
|
Foreign exchange (loss) gain
|
|
(1,035
|
)
|
319
|
|
(87
|
)
|
Loss on disposal of equipment
|
|
(28
|
)
|
|
|
|
|
Gain on disposal of a long-term investment
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
736
|
|
(5,862
|
)
|
|
|
|
|
|
|
|
|
Share in the results of an affiliated company
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(33,998
|
)
|
(21,460
|
)
|
(14,873
|
)
|
|
|
|
|
|
|
|
|
Income tax recovery (expense)
(note 18)
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings from continuing operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings from discontinued operations
(notes 4 &5)
|
|
(259
|
)
|
25,813
|
|
26,053
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share from continuing operations
|
|
|
|
|
|
|
|
Basic
|
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
Diluted
|
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share from discontinued operations
|
|
|
|
|
|
|
|
Basic
|
|
(0.00
|
)
|
0.50
|
|
0.57
|
|
Diluted
|
|
(0.00
|
)
|
0.48
|
|
0.57
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
|
|
|
|
|
|
|
|
Basic
|
|
(0.61
|
)
|
0.64
|
|
0.23
|
|
Diluted
|
|
(0.61
|
)
|
0.62
|
|
0.23
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares (note 20)
|
|
|
|
|
|
|
|
Basic
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,182,803
|
|
52,549,260
|
|
46,139,814
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
103
Æterna
Zentaris Inc.
Consolidated Statements of Comprehensive
Income
For the years ended December 31,
(expressed in thousands of US dollars, except shares
and per share data)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) for the period
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
13,783
|
|
4,007
|
|
(8,290
|
)
|
Reclassification adjustment related to disposal of
Atrium
|
|
|
|
(1,643
|
)
|
|
|
Reclassification adjustment related to disposal of
Echelon
|
|
(754
|
)
|
|
|
|
|
Variation in fair market value of short-term
investments, net of income taxes
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
(19,216
|
)
|
35,754
|
|
2,281
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
104
Æterna Zentaris Inc.
Consolidated Statements of Cash Flows
(expressed in thousands of US dollars, except shares
and per share data)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net earnings (loss) for the year
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
Net (earnings) loss from discontinued operations
|
|
259
|
|
(25,813
|
)
|
(26,053
|
)
|
Net earnings (loss) from continuing operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
Items not affecting cash and cash equivalents
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
5,566
|
|
8,964
|
|
5,944
|
|
Stock-based compensation costs
|
|
1,984
|
|
2,120
|
|
2,286
|
|
Future income taxes
|
|
(1,868
|
)
|
(29,160
|
)
|
520
|
|
Gain on disposal of a long-term investment
|
|
|
|
(409
|
)
|
|
|
Share in the results of an affiliated company
|
|
|
|
(1,575
|
)
|
|
|
Employee future benefits
|
|
164
|
|
(115
|
)
|
2,338
|
|
Deferred charges and other long term assets
|
|
510
|
|
(841
|
)
|
2,707
|
|
Deferred revenues
|
|
(6,368
|
)
|
(3,258
|
)
|
(10,291
|
)
|
Accretion on long term borrowings
|
|
82
|
|
1,227
|
|
4,479
|
|
Loss on disposal of property, plant and equipment
|
|
28
|
|
|
|
|
|
Impairment of long-lived asset held for sale
|
|
735
|
|
|
|
|
|
Foreign exchange loss (gain) on long-term items
denominated in foreign currency
|
|
641
|
|
(587
|
)
|
381
|
|
Change in non-cash operating working capital items
(note 17)
|
|
4,901
|
|
187
|
|
4,488
|
|
Net cash used in continuing operating activities
|
|
(25,662
|
)
|
(15,870
|
)
|
(2,630
|
)
|
Net cash provided by discontinued operating
activities
|
|
132
|
|
23,827
|
|
15,564
|
|
Net cash provided by (used in) operating
activities
|
|
(25,530
|
)
|
7,957
|
|
12,934
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
(751
|
)
|
(718
|
)
|
(655
|
)
|
Issuance of shares pursuant to the exercise of
stock options
|
|
33
|
|
81
|
|
130
|
|
Share issue expenses
|
|
(366
|
)
|
(112
|
)
|
(108
|
)
|
Net cash used in continuing financing activities
|
|
(1,084
|
)
|
(749
|
)
|
(633
|
)
|
Net cash provided by (used in) discontinued
financing activities
|
|
(230
|
)
|
(7,825
|
)
|
89,558
|
|
Net cash provided by (used in) financing
activities
|
|
(1,314
|
)
|
(8,574
|
)
|
88,925
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
(6,180
|
)
|
(79,300
|
)
|
(25,945
|
)
|
Proceeds from sale of short-term investments
|
|
33,405
|
|
49,267
|
|
26,771
|
|
Proceeds from sale of a long-term investment
|
|
|
|
1,387
|
|
|
|
Business acquisitions, net of cash and cash
equivalents acquired
|
|
|
|
(32
|
)
|
(37
|
)
|
Purchase of property, plant and equipment
|
|
(3,702
|
)
|
(1,845
|
)
|
(1,114
|
)
|
Proceeds from sale of property, plant and equipment
|
|
729
|
|
|
|
|
|
Acquisition of amortizable intangible assets
|
|
(67
|
)
|
(5
|
)
|
(558
|
)
|
Net cash provided by (used in) continuing
investing activities
|
|
24,185
|
|
(30,528
|
)
|
(883
|
)
|
Net cash provided by (used in) discontinued
investing activities
|
|
2,238
|
|
11,878
|
|
(94,699
|
)
|
Net cash provided by (used in) in investing
activities
|
|
26,423
|
|
(18,650
|
)
|
(95,582
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and
cash equivalents
|
|
1,337
|
|
1,356
|
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
916
|
|
(17,911
|
)
|
3,529
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents Beginning of year
|
|
9,356
|
|
27,267
|
|
23,738
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of year
|
|
10,272
|
|
9,356
|
|
27,267
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents related to:
|
|
|
|
|
|
|
|
Continuing operations
|
|
10,272
|
|
8,939
|
|
12,234
|
|
Discontinued operations
|
|
|
|
417
|
|
15,033
|
|
|
|
|
|
|
|
|
|
|
|
10,272
|
|
9,356
|
|
27,267
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents components:
|
|
10,195
|
|
9,174
|
|
27,093
|
|
Cash
|
|
77
|
|
182
|
|
174
|
|
Cash equivalents
|
|
10,272
|
|
9,356
|
|
27,267
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
105
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option
data and as otherwise noted)
1
Incorporation
and nature of activities
Æterna
Zentaris Inc. (Æterna Zentaris or the Company), incorporated under the
Canada Business Corporations Act, is a global biopharmaceutical company focused
on endocrine therapy and oncology with expertise in drug discovery, development
and commercialization.
Our pipeline
encompasses compounds at all stages of development, from drug discovery through
marketed products. The two highest priority clinical programs are our lead
value driver, cetrorelix for benign prostatic hyperplasia (BPH) and our lead oncology
program, AEZS-108 for endometrial and ovarian cancers.
2
Summary
of significant accounting policies
Basis of presentation
These financial statements have been prepared
in accordance with Canadian generally accepted accounting principles. These financial
statements differ in certain respects from those prepared in accordance with
United States generally accepted principles (US GAAP) and do not provide
certain disclosures which would be found in US GAAP financial statements, as
permitted by the regulations of the Securities and Exchange Commission of the
United States. These recognition, measurement differences and disclosure
differences as it relates to the Company are described in note 24 Summary of
differences between generally accepted accounting principles in Canada and in
the United States.
Evaluation of
Going Concern, Results of Operations, and Managements Plans:
After
reviewing its strategic plan and the corresponding budget and forecasts,
management believes that the Company currently has sufficient cash and cash
equivalents to fund planned expenditures and execute its focused strategy for
at least the next 12 months. Management expects to derive additional cash from
potential sale of non-core assets and financing.
Basis
of consolidation
These
consolidated financial statements include all companies in which the Company,
directly or indirectly has more than 50% of the voting rights or over which it
exercises control. Companies are included in the consolidation from the date
that control is transferred to the Company while companies sold are excluded
from the consolidation from the date that control ceases. The purchase method
of accounting is used to account for acquisitions. Intercompany transactions,
balances and unrealized gains and losses on transactions between the companies
included in the basis of consolidation are eliminated.
Investments
in affiliated companies
Investments in
companies over which the Company is to exercise significant influence,
generally participation of between 20% and 50% of the voting rights, but over
which it does not exercise control, are accounted for by using the equity
method. The Companys share of its affiliated results of operations is
recognized in the statement of earnings.
106
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Accounting
estimates
The
preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities reported in the
financial statements. Those estimates and assumptions also affect the
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the years. Significant
estimates include the allowance for doubtful accounts, provisions for obsolete
inventory, future income tax assets and liabilities, the useful lives of
property, plant and equipment and intangible assets, the valuation of
intangible assets and goodwill, the fair value of options granted and employee
future benefits and certain accrued liabilities. Actual results could differ
from those estimates.
Foreign
currency translation
Reporting
currency and self-sustaining subsidiaries
The Company
uses the US dollar as its reporting currency. Assets and liabilities of the
Company and its self-sustaining subsidiaries whose functional currency is other
than the US dollar are translated using the exchange rate in effect at the
balance sheet date. Revenues and expenses are translated at the average rate in
effect during the year. Translation gains and losses are included in the
statement of comprehensive income.
Foreign
currency transactions and integrated foreign subsidiaries
The financial
statements of integrated foreign operations and transactions denominated in currencies
other than the functional currency are re-measured into the functional currency
using the temporal method. Under this method, monetary assets and liabilities
are re-measured, in the functional currency, at the exchange rate in effect on
the date of the balance sheet. Non-monetary assets and liabilities are
re-measured at historical rates, unless such assets and liabilities are carried
at market, in which case, they are translated at the exchange rate in effect on
the date of the balance sheet. Revenues and expenses are re-measured at the
monthly average exchange rate. Transaction gains and losses resulting from such
re-measurement are reflected in the statements of earnings.
Cash
and cash equivalents
Cash and cash
equivalents consist of cash on hand and balances with banks, exclusive of bank
advances, as well as all highly liquid short-term investments. The Company
considers all highly liquid short-term investments having a term of less than
three months at the acquisition date to be cash equivalents.
107
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Short-term
investments
Short-term
investments consist mainly of bonds which do not meet the Companys definition
of cash and cash equivalents.
In accordance
with the new requirements of Canadian Institute Chartered Accountants (CICA)
3855 Financial Instruments, adopted by the Company on January 1, 2007,
short-term investments are classified as available-for-sale investments. The
Company recognizes transactions on the settlement date. These investments are
recognized at fair value. Unrealized gains and losses are recognized, net of
income taxes, if any, in Comprehensive income. Upon the disposal or
impairment of these investments, these gains or losses are reclassified in the
consolidated statement of earnings. See note 3.
Prior to 2007,
short-term investments were valued at the lower of amortized cost and market
value.
Inventory
Inventory is
valued at the lower of cost and market value. Cost is determined using the
first in, first out basis. Cost of finished goods and work in progress includes
raw materials, labour and manufacturing overhead under the absorption costing
method. Market value is defined as replacement cost for raw materials and as
net realizable value for finished goods and work in progress.
Property,
plant and equipment and depreciation
Property,
plant and equipment are recorded at cost, net of related government grants and
accumulated depreciation. Depreciation is calculated using the following
methods and annual rates:
|
|
Methods
|
|
Annual rates
%
|
|
|
|
|
|
|
|
Building
|
|
Straight-line
|
|
5
|
|
Equipment
|
|
Declining
balance and straight-line
|
|
20
|
|
Office furniture
|
|
Declining
balance and straight-line
|
|
10 and 20
|
|
Computer equipment
|
|
Straight-line
|
|
25 and 33
1
/
3
|
|
Automotive equipment
|
|
Straight-line
|
|
20
|
|
Leasehold improvements
|
|
Straight-line
|
|
Remaining lease term
|
|
Deferred charges
Deferred charges relate to deferred upfront
payments made by a subsidiary in connection with research and development
collaborations, and to financing charges with regard to the filing of a
shelf-prospectus during 2007. These deferred charges are included in the
statement of earnings over the progress of the research and development work
related to the contracts and over the term of the convertible term loans,
respectively. Financing charges are included in the Share Capital as soon as
the financing is completed, at the latest in 2009.
108
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Intangible
assets
Intangible assets with finite useful lives
consist of in-process research and development, acquired in business
combinations, patents and trademarks, as well as technology and other. Patents
and trademarks represent costs, including professional fees, incurred for the
filing of patents and the registration of trademarks for product marketing and
manufacturing purposes, net of related government grants and accumulated
amortization. Intangible assets with finite useful lives are amortized on a
straight-line basis over their estimated useful lives of eight to fifteen years
for in-process research and development and patents, ten years for trademarks
and from three to ten years for technology and other.
Goodwill
Goodwill represents the excess of the
purchase price over the fair values of the net assets of entities acquired at
the respective dates of acquisition. Goodwill is not amortized and is subject
to an annual impairment test, or more frequently if events or changes in
circumstances indicate that it might be impaired. Testing for impairment is
accomplished mainly by determining whether the fair value of a reporting unit,
based upon discounted cash flows, exceeds the net carrying amount of that
reporting unit as of the assessment date. If the fair value is greater than the
carrying amount, no impairment is necessary. In the event that the carrying
amount exceeds the sum of the discounted cash flows, a second test must be
performed whereby the fair value of the segments goodwill must be estimated to
determine if it is less than its carrying amount. Fair value of goodwill is
estimated in the same way as goodwill is determined at the date of the
acquisition in a business combination, that is, the excess of the fair value of
the reporting unit over the fair value of the identifiable net assets of the
reporting unit.
Impairment of long-lived assets
Property, plant and equipment and intangible
assets with finite lives are reviewed for impairment when events or
circumstances indicate that costs may not be recoverable. Impairment exists
when the carrying value of the asset is greater than the undiscounted future
cash flows expected to be provided by the asset. The amount of impairment loss,
if any, is the excess of its carrying value over its fair value, which fair
value is determined based upon discounted cash flows or appraised values,
depending on the nature of assets.
Employee future benefits
The Companys subsidiary in Germany maintains
defined contribution and unfunded defined benefit plans as well as other
benefit plans for its employees. Its obligations are accrued under employee
benefit plans and the related costs. In this regard, the following policies
have been adopted:
The cost of pension and other benefits earned by employees is
actuarially determined using the projected unit credit method and benefit
method prorated on length of service and managements best estimate of salary
escalation, retirement ages of employees and employee turnover.
The net actuarial gain (loss) of the benefit obligation is recorded
in the statement of earnings as it arises.
For defined contribution plans,
the pension expenses recorded in the statement of earnings is the amount of
contribution the Company is required to pay for services rendered by employees.
109
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Deferred
revenues
Deferred revenues relate to upfront
payments received by a subsidiary in connection with research cooperation agreements.
These revenues are included in the statement of earnings based on the progress
of the research and development work related to the contracts.
Revenue recognition
The Company is
currently in a phase in which potential products are being further developed or
marketed jointly with strategic partners. The existing licensing agreements
usually foresee one-time payments (upfront payments), payments for research and
development services in the form of cost reimbursements, milestone payments and
royalty receipts for licensing and marketing product candidates. Revenues
associated with those multiple-element arrangements are allocated to the
various elements based on their relative fair value. Agreements containing
multiple elements are divided into separate units of accounting if certain
criteria are met, including whether the delivered element has stand-alone value
to the customer and whether there is objective and reliable evidence of the
fair value of the undelivered obligation(s). The consideration received is
allocated among the separate units based on each units fair value or using the
residual method, and the applicable revenue recognition criteria are applied to
each of the separate units.
License fees
representing non-refundable payments received upon the execution of license
agreements are recognized as revenue upon execution of the license agreements
when the Company has no significant future performance obligations and
collectability of the fees is assured. Upfront payments received at the beginning
of licensing agreements are not recorded as revenue when received but are
amortized based on the progress to the related research and development work.
This progress is based on estimates of total expected time or duration to
complete the work which is compared to the period of time incurred to date in
order to arrive at an estimate of the percentage of revenue earned to date.
Milestone
payments, which are generally based on developmental or regulatory events, are
recognized as revenue when the milestones are achieved, collectability is
assured, and when there are no significant future performance obligations in
connection with the milestones.
In those
instances where the Company has collected upfront or milestone payments but has
ongoing future obligations related to the development of the drug product,
management considers the milestone payments and the remaining obligations under
the contract as a single unit of accounting. In those circumstances where the
collaboration does not require specific deliverables at specific times or at
the end of the contract term, but rather the Companys obligations are
satisfied over a period of time, revenue recognition is deferred and amortized
over the period of its future obligations.
Royalty
revenue, based on a percentage of sales of certain declared products sold by
third parties, is recorded when the Company has fulfilled the terms in
accordance with the contractual agreement, has no future obligations, the
amount of the royalty fee is determinable and collection is reasonably assured.
Revenues from
sales of products are recognized, net of estimated sales allowances and
rebates, when title passes to customers, which is at the time goods are
shipped, when there are no future performance obligations, when the purchase
price is fixed and determinable, and collection is reasonably assured.
110
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Stock-based
compensation costs
Since January 1,
2003, the Company accounts for all forms of employee stock-based compensation
using the fair value-based method.
The fair value
of stock options is determined using the Black-Scholes option pricing model and
stock-based compensation expense is recognized over the vesting period of the
options and credited to Other Capital, and any consideration received by the
Company on the exercise of stock options is credited to Share Capital. Other
capital component of the stock-based compensation is transferred to Share
Capital upon the issuance of shares.
Prior to this
date, no stock-based compensation costs were recognized for grants of
stock-based awards to employees. However, the Company is required to disclose
pro forma information with respect to net earnings and net earnings per share
as if stock-based compensation costs were recognized in the financial
statements for all reporting years using the fair value-based method for
outstanding stock options granted during 2002 (note 16).
Income
taxes
The Company
follows the liability method of accounting for income taxes. Under this method,
future income tax assets and liabilities are determined according to
differences between the carrying amounts and tax bases of the assets and
liabilities. Future income tax assets and liabilities are measured using
substantively enacted and enacted tax rates expected to apply in the years in which
the differences are expected to reverse.
The Company
establishes a valuation allowance against future income tax assets if, based on
available information, it is not more likely than not that some or all of the
future income tax assets will be realized.
Research
and development costs
Research costs
are expensed as incurred. Development costs are expensed as incurred except for
those which meet generally accepted criteria for deferral, which are
capitalized and amortized against operations over the estimated period of
benefit. No costs have been deferred during any periods.
Research
and development tax credits and grants
The Company is
entitled to scientific research and experimental development (SR&ED) tax
credits granted by the Canadian federal government (Federal) and the
government of the Province of Québec (Provincial). Federal SR&ED tax
credits are earned on qualified Canadian SR&ED expenditures at a rate of
20% and can only be used to offset Federal income taxes otherwise payable.
Refundable Provincial SR&ED tax credits are generally earned on qualified
SR&ED salaries, subcontracting and university contract expenses incurred in
the Province of Québec, at a rate of 17.5%.
SR&ED tax
credits and grants are accounted for using the cost reduction method.
Accordingly, tax credits and grants are recorded as a reduction of the related
expenses or capital expenditures in the period the expenses are incurred. The
refundable portion of SR&ED tax credits is recorded in the year in which
the related expenses or capital expenditures are incurred and the
non-refundable portion of SR&ED tax credits and grants is recorded at such
time, provided the Company has reasonable assurance the credits or grants will
be realized.
111
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Earnings
(loss) per share
Basic net
earnings (loss) per share is calculated using the weighted average number of
common shares outstanding during the year.
Diluted net earnings (loss) per share is
calculated based on the weighted average number of common shares outstanding
during the year, plus the effects of dilutive common share equivalents such as
options and convertible term loans. This method requires that diluted net
earnings (loss) per share be calculated using the treasury stock method, as if
all common share equivalents had been exercised at the beginning of the
reporting period, or period of issuance, as the case may be, and that the funds
obtained thereby were used to purchase common shares of the Company at the
average trading price of the common shares during the period.
3
New
accounting standards
Accounting
changes
Effective January 1,
2007, the Company adopted CICA Handbook Section 1506 Accounting Changes.
This Section establishes criteria for changes in accounting policies,
accounting treatment and disclosures regarding changes in accounting policies,
estimates and corrections of errors. In particular, this Section allows
for voluntary changes in accounting policy only when they result in the
financial statements providing reliable and more relevant information. Furthermore,
this section requires disclosure of when an entity has not applied a new source
of GAAP that has been issued but is not yet effective. Such disclosures are
provided below.
Financial
instruments
In January 2005,
the CICA issued four new accounting standards in relation with financial
instruments: section 3855 Financial Instruments Recognition and measurement,
section 3865 Hedges, section 1530 Comprehensive Income and section 3251 Equity.
Section 3855
expands on section 3860 Financial Instrument - Disclosure and Presentation,
by prescribing when a financial instrument is to be recognized on the balance
sheet and at what amount. It also specifies how financial instrument gains and
losses are to be presented.
Section 3865
provides alternative treatments to section 3855 for entities which choose to
designate qualifying transactions as hedges for accounting purposes. It
replaces and expands on Accounting Guideline AcG-13 Hedging Relationships,
and the hedging guidance in Section 1650 Foreign Currency Translation by
specifying how hedge accounting is applied and what disclosure is necessary
when it is applied.
Section 1530
Comprehensive Income introduces a new requirement to temporarily present
certain gains and losses outside net income.
Consequently, Section 3250
Surplus has been revised as Section 3251 Equity. Sections 1530, 3251,
3855 and 3865 were adopted by the Company on January 1, 2007.
112
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Recognition
of financial assets and liabilities
Following the
adoption of Section 3855, the Company classified its financial instruments
as follows:
Cash
|
|
Held for trading
|
Short-term investments
|
|
Available-for-sale securities
|
Accounts receivable
|
|
Loans and receivable
|
Accounts payable and accrued liabilities
|
|
Other financial liabilities
|
Long-term debt
|
|
Other financial liabilities
|
Short-term
investments
The short-term
investments are classified as available-for-sale investments. The Company
recognizes transactions on the settlement date.
These
investments are recognized at fair value. Unrealized gains and losses are
recognized, net of income taxes, if any, in Comprehensive income. Upon the
disposal or impairment of these investments, these gains or losses are
reclassified in the consolidated statement of earnings.
As a result of
the application of CICA 3855, a difference of $41,000 between the carrying
amount and the fair value of investments classified as available-for-sale is
recognized as an adjustment to the opening balance of Accumulated other
comprehensive income, net of income taxes.
Effective
interest rate method
Premiums and
discounts on short-term investments and long-term debt are accounted for using
the effective interest rate method.
113
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The impact of
the use of the effective interest rate method amounted to $587,000 and was
recognized as an adjustment to the opening balance of deficit, net of income
taxes.
Transition
The Company has elected to use January 1
2003, as the transition date for embedded derivatives
The
recognition, derecognition and measurement methods used other than the
adjustment described above for the short-term investments and the long-term
debt, have not changed from the methods of periods prior to the effective date
of the new standards. Consequently, there were no further adjustments to record
on transition.
General
standards of financial statement presentation
In May of
2007, the CICA amended Section 1400, General Standards of Financial
Statement Presentation to change the guidance related to managements
responsibility to assess the ability of the entity to continue as a going
concern. Management is required to make an assessment of an entitys ability to
continue as a going concern and should take into account all available
information about the future, which is at least, but not limited to, 12 months
from the balance sheet date. Disclosure is required of material uncertainties
related to events or conditions that may cast significant doubt upon the entitys
ability to continue as a going concern.
The amendments
to Section 1400 apply to interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2008. The Companys
management has elected to early adopt this requirement; adoption was effective
on January 1, 2007 and the related disclosure is provided in Note 2.
Impact
of accounting pronouncements not yet adopted
Capital
Disclosure
The CICA
issued Section 1535, Capital Disclosures. This standard establishes
guidelines for disclosure of information regarding an entitys capital which
will enable users of its financial statements to evaluate an entitys
objectives, policies and processes for managing capital, including disclosures
of any externally imposed capital requirements and the consequences of
non-compliance. The new requirements will be effective starting January 1,
2008. Although the new standard provides for additional disclosure only, with
no measurement impact, the Company is currently in the process of evaluating
the impact that these additional disclosure standards will have on the Companys
financial statements.
114
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Financial
Instruments Disclosures and Financial Instruments - Presentation
The CICA
issued Section 3862, Financial Instruments Disclosures and Section 3863,
Financial Instruments Presentation which replace Section 3861, Financial
Instruments Disclosure and Presentation. The new disclosure standard
requires the disclosure of additional detail of financial asset and liability
categories as well as a detailed discussion on the risks associated with the
companys financial instruments. The presentation requirements are carried
forward unchanged. These new standards will be effective starting January 1,
2008. Although the new standard provides for additional disclosure only, with
no measurement impact, the Company is currently in the process of evaluating
the impact that these additional disclosure standards will have on the Companys
financial statements.
Inventories
The CICA
issued Section 3031, Inventories which will replace existing Section 3030
with the same title. This standard requires that inventories should be measured
at the lower of cost and net realizable value, and includes guidance on the
determination of cost, including allocation of overheads and other costs. The
standard also requires that similar inventories within a consolidated group be
measured using the same method. It also requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new Section is effective for interim and annual
financial statements relating to fiscal years beginning on or after January 1,
2008. The Company is currently evaluating the impact of this new standard.
Goodwill
and intangible assets
In February 2008,
the CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062,
Goodwill and other intangible assets and Section 3450, Research and
development costs. Various changes have been made to other sections of the CICA
Handbook for consistency purposes. The new Sections will be applicable to
financial statements relating to fiscal years beginning on or after October 1,
2008. Accordingly, the Company will adopt the new standards for its fiscal year
beginning January 1, 2009. It establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the previous Section 3062.
The Company is currently evaluating the impact of the adoption of this new Section on
its consolidated financial statements.
115
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
4
Distribution
of the remaining interest in Atrium Biotechnologies Inc.
During 2006,
the Company completed a lengthy and detailed review process whereby it examined
a number of strategic alternatives for how best to pursue and implement its
business plan of becoming a pure play biopharmaceutical company with a focus
on endocrine therapy and oncology. Among the alternatives considered was the
divestiture of Æterna Zentaris interest in Atrium Biotechnologies Inc., now
Atrium Innovation Inc. (Atrium) and the resulting focus on advancing its development
pipeline.
On September 19,
2006, the Company initiated a Secondary Offering to sell 3,485,000 Atrium
Subordinate Voting Shares at a price of CAN$15.80 per share.
On October 18,
2006, the Company closed this Secondary Offering for net proceeds of $45
million. The gain on the disposal of this investment amounted to $29,248,000
including $1,643,000 related to cumulative translation adjustments.
Concurrently
with the closing of the Secondary Offering and in accordance with the articles
of Atrium, the Companys remaining Atrium Multiple Voting Shares were
automatically converted into Atrium Subordinate Voting Shares on a one-for-one
basis such that the Company subsequently owned 11,052,996 Atrium Subordinate
Voting Shares representing approximately 36.1% of the issued and outstanding
shares of Atrium.
As of October 18,
2006, Atrium was excluded from the consolidation since the Companys control
ceased. Furthermore, given the distribution of the remaining Atrium shares
discussed below, all historical operations and cash flows recorded through the
consolidation of Atrium until that date have been reported as discontinued
operations and therefore, these operations and cash flows are presented as such
in the statement of earnings and in the statement of cash flows.
On December 15,
2006, the Companys shareholders approved a reduction in the stated capital of
the Company in an amount equal to the fair market value of its remaining
interest in Atrium for the purpose of effecting a special distribution in kind
of all 11,052,996 subordinate voting shares of Atrium held by the Company. On January 2,
2007, Æterna Zentaris shareholders received approximately 0.2079 of an Atrium
subordinate voting share for each one of their common shares.
This special distribution has been accounted
for as a nonreciprocal transfer to shareholders measured at the carrying value
of the investment in Atrium on January 2, 2007. As the special
distribution is considered as a taxable transaction for the Company and treated
as a reduction of the stated capital for tax purposes, the share capital of the
Company has been reduced by the fair value of the Atrium shares distributed of
$137,959,000, the long-term investment in Atrium $57,128,000 has been removed
from the balance sheet and the difference, taking into account the related
income taxes of $15,333,000 and cumulative translation adjustment of
$5,624,000, has been recorded as Other Capital for an amount of $71,122,000.
116
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
For the years ended December 31, 2007,
2006 and 2005, previously consolidated revenues and expenses of Atrium,
representing the former Active Ingredients & Specialty Chemicals
Segment as well as the Health & Nutrition Segment, have been
reclassified from continuing operations to discontinued operations, as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
239,535
|
|
200,863
|
|
|
|
|
|
|
|
|
|
Earnings before the following
items
|
|
|
|
28,360
|
|
21,414
|
|
|
|
|
|
|
|
|
|
Gain on disposal of Atrium shares
|
|
|
|
29,248
|
|
|
|
Income tax expense (a)
|
|
|
|
(19,923
|
)
|
(6,838
|
)
|
Gain (loss) on dilution of investments (b)
|
|
|
|
(628
|
)
|
19,002
|
|
|
|
|
|
|
|
|
|
Earnings before
non-controlling interest
|
|
|
|
37,057
|
|
33,578
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
(10,967
|
)
|
(7,064
|
)
|
|
|
|
|
|
|
|
|
Net earnings from
discontinued operations
|
|
|
|
26,090
|
|
26,514
|
|
(a)
In 2006, an
amount of $7,006,000 is related to the gain on disposal of Atrium shares and an
amount of $5,692,000 is related to future income tax liabilities on unremitted
earnings of Atrium.
(b)
Gain (loss) on
dilution of investments
Following the exercise of Atriums stock
options, Atrium issued 627,500 subordinate voting shares between January 1
and October 18, 2006. As a consequence, a loss on dilution amounting to
$628,000 was recognized.
On April 6, 2005, Atrium completed its
Initial Public Offering through the issuance of 4,166,667 subordinate voting
shares at a price of CAN$12.00 per share for total gross proceeds of
$40,957,000 (CAN$50,000,000). Immediately prior to the closing of the
aforementioned offering, Atrium completed the acquisition of the
non-controlling interest in Unipex Finance S.A.S. for an amount of $7,289,000.
This amount was settled through the issuance of 741,584 subordinate voting
shares of Atrium at the offering price of CAN$12.00 per share. Moreover,
pursuant to the acquisition of Douglas Laboratories by Atrium in December 2005,
Atrium issued 917,532 subordinate voting shares at a price of CAN$10.95 per
share. Following the exercise of Atriums stock options during 2005, Atrium
also issued 387,000 subordinate voting shares at an average price of CAN$2.28
for total proceeds of $884,000. As a consequence of these transactions, the
Companys economic interest in Atrium decreased from 61.1% to 48.46%, generating
a gain on dilution of investments amounting to $19,002,000.
117
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
5
Acquisition
and disposal of Echelon Biosciences Inc.
On January 1, 2005, the Company
completed the acquisition of 100% of the issued and outstanding common shares
of Echelon Biosciences Inc. (Echelon) for a total consideration of
$2,935,522, of which an amount of $36,718 including all acquisition-related
costs, was paid cash, net of cash and cash equivalents acquired of $161,734,
and the balance was paid through the issuance of 443,905 common shares of the
Company, the price per share corresponded to the weighted moving average
trading prices of the Company for the last fifteen consecutive trading days
ending on December 31, 2004. The acquisition was subject to contingent
payments specified in the agreement for an approximate amount of $3,500,000 of
which an amount of $2,900,000 was payable in shares and the balance of $600,000
payable in cash at the latest in January 2008, based on contractual
conditions being met. During 2005, an amount of $196,000 had been recorded as
contingent consideration payable, thus having the effect of increasing
goodwill. This amount has been settled through a cash payment of $32,000 and
the issuance of 23,789 common shares of the Company. As of January 1, 2008
the remaining conditions were not met, and as such, no additional consideration
will be paid.
During 2007,
the Company continued its review process whereby it examined a number of
strategic alternatives for how best continue the pursuit and implementation
of its business plan of becoming a pure
play biopharmaceutical company with a focus on endocrine therapy and oncology.
Among the alternatives considered was the divestiture of Æterna Zentaris
investment in Echelon and the resulting focus on advancing its development
pipeline.
At September 30,
2007, the Company performed a preliminary impairment test on the goodwill
related to Echelon. According to the preliminary test results, an estimated
impairment loss of $500,000 was recorded.
On November 30, 2007,
Æterna Zentaris sold all issued and outstanding shares of Echelon to Frontier
Scientific, Inc. for an upfront payment of $2,600,000 and a $600,000
contingent consideration. From that date, Echelon was excluded from the
consolidation, and all historical operations and cash flows recorded through
the consolidation of Echelon until that date have been reported as discontinued
operations. The contingency consideration is based on the Echelon reaching
specific sales levels in 2008 and 2009.
For the years ended December 31, 2007,
2006 and 2005, consolidated revenues and expenses of Echelon have been
reclassified from continuing operations to discontinued operations, as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
2,358
|
|
2,593
|
|
2,391
|
|
|
|
|
|
|
|
|
|
Loss before the following
items
|
|
(206
|
)
|
(369
|
)
|
(577
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
(500
|
)
|
|
|
|
|
Loss on disposal of Echelon shares, net of
cumulative translation adjustment
|
|
(44
|
)
|
|
|
|
|
Income tax recovery
|
|
491
|
|
92
|
|
116
|
|
Net loss from discontinued
operations
|
|
(259
|
)
|
(277
|
)
|
(461
|
)
|
118
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Major classes of assets and
liabilities as of December 31, 2006 have been reclassified and are
presented as discontinued operations as follows:
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash
|
|
417
|
|
Other
current assets
|
|
730
|
|
|
|
|
|
Current
assets of discontinued operations
|
|
1,147
|
|
|
|
|
|
Intangible
assets
|
|
1,755
|
|
|
|
|
|
Goodwill
|
|
1,239
|
|
|
|
|
|
Property,
Plant & Equipment
|
|
431
|
|
|
|
|
|
Non-current
assets of discontinued operations
|
|
3,425
|
|
|
|
|
|
|
|
4,572
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities of discontinued operations
|
|
319
|
|
|
|
|
|
Long-term
debt
|
|
17
|
|
|
|
|
|
Future
Income Tax Liabilities
|
|
598
|
|
|
|
|
|
Non-current
liabilities of discontinued operations
|
|
615
|
|
|
|
|
|
|
|
934
|
|
119
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
6
Long-lived
assets held for sale
During 2007, the Company continued its review
process whereby it examined a number of strategic alternatives for how best
continue the pursuit and implementation
of its business plan of becoming a pure
play biopharmaceutical company with a focus on endocrine therapy and oncology.
As part of its strategy to finance with non-dilutive vehicles, using
non-core assets, the Company decided to dispose of its building and land
located in Quebec City, as well as its rights to intangible property, Impavido
(Miltefosine) and certain equipment. As at December 31, 2007, the assets
reclassified as long-lived assets held for sale, are as follows:
Asset
|
|
Cost
|
|
Accumulated
depreciation and
amortization
|
|
Net Book Value
|
|
|
|
$
|
|
$
|
|
$
|
|
Building
and Land
|
|
11,181
|
|
3,919
|
|
7,262
|
|
Equipment
|
|
1,347
|
|
1,164
|
|
183
|
|
Intangible
property
|
|
11,851
|
|
5,297
|
|
6,554
|
|
|
|
|
|
|
|
|
|
Total
assets held for sale
|
|
24,379
|
|
10,380
|
|
13,999
|
|
The Company estimates that the net realizable value
of all the assets exceeds their carrying value. Furthermore, at the time when
the assets were considered held for sale, all amortization or depreciation
ceased.
Following an estimation of the fair value by Management
after having received certain preliminary offers by third parties, the Company
recorded an impairment charge of $735,000 (CAN$729,000) against the asset
related to the building and land held for sale. The Company expects to complete
a sale transaction in the first six months of 2008.
In 2006, following the decision to terminate
the pharmaceutical development of one of its products, the Company recorded an
impairment on related manufacturing equipment in order to bring it down to its
fair value, which was based on the Companys best estimate of the realisable
value. Accordingly, during 2006, an amount of $1,060,856 has been recorded as
an impairment loss included in depreciation of property, plant and equipment.
The Company sold some of these assets in 2007 and is now actively in the
process of selling the remainder of this equipment and estimates that the
assets will be sold within the next year, at a net selling price which exceeds
their carrying value.
On March 1, 2008, the Company entered
into a definite purchase and sale agreement with respect to all rights related
to the manufacture, production, distribution, marketing, sale and/or use of
Impavido® (miltefosine) with Paladin Labs Inc., for an aggregate purchase price
of approximately $9,200,000 (CAN$9,125,000) payable in cash, subject to certain
post-closing purchase price adjustments.
Completion of the transactions contemplated
by the purchase agreement is subject to customary closing conditions, including
the parties having received certain third-party consents and approvals.
The sale is anticipated to be finalized early in the first
six months of 2008.
120
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
7
Other
receivables
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Interest
|
|
272
|
|
592
|
|
Grants
*
|
|
1,060
|
|
857
|
|
Research
and development tax credits recoverable
|
|
252
|
|
103
|
|
Commodity
taxes
|
|
453
|
|
880
|
|
Other
|
|
1,007
|
|
301
|
|
|
|
|
|
|
|
|
|
3,044
|
|
2,733
|
|
*
These grants represent a holdback of a contribution from a federal
program called Technology Partnerships Canada (TPC). The Company received a
contribution equivalent to 30% of the eligible expenses incurred by the Company
in the development of an angiogenesis inhibitor in oncology, dermatology and
ophthalmology. Since the pharmaceutical development has been terminated, the
Company does not expect to make any reimbursements in connection with this
program.
8
Inventory
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Raw
materials
|
|
3,399
|
|
3,233
|
|
Work
in progress
|
|
1,602
|
|
1,070
|
|
Finished
goods
|
|
405
|
|
741
|
|
|
|
|
|
|
|
|
|
5,406
|
|
5,
044
|
|
9
Deferred
charges and other long-term assets
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Deferred
charges
|
|
1,051
|
|
1,151
|
|
Other
|
|
390
|
|
203
|
|
|
|
|
|
|
|
|
|
1,441
|
|
1,354
|
|
Included in the above deferred
charges is $392,000 of cost related to the filing of a shelf prospectus on September 19,
2007.
121
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
10
Property,
plant and equipment
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Cost
|
|
Accumulated
depreciation
|
|
Cost
|
|
Accumulated
depreciation
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
52
|
|
|
|
Building
(note 6)
|
|
|
|
|
|
11,031
|
|
3,280
|
|
Equipment
|
|
9,379
|
|
3,923
|
|
10,997
|
|
6,867
|
|
Office
furniture
|
|
1,261
|
|
648
|
|
641
|
|
492
|
|
Computer
equipment
|
|
1,174
|
|
805
|
|
1,047
|
|
840
|
|
Automotive
equipment
|
|
38
|
|
36
|
|
32
|
|
30
|
|
Leasehold
improvements
|
|
1,170
|
|
150
|
|
719
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,022
|
|
5,562
|
|
24,519
|
|
11,518
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
5,562
|
|
|
|
11,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount
|
|
7,460
|
|
|
|
13,001
|
|
|
|
11
Intangible
assets
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Cost
|
|
Accumulated
amortization
|
|
Cost
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development, patents and trademarks (note 6)
|
|
47,758
|
|
17,514
|
|
55,388
|
|
18,187
|
|
Technology
and other
|
|
740
|
|
593
|
|
619
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,498
|
|
18,107
|
|
56,007
|
|
18,656
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated amortization
|
|
18,107
|
|
|
|
18,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount
|
|
30,391
|
|
|
|
37,351
|
|
|
|
In 2006, following the decision
to terminate the pharmaceutical development of certain products, the Company
recorded an impairment on certain patents and trademarks. Accordingly, an
amount of $1,815,172 has been recorded as an impairment loss included in
amortization of intangible assets.
The
amortization expense for intangible assets in each of the next five fiscal
years will amount to $3,191,000 in 2008, $3,181,000 in 2009, $3,153,000 in
2010, 2011 and 2012.
122
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
12
Goodwill
The change in the carrying value is as
follows:
|
|
Continuing
operations
|
|
Discontinued
operations
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Balance
as at December 31, 2005
|
|
8,559
|
|
110,610
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
6,623
|
|
Adjustments
|
|
|
|
(2,109
|
)
|
Impact
of foreign exchange rate
|
|
950
|
|
2,520
|
|
Reduction
of goodwill related to the sale of shares of Atrium (note 4)
|
|
|
|
(116,405
|
)
|
|
|
|
|
|
|
Balance
as at December 31, 2006
|
|
9,509
|
|
1,239
|
|
|
|
|
|
|
|
Impact
of foreign exchange rate
|
|
983
|
|
212
|
|
Reduction
and impairment of goodwill related to disposal of Echelon (note 5)
|
|
|
|
(1,451
|
)
|
|
|
|
|
|
|
Balance
as at December 31, 2007
|
|
10,492
|
|
|
|
13
Accounts
payable and accrued liabilities
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Trade
payable
|
|
11,404
|
|
6,962
|
|
Salaries
and employee benefits
|
|
1,628
|
|
1,095
|
|
Other
accrued liabilities
|
|
3,052
|
|
1,678
|
|
|
|
|
|
|
|
|
|
16,084
|
|
9,735
|
|
123
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
14
Long-term
debt
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Loan
from the federal and provincial governments, nominal value of CAN$800
discounted at an effective rate of 8.43% (CAN $769 in 2007, and CAN$1,600 in
2006) non-interest bearing, payable in five annual equal and consecutive
instalments since July 2004.
|
|
775
|
|
1,373
|
|
|
|
|
|
|
|
Less:
Current portion
|
|
775
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
The principal instalment due on long-term
debt for the next year amounts to $775,000 in 2008.
15
Employee
future benefits
The Companys subsidiary in Germany provides
unfunded defined benefit pension plans and unfunded postemployment benefit
plans for some groups of employees. Provisions for pension obligations are
established for benefits payable in the form of retirement, disability and
surviving dependant pensions.
The following table provides a reconciliation
of the changes in the plans accrued benefits obligations:
|
|
Pension benefit plans
|
|
Other benefit plans
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Obligation
Beginning of year
|
|
7,547
|
|
6,932
|
|
5,634
|
|
620
|
|
523
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
service cost
|
|
352
|
|
293
|
|
200
|
|
29
|
|
39
|
|
23
|
|
Interest
cost
|
|
269
|
|
293
|
|
269
|
|
52
|
|
22
|
|
19
|
|
Actuarial
loss (gain)
|
|
(490
|
)
|
(674
|
)
|
1,748
|
|
104
|
|
53
|
|
182
|
|
Benefits
paid
|
|
(70
|
)
|
(64
|
)
|
(65
|
)
|
(81
|
)
|
(70
|
)
|
(43
|
)
|
Effect
of foreign currency exchange rate changes
|
|
782
|
|
767
|
|
(854
|
)
|
70
|
|
53
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
End of year
|
|
8,390
|
|
7,547
|
|
6,932
|
|
794
|
|
620
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
(recovery) recognized
|
|
131
|
|
(88
|
)
|
2,217
|
|
185
|
|
114
|
|
224
|
|
124
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
The significant actuarial assumptions adopted
to determine the Companys accrued benefits obligations are as follows:
|
|
Pension benefit plans
|
|
Other benefit plans
|
|
Actuarial assumptions
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate for expenses
|
|
4.50
|
|
4.00
|
|
5.25
|
|
4.50
|
|
4.00
|
|
5.25
|
|
Discount
rate for liabilities
|
|
5.70
|
|
4.50
|
|
4.00
|
|
5.70
|
|
4.50
|
|
4.00
|
|
Pension
benefits increase
|
|
2.00
|
|
1.25
|
|
1.25
|
|
2.00
|
|
1.25
|
|
1.25
|
|
Rate
of compensation increase
|
|
2.75 to 3.75
|
|
2.75 to 3.75
|
|
2.75 to 3.75
|
|
2.75
|
|
2.75
|
|
2.75
|
|
The last actuarial reports give effect to the
pension and postemployment benefit obligations as at December 31, 2007.
The next actuarial reports are planned for December 2008.
In accordance
with the assumptions used as at December 31, 2007, the benefits expected
to be paid in each of the next five fiscal years will amount to $135,114 in
2008, $303,725 in 2009, $307,736 in 2010, $349,426 in 2011 and $474,368 in
2012. Furthermore, total benefits amounting to $2,707,485 are expected to be
paid from 2013 to 2017.
Cash required
in the next year to fund the plans will approximate the amount of expected
benefits.
Defined contribution plans
Total expenses amount to $285,824 in 2007
($263,810 in 2006 and $215,788 in 2005) for defined contribution pension plans.
The Company also sponsors a 401K plan in its
U.S. subsidiary. Under this plan, the Company may contribute a
discretionary amount equal to a percentage of employee contributions to the
plan and may also make discretionary profit sharing contribution. During
the year ended December 31, 2007, the Company did not record any
contribution.
Total cash payments for employee future
benefits in 2007, consisting of cash contributed by the Company to its defined
contribution plans as well as direct payments to retired employees, amount to
$436,696 ($398,340 in 2006 and $323,382 in 2005).
125
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
16
Share
capital
(a)
Authorized
Unlimited number of shares of
the following classes:
Common, voting and
participating, one vote per share
Preferred, first and second
ranking, issuable in series, with rights and privileges specific to each class.
As at December 31, 2007, there are no
preferred shares issued and outstanding.
(b)
Issued
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of year
|
|
53,169,470
|
|
168,466
|
|
46,139,814
|
|
130,344
|
|
45,670,909
|
|
127,585
|
|
Conversion
of convertible term loans
|
|
|
|
|
|
6,955,088
|
|
37,786
|
|
|
|
|
|
Issued
pursuant to the stock option plan
|
|
18,000
|
|
33
|
|
22,000
|
|
81
|
|
25,000
|
|
130
|
|
Ascribed
value from Other Capital
|
|
|
|
26
|
|
|
|
29
|
|
|
|
|
|
Issued
pursuant to the acquisition of a patent from a senior officer (note 21)
|
|
|
|
|
|
28,779
|
|
175
|
|
|
|
|
|
Issuance
pursuant to acquisition of Echelon
|
|
|
|
|
|
23,789
|
|
163
|
|
443,905
|
|
2,737
|
|
Reduction
of the stated capital (note 4)
|
|
|
|
(137,959
|
)
|
|
|
|
|
|
|
|
|
Share
issue expenses
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
End of year
|
|
53,187,470
|
|
30,566
|
|
53,169,470
|
|
168,466
|
|
46,139,814
|
|
130,344
|
|
(c)
Common share
issues
Pursuant to the exercise of stock options,
the Company issued, during fiscal 2007, 18,000 common shares for total proceeds
of $33,200. In the prior fiscal year 2006, 22,000 common shares were issued for
total proceeds of $81,000. Consequently, stock-based compensation costs of
$26,000 ($29,000 in 2006) relating to those exercised options have been
reclassified from other capital to share capital.
On February 14 and 17, 2006, the
Solidarity Fund QFL (the Fund) and SGF Santé inc. (SGF) have respectively
exercised their right to early convert the entirety of their convertible term
loans in the principal amount of CAN$12.5 million each that they had extended
to the Company in April 2003 and that were to mature on March 31,
2006. In accordance with the terms of the convertible term loans, and
additional arrangements between the Company, the Fund and SGF, Æterna Zentaris
has issued to each of the loan holders 3,477,544 of its common shares upon
conversion of their loans, representing the principal and interest due to the
stated maturity date under the loans, based on the conversion price that had
been agreed upon in the loan agreements.
126
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
For accounting purposes, the convertible term
loans are separated between debt and equity, the equity portion representing
the value of the holders conversion options. As a consequence of this
transaction, the Company recorded a loss on settlement of long-term debt
amounting to $599,190, representing an inducement to the original terms of the
loan agreements. An amount of $280,000 was recorded in the statement of
deficit, and the remainder was charged to expense in the statement of earnings and
was included in the accretion on convertible term loans in the statement of
cash flows.
(d)
Shareholder right
plan
On March 29, 2004, the Company adopted a
shareholder right plan (the Rights Plan). The continuation of the Rights Plan
and its amendments and restatement has been approved by the Board of Directors
on March 5, 2007. The rights issued to the shareholders under the Rights
Plan will be exercisable, under certain conditions, only when a person or
entity, including any related party(ies), acquires or announces his (its)
intention to acquire more than twenty (20) percent of the outstanding common
shares of the Company (as such, shares may be redesignated or
reclassified) without complying with the permitted bid provisions of the
Rights Plan or without approval of the Companys Board of Directors. Should
such an acquisition occur, each right would, upon exercise, entitle a holder,
other than the person pursuing the acquisition together with its related
party(ies), to purchase common shares of the Company at a fifty (50) percent
discount to the market price of the Companys shares at that time.
(e)
Companys stock
option plan
In December 1995, the Companys Board of
Directors adopted a stock option plan (the Stock Option Plan) for its
directors, senior executives, employees and other collaborators providing
services to the Company. The number of shares that are issuable under the Stock
Option Plan was amended by a resolution adopted by the shareholders on May 2,
2007. This resolution increased the Plans limit specifying the limit of
options from 4,543,744 to ten percent (10%) of the outstanding shares.
127
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
On May 23,
2007, the Toronto Stock Exchange accepted a stock option pool totalling
$5,317,947. In 2007, 870,000 options were granted in U.S. dollars and 815,000
options were granted in Canadian dollars. Options granted under the Stock
Option Plan expire after a maximum period of ten years following the date of
grant. Options granted under the Stock Option Plan generally vest over a three-year
period. The following table summarizes the stock option activity under the
Stock Option Plan:
|
|
2007
|
|
2006
|
|
2005
|
|
Canadian dollar denominated awards
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of year (*)
|
|
3,490,092
|
|
4.00
|
|
3,843,592
|
|
6.16
|
|
3,480,592
|
|
6.58
|
|
Granted
|
|
815,000
|
|
3.24
|
|
45,000
|
|
6.41
|
|
686,500
|
|
5.63
|
|
Exercised
|
|
(18,000
|
)
|
1.96
|
|
(22,000
|
)
|
3.98
|
|
(25,000
|
)
|
6.31
|
|
Expired
|
|
|
|
|
|
(346,000
|
)
|
7.68
|
|
(65,000
|
)
|
8.34
|
|
Forfeited
|
|
(151,000
|
)
|
4.93
|
|
(30,500
|
)
|
6.21
|
|
(233,500
|
)
|
10.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
End of year
|
|
4,136,092
|
|
3.83
|
|
3,490,092
|
|
6.02
|
|
3,843,592
|
|
6.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable End of year
|
|
3,300,593
|
|
4.02
|
|
2,736,099
|
|
5.88
|
|
2,260,930
|
|
6.17
|
|
(*)
Following
the one-time distribution of the Companys remaining interest in Atrium on January 2,
2007 and as contemplated under the Stock Option Plan (see note 4), the Board of
Directors of the Company approved an equitable adjustment to all unexercised
options outstanding pursuant to the Stock Option Plan. The adjustment was a
reduction in the exercise price of all outstanding stock options of CAN$2.02
per common share. Furthermore, in 2007 the Board of Directors approved the
extension of the option period from 1 month to 3 years on 875,000 options in
connection with the departure of executive members.
The total intrinsic value for
stock options exercised amounted to CAN$24,040 in 2007 (CAN$68,959 in 2006 and
CAN$28,750 in 2005) There is no tax benefit realized by the Company as the
compensation cost related to stock options is not deductible for income tax
purposes.
128
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
The following table summarizes the stock
options outstanding as at December 31, 2007:
|
|
Options outstanding
|
|
Exercise price
(CAN$ )
|
|
Number
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
1.68
to 2.50
|
|
1,311,593
|
|
6.74
|
|
1.88
|
|
Nil
|
|
2.51
to 3.75
|
|
1,062,500
|
|
6.13
|
|
3.56
|
|
Nil
|
|
3.76
to 5.50
|
|
669,666
|
|
7.12
|
|
4.47
|
|
Nil
|
|
5.51
to 6.00
|
|
798,000
|
|
6.27
|
|
5.83
|
|
Nil
|
|
6.01
to 8.88
|
|
294,333
|
|
4.41
|
|
6.59
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,136,092
|
|
6.39
|
|
3.83
|
|
Nil
|
|
|
|
Options currently exercisable
|
|
Exercise price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
1.68
to 2.50
|
|
939,924
|
|
1.91
|
|
Nil
|
|
2.51
to 3.75
|
|
862,498
|
|
3.56
|
|
Nil
|
|
3.76
to 5.50
|
|
405,838
|
|
4.44
|
|
Nil
|
|
5.51
to 6.00
|
|
798,000
|
|
5.83
|
|
Nil
|
|
6.01
to 8.88
|
|
294,333
|
|
6.59
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
3,300,593
|
|
4.02
|
|
Nil
|
|
129
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
|
|
2007
|
|
2006
|
|
2005
|
|
US dollar denominated awards
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
870,000
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
End of year
|
|
870,000
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable End of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Exercise price
(US$ )
|
|
Number
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
(US$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
1.68
to 2.50
|
|
375,000
|
|
9.95
|
|
1.82
|
|
Nil
|
|
2.51
to 3.75
|
|
470,000
|
|
9.27
|
|
3.50
|
|
Nil
|
|
3.76
to 5.50
|
|
25,000
|
|
9.35
|
|
3.96
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
870,000
|
|
9.56
|
|
2.79
|
|
Nil
|
|
130
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
As at December 31, 2007,
the total compensation cost related to nonvested stock options not yet
recognized amounted to $1,366,409 ($1,071,651 in 2006). This amount is expected
to be recognized over a weighted average period of 1.88 years (1.34 years in
2006).
The Company settles stock
options exercised through the issuance of common shares from treasury.
The factors considered in
developing the assumptions used in the Black-Scholes option pricing model are
the following:
(a)
The risk-free interest rate is based on Canadian
Government Bond constant maturity interest rate whose term is consistent with
the expected life of the stock options.
(b)
The historical volatility of the Companys stock
price as well as future expectations are used to establish the expected stock
price volatility.
(c)
The Company estimates the expected life of stock
options based upon employees historical data related to the exercise of stock
options and post-vesting employment terminations.
Assumptions used in determining stock-based compensation costs
The table below shows the assumptions used in
determining stock-based compensation costs under the Black-Scholes option
pricing model:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
Nil
|
|
Nil
|
|
Nil
|
|
Expected
volatility
|
|
57.2
|
%
|
58.1
|
%
|
62.1
|
%
|
Risk-free
interest rate
|
|
3.88
|
%
|
4.06
|
%
|
3.92
|
%
|
Expected
life (years)
|
|
4.62
|
|
5.77
|
|
5.80
|
|
Weighted
average grant date fair value
|
|
US$1.93 and
CAN$2.25
|
|
CAN$3.67
|
|
CAN$3.33
|
|
|
|
|
|
|
|
|
|
131
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Had compensation costs been determined using
the fair value method at the date of grant for awards granted in 2002 under
this stock option plan, the Companys pro forma net earnings, basic and diluted
net earnings per share after giving effect to the grant of these options in
2002 are:
|
|
Year ended
December 31,
|
|
|
|
2005
|
|
|
|
$
|
|
|
|
|
|
Pro
forma net earnings
|
|
10,429
|
|
Pro
forma net earnings per share
|
|
|
|
Basic
|
|
0.23
|
|
Diluted
|
|
0.23
|
|
17
Statements
of cash flows
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Change
in non-cash operating working capital items
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
1,371
|
|
2,686
|
|
1,474
|
|
Inventory
|
|
148
|
|
650
|
|
(534
|
)
|
Prepaid
expenses
|
|
(708
|
)
|
263
|
|
(802
|
)
|
Accounts
payable and accrued liabilities
|
|
5,340
|
|
1,848
|
|
4,977
|
|
Income
taxes
|
|
(1,250
|
)
|
(5,260
|
)
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
4,901
|
|
187
|
|
4,488
|
|
See note 4 for details related to non-cash
transactions of the distribution of the remaining interest in Atrium.
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Additional information
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
|
|
|
|
|
From
continuing operations
|
|
|
|
4
|
|
34
|
|
From
discontinued operations
|
|
9
|
|
7,784
|
|
1,908
|
|
Income
taxes paid (recovered)
|
|
|
|
|
|
|
|
From
continuing operations
|
|
(937
|
)
|
5,756
|
|
709
|
|
From
discontinued operations
|
|
7
|
|
8,698
|
|
6,084
|
|
132
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
18
Income
taxes
The
reconciliation of the combined Canadian federal and Québec provincial income
tax rate to the income tax (expense) recovery from continuing operations is as
follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Combined
federal and provincial statutory income tax rate
|
|
32.02
|
%
|
32.02
|
%
|
31.02
|
%
|
|
|
|
|
|
|
|
|
Income
tax recovery based on statutory income tax rate
|
|
$
|
10,886
|
|
$
|
6,872
|
|
$
|
4,613
|
|
Change
in valuation allowance
|
|
(6,963
|
)
|
22,644
|
|
(5,403
|
)
|
Accretion
on convertible term loans
|
|
|
|
(258
|
)
|
(1,448
|
)
|
Stock-based
compensation costs
|
|
(635
|
)
|
(679
|
)
|
(739
|
)
|
Difference
in statutory income tax rate of foreign subsidiaries
|
|
(16
|
)
|
994
|
|
(133
|
)
|
Change
in enacted rate used
|
|
(1,345
|
)
|
2,428
|
|
2,780
|
|
Tax
loss consolidation strategy (note 21)
|
|
|
|
(2,376
|
)
|
(827
|
)
|
Other
|
|
34
|
|
(588
|
)
|
548
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,961
|
|
$
|
29,037
|
|
$
|
(609
|
)
|
Loss
before income taxes
The loss before
income taxes from continuing operations is allocated as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Canada
|
|
(10,556
|
)
|
(10,436
|
)
|
(15,983
|
)
|
Germany
|
|
(23,276
|
)
|
(11,024
|
)
|
1,110
|
|
United
States
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,998
|
)
|
(21,460
|
)
|
(14,873
|
)
|
133
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Income
tax recovery (expense) is represented by:
|
|
|
|
|
|
|
|
Current
|
|
93
|
|
(123
|
)
|
(89
|
)
|
Future
|
|
1,868
|
|
29,160
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Foreign
|
|
93
|
|
(123
|
)
|
(89
|
)
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
|
Domestic
|
|
(284
|
)
|
25,036
|
|
|
|
Foreign
|
|
2,152
|
|
4,124
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
1,868
|
|
29,160
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
Foreign operations are predominantly in
Germany.
134
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Significant components of future income tax
assets and liabilities are as follows:
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Future
income tax assets
|
|
|
|
|
|
Current
|
|
|
|
|
|
Deferred
revenues
|
|
1,738
|
|
2,303
|
|
Inventory
|
|
658
|
|
157
|
|
Operating
losses carried forward
|
|
|
|
17,996
|
|
Research
and development costs
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
2,396
|
|
21,953
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Research
and development costs
|
|
12,119
|
|
11,425
|
|
Share
issue expenses
|
|
91
|
|
229
|
|
Operating
losses carried forward
|
|
17,145
|
|
7,101
|
|
Property,
plant and equipment
|
|
1,973
|
|
1,455
|
|
Intangible
assets and goodwill
|
|
206
|
|
206
|
|
Employee
future benefits
|
|
648
|
|
966
|
|
Deferred
revenues
|
|
1,211
|
|
3,658
|
|
Other
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
33,537
|
|
25,040
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
(23,289
|
)
|
(13,337
|
)
|
|
|
|
|
|
|
|
|
10,248
|
|
11,703
|
|
|
|
|
|
|
|
|
|
12,644
|
|
33,656
|
|
|
|
|
|
|
|
Future
income tax liabilities
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Accounts
receivable
|
|
48
|
|
11
|
|
Investment
in an affiliated company
|
|
|
|
5,829
|
|
Property,
plant and equipment
|
|
190
|
|
121
|
|
Deferred
charges and other long-term assets
|
|
2,434
|
|
604
|
|
Intangible
assets
|
|
9,376
|
|
14,798
|
|
Investment
tax credits
|
|
573
|
|
629
|
|
Other
|
|
23
|
|
76
|
|
|
|
|
|
|
|
|
|
12,644
|
|
22,068
|
|
|
|
|
|
|
|
Future
income tax assets (liabilities), net
|
|
|
|
11,588
|
|
|
|
|
|
|
|
Classified
as follows:
|
|
|
|
|
|
Future
income tax assets
|
|
|
|
21,953
|
|
Future
income tax liabilities
|
|
|
|
(10,365
|
)
|
|
|
|
|
|
|
|
|
|
|
11,588
|
|
As at December 31, 2007, the Company has
estimated non-refundable research and development tax credits of $7,004,150
which can be carried forward to reduce Canadian federal income taxes payable
and expire from 2011 to 2027. No tax benefit has been accounted for in
connection with those credits.
135
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
As at December 31,
2007, the Company had available operating losses in Canada. The following table
summarizes the year of expiry of these operating losses by tax jurisdiction:
|
|
Canada
|
|
Year of expiry
|
|
Federal
|
|
Provincial
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
2010
|
|
3,275
|
|
Nil
|
|
2014
|
|
9,801
|
|
Nil
|
|
2015
|
|
6,936
|
|
Nil
|
|
|
|
|
|
|
|
|
|
20,012
|
|
Nil
|
|
Furthermore, the Company had available
operating losses in Germany amounting to $45M for which there is no expiry
date.
The carryforwards and the tax credits claimed
could be subjected to a review and a possible adjustment by tax authorities.
19
Segment
information for continuing operations
Subsequent to the divestiture in
Atrium in 2006, the Company operates in one single operating segment, being the
biopharmaceutical segment.
Information by geographic region
Revenues by
geographic region are detailed as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Canada
|
|
400
|
|
25
|
|
103
|
|
United
States
|
|
5,911
|
|
4,094
|
|
4,553
|
|
Europe
|
|
|
|
|
|
|
|
Switzerland
|
|
23,316
|
|
20,681
|
|
19,567
|
|
United
Kingdom
|
|
5,343
|
|
5,257
|
|
6,707
|
|
Netherlands
|
|
2,031
|
|
1,748
|
|
11,720
|
|
Other
|
|
70
|
|
809
|
|
108
|
|
Japan
|
|
1,862
|
|
6,114
|
|
|
|
Other
|
|
3,135
|
|
71
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
42,068
|
|
38,799
|
|
44,813
|
|
Revenues have been allocated to geographic
regions based on the country of residence of the related customers.
136
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Customers who represent more than 10% of
revenues are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
Customer
1
|
|
59
|
|
52
|
|
44
|
|
Customer
2
|
|
13
|
|
13
|
|
26
|
|
Customer
3
|
|
5
|
|
9
|
|
15
|
|
The following table presents revenues by
source:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales
and royalties
|
|
28,825
|
|
25,123
|
|
21,252
|
|
License
fees
|
|
12,843
|
|
13,652
|
|
23,530
|
|
Other
|
|
400
|
|
24
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
42,068
|
|
38,799
|
|
44,813
|
|
Long-lived assets by geographic region are
detailed as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Canada
|
|
7,643
|
|
8,821
|
|
United
States
|
|
841
|
|
11
|
|
Germany
|
|
53,858
|
|
51,029
|
|
|
|
|
|
|
|
|
|
62,342
|
|
59,861
|
|
Long-lived assets consist of property, plant
and equipment, long-lived assets held for sale, intangible assets and goodwill.
137
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
20
Earnings
(loss) per share
The following table sets forth the
computation of basic and diluted net earnings (loss) per share:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from discontinued operations
|
|
(259
|
)
|
25,813
|
|
26,053
|
|
|
|
|
|
|
|
|
|
Impact
of assumed conversion of dilutive stock options of Atrium
|
|
|
|
(754
|
)
|
(552
|
)
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from discontinued operations, adjusted for dilution effects
|
|
(259
|
)
|
25,059
|
|
25,501
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) adjusted for dilution effects
|
|
(32,296
|
)
|
32,636
|
|
10,019
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of shares outstanding
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock options
|
|
500,171
|
|
449,970
|
|
286,868
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average number of shares outstanding
|
|
53,682,974
|
|
52,549,260
|
|
46,426,682
|
|
|
|
|
|
|
|
|
|
Items
excluded from the calculation of diluted net earnings (loss) per share
because the exercise price was greater than the average market price of the
common shares or due to their anti-dilutive effect
|
|
|
|
|
|
|
|
Stock
options
|
|
3,164,499
|
|
1,893,539
|
|
2,169,697
|
|
Common
shares which would have been issued following the conversion of the
convertible term loans
|
|
|
|
776,237
|
|
6,043,564
|
|
For the years ended December 31, 2007
and 2005, the diluted amounts per share were the same amounts as the basic
amounts per share since the dilutive effect of stock options and convertible
term loans was not included in the calculation; otherwise, the effect would
have been anti-dilutive. Accordingly, the diluted amounts per share for those
years were calculated using the basic weighted average number of shares
outstanding.
138
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
21
Related
party transactions
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Administrative
revenues
|
|
Nil
|
|
35
|
|
33
|
|
Lease
revenues
|
|
Nil
|
|
304
|
|
248
|
|
Subcontracting
revenues and sales of raw materials
|
|
Nil
|
|
66
|
|
92
|
|
Subcontracting
expenses
|
|
Nil
|
|
44
|
|
337
|
|
Patent
acquired from a senior officer
|
|
Nil
|
|
175
|
|
|
|
On December 15, 2006, the Companys
shareholders approved a reduction in the stated capital of the Company in an
amount equal to the fair market value of its remaining interest in Atrium for
the purpose of effecting a special distribution in kind of all 11,052,996
Subordinate Voting Shares of Atrium held by the Company. This transaction was
completed on January 2, 2007, thus eliminating the related party
relationship.
These above transactions in 2006 and 2005
with our former subsidiary Atrium and a senior officer were in the normal
course of operations. They were measured at the exchange amount, which is the
amount of consideration established and agreed upon by the related parties. The
price of the shares issued for the acquisition of the patent was based on the
closing trading price of the Companys shares on February 28, 2006, being
the day before the signing of the agreement.
The transactions with Atrium include amounts
that occurred before October 18, 2006 and that were previously eliminated
from the consolidated financial statements but which will continue to occur
after the disposal.
At the end of the year 2006, amounts due to
and (from) the former subsidiary were payable (redeemable) on demand and
resulted from the transactions mentioned above.
Tax loss consolidation strategy
On September 15, 2005, the Company
obtained a one-day loan of $129 million from a financial institution to advance
$129 million to its former subsidiary Atrium by way of a subordinate 7%
interest-bearing promissory note. This note was unsecured and payable on
demand.
On the same day, Atrium acquired $129 million
in preferred shares from 4296672 Canada Inc., a wholly-owned subsidiary of the
Company. The dividend rate on the preferred shares was 7.05%. 4296672 Canada
Inc. used the proceeds to advance $129 million to the Company through an
interest-free loan, payable on demand. Then, the funds were used by the Company
to repay the one-day loan to the financial institution.
With respect to that arrangement that
terminated in October 2006, when the Company ceased to be the controlling
shareholder of Atrium, we had received a tax ruling delivered by Canada Revenue
Agency. All transactions have been eliminated during the consolidation process
and income tax savings resulting from the interest expense deduction have been
presented as discontinued operations.
139
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
22
Financial
instruments
Short-term investments
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Discount
notes bearing interest at effective annual rates ranging from 3.94% to 4.23%
in 2007 and at an annual rate of 4.29% to 4.31% in 2006, maturing on
different dates from May to December 2008, in 2006 investments
matured from March to June 2007.
|
|
5,178
|
|
8,649
|
|
Bonds,
bearing interest at effective annual rates ranging from 2.81% to 4.43% in
2007 and from 2.81% to 4.43% in 2006, maturing on different dates from January
to November 2008; and in 2006 from March 2007 to November 2008
|
|
25,937
|
|
42,901
|
|
|
|
|
|
|
|
|
|
31,115
|
|
51,550
|
|
Short-term investments totalled
CAN$30,844,000 in 2007 and CAN$60,076,000 in 2006.
Fair
value
Cash and cash
equivalents, accounts receivable and accounts payable and accrued liabilities
are financial instruments whose fair value approximates their carrying value
due to their short-term maturity. The fair value of short-term investments is
$31,115,066 ($51,589,289 in 2006). The fair value of long-term debt has been
established by discounting the future cash flows at an interest rate
corresponding to that which the Company would currently be able to obtain for
loans with similar maturity dates and terms. The approximate fair value of
long-term debt is $775,000 ($1,342,000 in 2006).
Foreign
currency risk
Since the Company operates on an international scale, it is exposed to
currency risks as a result of potential exchange rate fluctuations. As at December 31,
2007 and 2006, there are no significant forward exchange contracts outstanding.
Credit
risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
accounts receivable. Cash and cash equivalents are maintained with high-credit
quality financial institutions. Short-term investments consist primarily of
bonds issued by high-credit quality institutions and corporations.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and short-term investments to be minimal.
140
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Generally, the
Company does not require collateral or other security from customers for trade
accounts receivable; however, credit is extended following an evaluation of
creditworthiness. In addition, the Company performs on-going credit reviews of
all its customers and establishes an allowance for doubtful accounts when
accounts are determined to be uncollectible. Allowance for doubtful accounts
amounted to $nil and $7,000 as at December 31, 2007 and 2006,
respectively.
Interest
rate risk
The Companys exposure to interest rate risk
is as follows:
Cash and
cash equivalents
|
|
Variable
interest rate
|
|
Short-term
investments
|
|
Fixed
interest rate
|
|
Accounts
receivable
|
|
Non-interest
bearing
|
|
Accounts
payable and accrued liabilities
|
|
Non-interest
bearing
|
|
Long-term
debt
|
|
Non-interest
bearing
|
|
23
Commitments,
contingencies and guarantee
The Company is committed to various operating
leases for its premises plus service and manufacturing contract as follows:
|
|
Minimum
|
|
Service &
|
|
|
|
|
|
Lease
|
|
Manufacturing
|
|
Total
|
|
Year
|
|
Commitments
|
|
Commitments
|
|
Commitments
|
|
|
|
|
$
|
|
$
|
|
$
|
|
2008
|
|
|
2,092
|
|
13,295
|
|
15,387
|
|
2009
|
|
|
2,172
|
|
6,652
|
|
8,824
|
|
2010
|
|
|
2,092
|
|
300
|
|
2,392
|
|
2011
|
|
|
2,098
|
|
|
|
2,098
|
|
2012 and
beyond
|
|
|
2,072
|
|
|
|
2,072
|
|
Total
|
|
|
10,526
|
|
20,247
|
|
30,773
|
|
Rent expenses for operating leases, which may have
escalating rentals over the term of the lease, are recorded on a straight-line
basis over the term of the lease. The rent expense under the operating leases
for the periods ending December 31, 2007, 2006 and 2005 was respectively
$1,937,000, $1,878,000 and $1,545,000.
In October 2004, the Company entered
into a $2.5 M (1.75 M) bank guarantee in favour of one of its landlords in
Germany with respect to the Companys lease obligation. This guarantee will
mature in 2009.
141
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Contingencies
In the normal course of operations, the
Company may become involved in various claims and legal proceedings mainly
related to contract terminations, employee lay-offs and other employee-related
matters. As at December 31, 2007 there are no known or anticipated contingencies
or disputes pending against the company.
24
Summary
of differences between generally accepted accounting principles in Canada and
in the United States
As a company listed on the NASDAQ Global
Market, the Company is required to reconcile its financial statements for
significant measurement differences between generally accepted accounting
principles as applied in Canada (Canadian GAAP) and those applied in the United
States (U.S. GAAP). Furthermore, additional significant disclosures required
under U.S. GAAP and Regulation S-X of the Securities and Exchange Commission in
the United States (SEC) are also provided in the accompanying financial
statements and notes. The following summarizes the significant quantitative
differences between Canadian and U.S. GAAP, as well as other significant
disclosures required under U.S. GAAP and Regulation S-X of the SEC not already
provided in the accompanying financial statements.
The following summary sets out the material
adjustments to the Companys reported net earnings (loss), net earnings (loss)
per share and shareholders equity which would be made to conform with
U.S. GAAP:
142
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Statements
of Earnings
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Net
earnings (loss) for the year under Canadian GAAP
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
Accretion
on convertible term loans
|
(c)
|
|
|
502
|
|
4,479
|
|
Loss
on conversion of convertible term loans
|
(c)
|
|
|
(280
|
)
|
|
|
Amortization
of in-process R&D
|
(a)
|
1,546
|
|
2,348
|
|
1,610
|
|
Other
|
(b)
|
|
|
(10
|
)
|
(32
|
)
|
Reclassification
adjustment related to the sale of Echelon
|
(e)
|
(754
|
)
|
|
|
|
|
Deferred
taxes
|
(d)
|
(5,430
|
)
|
(959
|
)
|
|
|
Income
tax effects of the above adjustments
|
|
(494
|
)
|
(729
|
)
|
(658
|
)
|
|
|
|
|
|
|
|
|
Net
earnings (loss) for the year under U.S. GAAP
|
|
(37,428
|
)
|
34,262
|
|
15,970
|
|
|
|
|
|
|
|
|
|
Out
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
(36,415
|
)
|
8,449
|
|
(10,083
|
)
|
Net
earnings (loss) from discontinued operations
|
|
(1,013
|
)
|
25,813
|
|
26,053
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share
|
|
(0.70
|
)
|
0.66
|
|
0.34
|
|
From
continuing operations
|
|
(0.68
|
)
|
0.16
|
|
(0.22
|
)
|
From
discontinued operations
|
|
(0.02
|
)
|
0.50
|
|
0.56
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings (loss) per share
|
|
(0.70
|
)
|
0.65
|
|
0.34
|
|
From
continuing operations
|
|
(0.68
|
)
|
0.16
|
|
(0.22
|
)
|
From
discontinued operations
|
|
(0.02
|
)
|
0.49
|
|
0.56
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (note 20)
under U.S. GAAP
|
|
|
|
|
|
|
|
Basic
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,182,803
|
|
52,549,260
|
|
46,139,814
|
|
143
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Reconciliation of shareholders equity to conform to U.S. GAAP
The following
summary sets out the significant differences between the Companys reported shareholders
equity under Canadian GAAP as compared to U.S. GAAP. Please see corresponding
explanatory notes for additional information.
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Shareholders
equity in accordance with Canadian GAAP
|
|
88,591
|
|
178,879
|
|
In-process
R&D
|
(a)
|
(14,181
|
)
|
(14,348
|
)
|
Other
|
(b)
|
|
|
39
|
|
Deferred
tax effect
|
(d)
|
|
|
5,134
|
|
|
|
|
|
|
|
|
|
74,410
|
|
169,704
|
|
Statement of comprehensive income
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) for the year under U.S. GAAP
|
|
(37,428
|
)
|
34,262
|
|
15,970
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
12,607
|
|
4,654
|
|
(7,660
|
)
|
Reclassification
adjustment related to the sale of shares of Atrium
|
|
|
|
(1,643
|
)
|
|
|
Change
in fair value of investments
|
(f)
|
(29
|
)
|
(274
|
)
|
(139
|
)
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap, net of income taxes
|
(g)
|
|
|
78
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
(24,850
|
)
|
37,077
|
|
8,093
|
|
Accumulated
other comprehensive income, net of related income taxes, consists of the
following:
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
19,809
|
|
12,826
|
|
Unrealized
gains on investments
|
|
10
|
|
39
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
19,819
|
|
12,865
|
|
144
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The following table summarizes the
shareholders equity activity under U.S. GAAP since December 31, 2004:
|
|
Share
Capital
|
|
Deficit
|
|
Other
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Shareholders
Equity
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2004
|
|
126,991
|
|
(64,084
|
)
|
5,825
|
|
17,927
|
|
86,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings as per U.S. GAAP
|
|
|
|
15,970
|
|
|
|
|
|
15,970
|
|
Stock-based
compensation costs
|
|
|
|
|
|
2,286
|
|
|
|
2,286
|
|
Variation
in fair value of investments
|
|
|
|
|
|
|
|
(139
|
)
|
(139
|
)
|
Variation
in fair value of interest rate swap
|
|
|
|
|
|
|
|
(78
|
)
|
(78
|
)
|
Exercise
of stock options
|
|
130
|
|
|
|
|
|
|
|
130
|
|
Issuance
of shares pursuant to a business acquisition
|
|
2,737
|
|
|
|
|
|
|
|
2,737
|
|
Share
issue expenses
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
(7,660
|
)
|
(7,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2005
|
|
129,750
|
|
(48,114
|
)
|
8,111
|
|
10,050
|
|
99,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings as per U.S. GAAP
|
|
|
|
34,262
|
|
|
|
|
|
34,262
|
|
Stock-based
compensation costs
|
|
|
|
|
|
2,120
|
|
|
|
2,120
|
|
Variation
in fair value of investments
|
|
|
|
|
|
|
|
(274
|
)
|
(274
|
)
|
Variation
in fair value of interest rate swap
|
|
|
|
|
|
|
|
78
|
|
78
|
|
Exercise
of stock options
|
|
110
|
|
|
|
(29
|
)
|
|
|
81
|
|
Conversion
of convertible term loans
|
|
30,403
|
|
|
|
|
|
|
|
30,403
|
|
Issuance
of shares pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
a
contingent consideration paid upon business acquisition
|
|
163
|
|
|
|
|
|
|
|
163
|
|
acquisition
of a patent from a senior officer
|
|
175
|
|
|
|
|
|
|
|
175
|
|
Share
issue expenses
|
|
(112
|
)
|
|
|
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
3,011
|
|
3,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2006
|
|
160,489
|
|
(13,852
|
)
|
10,202
|
|
12,865
|
|
169,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss as per U.S. GAAP
|
|
|
|
(37,428
|
)
|
|
|
|
|
(37,428
|
)
|
Stock-based
compensation costs
|
|
|
|
|
|
1,984
|
|
|
|
1,984
|
|
Variation
in fair value of investments
|
|
|
|
|
|
|
|
(29
|
)
|
(29
|
)
|
Distribution
of Atrium (note 4)
|
|
(137,959
|
)
|
|
|
71,122
|
|
(5,624
|
)
|
(72,461
|
)
|
Issuance
of shares pursuant to stock option plan
|
|
33
|
|
|
|
|
|
|
|
33
|
|
Exercise
of Stock Options
|
|
26
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
12,607
|
|
12,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2007
|
|
22,589
|
|
(51,280
|
)
|
83,282
|
|
19,819
|
|
74,410
|
|
145
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Balance Sheets
The following table summarizes
the significant differences between the balance sheet items under Canadian GAAP
as compared to U.S. GAAP as at December 31, 2007 and 2006:
|
|
As at December 31, 2007
|
|
As at December 31, 2006
|
|
|
|
As
reported
|
|
U.S.
GAAP
|
|
As
reported
|
|
U.S.
GAAP
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
(a)
|
36,945
|
|
22,764
|
|
39,106
|
|
24,758
|
|
Future
income tax liabilities
|
(a)
|
|
|
|
|
10,963
|
|
5,829
|
|
Statements of cash flows
For the years ended December 31,
2007, 2006 and 2005, there are no significant differences between the statements
of cash flows under Canadian GAAP as compared to U.S. GAAP.
(a)
Research and development costs
Under U.S. GAAP, in-process research and
development acquired in a business combination is written off at the time of
acquisition. Under Canadian GAAP, in-process research and development acquired
in a business combination is capitalized and amortized over its estimated
useful life. Balance includes intangible assets held for sale, and assets and
liabilities from discontinued operations.
(b)
Other
Other adjustments required when
considering the significant differences between Canadian and U.S. GAAP include
individually minor amounts related to the following items:
financing costs arising from the
convertible notes (see (c) below) allocated to other capital under
Canadian GAAP that are amortized in earnings under U.S. GAAP;
organization costs deferred and
amortized under Canadian GAAP that are expensed as incurred under U.S. GAAP.
(c)
Convertible term loans
Under Canadian GAAP, proceeds from the issuance
of convertible term loans are allocated among long-term convertible term loans
and shareholders equity, resulting in a debt discount that is amortized to
expense over the term of the loans. The financing costs related to those loans
have been allocated on a pro-rata basis between deferred charges and other
capital. Under U.S. GAAP, those costs are all included in deferred charges and
amortized over the term of the loans, and convertible term loans are totally
considered as long-term debt. Furthermore, under U.S. GAAP, the entire
incremental consideration to induce conversion is recorded in earnings.
146
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
(d)
Deferred taxes
This adjustment reflects differences related
to the accounting for valuation allowance for U.S. GAAP purposes that arise
from timing differences.
(e)
Cumulative translation adjustment related to the sale of Echelon
Under Canadian GAAP, a gain or loss
equivalent to a proportionate amount of the exchange gain or loss accumulated
in the translation adjustment has to be
recognized in income when there has been a reduction of a net investment in a
foreign operation. Under U.S. GAAP, a gain or loss should only be recognized in
income in the case of a substantial or complete liquidation of a net investment
in a foreign operation being the substantial or complete liquidation of the
Company.
(f)
Investments
Investments, which are classified as
available-for-sale securities, include the Companys investment in discount
notes, commercial paper and bonds for which the Company does not have the
positive intent or ability to hold to maturity and an investment in shares of a
publicly traded company. Under U.S. GAAP, available-for-sale securities are
carried at fair value with unrealized gains and losses net of the related tax
effects as part of other comprehensive income.
Under Canadian GAAP, these investments were
valued at the lower of amortized cost and market value before January 1,
2007. Since this date, there is no difference in accounting under Canadian and
U.S. GAAP.
(g)
Interest rate swap
Under Canadian GAAP, prior to
2007, the Company accounted for Atriums interest rate swap using the accrual
method. U.S. GAAP requires all derivative instruments to be recognized at fair
value on the consolidated balance sheet. Under U.S. GAAP, this swap has been
designated as a cash flow hedge. Accordingly, the changes in fair value are
recorded in other comprehensive income until the related interest expense is
recorded in income.
(h)
Recently adopted and pending
accounting pronouncements
FASB Statement No. 123R Share-Based
Payment (SFAS 123R)
On December 16, 2004, the
Financial Accounting Standards Board (FASB) issued SFAS 123R which replaces
FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, and eliminates the ability to account for share-based payment
transactions using APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R covers the accounting requirements for a wide range of
share-based compensation arrangements. SFAS 123R requires that compensation
cost for employee stock-based compensation be measured based on the grant-date
fair value and recognized in the financial statements over the vesting period
(fair value method).
147
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The Company adopted SFAS 123R on
January 1, 2006 using the modified prospective application method of
transition and its adoption had no significant impact on its consolidated
financial statements. On January 1, 2003, the Company had already adopted
the prospective application method of transition of SFAS 123, which required
that all new awards granted to employees on or after January 1, 2003 be
accounted for at fair value. The fair value of awards granted was estimated
using the Black-Scholes option pricing model.
FASB Statement No. 158 Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158)
In September 2006, the FASB
issued SFAS 158. This statement amends SFAS 87, Employers Accounting for
Pensions, and SFAS 106, Employers Accounting for Post-Retirement Benefits
Other than Pensions, to require recognition of the over funded or under funded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in OCI, net of
tax effects, until they are amortized as a component of net periodic cost.
SFAS 158 is effective for the
fiscal year ending after December 15, 2006, except for the measurement
date provisions, which are effective for fiscal years ending after December 15,
2008. The Company adopted this standard on December 31, 2006 and its
adoption had no impact on its consolidated financial statements.
FASB Interpretation No. 48 Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48)
In June 2006, the FASB
issued FASB interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 requires that
the Company recognize the impact of a tax position in the financial statements
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The provisions of FIN 48 are effective beginning January 1,
2007 with the cumulative effect of the change in accounting principle recorded
as an adjustment to the opening balance of deficit. The Company adopted this
interpretation on January 1, 2007 and this adoption had no impact on the
Companys consolidated financial statements. Upon the adoption of FIN 48,
the Company elected to classify interest and penalties in interest expense.
148
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
FASB Statement No. 157 Fair Value Measurements (SFAS 157)
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company will adopt this statement
on January 1, 2008, and has not yet assessed the impact its adoption will
have on its consolidated financial statements.
FASB
Statement No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115
(SFAS 159)
On February 15,
2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115,
which permits entities to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions of this statement
apply only to entities that elect the fair value option. However, the amendment
to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,
applies to all entities with available-for-sale and trading securities. This
statement is effective for fiscal years beginning after November 15, 2007.
The Company will adopt this statement on January 1, 2008 and has not yet
determined if it will elect to use the fair value option.
EITF
Issue No. 07-3 Accounting for Advance Payments for Goods or Services to
be Received for Use in Future Research and Development Activities (EITF 07-3)
In June 2007,
EITF 07-3 provides clarification surrounding the accounting for nonrefundable
research and development advance payments, whereby such payments should be
recorded as an asset when the advance payment is made and recognized as an
expense when the research and development activities are performed. EITF 07-3
is effective for interim and annual reporting periods beginning after December 15,
2007. The Company will adopt the provisions of EITF 07-3 on January 1,
2008. The Company is currently assessing the impact of EITF 07-3 on its results
of operations and financial condition.
EITF
Issue No. 07-1 - Accounting for Collaborative Agreements Related to the
Development and Commercialization of Intellectual Property (EITF)
The Emerging Issues Task Force has adopted the accounting for
arrangements under which companies participate in the development and
commercialization of intellectual property into commercially viable products.
The ETIF defines a collaborative arrangement is a contractual arrangement that
involves a joint operating activity. These arrangements involve two (or more)
parties who are both (a) active participants in the activity and (b) exposed
to significant risks and rewards dependent on the commercial success of the
activity. A company may receive revenues and incur costs under such
arrangements as well as make or received payments from the other participant in
the arrangement. The EITF concluded revenues earned and costs incurred by a
company should be presented gross or net depending on whether the company is
the principal in the arrangement. The EITF has approved this pronouncement in December 2007
and it will
149
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
become effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently assessing the impact on the presentation of
revenues and costs within the Companys financial statements.
(i)
Other disclosures
Research and development tax credits
Under
Canadian GAAP, all research and development tax credits are recorded as a
reduction of costs in the statements of operations. Under U.S. GAAP, tax
credits that are refundable against taxable income are recorded in the income
taxes. These tax credits amounted to $1,862,000 in 2007, $1,684,000 in 2006 and
$nil in 2005. This difference has no impact on the net earnings (loss) and the
net earnings (loss) per share figures for the reporting years.
Furthermore,
under U.S. GAAP, the future income tax assets related to the unrecognized tax
credits totalled $7,004,000 in 2007 and $5,683,000 in 2006. However, a
valuation allowance corresponding to the same amounts has been accounted for in
2007 and 2006.
Long-lived
assets
Under
U.S. GAAP, long-lived assets by geographic region only consist of property,
plant and equipment which are detailed as follows:
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Canada
|
|
7,631
|
|
8,798
|
|
Germany
|
|
6,436
|
|
4,203
|
|
United States
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
14,905
|
|
13,001
|
|
Available-for-sale securities
The Company uses the specific identification
method in order to reclassify the gains or losses realized out of accumulated
other comprehensive income into the statement of earnings.
150
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
The gross realized gains and gross realized
losses included in the statement of earnings, the unrealized holding gain or
loss on available-for-sale securities as well as the amount of gains and losses
reclassified out of accumulated other comprehensive income into the statement
of earnings are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
|
410
|
|
17
|
|
Gross realized losses
|
|
67
|
|
21
|
|
|
|
Unrealized gains
|
|
|
|
126
|
|
197
|
|
Unrealized losses
|
|
42
|
|
67
|
|
67
|
|
Gains reclassified
|
|
53
|
|
390
|
|
269
|
|
Losses reclassified
|
|
30
|
|
78
|
|
|
|
Available-for-sale securities maturity dates:
|
|
$
|
|
|
|
|
|
Within one year
|
|
31,115
|
|
One to five years
|
|
|
|
|
|
31,115
|
|
As at December 31, 2007,
available-for-sale securities are composed of:
|
|
$
|
|
|
|
|
|
Government debt securities
|
|
5,778
|
|
Municipal debt securities
|
|
5,130
|
|
Corporate debt securities
|
|
20,207
|
|
|
|
31,115
|
|
Research and collaboration agreements
As part of our strategy to enhance our
development capabilities and to fund, in part, our capital requirements, we
have entered into collaboration agreements with several pharmaceutical
companies, which we refer to as our partners. Pursuant to our collaboration,
the Company received upfront payments, license fees, milestone payments and has
the potential to receive royalty payments in the future. Upfront payments are
typically non-refundable payments received upon the signature of an agreement
and are amortized over the estimated research and development (R&D)
period. License fees are typically contractually obligated payments to fund
R&D over the term of collaboration and include milestone payments, as well
as R&D contract services. Milestone payments are contingent payments made
only upon achievement of specified milestones, such as selection of candidates
for drug development, the commencement or termination of clinical trials or
receipt of regulatory approvals and achievement of a certain level of sales. If
drugs are successfully developed and commercialized as a result of our
collaboration agreements, we will receive royalty payments based upon net sales
of those drugs developed under the collaboration. Finally, R&D contract
services fees are research and development activities performed by the Company
on behalf of our partners and for which the Company has the right to receive
compensation.
151
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Ardana Bioscience
In 2002, the Company entered into a license
and collaboration agreement with Ardana Bioscience Ltd., a subsidiary of Ardana
plc (Ardana). Ardana was granted an exclusive worldwide license to develop
and commercialize the growth hormone secretagogue (EP-1572). Ardana
undertakes, at its own cost, all activities necessary to obtain regulatory and
marketing approvals for the substance. In return, the Company received 1.75
million (approximately $1.7 million) as upfront payment upon signing of the
agreement. The Company is also eligible to receive payments of up to an
aggregate of 7 million (approximately $9.2 million) upon Ardanas successful
achievement of clinical development and regulatory milestones, in addition to
low double-digit royalties on future net worldwide net sales of EP-1572.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $3.0 million, $1.5
million and $1.8 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$nil, $nil and $nil, respectively.
In 2002, the Company granted an exclusive
license to Ardana to develop and commercialize teverelix, a luteinizing
hormone-releasing hormone (LHRH) antagonist, for all therapeutic uses
worldwide with the exception of Japan, Korea and Taiwan. On April 2, 2004,
Ardana acquired full worldwide rights and was assigned the intellectual
property rights relating to teverelix and the underlying microcrystalline
suspension technology for the use of teverelix and any other potential LHRH
antagonists. The Company received 3.25 million (approximately $3.2 million) in
2002 and 5 million (approximately $6.1 million) in 2004 as upfront
payments upon signature of the agreement in 2002 and upon the assignment of the
substance in 2004 respectively. The agreement also provides, among other
things, 7 million (approximately $9.2 million) of guaranteed payments
until December 2006, 15 million (approximately $19.8 million) upon
successful achievement of a certain level of sales and low single-digit
royalties on future worldwide net sales.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $3.5 million, $3.6
million and $5.1 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
less than $0.1 million, $0.3 million and $0.6 million, respectively.
Keryx Biopharmaceuticals
Following the acquisition of AOI Pharma, Inc.
in January 2004 by Keryx Biopharmaceuticals, Inc. (Keryx), Keryx
has taken over the license and collaboration agreement signed with AOI Pharma, Inc.
in September 2002. Upon signature of this agreement in 2002, the Company
received $0.5 million as upfront payment. Keryx undertakes, at its own cost,
all clinical activities necessary to obtain regulatory and marketing approvals
of perifosine, a signal transduction inhibitor, for all uses in the United
States, Canada and Mexico. The agreement provides, among other things,
availability of data generated by both parties free of charge. The Company is also
eligible to receive payments of up to an aggregate of $18.3 million upon Keryxs
successful achievement of clinical development and regulatory milestones, in
addition to
152
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
scale-up royalties (from high single to low
double-digit) on future net sales in the United States, Canada and Mexico.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $1.7 million, $0.7
million and $0.9 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$0.9 million, $0.9 million and $0.9 million, respectively.
Nippon Kayaku
In 2006, we entered into a licensing and
collaboration agreement with Nippon Kayaku Co. Ltd. (Nippon Kayaku). Under the
terms of the agreement, we granted Nippon Kayaku an exclusive license to
develop and market ozarelix, a LHRH antagonist, for all potential oncological
indications in Japan. In return, the Company received 1.5 million
(approximately $1.9 million) as upfront payment upon signature. The agreement
provides, among other things, availability of data generated by both parties
free of charge. The Company is eligible to receive payments of up to an
aggregate of 18 million (approximately $23.8 million) upon Nippon Kayakus
successful achievement of clinical development, regulatory milestones and a
certain level of sales, in addition to low double-digit royalties on potential
net sales. Furthermore, as indicated below regarding the Spectrum
Pharmaceuticals, Inc. (Spectrum) R&D agreement, Spectrum is entitled
to receive fifty percent of any upfront, milestone payments and royalties
received from any research and collaboration agreement signed by the Company
for the development and commercialization of ozarelix in Japan.
Revenues recognized under the agreement for
the years ended December 31, 2007 and 2006 were $0.5 million and
$0.2 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007and 2006 were
$0.1 million and $0.1 million, respectively.
Shionogi
In 1995, the Company entered into a research
and collaboration agreement with Shionogi and Co. (Shionogi). The Company
granted Shionogi a license to develop, use, commercialize and manufacture
cetrorelix, our LHRH antagonist, in Japan and for all human indications. Under
the agreement, Shionogi is responsible, at its own cost, for all activities
necessary to obtain regulatory and marketing approvals for cetrorelix. The
agreement provides, among other things, availability of data generated by both
parties free of charge. Upon signature of this agreement, the Company received
1.3 million (approximately $1.4 million) as upfront payment and was eligible
to receive milestone payments of up to an aggregate of 5.4 million
(approximately $7.1 million) upon Shionogis successful achievement of clinical
development and regulatory milestones. To date, the Company received
4.4 million (approximately $5.8 million) of these milestone payments.
Since the development of cetrorelix is completed in the
in vitro
fertilization (IVF), Control Ovarian Stimulation (COS) and Assisted
Reproductive Technology (ART) in Japan, the Company does not expect to
receive further development milestone payments.
153
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
In addition, upon commercialization of
cetrorelix in benign prostatic hyperplasia (BPH), the Company will be
entitled to a manufacturing margin.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $nil, $3.8 million
and $nil, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$nil, $1 million and $0.3 million, respectively.
Solvay Pharmaceuticals
In 2002, the Company entered into a research
and collaboration agreement with Solvay Pharmaceuticals Bv, a subsidiary of
Solvay SA (Solvay). The Company granted Solvay an exclusive license to
develop, use, commercialize and manufacture cetrorelix worldwide (ex-Japan) and
for all indications excluding IVF/COS/ART.
Under the agreement, Solvay was responsible, at its own cost, for all
activities necessary to obtain regulatory and marketing approvals for
cetrorelix in different indications including, uterine myoma, endometriosis and
BPH. The agreement provides, among other things, availability of data generated
by both parties free of charge. Upon signature of this agreement, the Company
received 6 million (approximately $6.2 million) as upfront payment and was
eligible to receive milestone payments of up to an aggregate of
18 million (approximately $23.8 million) upon Solvays successful
achievement of clinical development and regulatory milestones, in addition to
low double-digit royalties on future worldwide (ex-Japan) net sales of
cetrorelix.
In December, 2005, Æterna Zentaris and Solvay
amended the agreement whereas the Company regained exclusive worldwide
(ex-Japan) rights for cetrorelix for the BPH indication solely, without any
financial compensation payable to Solvay. In May 2007, the parties entered
into a termination agreement whereby the Company regained exclusive worldwide
(ex-Japan) rights for cetrorelix in all indications, including endometriosis
and uterine myoma, without any financial compensation payable to Solvay.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $2.0 million, $1.2
million and $4.5 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$1.9 million, $0.6 million and $0.6 million, respectively.
154
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Spectrum Pharmaceuticals
In 2004, the Company entered into a licensing
and collaboration agreement with Spectrum Pharmaceuticals, Inc. (Spectrum)
for ozarelix, a LHRH antagonist. Under the terms of the agreement, the Company
granted Spectrum an exclusive license to develop and commercialize ozarelix for
all potential indications in North America (including Canada and Mexico) as
well as India. The agreement provides, among other things, availability of data
generated by both parties free of charge. Upon signature of this agreement, the
Company received 2 million as upfront payment (approximately $2.4
million) of which an amount of 1 million was paid cash and the balance
paid through the issuance of shares of the capital of Spectrum. The Company is
eligible to receive payments of up to an aggregate of 18.5 million
(approximately $24.4 million) upon Spectrums successful achievement of
clinical development and regulatory milestones, in addition to royalties
(scale-up royalties from high single to low double-digit) on potential net
sales. In consideration of the amounts paid by Spectrum under this agreement,
Spectrum is entitled to receive fifty percent of any upfront, milestone
payments and royalties received from any research and collaboration agreement
signed by the Company for the development and commercialization of ozarelix in
Japan.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $1.9 million, $2.9
million and $2.6 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$0.6 million, $1.7 million and $2.6 million, respectively.
Tulane University
In 2002, the Company signed license
agreements with the Tulane Educational Fund (Tulane) with regard to various
substances, including cetrorelix. Under the agreements, we obtained exclusive
worldwide licenses to use Tulanes patents to develop, manufacture, market and
distribute these substances.
The agreement provides the payment by the
Company of single-digit royalties on future worldwide net sales for all
indications, except BPH, where it provides the payment of low single-digit
royalties. Tulane is entitled to receive a low double-digit royalty on any lump
sum, periodic or other cash payments received by the Company from
sub-licensees.
Costs incurred under the agreement for the
years ended December 31, 2007, 2006 and 2005 were $0.1million, $0.3
million and $0.4 million, respectively.
25
Comparative figures
Certain comparative figures have been
reclassified to conform with the current year presentation.
155
Item 19. Exhibits
Exhibit Index
1.1
|
|
Articles
|
1.2
|
|
By-Laws
|
2
|
|
Shareholder Rights Plan
|
4.1
|
|
Stock Option Plan
|
4.2
|
|
Employment Agreement for Dr. Paul Blake
|
4.3
|
|
Employment Agreement for Dr. Jürgen Engel
|
4.4
|
|
Employment Agreement for Dr. David J. Mazzo
|
4.5
|
|
Employment Agreement for Ms. Ellen McDonald
|
4.6
|
|
Employment Agreement for Mr. Mario Paradis
|
4.7
|
|
Employment Agreement for Dr. Nicholas J.
Pelliccione
|
4.8
|
|
Employment Agreement for Mr. Dennis Turpin
|
8.1
|
|
Subsidiaries of Æterna Zentaris Inc. (see Item 10.I
of this annual report)
|
11.1
|
|
Code of Ethical Conduct
|
11.6
|
|
Audit Committee Charter
|
12.1
|
|
Certification of the Principal Executive Officer
pursuant to §302 of the Sarbanes-Oxley Act of 2002
|
12.2
|
|
Certification of the Principal Financial Officer
pursuant to §302 of the Sarbanes-Oxley Act of 2002
|
13.1
|
|
Certificate of the Principal Executive Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
13.2
|
|
Certificate of the Principal Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
156
SIGNATURES
The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
|
ÆTERNA
ZENTARIS INC.
|
|
|
|
|
|
Dennis Turpin
|
|
Senior Vice President and
Chief Financial Officer
|
Date: March 28,
2008
157
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