Exhibit 99.1
AUDITORS' REPORT
To the Shareholders of
QLT INC.
We have audited the consolidated balance sheets of QLT Inc. as at December
31, 2003 and 2002 and the consolidated statements of income, cash flows and
changes in shareholders' equity for each of the three years in the period ended
December 31, 2003. These financial statements are the responsibility of the
Company's 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. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2003 and 2002 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003, in accordance with
Canadian generally accepted accounting principles.
On March 5, 2004, we reported separately to the shareholders of QLT Inc. on
our audit, conducted in accordance with auditing standards generally accepted in
the United States of America, of financial statements, for the same period,
prepared in accordance with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, Canada
March 5, 2004
CONSOLIDATED BALANCE SHEETS
As at December 31, 2003 2002
- ------------------ ---- ----
(In accordance with Canadian generally accepted
accounting principles)
(In thousands of United States dollars)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $262,408 $128,138
Short-term investment securities 233,022 79,797
Accounts receivable (Note 4) 35,395 30,186
Inventories (Note 5) 26,808 23,900
Current portion of future income tax assets (Note 19) 11,801 17,092
Other (Note 6) 16,150 13,310
-------- --------
585,584 292,423
PROPERTY AND EQUIPMENT (Note 7) 43,262 35,281
FUTURE INCOME TAX ASSETS (Note 19) - 10,897
INTANGIBLE ASSETS - 8,162
OTHER LONG-TERM ASSETS (Note 8) 5,889 4,170
-------- --------
$634,735 $350,933
======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $8,683 $9,960
Accrued restructuring charge (Note 16) - 2,631
Other accrued liabilities (Note 10) 13,574 7,027
Deferred revenue 6,594 12,678
-------- --------
28,851 32,296
LONG-TERM DEBT (Note 11) 141,471 -
-------- --------
170,322 32,296
COMMITMENTS (Note 21)
CONTINGENCIES (Note 23)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 12)
Authorized
500,000,000 common shares without par value
5,000,000 first preference shares without par
value, issuable in series
Issued and outstanding
Common shares 389,502 385,591
December 31, 2003 - 68,892,027 shares
December 31, 2002 - 68,407,753 shares
EQUITY COMPONENT OF CONVERTIBLE DEBT (Note 11) 33,500 -
ACCUMULATED DEFICIT (7,582) (42,257)
CUMULATIVE TRANSLATION ADJUSTMENTS 48,993 (24,697)
-------- --------
464,413 318,637
-------- --------
$634,735 $350,933
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2003 2002 2001
- ----------------------- ---- ---- ----
(In accordance with Canadian generally
accepted accounting principles)
(In thousands of United States dollars
except per share information)
REVENUES
Revenue from Visudyne(R) (Note 13) $ 142,125 $ 104,087 $ 79,522
Contract research and development (Note
14) 4,625 6,392 3,837
--------- --------- ---------
$ 146,750 110,479 83,359
--------- --------- ---------
COSTS AND EXPENSES
Cost of sales 24,328 19,073 14,925
Research and development (Note 15) 42,660 40,402 30,386
Selling, general and administrative 16,820 16,092 7,633
Depreciation and amortization 4,211 5,102 3,542
Restructuring (recovery) charge (Note 16) (394) 2,867 -
Write-down of intangible assets (Note 17) 8,096 - -
Prior years' investment tax credits
not previously recognised (Note 15) - - (4,513)
--------- --------- ---------
95,721 83,536 51,973
--------- --------- ---------
OPERATING INCOME 51,029 26,943 31,386
INVESTMENT AND OTHER INCOME
Net foreign exchange gains (losses) 1,365 (278) 3,814
Interest income 8,581 4,836 6,819
Interest expense (4,857) - -
(Write-down) gain on investments (Note 18) (560) (6,204) 3,366
Other gains (losses) 1,813 (169) 233
--------- --------- ---------
INCOME BEFORE INCOME TAXES 57,371 25,128 45,618
--------- --------- ---------
(PROVISION FOR) RECOVERY OF INCOME TAXES
(Note 19) (22,696) (12,723) 32,136
--------- --------- ---------
NET INCOME $ 34,675 $ 12,405 $ 77,754
========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.50 $ 0.18 $ 1.15
Diluted $ 0.50 $ 0.18 $ 1.13
--------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (IN THOUSANDS)
Basic 68,733 68,228 67,832
Diluted 68,972 68,432 68,548
--------- --------- ---------
See the accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2003 2002 2001
- ----------------------- ---- ---- ----
(In accordance with Canadian generally
accepted accounting principles)
(In thousands of United States dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 34,675 $ 12,405 $ 77,754
Adjustments to reconcile net income to
net cash by operating activities
Depreciation and amortization 4,211 5,102 3,542
Write-down (gain) on investments 560 6,204 (3,366)
(Note 18)
Amortization of deferred financing 397 - -
expenses
Implied interest on convertible debt 2,498 - -
Unrealized foreign exchange gains (6,396) (566) (1,065)
Future income tax expenses (recovery) 22,696 12,723 (32,136)
(Note 19)
Benefit of investment tax credits (2,244) (2,108) (6,296)
included in operating expenses
Write-down on intangibles assets 8,096 - -
Restructuring (recovery) charge (394) 2,631 -
Changes in non-cash operating assets and
liabilities
Accounts receivable 1,254 (3,314) (14,412)
Other assets 3,984 (3,916) (3,980)
Inventories 2,167 7,872 (7,204)
Accounts payable (1,038) (341) (258)
Accrued restructuring charge (Note 16) (2,437) - -
Other accrued liabilities 5,203 (654) 3,581
Deferred revenue (8,251) 5,031 6,102
--------- --------- ---------
64,981 41,069 22,262
--------- --------- ---------
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Short-term investment securities (127,719) 15,907 (88,088)
Purchase of investments - - (7,331)
Purchase of property and equipment (5,683) (2,242) (3,628)
Proceeds from sale of investment - - 11,545
Purchase of development and marketing
rights - - (9,902)
--------- --------- ---------
(133,402) 13,665 (97,404)
--------- --------- ---------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Long-term debt (net) 134,179 - -
Equity component of long term debt 33,515 - (8,693)
Issuance of common shares 3,903 3,726 2,928
--------- --------- ---------
171,597 3,726 (5,765)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 31,094 (684) (8,159)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 134,270 57,776 (89,066)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 128,138 70,362 159,428
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 262,408 $ 128,138 $ 70,362
--------- --------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid: $ 423 $ 970 $ 418
Income taxes paid: - - -
--------- --------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1. On February 1, 2002, the Company received 135,735 common shares of Diomed
Holdings Inc. ("Diomed") and on August 5, 2002, received 696,059 preferred
shares of Diomed as part of the consideration received by the Company from
the sale of its Optiguide(R) FiberOptics business to Diomed on November 8,
2000. Under the terms of the sale, Diomed elected to settle the amount owing
in shares. The Company recorded this investment at a carrying value of $0.7
million and recorded a loss of $0.4 million on settlement of accounts
receivable of $1.2 million.
2. A standby letter of credit in the amount of Canadian ("CAD") $2.5 million was
issued under the second segment of the Company's unsecured credit facility.
This letter of guarantee was security for the final payment of a land
purchase and bore interest at 0.7% per annum. During April 2003, the land
purchase was completed and the letter of guarantee cancelled.
(In accordance with Canadian generally accepted accounting principles)
See the accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Shares
------------------------
Equity
Cumulative Component of Total
Translation Convertible Accumulated Shareholders'
Shares Amount Adjustment Debt Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------
(All amounts except share and per share information
are expressed in thousands of United States dollars)
Balance at December 31, 2000 67,700,207 $ 378,938 $ (13,429) $ - $ (132,416) $ 233,093
Exercise of stock options at
prices ranging from CAD
$6.75 to CAD $48.88 per share 290,972 2,928 - - - 2,928
Translation adjustment from
application of U.S. dollar
reporting - - (14,863) - - (14,863)
Net income - - - - 77,754 77,754
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 67,991,179 $ 381,865 $ (28,292) $ - $ (54,662) $ 298,911
Exercise of stock options at
prices ranging from CAD
$9.28 to CAD $39.23 per share 416,574 3,726 - - - 3,726
Translation adjustment from
application of U.S. dollar
reporting - - 3,596 - - 3,596
Net income - - - - 12,405 12,405
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 68,407,753 $ 385,591 $ (24,697) $ - $ (42,257) $ 318,637
EXERCISE OF STOCK OPTIONS AT
PRICES RANGING FROM CAD
$9.28 TO CAD $23.50 PER
SHARE 484,274 3,911 - - - 3,911
TRANSLATION ADJUSTMENT FROM
APPLICATION OF U.S. DOLLAR
REPORTING - - 73,690 - - 73,690
EQUITY COMPONENT OF
CONVERTIBLE DEBT - - - 33,500 - 33,500
Net income - - - - 34,675 34,675
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 68,892,027 $ 389,502 $ 48,993 $ 33,500 $ (7,582) $ 464,413
- ------------------------------------------------------------------------------------------------------------------------------
See the accompanying Notes to the Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company is a global bio-pharmaceutical company dedicated to the
discovery, development and commercialization of innovative therapies to
treat eye diseases, cancer and dermatological conditions. The Company is a
pioneer in the field of photodynamic therapy ("PDT"). PDT is a minimally
invasive medical procedure utilizing photosensitizers (light-activated
drugs) to treat a range of diseases associated with rapidly growing tissue.
1. BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP").
The Company also prepares its consolidated financial statements in
accordance with U.S. GAAP. Consolidated financial statements in U.S. GAAP
are included as part of the Company's 2003 Annual Report on Form 10-K. All
amounts herein are expressed in United States dollars unless otherwise
noted.
2. PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated. All of the Company's subsidiaries are inactive.
The long-term investment in NS & QLT Technologies ("NSQ") in which the
Company exercised joint control was recorded using the proportionate
consolidation method whereby the Company consolidates its proportionate
share of the investee's assets, liabilities, revenues, expenditures and cash
flows. In December 2002, dissolution procedures for NSQ were commenced and
NSQ's remaining assets have been distributed back to its shareholders. The
Company does not currently have any investments accounted for using the
proportionate consolidation method.
3. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting periods presented. Significant estimates are used for, but not
limited to, provisions for non-completion of inventory, assessment of the
net realizable value of long-lived assets, accruals for contract
manufacturing and research and development agreements, allocation of costs
to manufacturing under a standard costing system, taxes and contingencies.
Actual results may differ from estimates made by management.
Reporting Currency and Foreign Currency Translation
---------------------------------------------------
Effective December 31, 2002 the Company changed its reporting currency to
the U.S. dollar from the Canadian dollar in order to provide information on
a more comparable basis with the majority of the companies in the Company's
peer group. The consolidated financial statements of the Company are
translated into U.S. dollars using the current rate method. Assets and
liabilities are translated at the rate of exchange prevailing at the balance
sheet date. Shareholders' equity is translated at the applicable historical
rates. Revenue and expenses are translated at a weighted average rate of
exchange for the respective years. Translation gains and losses are included
as part of the cumulative foreign currency translation adjustment, which is
reported as a component of shareholders' equity under accumulated other
comprehensive income (loss). The Company retained the Canadian dollar as its
functional currency.
The financial information for the year ended December 31, 2001 is presented
in U.S. dollars as if the U.S. dollar had been used as the reporting
currency during that period.
(In accordance with Canadian generally accepted accounting principles)
Segmented Information
---------------------
The Company is considered to operate in one industry segment and currently
generates revenue from a single pharmaceutical product, Visudyne.
Cash, Cash Equivalents and Short-term Investment Securities
-----------------------------------------------------------
Cash equivalents include highly liquid investments with insignificant
interest rate risk and original maturities of three months or less at the
date of purchase. Investments with maturities between three months and one
year at the date of purchase are considered to be short-term investment
securities. Short-term investment securities consist primarily of
investment-grade commercial paper (R-1 DBRS rating), bankers' acceptances
and certificates of deposit. All short-term investment securities are
carried at cost plus accrued interest which, due to the short-term maturity
of these financial instruments, approximates their fair value.
Inventories
-----------
Raw materials and supplies inventories are carried at the lower of actual
cost and net realizable value. Finished goods and work-in-process
inventories are carried at the lower of weighted average cost and net
realizable value. The Company records a provision for non-completion of
product inventory to provide for potential failure of inventory batches in
production to pass quality inspection. The provision is calculated at each
stage of the manufacturing process. The Company estimates its non-completion
rate based on past production and adjusts its provision quarterly based on
actual production volume. A batch failure may utilize a significant portion
of the provision as a single completed batch currently costs between $1.0
million and $1.7 million, depending on the stage of production.
Long-term Investments
---------------------
Investments in affiliates where the Company exercises significant influence
and/or has an ownership interest from 20% to 50% are accounted for using the
equity method. Other long-term investments are recorded at cost less
provision for impairment. The Company reviews its long-term investments for
indications of impairment by reference to anticipated cash flows expected to
result from the investment, the results of operations and financial position
of the investee and other evidence of the net realizable value of the
investment. Whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable and this condition is determined to
be other than temporary, the investment is written down to its estimated net
realizable value and the resulting losses are recognized in income in the
period.
Property and Equipment
----------------------
During the first quarter of 2003 the Company reviewed its intended use of
property and equipment and adopted the straight-line method for all newly
acquired property and equipment beginning in 2003. The Company retains the
declining balance method for all property and equipment acquired prior to
2003.
Property and equipment are recorded at cost and amortized as follows:
Method Rates Method Years
------ ----- ------ -----
Buildings Declining balance 4%
Office furnishings, fixtures and other Declining balance 20% or Straight-line 5
Research and commercial manufacturing equipment
and computer operating system Declining balance 20% or Straight-line 5
Computer hardware Declining balance 30% or Straight-line 3
Long-term debt
--------------
The convertible senior notes are a compound financial instrument.
Accordingly, the fair value of the conversion privilege forming part of the
note has been classified as part of shareholders' equity with the balance of
the proceeds classified as a financial liability. The carrying value of the
financial liability is being accreted to the principal amount as additional
interest expense over the term of the note.
Intangible Assets
-----------------
Licenses, rights and other intangibles were recorded at cost less provision
for impairment and were amortized on a straight-line basis over their
estimated useful lives. The Company performed periodic evaluations of its
intangible assets to assess for indications of impairment. During 2003, the
Company's intangible assets were written down due to impairment. (See Note
17 - (Write-down) Gain on Investments).
(In accordance with Canadian generally accepted accounting principles)
Revenue Recognition
-------------------
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, a division of Novartis Pharma AG ("Novartis Ophthalmics"), the
Company is responsible for manufacturing and product supply and Novartis
Ophthalmics is responsible for marketing and distribution of Visudyne. Our
agreement with Novartis Ophthalmics provides that the calculation of total
revenue for the sale of Visudyne be composed of three components: (1) an
advance on the cost of inventory sold to Novartis Ophthalmics, (2) an amount
equal to 50% of the profit that Novartis Ophthalmics derives from the sale
of Visudyne to end-users, and (3) the reimbursement of other specified costs
incurred and paid for by the Company (See Note 13 - Revenue from Visudyne).
The Company recognizes revenue from the sale of Visudyne when persuasive
evidence of an arrangement exists, delivery to Novartis has occurred, the
end selling price of Visudyne is fixed or determinable, and collectibility
is reasonably assured. Under the calculation of total revenues noted above,
this occurs upon "sell through" to the end user.
Contract research and development revenues consist of non-refundable
research and development funding under collaborative agreements with the
Company's various strategic partners, including (but not limited to)
Novartis Ophthalmics. Contract research and development funding generally
compensates the Company for discovery, preclinical and clinical expenses
related to the collaborative development programs for certain products and
product candidates of the Company, and is recognized as revenue at the time
research and development activities are performed under the terms of the
collaborative agreements. Amounts received under the collaborative
agreements are non-refundable even if the research and development efforts
performed by the Company do not eventually result in a commercial product.
Contract research and development revenues earned in excess of payments
received are classified as contract research and development receivables.
(See Note 4 - Accounts Receivable and Note 14 - Contract Research and
Development).
The Company does not offer rebates or discounts and has not experienced any
material product returns; accordingly, the Company does not provide an
allowance for rebates, discounts, and returns.
Cost of Sales
-------------
Cost of sales, consisting of expenses related to the production of bulk
Visudyne sold to Novartis Ophthalmics and royalties on Visudyne sales, are
charged against earnings in the period of the related product sale by
Novartis Ophthalmics to third parties. The Company utilizes a standard
costing system, which includes a reasonable allocation of overhead expenses,
to account for inventory and cost of sales with adjustments being made
periodically to reflect current conditions. Overhead expenses comprise
direct and indirect support activities related to the manufacture of bulk
Visudyne and involve costs associated with activities such as quality
inspection, quality assurance, supply chain management, safety and
regulatory. Overhead expenses are allocated to inventory during each stage
of the manufacturing process under a standard costing system, and eventually
to cost of sales as the related products are sold by Novartis Ophthalmics to
third parties. The Company records a provision for the non-completion of
product inventory based on its history of batch completion.
Stock-Based Compensation
------------------------
The Company has adopted the initial recommendations of the CICA Handbook
Section 3870, Stock-Based Compensation and Other Stock-Based Payments,
("Section 3870") effective January 1, 2002. This section establishes
standards for the recognition, measurement and disclosure of stock-based
compensation and other stock-based payments made in exchange for goods and
services. The standard requires that all stock-based awards made to
non-employees be measured and recognized using a fair value based method.
Initially the standard encouraged the use of a fair value based method for
all awards granted to employees, but only required the use of a fair value
based method for direct awards of stock, stock appreciation rights, and
awards that call for settlement in cash or other assets. Awards that an
entity has the ability to settle in stock are recorded as equity, whereas
awards that the entity is required to or has a practice of settling in cash
are recorded as liabilities. The Company has adopted the disclosure only
provision for stock options granted to employees and directors, as permitted
by Section 3870.
In November 2003, Section 3870 was amended to require that all stock-based
compensation be expensed when granted, using a fair value based method of
accounting for all rewards outstanding at the start of the first fiscal year
beginning on or after January 1, 2002. The Company has adopted the new
recommendations effective January 1, 2004.
(In accordance with Canadian generally accepted accounting principles)
Research and Development
------------------------
Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with the
Company's various research and development programs. Overhead expenses
comprise general and administrative support provided to the research and
development programs and involve costs associated with support activities
such as facility maintenance, utilities, office services, information
technology, legal, accounting and human resources. Research and development
costs are expensed as incurred, net of related tax credits, unless they meet
generally accepted accounting criteria for deferral and amortization. Patent
application, filing and defense costs are expensed as incurred and included
in general and administrative expenses.
Income Taxes
------------
Income taxes are reported using the asset and liability method, whereby
future tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carry forwards using applicable
enacted or substantially enacted tax rates. An increase or decrease in these
tax rates will increase or decrease the carrying value of future net tax
assets resulting in an increase or decrease to net income. A valuation
allowance is provided when it is more likely than not that a deferred tax
asset may not be realized.
Derivative Financial Instruments
--------------------------------
The Company enters into foreign exchange contracts to manage exposure to
currency rate fluctuations related to its expected future net earnings and
cash flows. The Company does not engage in speculative trading of derivative
financial instruments. The foreign exchange contracts are not designated as
hedging instruments and as a result all foreign exchange contracts are
marked to market and the resulting gains and losses are recorded in the
statement of income in each reporting period. Details of foreign exchange
contracts outstanding at December 31, 2003 are described in Note 18.
Legal Proceedings
-----------------
The Company is involved in a number of legal actions, the outcomes of which
are not within the Company's complete control and may not be known for
prolonged periods of time. In these legal actions, the claimants seek
damages, as well as other relief, which, if granted, would require
significant expenditures. The Company records a liability in the
consolidated financial statements for these actions when a loss is known or
considered probable and the amount can be reasonably estimated. If the loss
is not probable or cannot be reasonably estimated, a liability is not
recorded in the consolidated financial statements. The Company's potentially
material legal proceedings are discussed in Note 23 to the consolidated
financial statements. As of December 31, 2003, no reserve has been
established related to these proceedings.
Net Income Per Common Share
---------------------------
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
per common share is computed in accordance with the treasury stock method
which uses the weighted average number of common shares outstanding during
the period and also includes the dilutive effect of potentially issuable
common stock from outstanding stock options and convertible debt.
The following table sets out the computation of basic and diluted net income
per common share:
(In thousands of United States dollars, except per share
data) 2003 2002 2001
--------------------------------------------------------------------------------------------------------------
Numerator:
Net Income $34,675 $12,405 $77,754
====================================
Denominator:
Weighted-average common shares outstanding 68,733 68,228 67,832
Effect of dilutive securities:
Stock options 239 203 716
------------------------------------
Diluted weighted-average common shares outstanding 68,972 68,432 68,548
====================================
Basic net income per common share $ 0.50 $ 0.18 $ 1.15
Diluted net income per common share $ 0.50 $ 0.18 $ 1.13
(In accordance with Canadian generally accepted accounting principles)
The effect of approximately 9,692,637 shares related to the assumed
conversion of the $172.5 million 3% convertible senior notes (as described
in Note 11) has been excluded from the computation of diluted earnings per
share for the year ended December 31, 2003 as none of the conditions that
would permit conversion have been satisfied.
In addition to excluding the effect of the assumed conversion of the
convertible senior notes, also excluded from the calculation of diluted net
income per common share for the year ended December 31, 2003 were 6,290,893
shares (in 2002 - 7,334,365 shares, in 2001 - 4,965,562 shares) of common
stock from stock options because their effect was anti-dilutive.
Reclassification
Certain comparative figures have been reclassified to conform with the
current year's presentation.
4. ACCOUNTS RECEIVABLE
(In thousands of United States dollars) 2003 2002
--------------------------------------- ---- ----
Visudyne(R) $34,035 $28,636
Contract research and development 1,032 1,128
Trade and other 328 422
------- -------
$35,395 $30,186
======= =======
Accounts receivable - Visudyne represents amounts due from Novartis
Ophthalmics and consists of the Company's 50% share of pre-tax profit on
sales of Visudyne, amounts due from the sale of bulk Visudyne to Novartis
Ophthalmics and reimbursement of specified royalty and other costs. The
Company has not, in the past, experienced bad debts. Based on this history
and because the Company's accounts receivable consists primarily of
receivables from its strategic partner, Novartis Ophthalmics, the Company
does not provide an allowance for doubtful accounts.
5. INVENTORIES
(In thousands of United States dollars) 2003 2002
--------------------------------------- ---- ----
Raw materials and supplies $ 2,066 $ 1,706
Work-in-process 24,660 22,057
Finished goods 82 1,801
Provision for non-completion of product inventory -- (1,664)
-------- --------
$ 26,808 $ 23,900
======== ========
The Company records a provision for non-completion of product inventory to
provide for potential failure of inventory batches in production to pass
quality inspection. The entire provision for non-completion of product
inventory of $2.7 million was utilized for inventory batches in production
which did not pass quality inspection during November 2003. The Company had
not previously experienced inventory spoilage. Based on this history,
inventory turnover, and expected sales, the Company believes that at this
time the risk of inventory obsolescence is negligible. Accordingly, the
Company has not established any reserve for obsolescence
(In accordance with Canadian generally accepted accounting principles)
6. OTHER
(In thousands of United States dollars) 2003 2002
--------------------------------------- ---- ----
Inventory in transit (held by Novartis Opthalmics) $10,122 $11,993
Foreign exchange contracts 4,447 --
Prepaid expenses and other 1,581 1,317
------- -------
$16,150 $13,310
======= =======
Inventory in transit comprises finished goods that have been shipped to and
are held by Novartis Ophthalmics. Under the terms of the Company's
collaborative agreement, upon delivery of inventory to Novartis
Ophthalmics, the Company is entitled to an advance equal to the Company's
cost of inventory. The inventory in transit is also included in deferred
revenue at cost, and will be recognized as revenue in the period of the
related product sale and delivery by Novartis Ophthalmics to third parties,
where collection is reasonably assured.
7. PROPERTY AND EQUIPMENT
2003 2002
---------- ----------
Accumulated Net Net
(In thousands of United States dollars) Cost Amortization Book Value Book Value
--------------------------------------- ---- ------------ ---------- ----------
Buildings $29,227 $ 3,567 $25,660 $20,509
Office furnishings, fixtures, and other 5,009 2,900 2,109 2,018
Research equipment 8,148 5,183 2,965 2,555
Commercial manufacturing equipment 2,551 1,420 1,131 1,093
Computer hardware and operating system 13,313 6,736 6,577 5,123
Land 4,820 -- 4,820 3,983
------- ------- ------- -------
$63,068 $19,806 $43,262 $35,281
======= ======= ======= =======
8. OTHER LONG-TERM ASSETS
(In thousands of United States dollars) 2003 2002
--------------------------------------- ---- ----
Deferred financing expenses $4,784 $ --
Axcan Pharma Inc. -- 2,359
Diomed Holdings, Inc. 257 679
Other 848 1,132
------ ------
$5,889 $4,170
====== ======
Deferred financing expenses represent total debt issue costs of $4.9
million related to the convertible senior notes (See Note 11 - Long Term
Debt), less amortization of $0.2 million. Deferred financing expenses are
being amortized over 5 years commencing August 2003. The long-term
receivable from Axcan represents the present value of a $2.5 million
receivable relating to the sale of Photofrin (see Note 17 - (Write-down)
Gain on Investments) which does not bear interest and was received in cash
during 2003. The long-term investment in Diomed Holdings, Inc. represents
the restricted Class A Convertible Preferred Stock the Company received as
consideration for the sale of the Company's Optiguide fiber optic business
to Diomed Holdings, Inc. and was converted to Diomed Holdings Inc. common
shares during 2003 (see Note 17 - (Write-down) Gain on Investments). Other
long-term investments consist principally of long-term employee loans which
are non-interest bearing with terms ranging from one to five years, and
which will be forgiven if certain conditions are met.
(In accordance with Canadian generally accepted accounting principles)
9. CREDIT FACILITY
During 2003 the Company maintained a CAD $3.5 million unsecured credit
facility agreement. A segment of this facility was structured as a CAD $1.0
million revolving demand loan which bore interest at the bank's prime rate
for Canadian dollar drawdowns and the U.S. base rate for U.S. dollar
drawdowns. As at December 31, 2003, no amount was drawn against this
portion of the facility. The company terminated the unsecured credit
facility agreement subsequent to December 31, 2003.
10. OTHER ACCRUED LIABILITIES
(In thousands of United States dollars) 2003 2002
--------------------------------------- ---- ----
Royalties $ 2,470 $ 2,025
Compensation 5,325 3,557
Foreign exchange contracts 3,589 706
Manufacturing -- 568
Interest 2,132 171
Other 58 --
------- -------
$13,574 $ 7,027
======= =======
11. LONG TERM DEBT
In August of 2003 the Company completed a private placement of $172.5
million aggregate principal amount of convertible senior notes due in 2023.
The notes bear interest at 3% per annum, payable semi-annually beginning
March 15, 2004.
The notes are being accounted for in accordance with their substance and
are presented in the financial statements in their component parts,
measured at their respective fair values at the time of issue. An amount of
$139 million was included in long term debt as the liability component of
convertible debt, and was calculated as the present value of the required
interest and principal payments discounted at a rate approximating the
interest rate that would have been applicable to non-convertible debt at
the time the notes were issued. An amount of $33.5 million, representing
the estimated value of the right of conversion, was included in
shareholders' equity as the equity component of convertible debt and was
calculated as the difference between the debt component and the face value
of the notes. Interest expense for the notes comprised the interest
calculated on the face value of the convertible notes plus a notional
interest amount of $2.5 million, representing the accretion of the carrying
value of the notes.
The convertible senior notes are convertible at the option of the holders
into common shares at the conversion rates referred to below only in the
following circumstances: (i) if the Company's common share price,
calculated over a specified period, has exceeded 120% of the effective
conversion price of the convertible senior notes; (ii) if the trading price
of the convertible senior notes over a specified period has fallen below
95% of the amount equal to the Company's then prevailing common share price
times the applicable conversion rate; (iii) if, subject to certain
exceptions, the convertible senior notes are called for redemption; or (iv)
if specified corporate transactions were to occur. The notes are
convertible into common shares of the Company, at an initial conversion
rate of 56.1892 shares per $1,000 principal amount of notes, which
represents a conversion price of approximately $17.80 per share.
The Company has the right to redeem the convertible senior notes for cash
at any time on or after September 15, 2008. The Company also has the option
at any time to redeem for cash all, but not less than all, of the notes at
100% of their principal amount, plus any accrued and unpaid interest to,
but excluding, the redemption date, in the event of certain changes to
Canadian withholding tax requirements. Holders of the convertible senior
notes have the right to require the Company to redeem these notes, for
cash, at their issue price plus accrued interest on September 15 in each of
2008, 2013, and 2018. On the occurrence of certain events, such as a change
in control or termination of trading, holders of the notes may require the
Company to repurchase all or a portion of their notes
(In accordance with Canadian generally accepted accounting principles)
for cash at a price equal to the principal amount plus accrued unpaid
interest to, but excluding, the repurchase date. The notes also become
immediately due and payable upon certain events of default by the Company.
The notes are senior unsecured obligations and rank equally with all of the
Company's future senior unsecured indebtedness. The notes are effectively
subordinated to all of the Company's future secured indebtedness and all
existing and future liabilities of our subsidiaries, including trade
payables.
12. SHARE CAPITAL
(a) Authorized Shares
There were no changes to the authorized share capital of the Company
during the three-year period ended December 31, 2003.
(b) Share Buy-Back Program
On August 11, 2003 the Company announced a share buy-back program. The
share purchases will be made as a normal course issuer bid; the
Company may purchase for cancellation up to a maximum of 5,000,000
common shares, being approximately 7.32% of the public float of
68,338,072 common shares on August 11, 2003. All purchases will be
effected in the open market through the facilities of The Toronto
Stock Exchange and the Nasdaq National Market, in accordance with all
regulatory requirements, and will be effected during the period
commencing August 13, 2003 and ending August 12, 2004. As of December
31, 2003, the Company has not purchased any of its common shares as
part of this program.
(c) Shareholder Protection Rights Plan
Effective March 17, 2002 the Company adopted a Shareholder Rights
Plan, which was then amended and restated effective April 8, 2002 (the
"Rights Plan"), and approved, as amended, by the shareholders of the
Company on April 25, 2002. The Rights Plan replaced the shareholder
rights plan (the "Initial Rights Plan") that was initially adopted by
the Company on March 17, 1992, confirmed by shareholders on April 28,
1992, amended March 31, 1997 and re-confirmed, as amended, by
shareholders on May 12, 1997. The Initial Rights Plan expired on March
17, 2002. The Rights Plan will remain in effect, unless earlier
terminated pursuant to its terms, until the 2005 annual meeting of
shareholders, and, if reconfirmed at the 2005 annual meeting, the
Rights Plan will remain in effect until the 2008 annual meeting of
shareholders. Under the Rights Plan, holders of common shares are
entitled to one share purchase right for each common share held.
Generally, if any person or group makes a take-over bid, other than a
bid permitted under the Rights Plan (a "Permitted Bid") or acquires
beneficial ownership of 20% or more of the Company's outstanding
common shares without complying with the Rights Plan, the Rights Plan
will entitle the holders of share purchase rights to purchase, in
effect, common shares of the Company at 50% of the prevailing market
price. A take-over bid for the Company can avoid the dilutive effects
of the share purchase rights, and therefore become a Permitted Bid, if
it complies with provisions of the Rights Plan or if it is expressly
approved by the Board of Directors.
(d) Stock Options
The Company has in place three incentive stock option plans which
are described below. At present the Company may only grant options
from one of these plans, namely the 2000 Incentive Stock Option Plan
(the "2000 Plan"). The other plans remain in place for so long as
options previously granted under those plans remain outstanding. The
2000 Plan provides for the grant of options to purchase common shares
to directors, officers and employees of the Company, or any of its
subsidiaries, to provide incentive to develop the growth of the
Company. The 2000 Plan is administered by the Executive Compensation
Committee (the "Committee") appointed by the Board of Directors. Since
2001, vesting of stock options for all employees and directors, which
is at the discretion of the Committee, has occurred ratably over three
years.
(In accordance with Canadian generally accepted accounting principles)
(i) 1998 Incentive Stock Option Plan ("1998 Plan")
The 1998 Plan, which provided for the issuance of up to 5,000,000
common shares, was approved by shareholders in May 1998. The maximum
term of any option granted under the 1998 Plan is five years. Under
this Plan, the exercise price of an option was set by the Committee at
the time of granting and could not be less than the fair market price
of the common shares on the date of the granting. No option could be
granted under the 1998 Plan if it would have resulted in the optionee
holding options or rights to acquire in excess of 5% of the issued and
outstanding common shares (on a non-diluted basis). The 1998 Plan
automatically terminated on February 10, 2003 but options granted
before the termination of the 1998 Plan may be exercised until they
expire in accordance with their original terms. At December 31, 2003,
options to purchase an aggregate total of 1,953,614 common shares were
outstanding under the 1998 Plan and exercisable in the future at
prices ranging between CAD $12.10 and CAD $51.50 per common share.
(ii) 2000 Incentive Stock Option Plan
The 2000 Plan, which provides for the issuance of up to 5,000,000
common shares, was approved by shareholders on May 5, 2000. On April
25, 2002, at the Annual General Meeting of the Company, the
shareholders passed a resolution approving an amendment to the 2000
Plan by increasing the maximum number of common shares issuable under
the Plan to 7,000,000 common shares. The 2000 Plan is to replace the
1995 Plan and the 1998 Plan. A guideline currently set in place by the
Committee is for the maximum term of any option granted under the 2000
Plan not to exceed five years, subject to the right of the Committee
to extend the term in certain circumstances. The exercise price of an
option granted is set by the Committee at the time of granting and may
not be less than the fair market price of the common shares on the
date of the granting. No option may be granted under the 2000 Plan if
it would result in the optionee holding options or rights to acquire
in excess of 5% of the issued and outstanding common shares (on a
non-diluted basis). The Committee may suspend, amend, or terminate the
2000 Plan at any time without notice, provided that no outstanding
option is adversely affected thereby. The 2000 Plan will automatically
terminate on March 1, 2010, unless it has previously been terminated
by the Committee, but options granted before termination of the 2000
Plan may be exercised until they expire in accordance with their
original terms. At December 31, 2003, options to purchase an aggregate
total of 5,283,010 common shares were outstanding under the 2000 Plan
and exercisable in the future at prices ranging between CAD $12.93 and
CAD $108.60 per common share.
(In accordance with Canadian generally accepted accounting principles)
Stock option activity with respect to all of the Company's stock option
plans is presented below:
Exercise Price
(In Canadian dollars) Number of Shares Per Share Range
--------------------- ---------------- ---------------
Outstanding at December 31, 2000 5,493,307 $ 4.56 - 108.60
Granted 3,381,707 31.40 - 108.60
Exercised (290,972) 6.75 - 48.88
Cancelled (431,646) 4.56 - 108.60
---------- ---------------
Outstanding at December 31, 2001 8,152,396 $ 9.28 - 108.60
Granted 1,047,862 12.93 - 39.23
Exercised (416,574) 9.28 - 39.23
Cancelled (982,446) 13.78 - 108.60
---------- ---------------
Outstanding at December 31, 2002 7,801,238 $ 9.28 - 108.60
Granted 1,005,322 12.10 - 18.36
Exercised (484,274) 9.28 - 23.50
Cancelled (1,085,662) 9.28 - 108.60
---------- ---------------
Outstanding at December 31, 2003 7,236,624 $12.10 - 108.60
---------- ---------------
The weighted average exercise price of outstanding options as at December
31, 2003 and December 31, 2002 are CAD $47.82 and CAD $50.85, respectively
(U.S.$36.88 and U.S.$39.22, respectively).
Additional information relating to stock options outstanding as of December
31, 2003, is presented below:
(In Canadian dollars) Options Outstanding Options Exercisable
--------------------- ----------------------------------------- ---------------------------
Weighted
Average
Weighted Remaining Weighted
Number of Average Contractual Number of Average
Price Range Options Exercise Price Life (Years) Options Exercise Price
----------- ------- -------------- ------------ ------- --------------
Under $17.50 940,981 $ 13.42 4.20 221,335 $ 13.38
$17.51- $25.00 847,578 22.54 3.35 471,341 22.68
$25.01- $37.50 1,481,211 31.38 1.64 1,293,797 31.33
$37.51- $50.00 2,323,929 41.49 1.99 2,071,602 41.88
Over $50.00 1,642,925 104.34 1.36 1,639,425 104.40
--------- ---------
7,236,624 5,697,500
========= =========
The number of options issued and outstanding under all plans at any time is
limited to 15% of the number of issued and outstanding common shares of the
Company. As of December 31, 2003 the number of options issued and
outstanding under all plans was 11% of the issued and outstanding common
shares.
The following pro forma financial information presents the net income and
net income per common share had the Company recognized stock-based
compensation using a fair value based accounting method:
(In accordance with Canadian generally accepted accounting principles)
(In thousands of United States dollars
except per share information) 2003 2002 2001
----------------------------- ---- ---- ----
Net Income (Loss)
As reported $ 34,675 $ 12,405 $ 77,754
Add: Employee stock option expense -- -- --
Less: Additional employee compensation
expense under the fair value method (18,766) (25,525) (25,667)
---------- ---------- ----------
Pro forma $ 15,909 $ (13,120) $ 52,087
---------- ---------- ----------
Basic net income (loss) per common share
As reported $ 0.50 $ 0.18 $ 1.15
Pro forma 0.23 (0.19) $ 0.77
---------- ---------- ----------
Diluted net income (loss) per share
As reported $ 0.50 $ 0.18 $ 1.13
Pro forma 0.23 (0.19) $ 0.76
---------- ---------- ----------
The pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
The Black-Scholes option pricing model was developed for use in estimating
the value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price
volatility. The Company uses projected data for expected volatility and
expected life of its stock options based upon historical and other economic
data trended into future years. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the estimate, in management's opinion, the existing
valuation models do not provide a reliable measure of the fair value of the
Company's employee stock options.
The weighted average fair value of stock options granted in 2003 was CAD
$4.36 whereas the 2002 and 2001 options were valued at CAD $11.82 and CAD
$18.16 respectively. The Company used the Black-Scholes option pricing
model to estimate the value of the options at each grant date, under the
following weighted value average assumptions:
2003 2002 2001
---- ---- ----
Annualized Volatility 63.4% 83.1% 81.1%
Risk-free Interest Rate 3.3% 4.4% 4.8%
Expected Life (Years) 2.5 2.5 2.5
(In accordance with Canadian generally accepted accounting principles)
13. REVENUE FROM VISUDYNE(R)
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, the Company is responsible for manufacturing and product
supply and Novartis Ophthalmics is responsible for marketing and
distribution of Visudyne.
The Company's Revenue from Visudyne was determined as follows:
(In thousands of United States dollars) 2003 2002 2001
--------------------------------------- ---- ---- ----
Visudyne(R) sales by Novartis Ophthalmics $ 356,948 $ 287,098 $ 223,343
Less: Marketing and distribution costs (110,958) (107,293) (87,622)
Less: Inventory costs (22,624) (16,424) (12,848)
Less: Royalties (8,082) (6,604) (5,218)
--------- --------- ---------
$ 215,284 $ 156,777 $ 117,656
========= ========= =========
QLT share of remaining revenue on final sales by
Novartis Opthalmics (50%) $ 107,642 $ 78,388 $ 58,828
Add: Inventory costs reimbursed to QLT 19,757 13,574 10,263
Add: Royalties reimbursed to QLT 8,082 6,604 5,218
Add: Other costs reimbursed to QLT 6,644 5,521 5,213
--------- --------- ---------
Revenue from Visudyne(R) as reported by QLT $ 142,125 $ 104,087 $ 79,522
========= ========= =========
For the year ended December 31, 2003 approximately 51% (2002 - 59%, 2001 -
63%) of total Visudyne sales were in the United States, with Europe and
other markets responsible for the remaining 49% (2002 - 41%, 2001 - 37%).
14. CONTRACT RESEARCH AND DEVELOPMENT
The Company receives non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners, which is recorded as
contract research and development revenue. Details of the Company's
contract research and development revenue are as follows:
(In thousands of United States dollars) 2003 2002 2001
--------------------------------------- ---- ---- ----
Visudyne(R) ocular programs $2,527 $2,475 $2,503
Visudyne(R) dermatology programs 1,062 2,745 1,318
Tariquidar programs 1,000 1,000 --
Others 36 172 16
------ ------ ------
Contract research & development revenue $4,625 $6,392 $3,837
====== ====== ======
15. INVESTMENT TAX CREDITS
Investment tax credits for the years ended December 31, 2003 and 2002 of
$2.2 million and $2.1 million, respectively, have been applied as a
reduction of research and development expenditures in the consolidated
statement of income. Investment tax credits of approximately $4.5 million
are disclosed separately in the 2001 consolidated statement of income and
represent the tax benefit expected to be received from investment tax
credits relating to research and development expenditures prior to 2001,
which the Company has concluded are more likely than not to be realized.
(In accordance with Canadian generally accepted accounting principles)
16. RESTRUCTURING CHARGE
In the fourth quarter of 2002 the Company restructured its operation to
reduce operating expenses and concentrate its resources on key product
development programs and business initiatives. The Company reduced its
overall headcount by 62 people or 17%. The Company provided affected
employees with severance and support to assist with outplacement. As a
result, the Company recorded a $2.9 million restructuring charge in the
fourth quarter of 2002 related to severance and termination costs. During
the second quarter of 2003, the Company reassessed its restructuring
reserve based on expected remaining cash outlays for severance, termination
benefits and other related costs, and accordingly reduced the reserve by
$0.4 million. As of December 31, 2003 the Company has substantially
completed all activities associated with the restructuring, the details of
which are as follows:
Reduction of
(In thousands accrued
of United November Cash December 31, Cash restructuring December 31,
States dollars) 2002 payments* 2002 payments* charge 2003
--------------- ---- --------- ---- --------- ------ ----
Severance and
Termination
benefits accrued $ 2,205 $ 224 $ 1,981 $(1,981) $ -- $ --
Other related
expenses accrued 655 5 650 (256) (394) --
------- ------- ------- ------- ------- -------
$ 2,860 $ 229 $ 2,631 $(2,237) $ (394) $ --
======= ======= ======= ======= ======= =======
(*) These amounts are net of any foreign exchange impact.
17. WRITE-DOWN OF INTANGIBLE ASSETS
During the quarter ended June 30, 2003, the Company discontinued the Phase
III tariquidar trials in non-small cell lung cancer following the
recommendation of the Independent Data Safety Monitoring Committee. In
addition, the Company decided not to enroll new patients in the Phase II
refractory breast cancer trial and currently has no specific plans on the
clinical development of tariquidar. As a result, the Company wrote off the
entire remaining unamortized balance of $7.0 million, net of amortization
of $3.0 million, relating to the $10.0 million licensing fee paid to Xenova
PLC for the Company's licensing of tariquidar.
During the quarter ended September 30, 2003, the Company wrote off the
entire balance of $1.1 million relating to the signal transduction
inhibitors development option acquired from Kinetek Pharmaceuticals Inc.
("Kinetek") as a result of a prolonged period of inactivity in this
program, and redeployment of personnel to other programs both within
Kinetek and the Company.
18. (WRITE-DOWN) GAIN ON INVESTMENTS
(In thousands of United States dollars) 2003 2002 2001
--------------------------------------- ---- ---- ----
Write-down of investment in Diomed Holdings Inc. $ (560) $ -- $ --
Write-down of investment in Kinetek Pharmaceuticals, Inc. -- (6,204) --
Gain on sale of investment in Axcan Pharma Inc. -- -- 3,366
------- ------- -------
$ (560) $(6,204) $ 3,366
======= ======= =======
The Company's investment in Diomed Holdings Inc. was significantly diluted
as a result of an equity financing by the investee during the fourth
quarter of fiscal 2003, and was also impaired in the amount of $0.6 million
to reflect an other than temporary decline in value.
The Company performed periodic evaluations of its investments to assess for
indications of impairment. During the
(In accordance with Canadian generally accepted accounting principles)
fourth quarter of fiscal 2002, the Company contracted an impairment
assessment by an independent valuation consultant. Based on this assessment
and the events affecting Kinetek, the Company wrote down its entire
investment in Kinetek shares and recorded a write-down of $6.2 million.
The Company's investments in Axcan were acquired as part of the
consideration received from the sale of worldwide rights to Photofrin to
Axcan. The Axcan Series A preferred shares were redeemed on June 8, 2001 by
Axcan for an equivalent value of common shares plus a common share dividend
totalling $4.5 million in value. In 2001, all of the Axcan common shares
were sold for net proceeds of $11.5 million, resulting in a gain on sale of
$3.4 million.
19. INCOME TAXES
The components of the provision for (recovery of) income taxes are as
follows:
(In thousands of United States dollars) 2003 2002 2001
--------------------------------------- ---- ---- ----
Provision for future income taxes $ 22,404 $ 11,618 $ 19,720
Increase in (reduction of) valuation allowance 292 1,105 (51,850)
-------- -------- --------
Provision for (recovery of) income taxes $ 22,696 $ 12,723 $(32,136)
======== ======== ========
Differences between the statutory income tax rates applicable to the
Company and the Company's effective income tax rate applied to the pre-tax
income consist of the following:
(In thousands of United States dollars) 2003 2002 2001
--------------------------------------- ---- ---- ----
Net income before income taxes $ 57,371 $ 25,128 $ 45,618
Canadian statutory tax rates 37.62% 39.62% 44.62%
-------- -------- --------
Expected income tax provision $ 21,583 $ 9,956 $ 20,355
Accretion expense 892 -- --
Increase in (reduction of ) valuation allowance 292 1,105 (51,856)
Valuation allowance on write-down of investment 308 1,229 --
Deferred gain on sale of Photofrin (682) -- --
Permanent differences and other 303 433 (635)
-------- -------- --------
Provision for (recovery of) income taxes $ 22,696 $ 12,723 $(32,136)
======== ======== ========
The tax effects of temporary differences that give rise to significant
components of the future income tax assets and future income tax
liabilities are presented below:
(In accordance with Canadian generally accepted accounting principles)
(In thousands of United States dollars) 2003 2002
--------------------------------------- ---- ----
Non-capital loss carry forwards $ -- $ 5,327
Research and development expenditures 510 16,241
Investment tax credits 8,631 5,466
Write-down of long-term investments 1,654 1,105
Development rights 3,559 --
Other temporary differences (899) 955
-------- --------
Total gross future income tax assets $ 13,455 $ 29,094
Less: valuation allowance (1,654) (1,105)
-------- --------
Total future income tax assets $ 11,801 $ 27,989
-------- --------
Total gross future income tax liabilities -- --
-------- --------
Net future income tax assets $ 11,801 $ 27,989
Less: current portion (11,801) (17,092)
-------- --------
Net long-term portion of future income tax assets $ -- $ 10,897
======== ========
As at December 31, 2003 the Company had $1.4 million of unclaimed research
and development expenditures available for tax purposes which have no
expiration date. The Company also had net investment tax credits of $8.6
million available which will expire at various dates through 2013. The
future tax benefit of these future tax assets is ultimately subject to
final determination by taxation authorities.
The realization of the Company's future income tax assets is primarily
dependent on generating sufficient taxable income prior to expiration of
any loss carry forward balances. During 2001, the Company's development and
operations suggested that the "more likely than not" test for accounting
purposes had been met and accordingly, the valuation allowance that had
been recorded in the past against the net future income tax asset was
reversed. During 2003, the Company adjusted its valuation allowance
relating to the write-down of its investment in Diomed. The valuation
allowance is reviewed periodically and if the "more likely than not"
criterion changes for accounting purposes, then the valuation allowance
will be adjusted accordingly.
20. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
As at December 31, 2003 and 2002 the carrying amounts for the Company's
cash and cash equivalents, short-term investment securities, accounts
receivable, accounts payable, accrued restructuring charge, and other
accrued liabilities approximated fair value due to the short-term maturity
of these financial instruments. The Company's investment in common shares
of Diomed Holdings Inc. is carried at fair value based on quoted market
prices. The Company's long-term debt comprises $172.5 million aggregate
principal amount of convertible senior notes due in 2023 and the liability
component has a fair value of $145.0 million calculated as the present
value of the required interest and principal payments discounted at a rate
approximating the yield applicable to similar non-convertible debt at
December 31, 2003.
With respect to the concentration of credit risk, the Company's accounts
receivables comprise primarily aggregate amounts owing from the Company's
co-development partner, Novartis Ophthalmics, as at December 31, 2003 and
December 31, 2002.
The Company purchases goods and services in both Canadian and U.S. dollars,
and earns most of its revenues in U.S. dollars and Euros. The Company
enters into foreign exchange contracts to manage exposure to currency rate
fluctuations related to its expected future net income (primarily in U.S.
dollars and Euros) and cash flows (in U.S. dollars and Swiss francs). The
Company is exposed to credit risk in the event of non-performance by
counterparties in connection with these foreign exchange contracts. The
Company mitigates this risk by transacting with a diverse group of
financially sound counterparties and, accordingly, does not anticipate loss
for non-performance. Foreign
(In accordance with Canadian generally accepted accounting principles)
exchange risk is also managed by satisfying foreign denominated
expenditures with cash flows or assets denominated in the same currency.
The net unrealized gain in respect of such foreign currency contracts, as
at December 31, 2003, was approximately $3.8 million, which was included in
the Company's results of operations.
21. COMMITMENTS
In the normal course of business, the Company enters into Visudyne supply
agreements with contract manufacturers, which expire at various dates to
2008 and total $8.2 million, as well as other purchase commitments related
to daily operations. In addition, the Company has entered into operating
lease agreements related to office equipment. The minimum annual commitment
related to these agreements payable over the next five years are as
follows:
(In thousands of Unites States dollars)
Year ending December 31,
------------------------
2004 $ 8,973
2005 3,217
2006 2,050
2007 184
2008 2,365
22. SEGMENTED INFORMATION
Details of the Company's revenues and property and equipment by geographic
segments are as follows:
Revenues(1)
(In thousands of United States dollars) 2003 2002 2001
United States $ 86,754 $ 73,309 $ 61,274
Europe 47,637 30,722 19,056
Canada 7,734 4,510 2,501
Other 4,625 1,938 528
-------- -------- --------
$146,750 $110,479 $ 83,359
======== ======== ========
Property and equipment
(In thousands of United States dollars) 2003 2002
- --------------------------------------- ---- ----
Canada $42,687 $34,608
United States 575 673
------- -------
$43,262 $35,281
======= =======
(1) Revenues are attributable to a geographic segment based on the location of
the customer for revenue from Visudyne and royalties on product sales, and
the location of the head office of the collaborative partner in the case of
revenues from contract research and development and collaborative
arrangements.
(In accordance with Canadian generally accepted accounting principles)
23. CONTINGENCIES
(A) PATENT LITIGATION WITH MEEI
The First MEEI Lawsuit
On April 24, 2000 Massachusetts Eye and Ear Infirmary ("MEEI") filed a
civil suit against the Company in the United States District Court for the
District of Massachusetts seeking to establish exclusive rights for MEEI as
the owner of certain inventions relating to the use of verteporfin as the
photoactive agent in the treatment of certain eye diseases including Age
Related Macular Degeneration ("AMD"). During 2002 the Court granted summary
judgement in favor of QLT, dismissing all counts of MEEI's complaint
against the Company in this lawsuit.
The lawsuit (Civil Action No. 00-10783-JLT) relates, in part, to an ongoing
dispute involving U.S. Patent No. 5,798,349 (the " '349 Patent") which was
issued on August 25, 1998 to the Company, MEEI and Massachusetts General
Hospital ("MGH") as co-owners. The complaint alleged breach of contract,
misappropriation of trade secrets, conversion, misrepresentation, unjust
enrichment, unfair trade practices and related claims and asked that the
Court: (i) declare MEEI the owner of certain inventions claimed in the '349
Patent; (ii) enjoin the Company from infringement of those claims or any
action that would diminish the validity or value of such claims; (iii)
declare that the Company breached an agreement with MEEI to share equitably
in any proceeds derived as a result of collaboration leading to the '349
Patent; (iv) impose a constructive trust upon the Company for any benefit
that the Company has or will derive as a result of the '349 Patent; and (v)
award MEEI monetary relief for misappropriation of trade secrets in an
amount equal to the greater of MEEI's damages or the Company's profits from
any such misappropriation, and double or treble damages under Massachusetts
law.
The Company's counterclaim, filed in 2000 against MEEI and two employees of
MEEI, sought: (i) to correct inventorship on the '349 Patent by adding an
additional MGH researcher as a joint inventor; (ii) a declaration that the
Company and MGH are joint owners of the '349 Patent; (iii) a determination
that MEEI is liable to the Company for conversion and unfair trade
practices under Massachusetts law; (iv) an injunction to prohibit MEEI from
prosecuting any patent application claiming subject matter already claimed
in the '349 Patent; and (v) an award of damages and attorneys' fees.
In 2002 QLT moved for summary judgement against MEEI on all counts of
MEEI's complaint in Civil Action No. 00-10783-JLT. The Court granted QLT's
motions, thus dismissing all of MEEI's claims in this lawsuit. Final
judgement of dismissal was entered in April 2003. In May 2003, MEEI filed a
notice of appeal. With respect to QLT's counterclaim requesting correction
of inventorship of the '349 patent to add an additional MGH inventor, the
Court stayed the claim pending the outcome of Civil Action No.
01-10747-EFH, described below. QLT voluntarily dismissed the remainder of
its counterclaims in Civil Action No. 00-10783-JLT without prejudice in
April 2003.
The Second MEEI Lawsuit
On May 1, 2001 the United States Patent Office issued United States Patent
No. 6,225,303 (the "'303 Patent") to MEEI. The '303 Patent is derived from
the same patent family as the '349 Patent and claims a method of treating
unwanted choroidal neovasculature in a shortened treatment time using
verteporfin. The patent application which led to the issuance of the '303
patent was filed and prosecuted by attorneys for MEEI and, in contrast to
the '349 patent, named only MEEI researchers as inventors.
The same day the '303 patent was issued, MEEI commenced a second civil suit
against the Company and Novartis Ophthalmics, Inc. (now Novartis
Ophthalmics, a division of Novartis Pharma AG) in the United States
District Court for the District of Massachusetts alleging infringement of
the '303 Patent (Civil Action No. 01-10747-EFH). The suit seeks damages and
injunctive relief for patent infringement and unjust enrichment. The
Company has answered the complaint, denying its material allegations and
raising a number of affirmative defenses, and has asserted counterclaims
against MEEI and the two MEEI researchers who are named as inventors on the
'303 patent. The Company's counterclaim seeks to correct inventorship of
the '303 patent by adding QLT and MGH researchers as joint inventors and
asks the court to declare that QLT and MGH are co-owners of the '303
patent. The counterclaim also requests a declaration that QLT does not
infringe, induce infringement, or contribute to infringement of the '303
patent, asserting, among other reasons, that QLT and MGH are rightful
co-owners of the patent and QLT has a license from MGH of MGH's
co-ownership rights under the patent. In addition, the
(In accordance with Canadian generally accepted accounting principles)
counterclaim seeks a declaratory judgment that the '303 patent is invalid
and unenforceable. Finally, the Company's counterclaim seeks an award of
monetary damages for breach of material transfer agreements governing
MEEI's use of verteporfin, based upon MEEI's failure to notify QLT of
MEEI's intent to file the patent application that led to the issuance of
the '303 patent to MEEI.
In November of 2001 MGH sought and was granted leave to intervene in the
action to protect its rights in the '303 patent. MGH's complaint in
intervention, like QLT's counterclaim, asks the court to correct
inventorship of the '303 patent by adding QLT and MGH researchers as joint
inventors of the inventions claimed in the patent and by declaring that MGH
is a joint owner of those inventions.
In April of 2003 QLT moved to dismiss MEEI's claims for unjust enrichment
on the grounds that this claim had been previously decided by a court. The
Court granted QLT's motion on May 28, 2003.
No trial has been scheduled in Civil Action No. 01-10747-EFH, and none is
expected until late 2004 at the earliest.
The Company believes MEEI's claims in both lawsuits are without merit and
intends to vigorously defend against such actions and pursue its
counterclaims. The outcomes of these disputes are not presently
determinable or estimatable and there can be no assurance that the matters
will be resolved in favor of the Company. If the lawsuits are not resolved
in the Company's favor, the Company may be obliged to pay damages, to pay
an additional royalty or damages for access to the inventions covered by
claims in issued U.S. patents, may be subject to such equitable relief as a
court may determine (which could include an injunction) or may be subject
to a remedy combining some or all of the foregoing.
(B) SECURITIES CLASS ACTION
In January and February of 2001 seven proposed securities class actions
were filed in the United States District Court for the Southern District of
New York on behalf of purchasers of the Company's common shares between
August 1, 2000 and December 14, 2000. On May 3, 2001, the court ordered
consolidation of the seven actions.
The complaints name as defendants: the Company; Julia Levy, former
President, Chief Executive Officer and a current Director of the Company;
and Kenneth Galbraith, the Company's former Executive Vice President, Chief
Financial Officer and Corporate Secretary. The plaintiffs allege that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934.
The plaintiffs allege that on December 14, 2000 the Company announced that
it expected to miss its Visudyne sales estimates for the fourth-quarter
2000, and that in response, the Company's common share price dropped
approximately 31%. The plaintiffs claim that the Company's December 14,
2000 statements contradicted prior information issued by the defendants
concerning the demand for Visudyne and the Company's prospects. The
plaintiffs allege that the defendants overstated the demand for Visudyne,
did not properly disclose reimbursement issues relating to Visudyne and
that the defendants had no basis in the months preceding the December
announcement for their projections of fourth-quarter sales. The plaintiffs
further allege that the intent of the individual defendants to mislead
investors can be inferred from their sale of a substantial amount of the
Company's common shares during the months of August and September 2000. The
plaintiffs seek injunctive relief, fees and expenses and compensatory
damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without merit and
intends to vigorously defend against such claims. However, the outcome of
this litigation is not presently determinable or estimatable and there can
be no assurance that the matters will be resolved in favor of the Company
and the other defendants. If the lawsuit is not resolved in the Company's
favor, there can be no guarantee that the Company's insurance will be
sufficient to pay for the damages awarded to the plaintiffs.
The effect of a negative judgement or likely loss with respect to one or
both of the above-mentioned claims, if any, will be recorded in the period
it becomes determinable.
(In accordance with Canadian generally accepted accounting principles)