1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NO. 0-24882
CORVITA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-2745022
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8210 N.W. 27TH STREET
MIAMI, FLORIDA 33122
(Address of principal executive offices)
(305) 599-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At May 14, 1996, Registrant had 7,158,631 shares of Common Stock, par value
$.001 per share, outstanding.
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2
CORVITA CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
10-Q INDEX
PART I. - FINANCIAL INFORMATION PAGE NO.
- - --------------------------------- --------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1995 and March 31,
1996 (unaudited) 3
Consolidated Statements of Operations for each of the three and
nine month periods ended March 31, 1995 and 1996 and
the period April 7, 1987 (inception) through March 31, 1996
(unaudited) 4
Consolidated Statements of Cash Flows for each of the nine month
periods ended March 31, 1995 and 1996 and the period
April 7, 1987 (inception) through March 31, 1996 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. - OTHER INFORMATION
- - -------------------------------
Items 1 through 6 20
Exhibit Index 20
Signatures Page 22
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PART I
Item 1. FINANCIAL STATEMENTS
CORVITA CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(In 000's)
June 30, March 31,
1995 1996
---------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,303 $ 324
Commercial paper 4,491 -
Accounts receivable 220 245
Inventory 105 54
Prepaid expenses & other current assets 384 247
---------- -------------
Total current assets 6,503 870
PROPERTY AND EQUIPMENT - Net 1,100 1,201
PATENTS AND TRADEMARKS - Net 533 527
INVESTMENT IN AFFILIATE 26 46
---------- -------------
TOTAL ASSETS $ 8,162 $ 2,644
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 401 $ 764
Accrued expenses 734 3,154
Current portion of notes payable 321 254
---------- -------------
Total current liabilities 1,456 4,172
---------- -------------
LONG-TERM NOTES PAYABLE - Net of current portion 785 810
---------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; $.001 par value; 18,750,000 shares authorized;
7,042,081 and 7,106,149 shares outstanding at June 30, 1995 and
March 31, 1996, respectively 7 7
Additional paid-in capital 31,541 31,605
Deficit accumulated during the development stage (25,601) (33,930)
Cumulative translation adjustments (26) (20)
---------- -------------
Total stockholders' equity (deficit) 5,921 (2,338)
---------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 8,162 $ 2,644
========== =============
See notes to consolidated financial statements.
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CORVITA CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
April 7, 1987
For the three months ended For the nine months ended (Inception)
March 31, March 31, Through
---------------------------- -------------------------- March 31,
1995 1996 1995 1996 1996
------------ -------------- ----------- ------------ ------------
(In 000's) (In 000's) (In 000's) (In 000's) (In 000's)
REVENUES
Product sales $ 224 $ 288 $ 597 $ 667 $ 3,050
Royalties - 9 - 11 11
Consulting services and other 41 - 182 20 1,038
License fee - - - - 1,000
Sale of invention records 250 - 250 - 525
------------ -------------- ------------ ------------ ---------
Total revenues 515 297 1,029 698 5,624
------------ -------------- ------------ ------------ ---------
MANUFACTURING EXPENSES
Cost of sales and manufacturing overhead 484 480 1,446 1,580 7,289
------------ -------------- ------------ ------------ ---------
Gross profit (loss) 31 (183) (417) (882) (1,665)
------------ -------------- ------------ ------------ ---------
OPERATING EXPENSES
Research and development 734 1,252 2,041 3,406 19,541
Research purchased - - - 2,000 2,000
Selling, general and administrative 632 700 1,678 2,258 11,380
------------ -------------- ------------ ------------ ---------
Total operating expenses 1,366 1,952 3,719 7,664 32,921
------------ -------------- ------------ ------------ ---------
OTHER INCOME (EXPENSE)
Interest income (expense), net 93 (2) 86 47 641
Grants and other income (expense), net 283 (1) 289 150 799
Withdrawn public offering expense - - (200) - (456)
Loss on partial sale of affiliate - - - - (146)
Equity in net income (loss) of affiliate 22 (25) (52) 20 (104)
Gain (loss) from foreign currency, net (2) - - - (78)
------------ -------------- ------------ ------------ ---------
Total other income (expense) 396 (28) 123 217 656
------------ -------------- ------------ ------------ ---------
NET LOSS $ (939) $ (2,163) $ (4,013) $ (8,329) $ (33,930)
============ ============== ============ ============ =========
Net loss per common share $ (0.13) $ (0.30) $ (0.88) $ (1.18)
============ ============== ============ ============
Weighted average shares outstanding 7,073,258 7,104,373 4,535,973 7,077,655
============ ============== ============ ============
See notes to consolidated financial statements.
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CORVITA CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended April 7, 1987
March 31, (Inception)
--------------------- Through
1995 1996 March 31, 1996
---------- --------- --------------
(In 000's) (In 000's) (In 000's)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,013) $ (8,329) $ (33,930)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 272 349 2,108
Gain on the sale or disposition of equipment (25) (4) (28)
Proceeds received from equipment in construction contract 181 20 60
Loss from patent abandonment - 22 22
Foreign exchange gain - - (12)
Loss on partial sale of affiliate - - 146
Equity in net (income) loss of affiliate 52 (20) 104
Interest expense satisfied by issuance of stock - - 73
Common stock issued for services received - - 47
(Increase)/decrease in -
Accounts receivable 157 (24) (205)
Accrued interest income receivable (133) 128 -
Inventories 105 47 (40)
Additions to construction in progress of equipment for resale (80) - (88)
Prepaid expenses and other current assets (450) 133 (367)
Increase/(decrease) in -
Accounts payable (47) 381 734
Accrued expenses (468) 2,465 3,379
---------- --------- --------------
Net cash used by operating activities (4,449) (4,832) (27,997)
---------- --------- --------------
INVESTING ACTIVITIES
Net sale (purchase) of treasury bills and commercial paper (6,346) 4,363 -
Additions to property and equipment (154) (471) (3,167)
Additions to patents (38) (57) (528)
Proceeds from the sale of property and equipment - - 151
Effect of partial sale of affiliate - - (224)
---------- --------- --------------
Net cash provided (used) by investing activities (6,538) 3,835 (3,768)
---------- --------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of short-term notes payable 600 - 3,600
Proceeds from issuance of common stock, net 11,868 64 12,351
Proceeds from issuance of Series A, B, C, D and E
preferred stock, net - - 18,062
Proceeds from sale of treasury shares - - 4
Proceeds from issuance of notes payable 31 179 3,510
Principal repayment of short-term notes payable (2,100) - (3,600)
Principal repayment of notes payable (252) (207) (1,829)
---------- --------- --------------
Net cash provided by financing activities 10,147 36 32,098
Effect of exchange rate changes on cash 31 (18) (9)
---------- --------- --------------
NET INCREASE (DECREASE) IN CASH (809) (979) 324
CASH, BEGINNING OF PERIOD 1,639 1,303 -
---------- --------- --------------
CASH, END OF PERIOD $ 830 $ 324 $ 324
========== ========= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 131 $ 42 $ 531
========== ========= ==============
See notes to consolidated financial statements.
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CORVITA CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Corvita Corporation (the "Company") is a Florida corporation founded in
December 1986, which commenced operations in April 1987. The Company is a
development stage company which is developing several lines of vascular grafts
(i.e., artificial arteries) to be used to bypass, repair or replace diseased
human arteries during bypass surgery or introduced via catheters and minimal
invasive surgical techniques. The Company's vascular grafts utilize
Corethane(R), a specialty medical polymer developed and manufactured by the
Company. Substantially all of the Company's products are in various stages of
development and clinical trials or early stages of sales in the United States,
Western Europe, Japan and Latin America. To achieve profitable operations, the
Company must successfully complete the development and clinical trials of its
products, obtain required regulatory approvals, manufacture in sufficient
quantities on a cost effective basis and achieve market acceptance. There can
be no assurance that the Company's efforts in these regards will be successful.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
The Company has accumulated a significant deficit during the development stage
and requires additional financing to continue funding the development and
marketing of its products. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
The accompanying consolidated financial statements include the accounts of
Corvita Corporation and its wholly-owned subsidiary Corvita Europe, S.A.
(collectively, the "Company"). Corvita Europe, S.A. includes the accounts of
its 90%-owned subsidiary, Laboratoire Corvita, S.A.R.L. (Corvita Corporation
owns an additional 9% of Laboratoire Corvita, S.A.R.L.). The Company's
investment and 48% equity in the results of operations of Corvita Canada, Inc.
are reflected in the Company's consolidated statements on the equity method.
From April 1994 through March 31, 1996, the Company recognized approximately
($104,000) representing its 48% share of equity in the net loss of Corvita
Canada, Inc. At March 31, 1996, the value of the Company's 48% interest in
Corvita Canada, Inc. was approximately $46,000.
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CORVITA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary for the fair presentation of the
consolidated balance sheets, statements of operations and cash flows. The
consolidated statements of operations for the nine months ended March 31,
1996, are not necessarily indicative of the results to be expected for the
fiscal year ending June 30, 1996.
NOTE 2 - INCOME TAXES
At March 31, 1996, the Company had net operating loss carryforwards (including
estimates for the first nine months of fiscal 1996) of approximately
$25,200,000 for income tax purposes, expiring in the years 2002 through 2011.
Additionally, at March 31, 1996, the Company had research and development
credit carryforwards (including estimates for the first nine months of fiscal
1996) of approximately $930,000 expiring in the years 2003 through 2012. As a
result of certain equity transactions, the Company has experienced a greater
than 50% change of ownership, on each of May 23, 1990 and November 5, 1992, as
defined in Section 382 of the Internal Revenue Code. As a result, there are
annual limitations with respect to approximately $7.5 million of the net
operating loss carryforwards, and approximately $300,000 of research and
development costs credits. Net operating losses of approximately $17.7 million
and research and development credits of approximately $630,000 arising after
November 5, 1992, remain unrestricted. The Company has not recognized any
benefit for these operating loss and credit carryforwards because their
ultimate realization is not certain.
The Company has entered into an agreement with Pfizer, Inc. HPG Acquisition
Corp. in which a change of greater than fifty percent ownership is expected to
occur with respect to the Company during the latter part of May 1996. As a
result of this change of ownership, annual limitations will apply to all net
operating losses and research credits that have arisen before the change date.
NOTE 3 - NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares are not
included in the per share calculations where the effect of their inclusion
would be antidilutive.
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CORVITA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning July 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
NOTE 5 - SUBSEQUENT EVENT
On April 11, 1996, the Company and Pfizer Inc. ("Pfizer") jointly announced
that they had signed an Agreement and Plan of Merger ("Merger Agreement")
pursuant to which HPG Acquisition Corp., a wholly-owned subsidiary of Pfizer,
will acquire all of the outstanding stock of Corvita at $10.25 per share, or
approximately $85 million. To implement the agreement, Pfizer's subsidiary
commenced a cash tender offer on April 17, 1996. Consummation of the merger is
conditioned on, among other things, the tender of at least a majority of the
outstanding shares of Corvita, on a fully diluted basis, in the tender offer.
Shareholders owning approximately 20% of the outstanding shares of Corvita have
entered into binding agreements to tender their shares. Assuming the
successful completion of the prospective merger, Corvita will operate as a
business of the Pfizer Hospital Products Group (HPG).
-8-
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CORVITA CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
PART I.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since the commencement of operations in 1987, the Company has been engaged in
designing, developing, clinically testing, producing and marketing artificial
arteries. These artificial arteries are also known as endoluminal grafts and
synthetic vascular grafts (the "Corvita Grafts"). Endoluminal grafts and
synthetic vascular grafts reline, replace, repair or bypass occluded, damaged,
dilated or severely diseased arteries. Endoluminal grafts combine a graft lining
with a metallic stent which holds the graft in place inside an artery. The
Corvita Grafts include (i) the Corvita Endoluminal Grafts, implanted with
minimally invasive techniques similar to those used for balloon angioplasty,
which are designed to treat damaged, occluded or aneurysmal arteries, (ii) the
Corvita Peripheral Grafts, used to surgically replace diseased arteries
primarily in patients' legs, and (iii) the Corvita AV Access Grafts,
arterial-to-venous grafts which are surgically implanted primarily in patients'
arms and used to draw and return blood during hemodialysis.
Substantially all of the Company's revenues to date have been attributable to
product sales (primarily of Corvita Peripheral Grafts in Europe), sales of
invention records, license fees, consulting services and technology.
Corvita Peripheral Grafts have been studied for the past three years in the U.S.
under a Food and Drug Administration (FDA) controlled human clinical trial. A
510(k) application to market Corvita Peripheral Grafts in the U.S. was completed
and filed with the FDA on December 7, 1995, the FDA responded with questions on
March 8, 1996, and the Company responded with answers to the FDA's questions on
April 22, 1996. Corvita AV Access Grafts have been studied for almost two years
in the U.S. under an FDA-controlled human clinical trial. A feasibility
Investigational Device Exemption ("IDE") for the Corvita Endoluminal Grafts for
trauma applications was granted by the FDA in 1995, and human clinical trials
commenced in the second quarter of fiscal 1996. Additional clinical studies are
proceeding in Western Europe, South America and Japan.
The Company, a development stage company, has incurred a loss in each period
since its inception and expects to incur continued losses for the fiscal year
ending June 30, 1996. For the period from April 7, 1987 (inception) through
March 31, 1996, the Company incurred a cumulative net loss of approximately
($33,930,000).
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CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
On November 1, 1994 the Company consummated an initial public offering of
2,625,000 shares of Common Stock, realizing net proceeds of approximately
$11,850,000.
On April 11, 1996, the Company and Pfizer Inc. ("Pfizer") jointly announced that
they had signed an Agreement and Plan of Merger ("Merger Agreement") pursuant to
which HPG Acquisition Corp., a wholly-owned subsidiary of Pfizer, will acquire
all of the outstanding stock of Corvita at $10.25 per share, or approximately
$85 million. To implement the agreement, Pfizer's subsidiary commenced a cash
tender offer on April 17, 1996. Consummation of the merger is conditioned on,
among other things, the tender of at least a majority of the outstanding shares
of Corvita, on a fully diluted basis, in the tender offer. Shareholders owning
approximately 20% of the outstanding shares of Corvita have entered into binding
agreements to tender their shares. Assuming the successful completion of the
prospective merger, Corvita will operate as a business of the Pfizer Hospital
Products Group (HPG).
Certain Risks
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has accumulated
a significant deficit during the development stage and requires additional
financing to continue funding the development, manufacturing scale-up and
marketing of its products. In April, 1996, the Company exhausted the remaining
portion of the proceeds from its 1994 initial public offering, and since that
point it has been funding operations via proceeds of a loan from its prospective
merger partner Pfizer.
One compound which the Company uses to synthesize its proprietary Corethane(R)
polymers has until recently been supplied from a single source. The Company
does not have a supply contract with the supplier, and there can be no assurance
that the supplier will continue to provide sufficient quantities of the compound
to meet the Company's requirements. Should the supply of this compound be
interrupted, or should the supplier be unable to meet the Company's quality
requirements, the Company could be materially adversely affected. However, the
patent on this compound has expired, and the Company, if need be, has the
technical capabilities to manufacture the compound and could redirect resources
to accomplish this if necessary. In addition, a second supplier of this
compound has recently been established and the Company is in the process of
qualifying such second supplier for Company applications.
Hospitals have historically received reimbursement from third party payers,
including Medicare and Medicaid, for medical devices used in clinical studies,
but not yet approved
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CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
by the FDA. In June 1994, the U.S. Inspector General ("IG") issued a subpoena
to over 100 hospitals asking for information regarding their billing of Medicare
and Medicaid for reimbursement for procedures using medical devices not approved
by the FDA. Subsequently, the IG narrowed its probe to focus on the use of 10
types of unapproved cardiac devices manufactured by various companies (not
including the Company), including another manufacturer's vascular graft which
was undergoing trials during the period covered by the subpoena. The IG's
investigation has resulted in hospitals rejecting certain patients from clinical
trials of certain devices due to the risk of not being reimbursed for the costs
of the procedure or the device. Consequently, future participation by some
hospitals in clinical studies remains questionable. Because of these actions,
as well as the duration of regulatory review required in the past by the FDA,
many companies have increased their development, clinical trials and commercial
activities outside of the U.S. As a result of the potential consequences on
medical innovation in the U.S., regulatory and reimbursement issues have been
the subject of numerous discussions and debates in and among members of the
United States Congress. As a result of Congressional interest, FDA review times
have been reduced and the Health Care Financing Administration has announced the
change of reimbursement policies effective November 1, 1995, to permit Medicare
and Medicaid reimbursement for most investigational devices used in
FDA-controlled clinical trials in the U.S. There can be no assurance that this
policy change will enhance the rate at which patients are enrolled in the U.S.
clinical trials being sponsored by the Company.
To date, the Company's manufacturing activities have consisted primarily of
manufacturing limited quantities of its products for use in U.S., European,
Japanese and South American clinical trials and for limited commercial sales of
Corvita Peripheral Grafts, principally in Europe. The Company has continued to
increase manufacturing, quality control and engineering headcount and
infrastructure at its U.S. and European facilities. From inception through
March 31, 1996, the Company's operating revenues have been approximately
$5,624,000, including approximately $3,050,000 in product sales; and cost of
goods sold and manufacturing overhead (including quality control and
manufacturing engineering) in the comparable period have been approximately
$7,289,000.
The Company's manufacturing experience is limited. The Company has expended
significant resources on expanding the product line for Corvita Endoluminal
Grafts, and is in the process of moving additional products from development
engineering pilot lab production into production by manufacturing and quality
control personnel operating in clean room manufacturing environments. The
Company has periodically encountered manufacturing interruptions and low yields
while carefully controlling the scale-up of manufacturing infrastructure, and
there can be no assurance that the Company will be able to make the transition
to cost-effective commercial production successfully.
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CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
To date, the Company's limited marketing and sales efforts have utilized
distributors in several European and Latin American countries, as well as an
affiliated corporation in Canada. Upon filing of pre-marketing applications (as
noted above, the U.S. pre-market notification to the FDA for Corvita Peripheral
Grafts was filed on December 7, 1995) and receipt of FDA approvals for the
Corvita Grafts, the Company may begin U.S. sales and marketing activities. The
Company has elected to introduce Corvita Grafts by selecting leading clinicians
and researchers as investigators in its clinical trials who will publish and
otherwise report results to their peers in research and clinical publications
and at trade shows.
The Company's success will depend in part on its ability to maintain and protect
its intellectual property, including proprietary products, processes, materials,
trade secrets, and U.S. and foreign patents, patents pending and trademarks.
The Company currently holds 19 issued United States patents, has obtained rights
under 12 other U.S. patents by license, and has pending 18 U.S. patent
applications that cover various aspects of its technology. Other companies may
have proprietary rights or may have filed patent applications for materials,
products or processes competitive with those of the Company. There can be no
assurance that any of the Company's pending patent applications will be
approved, that its patents will be upheld or not circumvented by competitors,
that any patents or licenses will provide commercially significant protection
for the Company's products, or that the intellectual property laws of foreign
countries in which the Company does or may do business will protect the
Company's intellectual property to the same extent as U.S. laws. Further, there
can be no assurance that any licenses which might be required by the Company
would be available on reasonable terms, if at all. The failure by the Company to
acquire or maintain necessary patents or licenses could have a material adverse
effect on the Company's ability to commercialize its products.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of efforts by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others or to determine the scope and validity of the proprietary
rights of others. Adverse determinations in litigation could subject the
Company to substantial litigation costs and/or significant liabilities to third
parties, could require the Company to seek licenses from third parties or could
prevent the Company from manufacturing, selling or using its products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is not currently a party to any
material patent or other litigation.
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CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Certain of the Company's operations are transacted in foreign currencies. To
the extent that the Company conducts operations and sells or licenses its
products or technologies outside of the United States, the Company is subject to
fluctuations in currency exchange rates. To date, volatility in foreign
currency exchange rates has not had a significant impact on the Company's
financial position or results of operations.
-13-
14
CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Operations
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995. Total revenues decreased, principally as a result of decreased sales of
invention records and technology, to approximately $297,000 for the three
months ended March 31, 1996 (comprised of approximately $288,000 in product
sales and approximately $9,000 in royalties) from approximately $515,000
(comprised of approximately $224,000 in product sales, $250,000 from the sale
of intellectual property and approximately $41,000 in consulting services and
other operating revenues) for the comparable period of the prior year.
Cost of sales and manufacturing overhead for the three months ended March 31,
1996, decreased slightly to approximately $480,000 from approximately $484,000
in the corresponding period of the previous year. Gross loss was approximately
($183,000) in the three months ended March 31, 1996 compared to a gross profit
of approximately $31,000 for the comparable three months of the prior year
principally because of reduced sales of technology and intellectual property.
Research and development expenses (including clinical and regulatory expenses)
increased to approximately $1,252,000 for the third quarter of fiscal year 1996
from approximately $734,000 in the comparable period of the prior fiscal year,
principally as a result of the development, product line expansion and clinical
testing costs in the U.S., Europe and South America for Corvita Endoluminal
Grafts.
Selling, general and administrative expenses for the three months ended March
31, 1996, were approximately $700,000 versus approximately $632,000 in the
corresponding period of fiscal 1995. Increases were primarily due to an
increase of approximately $137,000 in professional expenses principally relating
to negotiations for a strategic corporate alliance, partially offset by
decreases in marketing expenses.
Net interest expense was approximately ($2,000) in the third quarter of fiscal
1996 compared to net interest income of approximately $93,000 in the
corresponding period of the prior year. The difference was due to a decrease in
interest-bearing cash and short-term investment balances as a result of
development stage expenditures reducing the remaining balance of proceeds
received on November 1, 1994 from the Company's initial public offering of
Common Stock, along with an increase in interest expense related to additional
bank loans.
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15
CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Other expense (excluding interest) increased to approximately ($26,000) for the
three months ended March 31, 1996 from other income of approximately $303,000 in
the corresponding period of the prior year. The difference was principally due
to recognition during the prior fiscal year's third quarter of approximately
$283,000 from a European research grant.
Net loss increased to approximately ($2,163,000) for the three months ended
March 31, 1996 from approximately ($939,000) for the comparable period of the
prior year, principally as a result of decreased sales of technology and
intellectual property, increased development and clinical expenses related to
Corvita Endoluminal Grafts, increased professional expenses relating to
negotiations for a corporate strategic alliance, and decreased grant receipts.
The Company expects to incur additional losses in future quarters.
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31,
1995. Total revenues decreased, principally as a result of decreased sales of
technology and intellectual property, to approximately $698,000 for the nine
months ended March 31, 1996 (comprised of approximately $667,000 in product
sales, approximately $11,000 in royalties and approximately $20,000 in
consulting services and technology sales) from approximately $1,029,000 for the
comparable period of the prior year (comprised of approximately $597,000 in
product sales, approximately $250,000 from the sale of intellectual property and
approximately $182,000 in consulting services and technology sales).
Cost of sales and manufacturing overhead for the nine months ended March 31,
1996, increased to approximately $1,580,000 from approximately $1,446,000 in the
corresponding period of the previous year, principally as a result of producing
a broader product line and a moderate increase in headcount in preparation for
expanded future production activity. Gross loss was approximately ($882,000) in
the nine months ended March 31, 1996 compared to a gross loss of approximately
($417,000) for the comparable nine months of the prior year principally because
of reduced sales of technology and intellectual property coupled with a moderate
increase in cost of sales and manufacturing overhead as noted above.
Research and development expenses (including clinical studies and regulatory
expenses) increased to approximately $3,406,000 for the nine months of fiscal
year 1996 from approximately $2,041,000 in the comparable period of the prior
fiscal year, principally as a result of the development, product line expansion
and clinical studies costs in the U.S., Europe and South America for Corvita
Endoluminal Grafts.
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16
CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company has accrued $2,000,000 of purchased research for the future
obligation to buy a Japanese clinical study and regulatory report on the Corvita
Peripheral Grafts when filed with the Japanese Ministry of Health and Welfare.
Such obligation, related to regaining certain marketing rights in Japan, was a
necessary pre-condition to the signing of a definitive merger agreement with
Pfizer.
Selling, general and administrative expenses for the nine months ended March 31,
1996 were approximately $2,258,000, versus approximately $1,678,000 in the
corresponding period of the prior fiscal year. Increases were primarily due to
an increase of approximately $352,000 in professional expenses principally
relating to negotiations involving a strategic corporate alliance, and $250,000
in marketing expenses for the repurchase of Japanese marketing rights for
certain Corvita products, including the Corvita Peripheral Graft and the Corvita
AV Access Graft, moderately offset by decreases in European marketing expenses.
Net interest income was approximately $47,000 in the first three quarters of
fiscal 1996 compared to approximately $86,000 in the corresponding period of the
prior year. The difference was principally due to a decrease in interest bearing
cash and short-term investment balances along with increases in interest expense
related to additional bank loans.
Other income (excluding interest) increased to approximately $170,000 for the
nine months ended March 31, 1996 from approximately $37,000 in the corresponding
period of the prior year. The difference was principally due to approximately
$20,000 from equity in net income (compared to ($52,000) from equity in net loss
in the corresponding period of the prior fiscal year) of the Canadian
affiliate, along with decreases in other expenses (approximately $200,000)
recognized in connection with an unsuccessful initial public offering during the
first nine months of prior year. Both of these were partially offset by
decreases of approximately $139,000 in European research grants. The Company
received approximately $150,000 in European research grants during the first
nine months of fiscal 1996 and approximately $289,000 during the comparable
period of the prior fiscal year.
Net loss increased to approximately ($8,329,000) for the nine months ended March
31, 1996 from approximately ($4,013,000) for the comparable period of the prior
year, principally as a result of decreased sales of technology and intellectual
property, the cost of clinical research and marketing rights purchased from
Akita Sumitomo Bakelite, Ltd. in Japan, increased development and clinical
expenses related to Corvita Endoluminal Grafts, and professional expenses
relating to discussions and negotiations for a strategic corporate alliance.
The Company expects to incur additional losses in future quarters.
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17
CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity and Capital Resources
The Company has financed its operations since inception principally through
private placements of Preferred Stock (converted into Common Stock upon the
Company's initial public offering), net proceeds from its November 1, 1994
initial public offering, product sales (predominantly sales of Corvita
Peripheral Grafts in Europe), sales of consulting services and technology,
license fees, grant receipts, interest on available cash balances and loans
(including loans from Pfizer).
Cash and short term investments equaled approximately $324,000 at March 31,
1996, compared to approximately $5,794,000 at June 30, 1995. The decrease in
cash and short term investments was a result of paying development stage
expenditures from proceeds of the Company's initial public offering consummated
on November 1, 1994. As previously disclosed, the proceeds of the Company's
initial public offering funded operations through April, 1996, while the Company
negotiated a strategic corporate alliance and considered other financing
alternatives.
Inventory totaled approximately $54,000 at March 31, 1996, compared to
approximately $105,000 at June 30, 1995. The Company has encountered
manufacturing interruptions and low yields while controlling the scale-up of
manufacturing infrastructure.
Accrued expenses were approximately $3,154,000 at March 31, 1996 compared to
approximately $734,000 at June 30, 1995. The increase in accrued expenses is
principally attributable to $2,000,000 projected not to be billable before June,
1996, by Akita Sumitomo Bakelite, Ltd. upon submission to the Japanese Ministry
of Health and Welfare of the clinical study report on the Corvita Peripheral
Graft.
For the nine months ended March 31, 1996, cash consumed by operating activities
increased to approximately ($4,832,000) from approximately ($4,449,000) for the
comparable nine months in the prior year, principally as a result of the
substantial increase in the Company's net operating loss, largely offset by the
increase in accounts payable and accrued expenses.
Investing activities for the nine months ended March 31, 1996 consisted of the
sale of short term investments to fund continued development stage expenses, and
expenditures of approximately $528,000 for equipment (principally for
manufacturing and manufacturing engineering) and the filing and issuance of new
patents. In the prior year, the Company purchased short-term investments with
proceeds from the Company's initial public offering, and expenditures for
equipment and patents totaled approximately $192,000.
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18
CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
At March 31, 1996, the Company had negative working capital of approximately
($3,302,000) and a stockholders deficit of approximately ($2,338,000). Both
became negative during the second quarter of fiscal 1996 as a result of
development stage losses including the $2,000,000 Akita Sumitomo Bakelite, Ltd.
accrual which will not be payable until at least the fourth quarter of fiscal
1996. Long term debt principally consisted of a non interest-bearing Belgian
development loan, payable as a percent of operating revenues. In April, 1996,
the Company exhausted the remaining portion of the proceeds from its 1994
initial public offering, and since that point it has been funding operations
via proceeds of a loan from its prospective merger partner Pfizer.
Pfizer agreed to make advances to the Company from time to time until the
earlier of (i) the termination of the Agreement and Plan of Merger, or (ii)
August 9, 1996, in an amount not to exceed $2,000,000. Funds will be advanced
in amounts not to exceed $150,000 once every five businessdays, after an initial
funding of $500,000. On April 11, 1996, the Company executed a promissory note
bearing interest on all outstanding amounts at a rate per annum equal to 8.25%.
Interest will be paid monthly in arrears on the last day of each month.
On April 11, 1996, the Company and Pfizer Inc. ("Pfizer") jointly announced that
they had signed an Agreement and Plan of Merger ("Merger Agreement") pursuant to
which HPG Acquisition Corp., a wholly-owned subsidiary of Pfizer, will acquire
all of the outstanding stock of Corvita at $10.25 per share, or approximately
$85 million. To implement the agreement, Pfizer's subsidiary commenced a cash
tender offer on April 17, 1996. Consummation of the merger is conditioned on,
among other things, the tender of at least a majority of the outstanding shares
of Corvita, on a fully diluted basis, in the tender offer. Shareholders owning
approximately 20% of the outstanding shares of Corvita have entered into binding
agreements to tender their shares. Assuming the successful completion of the
prospective merger, Corvita will operate as a business of the Pfizer Hospital
Products Group (HPG). On April 8, 1996, the Company filed a Schedule 14D-9,
Solicitation/Recommendation Statement Pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934 which was mailed to each shareholder of record
as of April 4, 1996. Schedule 14-D9 states that the Board of Directors of the
Company has unanimously determined that the consideration to be paid for each
Share in the Offer and the Merger is fair to the shareholders of the Company and
that the Offer and the Merger are otherwise in the best interests of the Company
and its shareholders, has approved and adopted the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger, and
recommends that all holders of Shares accept the Offer and tender their Shares
pursuant to the Offer. Among the number of factors considered by the Board, as
set forth fully in Schedule 14D-9 were: Dillon Read & Co., Inc.'s ("Dillon
Read") analysis of the Pfizer Offer from a financial point of view, as that
analysis was presented to the Board, and the Board s expectation that Dillon
Read would supply an
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19
CORVITA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
opinion to the effect that as of the date of this opinion and based upon and
subject to certain matters dated therein, the $10.25 per share cash
consideration to be received by the holders of Shares pursuant to the Pfizer
Offer and the Merger Agreement is fair from a financial point of view to the
public shareholders of the Company (Dillon Read did deliver a final opinion to
that effect on April 11, 1996); the fact that on January 18, 1996, the Company
issued a press release that stated that the Company was in discussions regarding
a possible acquisition of the Company in the $10 per Share range, and the fact
that neither prior nor subsequent to such press release did any other party
indicate a willingness to pursue an acquisition of the Company for a cash price
in excess of the $10.25 per Share price offered by Pfizer; information with
regard to the financial condition, results of operations, competitive position,
business and prospects of the Company, as reflected in the Company's
projections; the historical market price of, and recent trading activity in the
Shares; and current economic and market conditions and the going concern value
of the Company. The Board of Directors was advised by counsel to the Company,
Epstein Becker and Green, P.C. as to its duties in considering the offer.
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20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On April 11, 1996, the Company and Pfizer Inc. ("Pfizer")
jointly announced that they had signed an Agreement
and Plan of Merger ("Merger Agreement") pursuant to which HPG
Acquisition Corp., a wholly-owned subsidiary of Pfizer, will
acquire all of the outstanding stock of Corvita at $10.25 per
share, or approximately $85 million. To implement the
agreement, Pfizer's subsidiary commenced a cash tender offer on
April 17, 1996. Consummation of the merger is conditioned on,
among other things, the tender of at least a majority of the
outstanding shares of Corvita, on a fully diluted basis, in the
tender offer. Shareholders owning approximately 20% of the
outstanding shares of Corvita have entered into binding
agreements to tender their shares. Assuming the successful
completion of the prospective merger, Corvita will operate as a
business of the Pfizer Hospital Products Group (HPG).
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.67 Second Lease Amendment, dated
January 22, 1996, with The Graham
Companies (amending the Lease,
dated February 12, 1990, with The
Graham Companies, as amended).
10.68 Letter Agreement, dated March 4,
1996, with Acuson Corporation.
10.69 License Agreement, dated April 9,
1996, with The Polymer Technology
Group.
10.70 Consent to Assignment of License
and Supply Agreement, dated April 9,
1996, with Vascor, Inc.
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21
10.71 Agreement and Plan of Merger among
Pfizer Inc., HPG Acquisition
Corporation and Corvita Corporation
dated as of April 11, 1996. (Included
by reference to the Schedule 14D-9
with exhibits filed on April 18, 1996.)
10.72 License Agreement dated April 11,
1996 entered between Corvita
Corporation and Pfizer Inc. (Included
by reference to the Schedule 14D-9
with exhibits filed on April 18, 1996.)
10.73 Stock Purchase Agreement, dated as
of April 11, 1996 among Corvita
Corporation, and George A. Adams,
David C. MacGregor, Gregory J.
Wilson and Jennie M. Wilson, as
trustees for the Gregory Wilson
Family Trust, and Jennie M. Wilson.
(Included by reference to the
Schedule 14D-9 with exhibits filed on
April 18, 1996.)
10.74 Stock Purchase Agreement between
Corvita Corporation and Research
Visions Canada, Inc., dated as of
April 11, 1996. (Included by reference
to the Schedule 14D-9 with exhibits
filed on April 18, 1996.)
10.75 Loan Agreement among Pfizer Inc.,
HPG Acquisition Corporation, and
Corvita Corporation, dated as of
April 11, 1996. (Included by reference
to the Schedule 14D-9 with exhibits
filed on April 18, 1996.)
10.76 Confidentiality and Standstill
Agreement, dated August 16, 1995,
between Dillon, Read & Co. Inc. on
behalf of Corvita Corporation and
Pfizer Inc. (Included by reference to
the Schedule 14D-9 with exhibits
filed on April 18, 1996.)
10.77 Letter to Shareholders of Corvita
Corporation, dated April 17, 1996.
(Included by reference to the
Schedule 14D-9 with exhibits
filed on April 18, 1996.)
10.78 Opinion of Dillon, Read & Co. Inc.,
dated April 11, 1996, and Consent By
Dillon Read to the inclusion of the
Opinion as an Exhibit, dated
April 16, 1996. (Included by
reference to the Schedule 14D-9 with
exhibits filed on April 18, 1996.)
10.79 Shareholders Agreement, dated as of
April 11, 1996, among Pfizer Inc.,
HPG Acquisition Corp. and certain
shareholders named therein, and
including Schedule 1 thereto.
(Included by reference to the
Schedule 14D-9 with exhibits filed on
April 18, 1996.)
27 Financial Data Schedule (for SEC use
only)
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORVITA CORPORATION
Date: May 10, 1996 /s/ Norman R. Weldon
--------------------------------
Norman R. Weldon
President and Chief Executive
Officer
Date: May 10, 1996 /s/ Robert E. Boyett
--------------------------------
Robert E. Boyett
Treasurer (Principal Accounting
Officer)
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