SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
--- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 0-19153
________________________
NEXELL THERAPEUTICS INC.
(Exact name of Registrant as specified in its Charter)
________________________
Delaware 06-1192468
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
9 Parker, Irvine, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 470-9011
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
------- -------
The aggregate number of Registrant's shares of Common Stock, $.001 par
value, outstanding on November 7, 2001 was 20,940,509 shares.
________________________
1
NEXELL THERAPEUTICS INC.
INDEX
-----
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of
September 30, 2001 and December 31, 2000................... 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2001
and 2000................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2001 and 2000...... 5
Notes to Condensed Consolidated Financial
Statements (unaudited)..................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 21
Item 2. Changes in Securities and Use of Proceeds.................. 21
Item 3. Defaults upon Senior Securities............................ 21
Item 4. Submission of Matters to a Vote of Security Holders........ 21
Item 5. Other Information.......................................... 21
Item 6. Exhibits and Reports on Form 8-K........................... 22
SIGNATURES........................................................... 24
EXHIBIT INDEX........................................................ 25
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,767,000 $ 12,119,000
Trade receivables net of allowance for doubtful accounts of zero and
$37,000 at September 30, 2001 and December 31, 2000, respectively 20,000 2,940,000
Receivables from related party 4,040,000 1,576,000
Inventory - finished goods 286,000 3,831,000
Short term marketable securities 1,029,000 3,000,000
Other current assets 1,620,000 3,953,000
--------------- --------------
Total current assets 15,762,000 27,419,000
Fixed assets, net 3,429,000 8,164,000
Intangible assets, net 33,723,000 39,372,000
Other assets 1,000,000 500,000
--------------- --------------
Total assets $ 53,914,000 $ 75,455,000
=============== ==============
LIABILITIES
Current liabilities:
Accounts payable $ 3,086,000 $ 3,812,000
Accounts payable due to related party -- 2,821,000
Accrued expenses 7,493,000 2,807,000
Capital leases - current portion -- 638,000
Deferred revenue - current portion 450,000 450,000
--------------- --------------
Total current liabilities 11,029,000 10,528,000
Capital lease obligation - non current portion -- 1,912,000
Deferred revenue - non current portion 1,275,000 1,575,000
--------------- --------------
Total liabilities 12,304,000 14,015,000
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY
Convertible preferred stock; $.001 par value, 1,150,000 shares
authorized:
Series A; 78,967 issued and outstanding at September 30, 2001 and 100 100
December 31, 2000 (liquidation value $82,706,000 and $79,162,000)
Series B; 63,000 issued and outstanding at September 30, 2001 and 100 100
December 31, 2000 (liquidation value $63,666,000 and $63,194,000)
Common stock; $.001 par value, 80,000,000 shares authorized,
20,940,509 and 19,084,894 shares issued and outstanding
at September 30, 2001 and December 31, 2000, respectively. 21,000 19,000
Additional paid-in capital 262,081,800 258,188,800
Accumulated other comprehensive income 857,000 2,605,000
Accumulated deficit (221,350,000) (199,373,000)
--------------- --------------
Total shareholders' equity 41,610,000 61,440,000
--------------- --------------
Total liabilities and shareholders' equity $ 53,914,000 $ 75,455,000
=============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
NEXELL THERAPEUTICS INC. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------ ------------- -------------
Revenue $ 3,262,000 $ 4,498,000 $ 13,030,000 $ 13,912,000
Cost of goods sold 3,099,000 2,746,000 8,552,000 7,988,000
------------- ------------ ------------- -------------
Gross profit 163,000 1,752,000 4,478,000 5,924,000
------------- ------------ ------------- -------------
Operating expenses:
Research and development 1,545,000 2,609,000 5,300,000 8,691,000
General and administrative 2,758,000 4,031,000 5,535,000 9,456,000
Selling, marketing and distribution 972,000 2,459,000 5,982,000 7,936,000
Goodwill and intangible assets amortization 1,055,000 1,017,000 3,088,000 3,050,000
Impairment of intangible assets 2,637,000 -- 2,637,000 --
Depreciation 618,000 807,000 2,248,000 2,373,000
------------- ------------ ------------- -------------
Total operating expenses 9,585,000 10,923,000 24,790,000 31,506,000
------------- ------------ ------------- -------------
Operating loss (9,422,000) (9,171,000) (20,312,000) (25,582,000)
------------- ------------ ------------- -------------
Other (income) expenses:
Royalty, licensing and other related income (2,000) (1,000) (2,000) (77,000)
Royalty expense -- -- -- 100,000
Interest income (58,000) (350,000) (350,000) (963,000)
Interest expense 44,000 -- 181,000 --
Gain on sale of equity investments -- (3,231,000) -- (3,231,000)
Other, net 105,000 (97,000) 167,000 67,000
------------- ------------ ------------- -------------
Total other (income) expenses 89,000 (3,679,000) (4,000) (4,104,000)
------------- ------------ ------------- -------------
Net loss (9,511,000) (5,492,000) (20,308,000) (21,478,000)
Preferred stock dividends (1,666,000) (1,587,000) (4,961,000) (4,751,000)
------------- ------------ ------------- -------------
Net loss applicable to common stock $ (11,177,000) $ (7,079,000) $ (25,269,000) $ (26,229,000)
============= ============ ============= =============
Basic and diluted loss per share $ (0.53) $ (0.37) $ (1.23) $ (1.41)
------------- ------------ ------------- -------------
Weighted average number of shares of common stock
outstanding-basic and diluted 20,941,000 19,016,000 20,615,000 18,652,000
============= ============ ============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
-----------------------------------
2001 2000
---------------- --------------
Cash flows from operating activities:
Net loss................................................................... $ (20,308,000) $ (21,478,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................... 5,336,000 5,423,000
Noncash compensation.................................................... -- 1,549,000
(Gain) loss from disposal of equipment.................................. (259,000) 10,000
Gain on sale of equity investments...................................... -- (3,231,000)
Amortization of deferred revenue........................................ (300,000) (112,000)
Asset impairment charge................................................. 2,637,000 100,000
Changes in operating assets and liabilities, net of dispositions:
Increase in trade receivables.......................................... (1,043,000) (1,151,000)
(Increase) decrease in receivable from related party................... 208,000 (403,000)
Decrease in inventory.................................................. 1,244,000 1,003,000
Increase in other current assets and other assets...................... (714,000) (2,110,000)
Increase in accounts payable, accrued expenses and accounts payable to 5,278,000 5,730,000
related parties....................................................... ----------- -----------
Net cash used in operating activities................................... (7,921,000) (14,670,000)
Cash flows from investing activities:
Purchases of equipment..................................................... (584,000) (1,089,000)
Proceeds from sales of equipment........................................... 62,000 139,000
Proceeds from asset sale to Baxter......................................... 2,586,000 --
------------- -------------
Net cash provided by (used in) investing activities..................... 2,064,000 (950,000)
Cash flows from financing activities:
Proceeds from issuance of common stock in connection with the
exercise of warrants/options............................................ -- 4,047,000
Proceeds from sale of equity investments................................... -- 3,818,000
Proceeds from issuance of common stock, net................................ 3,895,000 --
Payment of preferred dividends............................................. (945,000) (945,000)
Payment of dividends to minority shareholders of subsidiary................ (251,000) --
Repayment of capital leases................................................ (417,000) --
------------- -------------
Net cash provided by financing activities............................... 2,282,000 6,920,000
Effect of exchange rate changes on cash...................................... 223,000 (405,000)
------------- -------------
Net decrease in cash and cash equivalents.................................... (3,352,000) (9,105,000)
Cash and cash equivalents at beginning of period............................. 12,119,000 28,695,000
------------- -------------
Cash and cash equivalents at end of period................................... $ 8,767,000 $ 19,590,000
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 181,000 --
Cash paid for income taxes........................ $ 22,000 $ 19,000
Non-cash investing and financing activities:
. The Company recognized a net unrealized loss on securities held for
investment of $1,971,000 and a net unrealized gain of $4,193,000 in the nine
months ended September 30, 2001 and 2000, respectively, which are included as
a component of comprehensive loss.
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
(1) Financial Statement Presentation
The unaudited condensed consolidated financial statements and notes thereto
of Nexell Therapeutics Inc. ("Nexell") and subsidiaries (collectively, the
"Company") herein have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"), and in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results of operations for the
interim periods presented. Certain information and footnote disclosures
normally included in financial statements, prepared in accordance with
accounting principles generally accepted in the United States of America,
have been condensed or omitted pursuant to such rules and regulations.
However, management believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated unaudited
financial statements and notes thereto have been prepared in conformity with
the accounting principles applied in our 2000 Annual Report on Form 10-K for
the year ended December 31, 2000 and should be read in conjunction with such
Report. The results for the interim periods are not necessarily indicative of
the results for the full fiscal year. Certain prior year amounts have been
reclassified to conform with the current year presentation.
(2) Principles of Consolidation
These condensed consolidated financial statements include the accounts of
Nexell, Nexell of California, Inc. ("NCI" or "Nexell California") and its
subsidiaries, VIMRX Genomics, Inc. ("VGI"), Innovir Laboratories, Inc.
("Innovir") and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(3) Comprehensive Loss
Comprehensive loss consists of net loss, net unrealized gain (loss) on
investment securities and foreign currency translation adjustments and is
presented in the table below. Accumulated other comprehensive loss is
included as a component of shareholders' equity.
Three Months Ended September 30, Nine Months Ended September 30,
-----------------------------------------------------------------------
2001 2000 2001 2000
-----------------------------------------------------------------------
Net loss $(9,511,000) $ (5,492,000) $(20,308,000) $(21,478,000)
Translation adjustment 646,000 (383,000) 222,000 (414,000)
Net unrealized gain (loss) in
investment securities (1,027,000) 344,000 (1,970,000) 4,193,000
----------- ------------ ------------ ------------
Total comprehensive loss $(9,892,000) $( 5,531,000) $(22,056,000) $(17,699,000)
=========== ============ ============ ============
The cumulative foreign currency translation adjustment included as a
component of accumulated other comprehensive income was $(24,000) and
$(246,000) at September 30, 2001 and December 31, 2000, respectively. The
cumulative net unrealized gain in investment securities included as a
component of accumulated other comprehensive income was $881,000 and
$2,851,000 at September 30, 2001 and December 31, 2000, respectively.
6
No income tax expense or benefit was allocated to the foreign currency
translation adjustments or to the net unrealized gain (loss) in investments
recorded in 2001 and 2000 due to the Company's significant net operating loss
tax carryforwards.
(4) Per Share Information
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
share is computed using the weighted average number of shares of common stock
outstanding and potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares consist of stock options and
warrants using the treasury stock method but are excluded if their effect is
antidilutive.
Stock options and warrants, excluding Class A performance warrants, to
purchase 4,445,776 and 4,716,377 shares of Nexell Common Stock ("Common
Stock") were outstanding at September 30, 2001 and 2000, respectively. Stock
options and warrants outstanding were not included in the computation of
diluted earnings per share as the Company incurred losses in all periods
presented.
(5) Investments
The Company owns 457,143 shares of the common stock of Epoch Pharmaceuticals,
Inc., representing an approximately 2% ownership at September 30, 2001.
Included in comprehensive loss for the nine months ended September 30, 2001
is the unrealized loss recorded for this investment to adjust to fair market
value at September 30, 2001. The above investment is included in "short term
marketable securities" on the accompanying condensed consolidated balance
sheet and is accounted for as an available-for-sale security at fair value,
with the unrealized gain reported as a component of accumulated other
comprehensive income.
(6) Geographic Information
The Company operates in one industry segment: the development, manufacture,
marketing and distribution of specialized instruments, biologicals, reagents,
sterile plastic sets and related products used in ex vivo cell research and
therapies. Effective with the completion of the Baxter transaction (see Note
7) on August 31, 2001, all assets are now held in the United States. Summary
comparative operating results for the United States and the rest of the world
follows:
Three Months Ended Nine Months Ended
------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- --------------
Revenues by Geographic Area:
United States $ 2,082,000 $2,809,000 $ 7,643,000 $ 8,666,000
Europe 1,001,000 1,557,000 4,288,000 4,825,000
Rest of World 179,000 132,000 1,099,000 421,000
----------- ---------- ----------- -----------
$ 3,262,000 $4,498,000 $13,030,000 $13,912,000
=========== ========== =========== ===========
Operating loss by Geographic Area:
United States $ 7,319,000 $6,633,000 $14,868,000 $19,001,000
Europe 1,509,000 2,337,000 4,206,000 5,894,000
Rest of World 594,000 201,000 1,238,000 687,000
----------- ---------- ----------- -----------
$ 9,422,000 $9,171,000 $20,312,000 $25,582,000
=========== ========== =========== ===========
7
(7) Agreement with Baxter Healthcare Corporation and Business Restructure
On June 12, 2001, the Company announced that it had signed a letter of intent
to transfer worldwide sales, marketing and distribution rights for its cell
processing products, including the Isolex(R) 300i Magnetic Cell Selection
System, to Baxter Healthcare Corporation ("Baxter"). This transaction was
completed on August 31, 2001. This agreement was intended to allow the
Company to outsource most near-term market support requirements to enable it
to focus on clinical development of specific therapeutic applications of its
proprietary technology. This will have the impact of significantly reducing
the Company's operating expenses and cash use due to the elimination of
direct sales, marketing and distribution headcount and the reduction of
related support infrastructure. The Company currently has 25 full-time
permanent employees versus 105 at December 31, 2000 as a result of these
reductions. Further, the impact of severance and related costs associated
with these reductions was limited since many of the sales and marketing
employees terminated by Nexell were retained in comparable positions by
Baxter.
In accordance with the terms of this agreement, Baxter paid the Company an
initial amount of approximately $2.6 million and will pay additional amounts
subject to final determination of the net book value of assets acquired, net
of any amounts payable to Baxter. Of the additional amount, approximately
$600,000 has been held back pending fulfillment of certain conditions by the
Company. The Company estimates that it will ultimately realize total net
proceeds of approximately $3.0 to $5.7 million. The estimated net proceeds
may be reduced by the amount of potential liabilities to Baxter that have
been accrued at estimated values by the Company but for which it has not yet
been invoiced. Additional payments of approximately $788,000 may be received
upon the occurrence of certain future events in accordance with the
agreement. All amounts are subject to final approval and negotiation by the
Company and Baxter in the time frames specified by the agreement. Assets with
the following net book values were sold.
- --------------------------------------------------------------------------------------------------------
Amount
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Trade accounts receivable $1,594,000
- --------------------------------------------------------------------------------------------------------
Inventory 2,301,000
- --------------------------------------------------------------------------------------------------------
Related party receivables due from Baxter 1,217,000
- --------------------------------------------------------------------------------------------------------
Fixed assets 665,000
- --------------------------------------------------------------------------------------------------------
Stock of Nexell International 2,242,000
- --------------------------------------------------------------------------------------------------------
Subtotal of assets sold to Baxter 8,019,000
- --------------------------------------------------------------------------------------------------------
Less: accounts payable to related party (Baxter) 2,331,000
- --------------------------------------------------------------------------------------------------------
Total estimated net consideration 5,688,000
- --------------------------------------------------------------------------------------------------------
As a result of the above, the Company recorded a gain of $259,000 on the
early extinguishment of the capital lease with Baxter. This gain is included
in "Other, net" in the accompanying Condensed Consolidated Statements of
Operations.
Concurrently with the above, on June 12, 2001, the Company announced its
intent to restructure its business to streamline ongoing operations and
reduce spending. The Company has reduced staffing by approximately two-
thirds, focusing its organization exclusively on therapeutic product
development. Certain existing Nexell employees were offered employment with
Baxter pursuant to the definitive agreements completed on August 31, 2001.
Additionally, certain employees were retained for varying periods to assist
in transitioning the business from the Company to Baxter.
8
Related costs will be reimbursed by Baxter. As a result of this restructure
plan, the Company recorded a charge of approximately $145,000 related to
severance and related costs and the transfer of distribution responsibilities
in the quarter ended September 30, 2001. The impact of these spending
reductions is expected to be reflected in operating results in the fourth
quarter of 2001.
Additionally, certain other non-recurring expenses were recorded in the third
quarter as a result of the events described above. These include direct
transaction costs of approximately $500,000; write-downs of inventory that
the Company believed would have otherwise been saleable in the ordinary
course of business but which Baxter elected not to purchase and are no longer
saleable by the Company due to non-compete provisions in the agreements of
approximately $1,182,000; a write-down of approximately $2,637,000 related to
certain intangibles that were impaired as a result of the transaction;
severance and related costs of approximately $145,000; and cumulative foreign
exchange losses of approximately $594,000.
(8) Anti-Dilution Adjustments
As a result of the issuance by the Company of common stock during the first
quarter of 2001 to Acqua Wellington North American Equities Fund, Ltd., and
certain stock options to employees during the first half of 2001, the
exercise price for the Company's publicly traded warrants (Nasdaq: NEXLW),
which had been $5.416 per share, has been adjusted to $5.105 per share, and
each Warrant now entitles the holder to purchase .2938 of a share of common
stock of the Company, instead of .2769 of a share of common stock of the
Company.
There have also been comparable adjustments to the Company's privately placed
Series B Preferred Stock and Class B Warrants. The conversion price of the
Series B Preferred Stock has been adjusted from $11 to $10.218, and the
aggregate number of shares of common stock into which the Series B Preferred
Stock may be converted has changed from 5,727,272 to 6,165,590. The exercise
price for the Class B Warrants has been adjusted from $12 to $11.129 and the
aggregate number of shares of common stock for which the Class B Warrants may
be exercised has changed from 750,000 to 808,676.
(9) New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations (SFAS 141), and SFAS 142, Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not be
accounted for separately. SFAS 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
9
The Company is required to adopt the provisions of SFAS 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling-of-interests method, and
SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-SFAS 142 accounting literature. Goodwill
and intangible assets acquired in business combinations completed before July
1, 2001 will continue to be amortized prior to the adoption of SFAS 142.
SFAS 141 will require, upon adoption of SFAS 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS 142
within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To
the extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In
the second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with SFAS 141, to
its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible,
but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of $25,122,000 and unamortized identifiable intangible assets
in the amount of $7,615,000 all of which will be subject to the transition
provisions of SFAS 141 and 142. Amortization expense related to goodwill was
$2,955,000 for the year ended December 31, 2000 and $739,000 and $2,217,000
for the three and nine months ended September 30, 2001, respectively. Because
of the extensive effort needed to comply with adopting SFAS 141 and 142, it
is not practicable to reasonably estimate the impact of adopting these
Statements on the Company's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the
10
impairment or disposal of long-lived assets. SFAS 144 supersedes Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. SFAS 144 retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of or is classified as
held for sale.
The Company is required and plans to adopt the provisions of SFAS 144 for the
quarter ending March 31, 2002. The Company has not determined the impact that
SFAS 144 will have on its financial statements.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
On August 31, 2001, Nexell Therapeutics Inc. (the "Company") and its wholly
owned subsidiary, Nexell of California, Inc. ("Nexell California" and together
with the Company, the "Nexell Group") completed the sale to Baxter Healthcare
Corporation ("Baxter") of certain assets and liabilities of the Nexell Group's
cell processing business (including trade receivables, inventory and fixed
assets and all of the stock of the Company's wholly owned subsidiary, Nexell
International Sprl) as well as worldwide sales, marketing and distribution
rights for the related products (including the Isolex(R) 300i Magnetic Cell
Selection System) for a purchase price that is subject to adjustment for final
settlement of the closing balance sheet, certain European taxes and other items,
and royalties on future product sales (the "Transaction"). Approximately $2.6
million of the purchase price was paid at closing. The Company estimates that it
will ultimately realize total net proceeds of between $3.0 and $5.7 million. The
net proceeds may be reduced by the amount of potential liabilities to Baxter
that have been accrued at estimated values by the Company but for which it has
not yet been invoiced. Additional payments of approximately $1.4 million may be
received upon the Company fulfilling certain conditions in accordance with the
asset purchase agreement referred to below. Pursuant to the Transaction, Baxter
has offered certain Nexell Group employees positions with Baxter. Consistent
with the Nexell Group's streamlined business plans, the Company's permanent
workforce has been reduced to 25 employees from 105 at December 31, 2000. The
Company recorded a charge of approximately $145,000 in the third quarter related
to severance and/or related costs, and the transfer of distribution
responsibilities, with the impact of spending reductions expected to be fully
reflected in operating results commencing on December 1, 2001. Upon closing of
the Transaction, substantially all of the Nexell Group's current revenue-
producing activities have ceased, and the Nexell Group will focus on development
of new cellular therapy products. As a result of the Transaction, the Company
recorded a gain of $259,000 which has been included in "Other, net" in the
Condensed Consolidated Statements of Operations.
The Transaction was effected pursuant to the terms of an Asset Purchase
Agreement dated August 3, 2001 among the Company, Nexell California and Baxter
("Asset Purchase Agreement"); a Distribution and License Agreement dated August
31, 2001 between Baxter and Nexell California; a Sublicense Agreement of the
First BD Sublicense dated August 31, 2001 between Baxter and Nexell California;
a Sublicense Agreement of the Second BD Sublicense dated August 31, 2001 between
Baxter and Nexell California; a Sublicense Agreement of the Dorken Sublicense
dated August 31, 2001 between Baxter and Nexell California; a Sublicense
Agreement of the Public Health Service Biological Materials License dated August
31, 2001 between Baxter and Nexell California; a Sublicense Agreement of the
Diaclone Monoclonal Antibody License dated August 31, 2001 between Baxter and
Nexell California; an Employee Lease Agreement dated August 31, 2001 among
Baxter, the Company and Nexell California; and a Supply Agreement dated August
31, 2001 between Baxter and Nexell California.
Pursuant to the Asset Purchase Agreement, the following agreements between
Baxter and Nexell California were terminated on August 31, 2001: (i) Hardware
and Disposable Supply Agreement dated December 17, 1997; (ii) US and Canada
Instrument Services Agreement dated June 30, 1999; (iii) Hardware and
Disposables Manufacturing Agreement dated December 17, 1997; (iv) Antibody
Manufacturing and Storage Agreement dated December 17, 1997; (v) Royalty
Assignment and
12
Agreement dated December 17, 1997; (vi) Equipment Lease Agreement dated December
21, 2000; and (vii) Instrument Services Agreement dated November 30, 1999.
Additionally, certain other non-recurring expenses were recorded in the third
quarter as a result of the events described above. These include direct
transaction costs of approximately $500,000; write-downs of inventory that the
Company believed would have otherwise been saleable in the ordinary course of
business but which Baxter elected not to purchase and are no longer saleable by
the Company due to non-compete provisions in the agreements of approximately
$1,182,000; a write-down of approximately $2,637,000 related to certain
intangibles that were impaired as a result of the transaction; and cumulative
foreign exchange losses of approximately $594,000.
Three Months Ended September 30, 2001 and 2000
Sales were $3,262,000 for the quarter ended September 30, 2001, a decrease of
$1,236,000 or 27% from $4,498,000 for the quarter ended September 30, 2000.
Effective with the close of the transaction with Baxter on August 31, 2001,
substantially all product revenues have been eliminated. Included in net sales
for the quarter ending September 30, 2001 are sales of raw materials to a
manufacturer, some of which the manufacturer uses in the production of finished
goods which are subsequently sold to the Company and others. These sales were
sporadic in nature as they were dependent, among other factors, on the
customer's production schedule, which in turn was somewhat dependent on the
Company's sales forecasts. In the third quarter of 2001, these sales totaled
$363,000. No such sales occurred in the comparable period in the prior year. No
such sales will occur in the future as a result of consummation of the
transaction with Baxter.
Gross profit was $163,000 or 5% for the quarter ended September 30, 2001, a
decrease of $1,589,000 from $1,752,000 or 39% for the quarter ended September
30, 2000. This decrease was principally the result of the transfer of product
sales to Baxter on August 31, 2001 and one-time write-offs that resulted from
the transaction. Certain inventory, totaling approximately $1,182,000, that the
Company believes would have been otherwise saleable in the ordinary course of
business was not purchased by Baxter. As the Company is precluded from sale of
this inventory by non-compete provisions of the agreement, this inventory was
written off to cost of sales in the third quarter. Exclusive of this adjustment,
gross profit would have been 41% for the quarter ended September 30, 2001.
Total operating expenses were $9,585,000 for the three months ended September
30, 2001, a
13
decrease of $1,338,000 or 12% over the quarter ended September 30, 2000. This
decrease was primarily due to focused headcount and employee related expense
reductions as a result of the Company's strategic planning process that was
implemented in October 2000. Additional reductions occurring in the third
quarter 2001 had a minimal effect on results for that quarter as they were
offset by certain non-recurring charges, including severance.
Research and development expenses decreased by $1,064,000 or 41% from $2,609,000
for the three months ended September 30, 2000 to $1,545,000 for the three months
ended September 30, 2001. The decrease was primarily the result of the expense
reductions initiated in October 2000 and more focused research and development
efforts resulting from the Company's strategic planning process.
General and administrative expenses decreased by $1,273,000 or 32% from
$4,031,000 in the third quarter of 2000 to $2,758,000 in the third quarter of
2001. This decrease was primarily the result of reduced expenses resulting from
headcount and other spending reductions initiated in October 2000 and in the
first nine months of 2001.
Selling, marketing and distribution expenses decreased by $1,487,000 or 60% from
$2,459,000 in the third quarter of 2000 to $972,000 in the third quarter of
2001. This decrease was partially the result of headcount and other spending
reductions initiated in October 2000, although this category of expenses was
less impacted by the expense reductions of October 2000 as management considered
sales, marketing and distribution expenditures to be at an appropriate level
based upon continued focus on revenue stabilization and growth. Additionally,
sales and marketing expenses were reduced from the comparable period of the
prior year as essentially all such expenses were eliminated effective September
1, 2001 as a result of the transfer of sales, marketing and distribution
responsibilities to Baxter. Additionally, under terms of the Asset Purchase
Agreement Baxter reimbursed the Company $400,000 for sales, marketing and
distribution costs incurred by the Company in the month of August 2001. It is
anticipated that there will be no significant sales, marketing and distribution
expenses in the immediate future.
Amortization expense increased by $38,000 from $1,017,000 for the quarter ended
September 30, 2000 to $1,055,000 for the quarter ended September 30, 2001. This
was the result of additional acquisitions of intangible assets in 2001.
In the three months ended September 30, 2001, the Company recorded an expense of
$2,637,000 as a result of the write-down of certain intangibles, principally
amounts allocated to workforce, which were considered impaired as a result of
the completion of the Baxter transaction and the related restructure. No such
expenses were incurred in the comparable period of the prior year.
Depreciation expense decreased by $189,000 or 23% from $807,000 in the quarter
ended September 30, 2000 to $618,000 in the comparable period of the current
year. This was the result of the sale of certain fixed assets to Baxter as a
result of the agreement and assets that have become fully depreciated during the
year.
Other expense was $89,000 in the third quarter of 2001 compared to other income
of $3,679,000 in the third quarter of 2000. This was principally the result of
the sale of equity investments in the prior year that resulted in a gain of
$3,231,000 while no such sales occurred in the current year. Also interest
income declined by $292,000 from the comparable period of the prior year due to
carrying
14
lower cash balances. Further, in the third quarter of 2001 a foreign exchange
loss of $594,000 was incurred as a result of the sale of the stock of the
Company's European subsidiary. This was partially offset by a gain of $259,000
that resulted from the cancellation of the Company's capital lease with Baxter
under terms of the Asset Purchase Agreement. Neither of these occurred in the
comparable period of the prior year.
The foregoing resulted in a net loss of $9,511,000 and a net loss applicable to
common stock of $11,177,000 for the quarter ended September 30, 2001. This
represented an increase in net loss of $4,019,000 or 73% and an increase in the
net loss applicable to common stock of $4,098,000 or 58% from the quarter ended
September 30, 2000.
Nine Months Ended September 30, 2001 and 2000
Sales were $13,030,000 for the nine months ended September 30, 2001, a decrease
of $882,000 or 6% from $13,912,000 for the nine months ended September 30, 2000.
Effective with the close of the transaction with Baxter on August 31, 2001,
substantially all product revenues have been eliminated. Thus, 2001 includes
only eight months of product revenues. Included in net sales for the nine months
ending September 30, 2001 are sales of raw materials to a manufacturer, some of
which the manufacturer uses in the production of finished goods which are
subsequently sold to the Company and others. These sales were sporadic in nature
as described above. In the first nine months of 2001, these sales totaled
$1,170,000 compared to $654,000 in the comparable period of the prior year. No
such sales will occur in the future as a result of consummation of the
transaction with Baxter.
Gross profit was $4,478,000 or 34% for the nine months ended September 30, 2001,
a decrease of $1,446,000 from $5,924,000 or 43% for the nine months ended
September 30, 2000. This decrease was principally the result of the transfer of
product sales to Baxter on August 31, 2001 and one-time write-offs that resulted
from the transaction as described above. Exclusive of this non-recurring
adjustment, the gross profit for the nine months ended September 30, 2001 was
43%.
Total operating expenses were $24,790,000 for the nine months ended September
30, 2001, a decrease of $6,716,000 or 21% over the nine months ended September
30, 2000. This decrease was primarily due to focused headcount and employee
related expense reductions as a result of the Company's strategic planning
process that was implemented in October 2000 and in the first nine months of
2001. These reductions were partially offset by increases due to certain non-
recurring expenses recorded in the third quarter of 2001 as a result of the
Baxter transaction and the related restructure. Additional operating expense
reductions occurring in the third quarter 2001 as a result of the restructure
had a minimal effect on results in the current year as they were offset by
certain non-recurring charges, including severance.
Research and development expenses decreased by $3,391,000 or 39% from $8,691,000
for the nine months ended September 30, 2000 to $5,300,000 for the nine months
ended September 30, 2001. The decrease was primarily the result of the expense
reductions initiated in October 2000 and more focused research and development
efforts resulting from the Company's strategic planning process.
General and administrative expenses decreased by $3,921,000 or 41% from
$9,456,000 in the first nine months of 2000 to $5,535,000 in the first nine
months of 2001. This decrease was primarily the result of headcount and other
spending reductions initiated in October 2000 and continuing in the
15
first nine months of 2001, which were partially offset by certain non-recurring
expenses recorded in the third quarter of 2001 related to the Baxter agreement
and related restructure of approximately $645,000.
Selling, marketing and distribution expenses decreased by $1,954,000 or 25% from
$7,936,000 in the first nine months of 2000 to $5,982,000 in the first nine
months of 2001. This decrease was primarily the result of headcount and other
spending reductions initiated in October 2000, although this category of
expenses was less impacted by the expense reductions of October 2000 as
management considered sales, marketing and distribution expenditures to be at an
appropriate level based upon continued focus on revenue stabilization and
growth. Additionally, sales and marketing expenses were reduced from the
comparable period of the prior year as essentially all such expenses were
eliminated effective August 31, 2001 as a result of the transfer of sales,
marketing and distribution responsibilities to Baxter. It is anticipated that
there will be no significant sales, marketing and distribution expenses in the
immediate future.
Amortization expense increased by $38,000 from $3,050,000 for the nine months
ended September 30, 2000 to $3,088,000 for the nine months ended September 30,
2001. This was the result of additional acquisitions of intangible assets in
2001.
In the nine months ended September 30, 2001, the Company recorded an expense of
$2,637,000 as a result of the write-down of certain intangibles as described
above. No such expenses were incurred in the comparable period of the prior
year.
Depreciation expense decreased by $125,000 or 5% from $2,373,000 in the nine
months ended September 30, 2000 to $2,248,000 in the comparable period of the
current year. This was the result of the sale of certain fixed assets to Baxter
as a result of the agreement and assets that have become fully depreciated
during the year.
Other income was $4,000 in the first nine months of 2001 compared to $4,104,000
in the first nine months of 2000. This decrease was principally the result of a
gain of $3,231,000 on the sale of equity investments in 2000 that did not recur
in 2001. Additionally, interest income declined by $613,000 from the comparable
period of the prior year due to carrying lower cash balances. Further, in the
third quarter of 2001 a foreign exchange loss of $594,000 was incurred as a
result of the sale of the stock of the Company's European subsidiary. This was
partially offset by a gain of $259,000 that resulted from cancellation of the
Company's capital lease with Baxter under terms of the Asset Purchase Agreement.
Neither of these occurred in the comparable period of the prior year.
The foregoing resulted in a net loss of $20,308,000 and a net loss applicable to
common stock of $25,269,000 for the nine months ended September 30, 2001. This
represented a decrease in net loss of $1,170,000 or 5% and a decrease in the net
loss applicable to common stock of $960,000 or 4% from the nine months ended
September 30, 2000.
Liquidity and Capital Resources
The Company had $8,767,000 in cash and cash equivalents as of September 30, 2001
as compared to $12,119,000 as of December 31, 2000. Working capital was
$4,733,000 at September 30, 2001 as compared to $16,891,000 at December 31,
2000. The $3,352,000 decrease in cash and cash
16
equivalents in the first nine months of 2001 primarily resulted from cash used
in the operations of the Company of $7,921,000. This was partially offset by
cash provided by investing activities of $2,064,000 and cash provided by
financing activities of $2,282,000. The decrease in working capital of
$12,158,000 resulted from the decrease in cash and cash equivalents and
decreases in trade receivables, inventory and other current assets as a result
of the sale of these assets to Baxter.
Net cash used in operations was $7,921,000 in the first nine months of 2001
compared to $14,670,000 in the first nine months of 2000, a decrease of
$6,749,000. Operating cash used decreased in the nine months ended September 30,
2001 as compared to the nine months ended September 30, 2000 as a result of a
non-cash intangible asset impairment charge of $2,637,000 in 2001 that did not
occur in 2000 and a $3,231,000 non-cash gain on the sale of equity investments
in 2000 that did not recur in 2001. In addition, timing factors affecting the
balances in operating assets and liabilities and cash net loss resulted in a
lower use of cash of $881,000 versus the comparable period of the prior year.
Net cash provided by investing activities was $2,064,000 in the first nine
months of 2001 compared to cash used in investing activities of $950,000 in the
first nine months of 2000. This difference was principally the result of cash
proceeds from the asset sale to Baxter.
Net cash provided by financing activities was $2,282,000 in the nine months
ended September 30, 2001 compared to $6,920,000 in the nine months ended
September 30, 2000. Cash provided by financing activities in the first nine
months of 2001 consisted of net proceeds from the issuance of common stock to an
investor of $3,895,000 partially offset by payments on capital lease obligations
of $417,000, payment of preferred dividends of $945,000 and payment of $251,000
in dividends to minority shareholders in the Company's Innovir subsidiary. In
the first nine months of 2000, the Company realized proceeds from issuance of
common stock in connection with option and warrant exercises of $4,047,000 and
proceeds from the sale of equity investments of $3,818,000 that were partially
offset by preferred dividend payments of $945,000. The capital lease was
cancelled as a result of the Baxter transaction and, accordingly, cash outflows
related to these obligations will not recur in future periods.
Cash dividends are payable on the Company's Series B Preferred Stock at the rate
of 3% of the liquidation preference, payable semi-annually and will be
approximately $1,890,000 per year. During the third quarter of 2001, the Company
implemented a severance, retention and performance bonus policy which superseded
all such programs previously in effect. Under this policy maximum cash severance
and retention payments of approximately $646,000 and maximum performance bonuses
of approximately $228,000 may be payable in December 2001 and March 2002,
respectively. Such amounts would be payable under certain conditions in the
event of an employee's termination without cause and/or achievement of specific
performance objectives.
The Company, in the ordinary course of business, routinely explores possible
business transactions that may lead to an acquisition or combination. In
general, in order to conserve cash the Company's preference is to use its stock
as consideration for any potential acquisition or similar corporate transaction.
17
The Company expects to incur substantial expenditures in the foreseeable future
for the research and development and ultimate commercialization of its proposed
cellular therapy products. Based on current projections, which include proceeds
from final settlement of the transaction with Baxter and which are subject to
change, the significant reduction in spending that resulted from the Company's
restructure and management's ability to liquidate certain assets if necessary,
the Company's management believes that the current balance of cash and cash
equivalents is sufficient to fund its remaining operations through at least
fiscal 2001. Thereafter, the Company will require additional funds, which it is
seeking to raise through public or private equity or debt financings,
collaborative or other arrangements with corporate sources, or through other
sources of financing. There can be no assurance that such additional funds will
be available to the Company on terms favorable to the Company, or at all, and
the Company's operations could be negatively materially impacted by the need to
further adjust spending and/or liquidate assets.
The Company's common stock is currently traded on the Nasdaq National Market
which imposes, among other requirements, listing maintenance standards, minimum
bid and public float requirements, which in the wake of market conditions
following the tragedy of September 11th, have been suspended temporarily until
January 2, 2001. Thereafter, unless the temporary suspension is extended, if the
closing bid price of the common stock is under $1.00 per share for 30
consecutive trading days, Nasdaq may choose to notify the Company that it may
delist the common stock from the Nasdaq National Market. If the closing bid
price of the common stock does not thereafter regain compliance for a minimum of
10 consecutive trading days during the 90 days following notification by Nasdaq,
Nasdaq may delist the common stock from trading on the Nasdaq National Market.
There can be no assurance that the common stock will remain eligible for trading
on the Nasdaq National Market. If the stock were delisted, the ability of the
Company's shareholders to sell their common stock would be negatively impacted.
The Company's publicly held warrants which are currently traded on Nasdaq also
could be subject to delisting.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of SFAS 141 immediately, except
with regard to business combinations initiated prior to July 1, 2001, which it
expects to account for using the pooling-of-interests method, and SFAS 142
effective January 1, 2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS 142 accounting literature. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS 142.
SFAS 141 will require, upon adoption of SFAS 142 on January 1, 2002, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in SFAS 141 for
recognition apart from goodwill. Upon adoption of SFAS 142, the Company will be
required to reassess the useful lives and residual values of all intangible
assets acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS 142
within the first interim period. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
18
In connection with the transitional goodwill impairment evaluation, SFAS 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $25,122,000 and unamortized identifiable intangible assets in the
amount of $7,615,000 all of which will be subject to the transition provisions
of SFAS 141 and 142. Amortization expense related to goodwill was $2,955,000
for the year ended December 31, 2000 and $739,000 and $2,217,000 for the three
and nine months ended September 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting SFAS 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. SFAS 144 retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale.
The Company is required and plans to adopt the provisions of SFAS 144 for the
quarter ending March 31, 2002. The Company has not determined the impact that
SFAS 144 will have on its financial statements.
Disclosure Regarding Forward Looking Statements
This Report on Form 10-Q contains certain statements that are "Forward Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although the Company believes that the expectations reflected in Forward Looking
Statements are reasonable, management can give no assurance that such
expectations will prove to have been correct. Generally, these statements
relate to business plans or strategies, including the proposed transaction with
Baxter, projected or anticipated benefits or other consequences
19
of such plans or strategies, or projections involving anticipated revenues,
expenses, earnings, levels of capital expenditures, liquidity or indebtedness or
other aspects of operating results or financial position. All phases of the
operations of the Company are subject to a number of uncertainties, risks and
other influences (including the response of the market to the Company's new
business strategy, ability of the Company to develop new cellular therapy
products, timely commencement and success of the Company's clinical trials and
other research endeavors, delays in receiving FDA or other regulatory approvals,
the development of competing therapies and/or technologies, the terms of any
future strategic alliances, the need for or availability of additional capital,
the volatility in the market price for the Company's securities and the ability
of the Company to maintain listing of its publicly traded securities on Nasdaq)
many of which are outside the control of the Company and any one of which, or a
combination of which, could materially affect the results of the Company's
operations and whether the Forward Looking Statements made by the Company
ultimately prove to be accurate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, operations of the Company are exposed to risks
associated with fluctuations in interest rates and foreign currency exchange
rates.
Interest Rate Risk
The Company maintains excess cash in a mutual fund, the "BlackRock Low Duration
Bond Portfolio" (the "fund"), which invests in asset backed securities, bonds
and various other commercial obligations. The fund may, from time to time, use
certain derivatives in its investment strategy. Additionally, the Company
maintains excess cash required for short-term needs in daily money market funds
with financial institutions.
Two of the main risks disclosed by the fund are interest rate risk and credit
risk. Typically, when interest rates rise, there is a corresponding decline in
the market value of bonds such as those held by the fund. Credit risk refers to
the possibility that the issuer of the bond will not be able to make principal
and interest payments. The Company addresses these risks by actively monitoring
the fund's performance and investment holdings. The Company does not enter into
financial instruments for trading or speculative purposes.
The Company's interest income is most sensitive to fluctuations in the general
level of U.S. interest rates. In this regard, changes in the U.S. interest
rates affect the interest earned on the Company's cash as well as the value of
the mutual fund in which excess cash is invested.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment of excess cash in a mutual fund, which
invests in asset backed securities, bonds and various other commercial
obligations. The fund may, from time to time, use certain derivatives in its
investment strategy. The fund's portfolio managers make all investment
decisions and the Company has no control over such investment decisions or the
fund's use of derivatives.
Foreign Currency Risk
Changes in foreign exchange rates, and in particular a strengthening of the U.S.
dollar, may negatively affect the Company's consolidated sales and gross margins
as expressed in U.S. dollars. To date, the Company has not entered into any
foreign exchange contracts to hedge its exposure to foreign exchange rate
fluctuations. However, if its international operations grow, the Company may
enter into foreign exchange contracts to manage its foreign exchange risk.
20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 2, 2000, the Company filed suit in the U.S. District Court in Delaware
(civil case number 00-141) against Miltenyi Biotec GmbH of Germany and its
related U.S. companies, Miltenyi Biotec, Inc. and Amcell Corporation
(collectively "Miltenyi"). The suit charges Miltenyi with patent infringement
(U.S. Patents 4,714,680 and 4,965,204), breach of contract and deceptive trade
practices. Becton Dickinson and The Johns Hopkins University, both of which have
proprietary rights associated with the Company's technology, have joined with
the Company in the suit. The Company is seeking damages and injunctive relief.
Miltenyi Biotec GmbH of Germany and Miltenyi Biotec, Inc. are contesting whether
jurisdiction over them is proper in the Delaware court. In the fall of 2000,
AmCell Corporation moved for partial summary judgment of non-infringement of the
patents, on the ground that AmCell's current activities are exempt from
liability for infringement under the clinical trial "safe harbor" provision
provided by 35 U.S.C. (S) 271(e)(1). The Company opposed this motion and itself
moved for partial summary judgment of infringement of the patents. In an opinion
dated April 23, 2001 concerning these motions, the court declined to resolve the
question of whether AmCell's activities are exempt from infringement under the
safe harbor provision, choosing instead to defer such resolution to the United
States Food and Drug Administration ("FDA"). The court further indicated,
however, that the Company could revisit these issues with the court depending on
the FDA's response to its consideration of these issues. Therefore, while
recognizing the Company's right to renew its claim for relief depending on the
FDA's actions, the court granted AmCell's motion for summary judgment and denied
the Company's motion for summary judgment. Following the entry of an order
pursuant to the grant and denial of these cross-motions, the Company moved to
amend the order to clarify certain matters raised therein. The company's motion
remains pending at this time. Also, following entry of the court's order,
inquiry was made at the FDA concerning the court's invitation to the FDA to
resolve the question of whether particular activities of defendants are exempt
from infringement under the relevant patent laws. Thereafter, the Company
received notification from the FDA that the FDA declines to address the issues
raised in the court's order. It is unclear at this time how the court will
respond to this notification from the FDA. Pursuant to the consummation of the
asset purchase agreement with Baxter, the Company granted Baxter the exclusive
right to maintain this lawsuit.
Item 2. Changes in Securities and Use of Proceeds.
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.
Not applicable.
21
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
2.4 Asset Purchase Agreement dated October 10, 1997 by and among
Baxter Healthcare Corporation ("Baxter"), the Company and
NCI(1)
2.5 Asset Acquisition Agreement dated February 18, 1999, by and
among Baxter, the Company and NCI (1)
2.6 Securities Agreement dated as of November 24, 1999 among the
Company and the Purchasers named in Schedule I thereto (certain
schedules are omitted and the Company agrees to furnish
supplementally a copy to the Commission upon request) (1)
2.7 Asset Purchase Agreement dated as of August 3, 2001 among the
Company, Nexell California and Baxter (schedules are omitted from
this agreement and Exhibits 10.89 through 10.96 filed herewith,
and the Company agrees to furnish supplementally a copy of any
schedule to the Commission upon request) (2)
3.1 The Company's Amended and Restated Certificate of Incorporation
as amended to date (1)
3.2 The Company's Amended and Restated By-Laws as amended to date (1)
4.4 Warrant Agreement dated June 17, 1996 between the Company and
American Stock Transfer & Trust Company (1)
4.5 The Certificate of Amendment of the Certificate of Incorporation
of the Company filed with the Delaware Secretary of State on
December 16, 1997 creating the Series A Preferred Stock and
amendments subsequent thereto (included in Exhibit 3.1 above)
4.6 The Certificate of Amendment of the Certificate of Incorporation
of the Company filed with the Delaware Secretary of State on
May 25, 1999 modifying the Series A Preferred Stock (included
in Exhibit 3.1 above)
4.7 The Company's Series 1 6 1/2% Convertible Subordinated Debenture
Due November 30, 2004 issued May 28, 1999 to Baxter (1)
4.8 The Company's Series 2 6 1/2% Convertible Subordinated Debenture
Due November 30, 2004 issued May 28, 1999 to Baxter (1)
4.9 The Company's Certificate of Designation filed with the Delaware
Secretary of State on November 24, 1999 creating the Series B
Preferred Stock (included in Exhibit 3.1 above)
10.89 Distribution and License Agreement dated August 31, 2001 between
Baxter and Nexell California. (2)
10.90 Sublicense Agreement of the First BD Sublicense dated August 31,
2001 between Baxter and Nexell California (2)
10.91 Sublicense Agreement of the Second BD Sublicense dated August
31, 2001 between Baxter and Nexell California (2)
10.92 Sublicense Agreement of the Dorken Sublicense dated August 31,
2001 between Baxter and Nexell California (2)
22
10.93 Sublicense Agreement of the Public Health Service Biological
Materials License dated August 31, 2001 between Baxter and
Nexell California (2)
10.94 Sublicense Agreement of the Diaclone Monoclonal Antibody License
dated August 31, 2001 between Baxter and Nexell California (2)
10.95 Employee Lease Agreement dated August 31, 2001 among Baxter, the
Company and Nexell California (2)
10.96 Supply Agreement dated August 31, 2001 between Baxter and Nexell
California (2)
(1) Filed as the same numbered Exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 and incorporated
herein by reference thereto
(2) Filed as the same numbered Exhibit to the Company's Current Report on
Form 8-K filed on September 17, 2001 and incorporated herein by
reference thereto
(b) Reports on Form 8-K:
-------------------
The Company filed a Current Report on Form 8-K on August 9, 2001, under Item 5,
announcing a definitive agreement with Baxter.
The Company filed a Current Report on Form 8-K on September 17, 2001, under
Items 2 and 7, announcing consummation of the asset transaction with Baxter.
23
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.
Dated: November 14, 2001
NEXELL THERAPEUTICS INC.
a Delaware Corporation
(Registrant)
By: /s/ William A. Albright, Jr.
------------------------------------------------------
William A. Albright, Jr.
Chief Executive Officer and Chief Financial Officer
(principal financial officer and authorized to sign on
behalf of the Registrant)
24
INDEX TO EXHIBITS
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
2.4 Asset Purchase Agreement dated October 10, 1997 by and among Baxter Healthcare Corporation ("Baxter"),
the Company and NCI(1)
2.5 Asset Acquisition Agreement dated February 18, 1999, by and among Baxter, the Company and NCI (1)
2.6 Securities Agreement dated as of November 24, 1999 among the Company and the Purchasers named in
Schedule I thereto (certain schedules are omitted and the Company agrees to furnish supplementally a
copy to the Commission upon request) (1)
2.7 Asset Purchase Agreement dated as of August 3, 2001 among the Company, Nexell California and Baxter
(schedules are omitted from this agreement and Exhibits 10.89 through 10.96 filed herewith, and the
Company agrees to furnish supplementally a copy of any schedule to the Commission upon request) (2)
3.1 The Company's Amended and Restated Certificate of Incorporation as amended to date (1)
3.2 The Company's Amended and Restated By-Laws as amended to date (1)
4.4 Warrant Agreement dated June 17, 1996 between the Company and American Stock Transfer & Trust
Company (1)
4.5 The Certificate of Amendment of the Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on December 16, 1997 creating the Series A Preferred Stock and amendments
subsequent thereto (included in Exhibit 3.1 above)
4.6 The Certificate of Amendment of the Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on May 25, 1999 modifying the Series A Preferred Stock (included in
Exhibit 3.1 above)
4.7 The Company's Series 1 6 1/2% Convertible Subordinated Debenture Due November 30, 2004 issued May 28,
1999 to Baxter (1)
4.8 The Company's Series 2 6 1/2% Convertible Subordinated Debenture Due November 30, 2004 issued May 28,
1999 to Baxter (1)
4.9 The Company's Certificate of Designation filed with the Delaware Secretary of State on November 24,
1999 creating the Series B Preferred Stock (included in Exhibit 3.1 above)
10.89 Distribution and License Agreement dated August 31, 2001 between Baxter and Nexell California. (2)
10.90 Sublicense Agreement of the First BD Sublicense dated August 31, 2001 between Baxter and Nexell
California (2)
10.91 Sublicense Agreement of the Second BD Sublicense dated August 31, 2001 between Baxter and Nexell
California (2)
10.92 Sublicense Agreement of the Dorken Sublicense dated August 31, 2001 between Baxter and Nexell
California (2)
10.93 Sublicense Agreement of the Public Health Service Biological Materials License dated August 31, 2001
between Baxter and Nexell California (2)
10.94 Sublicense Agreement of the Diaclone Monoclonal Antibody License dated August 31, 2001 between Baxter
and Nexell California (2)
10.95 Employee Lease Agreement dated August 31, 2001 among Baxter, the Company and Nexell California (2)
10.96 Supply Agreement dated August 31, 2001 between Baxter and Nexell California (2)
25
(1) Filed as the same numbered Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated herein by
reference thereto
(2) Filed as the same numbered Exhibit to the Company's Current Report on Form
8-K filed on September 17, 2001 and incorporated herein by reference
thereto
26