EXHIBIT 2
AETERNA LABORATORIES INC.
Consolidated Financial Statements
DECEMBER 31, 2002, 2001 2000
[LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
AETERNA LABORATORIES INC.
We have audited the consolidated balance sheets of AETERNA LABORATORIES INC. as
at December 31, 2002 and 2001 and the consolidated statements of operations,
deficit, contributed surplus and cash flows for each of the years in the
three-year period ended December 31, 2002. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Quebec, Quebec, Canada
January 31, 2003
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
(1)
AETERNA LABORATORIES INC.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(expressed in thousands of Canadian dollars)
DECEMBER 31,
-----------------------
2002 2001
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 12,494 11,993
Short-term investments 69,040 42,071
Accounts receivable (notes 5 and 6) 74,840 24,657
Income taxes recoverable -- 155
Inventory (notes 5 and 7) 16,335 8,304
Prepaid expenses and deferred charges 2,041 1,161
Future income tax assets 1,682 --
-----------------------
176,437 88,341
PROPERTY, PLANT AND EQUIPMENT (notes 8 and 15) 21,688 15,404
DEFERRED CHARGES 1,047 --
INTANGIBLE ASSETS (notes 9 and 15) 90,300 2,065
GOODWILL (note 3) 24,252 22,188
FUTURE INCOME TAX ASSETS (note 16) 17,249 6,354
-----------------------
330,968 134,352
-----------------------
-----------------------
LIABILITIES
CURRENT LIABILITIES
Promissory note (note 5) 43,000 --
Accounts payable and accrued liabilities (note 10) 42,557 23,430
Income taxes 3,783 --
Balance of purchase price (note 4) 39,690 --
Current portion of long-term debt 3,202 3,447
-----------------------
132,232 26,877
DEFERRED REVENUES 12,438 --
LONG-TERM DEBT (note 11) 9,969 10,401
EMPLOYEE FUTURE BENEFITS (note 13) 6,042 116
FUTURE INCOME TAX LIABILITIES (note 16) 35,275 --
NON-CONTROLLING INTEREST 24,676 18,339
-----------------------
220,632 55,733
-----------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 14) 153,578 97,513
CONTRIBUTED SURPLUS 854 --
DEFICIT (44,864) (19,082)
CUMULATIVE TRANSLATION ADJUSTMENT 768 188
-----------------------
110,336 78,619
-----------------------
330,968 134,352
-----------------------
-----------------------
The accompanying notes are an integral part of these consolidated financial
statements.
APPROVED BY THE BOARD OF DIRECTORS
/s/ Eric Dupont /s/ Pierre MacDonald
_________________________ _________________________
Eric Dupont, PhD Pierre MacDonald, MSc
Director Director
(2)
AETERNA LABORATORIES INC.
Consolidated Statements of Deficit
- --------------------------------------------------------------------------------
(expressed in thousands of Canadian dollars)
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
$ $ $
BALANCE - BEGINNING OF YEAR 19,082 15,613 5,955
Net loss for the year 25,782 3,469 9,658
------------------------
BALANCE - END OF YEAR 44,864 19,082 15,613
------------------------
------------------------
Consolidated Statements of Contributed Surplus
- --------------------------------------------------------------------------------
(expressed in thousands of Canadian dollars)
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
$ $ $
BALANCE - BEGINNING OF YEAR - - -
Issuance of warrants 747 - -
Stock-based compensation costs 107 - -
------------------------
BALANCE - END OF YEAR 854 - -
------------------------
------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
(3)
AETERNA LABORATORIES INC.
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(expressed in thousands of Canadian dollars, except share and per share data)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
$ $ $
REVENUES 101,204 43,777 8,405
----------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 77,443 29,950 1,123
General, selling and administrative 17,777 13,039 8,506
Research and development costs 26,062 22,681 16,707
Research and development tax credits and grants (note 15) (1,933) (5,989) (6,717)
Depreciation and amortization
Property, plant and equipment 1,992 1,353 1,231
Intangible assets 429 330 201
Goodwill - 167 22
----------------------------------------------------------------
121,770 61,531 21,073
----------------------------------------------------------------
OPERATING LOSS (20,566) (17,754) (12,668)
----------------------------------------------------------------
INTEREST INCOME 2,903 3,763 3,615
----------------------------------------------------------------
INTEREST EXPENSE
On redeemable common shares of the subsidiary - (437) (605)
On long-term debt (485) (274) -
Other (42) (142) -
----------------------------------------------------------------
(527) (853) (605)
----------------------------------------------------------------
LOSS BEFORE INCOME TAXES (18,190) (14,844) (9,658)
INCOME TAX RECOVERY (EXPENSE) (note 16) (4,425) 4,752 -
----------------------------------------------------------------
LOSS BEFORE THE FOLLOWING ITEMS (22,615) (10,092) (9,658)
GAIN ON DILUTION (notes 4d and 12) 424 10,223 -
NON-CONTROLLING INTEREST (3,591) (3,600) -
----------------------------------------------------------------
NET LOSS FOR THE YEAR (25,782) (3,469) (9,658)
----------------------------------------------------------------
----------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE (note 2) (0.67) (0.11) (0.33)
----------------------------------------------------------------
----------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 38,584,537 30,968,710 29,502,301
----------------------------------------------------------------
----------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
(4)
AETERNA LABORATORIES INC.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(expressed in thousands of Canadian dollars)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year (25,782) (3,469) (9,658)
Items not affecting cash and cash equivalents
Depreciation and amortization 2,421 1,850 1,454
Stock-based compensation costs 53 - -
Future income taxes 1,860 (5,674) (650)
Interest expense - 437 605
Gain on dilution (424) (10,223) -
Non-controlling interest 3,591 3,600 -
Employee future benefits 18 - -
Change in non-cash operating working capital items
Accounts receivable (6,048) (879) (1,353)
Inventory (960) (904) (433)
Prepaid expenses and deferred charges (212) (497) (314)
Accounts payable and accrued liabilities 2,603 431 3,536
Income taxes 983 (478) 650
-------------------------------------------------------------
(21,897) (15,806) (6,163)
-------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Promissory note 43,000 - -
Increase in long-term debt - - 95
Repayment of long-term debt (2,608) (2,620) (63)
Issuance of warrants 747 - -
Issuance of shares 57,442 19,459 21,527
Share issue expenses (1,324) (1,954) (1,872)
Issuance of shares by a subsidiary 2,000 - -
Redeemable common shares of a subsidiary (note 12) - - 20,000
Deferred interest expense paid in cash - - (334)
-------------------------------------------------------------
99,257 14,885 39,353
-------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in short-term investments (26,907) 19,317 (28,732)
Business acquisition, net of cash acquired (note 4) (43,474) (13,475) (2,055)
Acquisition of product line (435) - -
Purchase of property, plant and equipment (5,146) (610) (994)
Additions to intangible assets (1,423) (344) (174)
-------------------------------------------------------------
(77,385) 4,888 (31,955)
-------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (25) 3,967 1,235
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 526 766 -
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 11,993 7,260 6,025
-------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR 12,494 11,993 7,260
-------------------------------------------------------------
-------------------------------------------------------------
ADDITIONAL INFORMATION
Interest paid 466 478 -
Income taxes paid 1,776 1,462 -
The accompanying notes are an integral part of these consolidated financial
statements.
(5)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
1 INCORPORATION AND NATURE OF ACTIVITIES
The company, incorporated under the Canada Business Corporations Act, is
organized under three operating segments. The biopharmaceutical segment
focuses on the development of novel therapeutic approaches for diseases
characterized by unmet medical needs. The cosmetics and nutrition segment
focuses on the development, manufacturing and marketing of cosmetic,
nutritional and nutraceutical products. The distribution segment
specializes in the sale of high-end value-added products and active
ingredients distribution in the sectors of cosmetics, nutrition,
pharmaceuticals and fine chemicals. The company's customers are primarily
located in Canada, the United States, Europe and Asia.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles. These principles conform, in all
material respects, with accounting principles generally accepted in the
United States, except as described in note 20. The significant accounting
policies, which have been consistently applied, are summarized as follows:
BASIS OF CONSOLIDATION
The consolidated financial statements of AEterna Laboratories Inc. include
the accounts of the company and all of its subsidiaries, accounted for
using the full consolidation method. Intercompany transactions and related
balances have been eliminated. The subsidiaries and the company's
percentage of interest are as follows:
PERCENTAGE OF INTEREST
-------------------------------
2002 2001
SUBSIDIARIES % %
AEterna GmbH 100.00 -
Zentaris AG 100.00 -
Atrium Biotechnologies inc. ("Atrium") 61.76 63.64
Atrium Biotech USA 100.00 100.00
Unipex Finance S.A. 70.28 70.20
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets and
liabilities reported in the financial statements. Those estimates and
assumptions also affect the disclosure of contingencies at the date of the
financial statements and the reported amounts of revenues and expenses
during the years. Significant estimates include the allowance for doubtful
accounts, provisions for obsolete inventory, future income tax assets, the
useful lives of property, plant and equipment, the valuation of intangible
assets and goodwill and certain accrued liabilities. Actual results could
differ from those estimates.
(6)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
FOREIGN CURRENCY TRANSLATION
Atrium Biotech USA inc., a subsidiary of Atrium, AEterna GmbH and Zentaris
AG, German subsidiaries of AEterna Laboratories Inc. are considered to be
integrated foreign operations. As a result, the foreign subsidiaries
accounts are translated into Canadian dollars using the temporal method.
Under this method, monetary assets and liabilities are translated at the
exchange rates in effect at the balance sheet date. Non-monetary assets
and liabilities are translated at historical rates. Revenues and expenses
are translated at the average rate for the year. Gains and losses
resulting from translation are reflected in the statement of operations.
Unipex Finance S.A., a French subsidiary of Atrium, is considered to be a
self-sustaining foreign operation. As a result, the foreign subsidiary's
financial statements, whose functional currency is other than the Canadian
dollar, are translated into Canadian dollars using the current rate
method. Under this method, assets and liabilities are translated at the
exchange rates in effect at the balance sheet date and revenues and
expenses are translated at the average rate for the year. Gains and losses
resulting from translation are deferred in the "Cumulative translation
adjustment" account under "Shareholders' Equity".
Foreign currency transactions
Transactions denominated in foreign currencies are translated into
Canadian dollars as follows:
Monetary assets and liabilities are translated at the exchange rate in
effect at the balance sheet date and revenues and expenses are translated
at the average rate for the year. Non-monetary assets and liabilities are
translated at historical rates. Gains and losses arising from such
translation are reflected in the statements of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and balances with banks,
exclusive of bank advances, as well as all highly liquid short-term
investments. The company considers all highly liquid short-term
investments having a term of less than three months at the acquisition
date to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, which are valued at the lower of amortized cost
and market value, are mainly composed of bonds which do not meet the
company's definition of highly liquid short-term investments.
INVENTORY
Inventory is valued at the lower of cost and market value. Cost is
determined using the first in, first out basis. Cost of finished goods
includes raw materials, labour and manufacturing overhead under the
absorption costing method. Market value is defined as replacement cost for
raw materials and as net realizable value for finished goods.
(7)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are recorded at cost, net of related
government grants and accumulated depreciation. Depreciation is calculated
using the following methods and annual rates:
METHODS ANNUAL RATES
%
Building Straight-line 5
Equipment Declining balance 20
Office furniture Declining balance 20
Computer equipment Straight-line 33 1/3
Automotive equipment Straight-line 20
The carrying value of property, plant and equipment is evaluated whenever
significant events occur which may indicate a permanent impairment in
value, based upon a comparison of the carrying value to the net
recoverable amount.
DEFERRED CHARGES
Deferred charges relate to deferred upfront payments made by a subsidiary
in connection with research and development collaborations. These charges
are included in the statement of operations over the period of the
contracts.
INTANGIBLE ASSETS
Intangible assets consist of patents, trademarks, licenses, distribution
agreements and organization costs. Patents and trademarks represent costs,
including professional fees, incurred for the filing of patents and the
registration of trademarks for product marketing and manufacturing
purposes, net of related government grants and accumulated amortization.
Intangible assets are amortized on a straight-line basis over their
estimated useful lives of three to fifteen years for patents, trademarks,
licenses and distribution agreements and five years for organization
costs.
Intangible assets with finite lives are reviewed for impairment when
events or circumstances indicate that costs may not be recoverable.
Impairment exists when the carrying value of the assets is greater than
the pre-tax undiscounted future cash flows expected to be provided by the
asset. The amount of impairment loss, if any, is the excess of the
carrying value over the estimated pre-tax undiscounted future cash flows.
Finite-lived intangible assets are written down for any permanent
impairment in value of the unamortized portion. As at December 31, 2002,
there were no events or circumstances indicating that the carrying value
may not be recoverable. The company does not have indefinite-lived
intangible assets.
GOODWILL
Goodwill represents the excess of the purchase price over the fair values
of the net assets of entities acquired at the respective dates of
acquisition. Goodwill is tested annually, or more frequently if impairment
indicators arise, for impairment in relation to the fair value of each
reporting unit to which goodwill applies and the value of other assets in
that reporting unit. An impairment charge is recorded for any goodwill
that is considered impaired.
(8)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
EMPLOYEE FUTURE BENEFITS
Some of the company's subsidiaries maintain defined benefit plans and one
defined contribution plan for their employees. These subsidiaries accrue
their obligations under employee benefit plans and the related costs. In
this regard, the following policies have been adopted:
- The cost of pension and other retirement benefits earned by employees
is actuarially determined using the projected unit credit and benefit
method prorated on service and management's best estimate of expected
plan investment performance, salary escalation, retirement ages of
employees and expected health care costs.
- The net actuarial gain (loss) of the benefit obligation is reported
in the statement of operations as it arises.
DEFERRED REVENUES
Deferred revenues relate to upfront payments received by a subsidiary in
connection with research cooperation agreements. These revenues are
included in the statement of operations over the period of the contracts.
REVENUE RECOGNITION
The biopharmaceutical segment is currently in a phase in which potential
products are being further developed or marketed jointly with strategic
partners. The existing cooperation and royalty agreements usually foresee
one-time payments (upfront payments), payments for research and
development services in the form of cost reimbursements, milestone
payments and royalty receipts for licensing and marketing product
candidates.
Payments received at the beginning of research cooperation agreements
(upfront payments) are not recorded as revenue when received but are
amortized based on the progress of the research and development work
concerned.
Milestone payments are recognized when appropriate development results are
achieved and agreed by the customer. Royalty receipts for marketing
products are only to be paid by cooperation and royalty partners when
product revenues are achieved and are accordingly first recorded as
revenues by the company at such time.
Revenues from sales of products are recognized, net of estimated sales
allowances and rebates, when title passes to customers, which is at the
time goods are shipped.
INCOME TAXES
The company follows the asset and liability method of accounting for
income taxes. Under this method, future income tax assets and liabilities
are determined according to differences between the carrying amounts and
tax bases of the assets and liabilities. Changes in the net future income
tax assets or liabilities are included in the statement of operations.
Future income tax assets and liabilities are measured using substantively
enacted tax rates and laws expected to apply in the years in which assets
and liabilities are expected to be recovered or settled.
The company establishes a valuation allowance against future income tax
assets if, based on available information, it is not more likely than not
that some or all of the future income tax assets will be realized.
(9)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
RESEARCH AND DEVELOPMENT TAX CREDITS AND GRANTS
The company is entitled to scientific research and experimental
development ("SR&ED") tax credits granted by the Canadian federal
government ("Federal") and the government of the Province of Quebec
("Provincial"). Federal SR&ED tax credits are earned on qualified Canadian
SR&ED expenditures at a rate of 20% and can only be used to offset Federal
income taxes otherwise payable. Refundable provincial SR&ED tax credits
are generally earned on qualified SR&ED salaries, subcontracting and
university contract expenses incurred in the Province of Quebec, at a rate
of 20%.
SR&ED tax credits and grants are accounted for using the cost reduction
method. Accordingly, tax credits and grants are recorded as a reduction of
the related expenses or capital expenditures in the period the expenses
are incurred. The refundable portion of SR&ED tax credits is recorded in
the year in which the related expenses or capital expenditures are
incurred and the non-refundable portion of SR&ED tax credits and grants is
recorded at such time, provided the company has reasonable assurance the
credits or grants will be realized.
RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed as incurred. Development costs are expensed as
incurred except for those which meet generally accepted criteria for
deferral, which are capitalized and amortized against operations over the
estimated period of benefit. As at December 31, 2002, no costs have been
deferred.
LOSS PER SHARE
In order to calculate the loss per share, subordinate and multiple voting
shares are considered as common shares.
The basic net loss per share is calculated using the weighted average
number of common shares outstanding during the year.
The diluted net loss per share is calculated based on the weighted average
number of common shares outstanding during the year, plus the effects of
dilutive common share equivalents such as options and warrants. This
method requires that the diluted net loss per share be calculated using
the treasury stock method, as if all common share equivalents had been
exercised at the beginning of the reporting period, or period of issuance,
as the case may be, and that the funds obtained thereby were used to
purchase common shares of the company at the average trading price of the
common shares during the period. Stock options to purchase common shares
as disclosed in note 14e) were not included in the computation of net loss
per share because the inclusion of these options would be anti-dilutive.
STOCK-BASED COMPENSATION PLANS
The company and one of its subsidiaries maintain stock compensation plans,
which are described in note 14. No compensation expense is recognized for
these plans when stock options are granted to employees and directors,
unless granted for consulting services. Any consideration paid by
employees and directors on exercise of stock options is credited to share
capital. The options granted to collaborators are accounted for using the
fair value method. The company has chosen not to use the fair value method
to account for stock-based compensation costs arising from awards to
employees but discloses the pro-forma information relating to net loss and
loss per share as if the fair value method of accounting had been used.
(10)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
3 CHANGES IN ACCOUNTING POLICIES
BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILL
In 2001, the Canadian Institute of Chartered Accountants ("CICA") approved
new standards modifying the method of accounting for business combinations
entered into after June 30, 2001, and addressed the accounting for
goodwill and other intangible assets. The new standards on goodwill and
other intangible assets should be applied for fiscal years beginning on or
after January 1, 2002. The company has adopted these standards since
January 1, 2002 and it no longer amortizes goodwill. However, management
evaluates goodwill for impairment annually. Finite-lived intangible assets
will continue to be amortized over their estimated useful lives. As
required by the standards, the company completed the impairment tests and
did not record any impairments. These standards are essentially the same
as the new Statements of Financial Accounting Standards ("SFAS") No. 141
and 142 in the United States.
The net carrying value of goodwill is composed as follows:
DECEMBER 31,
-------------------------------
2002 2001
$ $
Balance - Beginning of year 22,188 1,294
Acquisitions 1,431 20,799
Amortization - (167)
Effect of foreign exchange rate 633 262
-------------------------------
Balance - End of year 24,252 22,188
-------------------------------
-------------------------------
The following table reflects the adjusted results as though the adoption
of the New Standards had occurred at the beginning of fiscal 2001 and
2000:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
$ $ $
Reported net loss (25,782) (3,469) (9,658)
Goodwill amortization - 167 22
---------------------------------------------
Adjusted net loss (25,782) (3,302) (9,636)
---------------------------------------------
---------------------------------------------
Basic and diluted net loss per share
As reported (0.67) (0.11) (0.33)
Goodwill amortization - - -
---------------------------------------------
Adjusted net loss (0.67) (0.11) (0.33)
---------------------------------------------
---------------------------------------------
(11)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
STOCK-BASED COMPENSATION PLANS
On January 1, 2002, the company adopted the recommendations of CICA
Handbook Section 3870 STOCK-BASED COMPENSATION AND OTHER STOCK-BASED
PAYMENTS. This Section establishes standards for the recognition,
measurement and disclosure of stock-based compensation made in exchange
for goods and services and requires the use of the fair value method to
account for awards to non-employees and direct awards of stock to
employees and encourages, but does not require the use of the fair value
method to account for stock-based compensation costs arising from awards
to employees. The company has chosen not to use the fair value method to
account for its stock-based compensation costs. However, in accordance
with Section 3870, it has presented pro-forma disclosures relating to net
loss and loss per share figures as if the fair value method of accounting
had been used.
FOREIGN CURRENCY TRANSLATION
On January 1, 2002, the company adopted the recommendations of CICA
Handbook Section 1650 FOREIGN CURRENCY TRANSLATION. The revised standard
no longer permits the deferral and amortization of unrealized gains and
losses that arise on the translation of long-term foreign currency
denominated monetary assets and liabilities. Under the new rules, such
gains and losses must be reported in the statement of operations as they
arise. The adoption of that standard did not have any effect on the
financial statements of the company.
4 BUSINESS ACQUISITIONS
ACQUISITIONS IN 2002
a) Zentaris AG
On December 30, 2002, AEterna GmbH, a new subsidiary of AEterna
Laboratories Inc., acquired 100% of the issued and outstanding shares
of Zentaris AG for a total consideration of $85,449,771
(euro 51,832,385). Zentaris AG is an integrated biopharmaceutical and
biotechnological company which develops and produces innovative
products and technologies for patient-friendly therapies in oncology
and endocrinology. The net assets acquired and the purchase price may
be subject to adjustments subsequent to the review of the audited
financial statements of Zentaris AG as at December 31, 2002. The
purchase price allocation shown below is preliminary and is based on
the company's estimates of fair value. The final allocation is
expected to be completed within the next six months and may result in
the purchase price being allocated from identified intangible assets,
among others, to goodwill. As described in note 2, goodwill that may
result from this acquisition will not be amortized. The results of
operations will be consolidated from December 30, 2002.
The balance of purchase price, bearing interest at the EURIBOR rate
for a three-month term deposit plus 1%, will be due and payable on
the earlier of September 30, 2003 or the merger date of AEterna GmbH
and Zentaris AG. Then, the receivable from a former affiliated
company of Zentaris AG described in note 6 will be cashed on the same
day.
(12)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
b) ADF Chimie S.A.
On May 1, 2002, Unipex Finance S.A., a French subsidiary of Atrium,
acquired 100% of the issued and outstanding common shares of ADF
Chimie S.A. for a total consideration of $2,315,471 of which an
amount of $1,877,284 was paid cash and $438,187 as a balance of
purchase price. The acquisition is subject to contingent payments
specified in the agreement for an approximate amount of $807,827
(euro 487,700) payable at the latest in July 2005. These contingent
payments will be recorded as goodwill when the related conditions
have been met. ADF Chimie S.A. is a distributor of active and
specialty ingredients for the cosmetics industry. The results of
operations of this acquisition have been included in the consolidated
statement of operations since May 1, 2002, being the date of
acquisition.
The net assets acquired at the allocated values are as follows:
ZENTARIS ADF CHIMIE
AG S.A.
$ $
Assets
Cash and cash equivalents 3,646 548
Other current assets 48,638 1,332
Property, plant and equipment 2,934 7
Intangible assets 86,890 -
Goodwill - 1,093
Future income tax assets 12,719 -
------------------------
154,827 2,980
------------------------
Liabilities
Current liabilities 15,778 665
Deferred revenues 12,438 -
Employee future benefits 5,886 -
Future income tax liabilities 35,275 -
------------------------
69,377 665
------------------------
Net assets acquired 85,450 2,315
------------------------
------------------------
Consideration
Cash 45,760 1,877
Balance of purchase price 39,690 438
------------------------
85,450 2,315
------------------------
------------------------
Net cash used for the acquisition 42,114 1,329
------------------------
------------------------
Goodwill is non-deductible for income tax purposes
(13)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
c) Other acquisitions
On April 15, 2002, Atrium Biotech USA Inc., a subsidiary of Atrium,
acquired a product line for a total cash consideration of $435,394.
The acquisition is subject to contingent payments specified in the
agreement for a maximum amount of $300,000 of which $100,000 have
been paid and recorded as goodwill. The balance of $200,000 may be
payable at the latest in October 2003 if the related conditions have
been met; it will be then recorded as goodwill. The results of
operations of this acquisition have been included in the statement of
operations since April 15, 2002, being the date of acquisition. Based
upon the allocation of the purchase price, the transaction resulted
in $212,134 of goodwill and $223,260 of inventory. The goodwill
acquired is deductible for income tax purposes.
On September 8, 2002, Atrium acquired 300 common shares of the
outstanding capital stock of Unipex Finance S.A., increasing its
interest in the latter to 70.28% (70.2% in 2001) for a cash
consideration of $31,171. The excess of the purchase price over the
net carrying value on the date of acquisition is $26,221 and is
recorded as goodwill not deductible for income tax purposes.
d) Gain on dilution
On September 13, 2002, as a result of the issuance of 166,667 shares
by Atrium, a gain on dilution amounting to $424,751 was recognized.
ACQUISITION IN 2001
On July 2, 2001, the subsidiary, Atrium, acquired 70.2% of the issued and
outstanding common shares of Unipex Finance S.A. for total cash
consideration of $21,000,390. Unipex Finance S.A. specializes in providing
value-added services of importation, in supporting innovation, and in
distributing raw materials and high-end brand-name additives for
multinational corporations. Under the shareholders' agreement, the
minority shareholders of Unipex Finance S.A. will have the right to
exchange their shares for shares of Atrium in the event of its listing on
the stock exchange.
The acquisition has been accounted for using the purchase method, and the
results of operations have been consolidated from the date of acquisition.
The net assets acquired at the allocated values are as follows:
$
Assets
Cash and cash equivalents 7,526
Other current assets 20,690
Property, plant and equipment 1,103
Identifiable intangible assets 304
----------
29,623
----------
Liabilities
Current liabilities 15,337
Long-term debt 10,475
----------
25,812
----------
Net identifiable assets 3,811
----------
----------
Net identifiable assets acquired - 70.2% 2,675
Goodwill 18,325
----------
Purchase price paid cash 21,000
----------
----------
(14)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
An amount of $8,300,000 out of the total amount of goodwill is deductible
for income tax purposes over the following years.
ACQUISITION IN 2000
On October 3, 2000, the subsidiary, Atrium, acquired a product line in the
nutritional supplements market from a third party for total consideration
of US$2,113,427 (CAN$3,184,935). Of this amount, US$1,363,427
(CAN$2,054,685) was paid in cash and the balance of the purchase price of
US$750,000 (CAN$1,130,250) was paid during 2001 and 2002. This
acquisition, which has been accounted for using the purchase method,
resulted in goodwill amounting to US$873,225 (CAN$1,315,950) based on the
following allocation of the purchase price to the net identifiable assets
acquired:
$
Net identifiable assets acquired 1,869
Goodwill 1,316
----------
Purchase price 3,185
----------
----------
Consideration
Cash 2,055
Balance of purchase price, non-interest bearing 1,130
----------
Cash paid 3,185
----------
----------
The operations of the product line acquired have been consolidated from
the date of acquisition.
The total amount of goodwill is deductible for income tax purposes.
5 CREDIT FACILITY AND PROMISSORY NOTE
A subsidiary has an available line of credit, bearing interest at prime
rate and renewable annually. A moveable hypothec without delivery on
accounts receivable and inventory amounting to $5,712,418 has been pledged
as security for the line of credit of an authorized amount of $5,000,000.
As at December 31, 2002 and 2001, the line of credit was unused.
The promissory note bearing interest at prime rate plus 1% was due on
demand. A moveable hypothec on the universality of the company's accounts
receivable, cash equivalents and short-term investments has been given as
security. The promissory note was repaid on January 15, 2003 through
short-term investments.
(15)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
6 ACCOUNTS RECEIVABLE
DECEMBER 31,
-----------------------------------------
2002 2001
$ $
Receivable from a former affiliated company of Zentaris AG, bearing
interest at the EURIBOR rate for a three-month term deposit plus 1%
(note 4a) 37,576 -
Trade, net of an allowance for doubtful accounts of $247 ($230 in 2001) 30,980 19,632
Interest 754 510
Grants 2,939 2,406
Research and development tax credits recoverable 860 1,295
Commodity taxes 1,094 536
Other 637 278
-----------------------------------------
78,840 24,657
-----------------------------------------
-----------------------------------------
7 INVENTORY
DECEMBER 31,
-----------------------------------------
2002 2001
$ $
Raw materials 6,965 1,629
Finished goods 8,716 6,471
Finished goods intended for clinical trials 654 204
-----------------------------------------
16,335 8,304
-----------------------------------------
-----------------------------------------
(16)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
8 PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
---------------------------------------------------------------------------------------
2002 2001
----------------------------------------- -----------------------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
$ $ $ $
Land 459 - 401 -
Building 13,582 1,920 13,231 1,302
Equipment 10,367 2,341 3,374 1,587
Office furniture 1,147 579 1,057 444
Computer equipment 1,648 778 1,090 441
Automotive equipment 140 37 49 24
---------------------------------------------------------------------------------------
27,343 5,655 19,202 3,798
----------------- ------------------
----------------- ------------------
Less:
Accumulated depreciation 5,655 3,798
------------------- ------------------
21,688 15,404
------------------- ------------------
------------------- ------------------
9 INTANGIBLE ASSETS
DECEMBER 31,
---------------------------------------------------------------------------------------
2002 2001
----------------------------------------- -----------------------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
$ $ $ $
Patents and trademarks 90,201 1,040 2,567 765
Licences and distribution
agreements 1,206 112 172 31
Organization costs 190 145 163 41
---------------------------------------------------------------------------------------
91,597 1,297 2,902 837
----------------- ------------------
----------------- ------------------
Less:
Accumulated amortization 1,297 837
------------------- ------------------
90,300 2,065
------------------- ------------------
------------------- ------------------
Acquisitions of intangible assets amount to $88,313,522 ($648,646 in 2001
and $173,717 in 2000) including the estimated fair value of $86,890,193
allocated to intangible assets subsequent to the acquisition of Zentaris
AG (note 4).
(17)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
10 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31,
-----------------------------------------
-----------------------------------------
2002 2001
$ $
Trade payable 27,009 17,798
Accrued liabilities on research contracts 3,747 2,710
Advance payment related to a licensing agreement 1,016 -
Salaries and employee benefits 2,250 1,716
Deferred revenues 4,867 -
Other accrued liabilities 3,668 1,206
-----------------------------------------
42,557 23,430
-----------------------------------------
-----------------------------------------
11 LONG-TERM DEBT
DECEMBER 31,
-----------------------------------------
-----------------------------------------
2002 2001
$ $
Loan from the federal and provincial governments, non-interest bearing,
payable in five annual equal and consecutive instalments. The first
instalment is due on July 2004. The authorized amount is $4,000,000
and represents 25% of the eligible costs related to the building and
to the process equipment 4,000 4,000
Loans payable in euros and for which the shares of the subsidiary Unipex
S.A. have been given as collateral
Bearing interest at LIBOR rate plus 1%, payable in quarterly
instalments including principal and interest, maturing in October
2004 3,687 4,626
Bearing interest at EURIBOR rate plus 2.5%, interest payable annually,
maturing in October 2005 3,788 3,244
Loan from a shareholder of a subsidiary for which the shares of the
subsidiary Unipex S.A. have been given as collateral, bearing interest
at 4%, interest payable annually, maturing in December 2003 1,262 1,082
Balance of purchase price, non-interest bearing, payable in monthly
instalments of euro 6,098 (CAN$10,100), maturing in July 2006 434 -
Paid during the year - 896
-----------------------------------------
13,171 13,848
Less: Current portion 3,202 3,447
-----------------------------------------
9,969 10,401
-----------------------------------------
-----------------------------------------
The principal instalments due on long-term debt for the next five years
amount to $3,201,911 in 2003, $2,789,832 in 2004, $4,708,957 in 2005,
$870,703 in 2006 and $800,000 in 2007.
(18)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
12 REDEEMABLE COMMON SHARES OF A SUBSIDIARY
On January 21 and September 19, 2000, Atrium, a company's subsidiary,
issued two blocks of 1,000,000 common shares each, totalling 2,000,000
common shares for cash consideration of $20,000,000. Each of the common
shares had one subordinate voting right and a participating right. Under
the terms of the first block of common shares issued on January 21, 2000,
Atrium agreed to use the $10,000,000 in proceeds within a period of 24
months following the effective date of the agreement to acquire shares or
assets of businesses in a similar industry ("qualifying acquisition").
This qualifying acquisition was made on July 2, 2001 (see note 4).
After January 21, 2005, anyone of the investors will have the right to put
their shares back to Atrium, and Atrium is obligated to repurchase them at
a price based on the percentage of interest in Atrium at the date the put
option is exercised multiplied by consolidated net earnings during the
immediately preceding fiscal year multiplied by a factor of 13.54.
Furthermore, if AEterna Laboratories Inc. ("AEterna") accepts an offer
concerning the purchase of at least 90% of the Atrium's issued and
outstanding shares, each of the investors are obligated to sell their
shares to this third party. AEterna shall pay to the investors the
difference between the acquisition price of these shares and the value
thereof that would have provided a return equal to an annual compound
interest rate of 25% on their investment.
As at December 31, 2000 the redeemable common shares of Atrium are
recorded at their fair value of $24,609,547, calculated under the
redemption formula referred to above. The difference between the carrying
value of the redeemable common shares of $20,000,000 and the estimated
redemption value as at December 31, 2000 is being amortized to operations
over the current and remaining term until January 21, 2005. The
unamortized portion has been recorded as deferred interest expense and has
been included in intangible assets until the amendment of the
shareholders' agreement.
On May 17 and 22, 2001, the company's subsidiary, Atrium, and all its
shareholders amended, effective as of January 21, 2000, certain terms of
the shareholders' agreement such that Atrium is no longer obligated to
repurchase the common shares as described below.
Under the terms of the amended shareholders' agreement, as of January 21,
2005, the investors have the option of selling some or all of its
interests in Atrium back to Atrium and the company, at a defined
repurchase price set out in the amended agreement. However, Atrium and the
company are not obligated to repurchase these shares. In the event of an
offer from third parties for such shares, Atrium and the company have in
turn the right of first refusal to repurchase the shares. If they refuse
the offer to repurchase, the company is obligated to pay the investors an
amount equal to the difference between the price paid by the purchaser and
the defined repurchase price, plus a premium of 10% of the defined
repurchase price. Both amounts will be paid by the issuance of the
company's shares.
As a result of the amendments to the shareholders' agreement, the company
reclassified the common shares issued by Atrium to the minority
shareholders from a liability to equity. Accordingly, in the second
quarter of the fiscal year ended December 31, 2001, the company recognized
a gain on dilution and a minority interest in Atrium.
(19)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
13 EMPLOYEE FUTURE BENEFITS
Some of the company's subsidiaries offer various defined benefit plans
which guarantee the payment of pension and post-employment benefits to
most of their employees.
With the exception of those offered by Zentaris AG to its employees, the
employee future benefits maintained by one of the company's subsidiaries
are not significant and therefore the disclosures otherwise required have
not been provided. The disclosures required with regards to those of
Zentaris AG will be provided when available to the company and after the
purchase price allocation has been completed (see note 4a).
14 SHARE CAPITAL
a) Authorized
Unlimited number of shares of the following classes:
Common
Multiple voting shares, voting and participating, ten
votes per share, convertible into one subordinate
voting share at the option of the holder
Subordinate voting shares, voting and participating, one
vote per share
Preferred, first and second ranking, issuable in series, with
rights and privileges specific to each class. As at
December 31, 2002, there are no preferred shares issued
and outstanding
b) Issued
DECEMBER 31,
-----------------------------------------------------------------------------------
2002 2001 2000
--------------------------- --------------------------- ---------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
$ $ $
MULTIPLE VOTING SHARES
Balance - Beginning of year 4,852,723 1,911 4,852,723 1,911 6,533,987 2,573
Conversion of shares (125,623) (49) - - (1,681,264) (662)
-----------------------------------------------------------------------------------
Balance - End of year 4,727,100 1,862 4,852,723 1.911 4.852,723 1,911
-----------------------------------------------------------------------------------
SUBORDINATE VOTING SHARES
Balance - Beginning of year 27,978,321 95,602 25,219,151 78,097 21,342,796 57,780
Conversion of shares 125,623 49 - - 1,681,264 662
Issued pursuant to the
stock option plan 257,983 1,189 802,170 3,803 604,996 3,177
Issued pursuant to a
private placement 7,600,000 56,253 - - - -
Issued pursuant to public
offerings - - 1,957,000 15,656 1,590,095 18,350
Share issue expenses - (1,377) - (1,954) - (1,872)
-----------------------------------------------------------------------------------
Balance - End of year 35,961,927 151,716 29,978,321 95,602 25,219,151 78,097
-----------------------------------------------------------------------------------
TOTAL SHARE CAPITAL 40,689,027 153,578 32,831,044 97,513 30,071,874 80,008
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
(20)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
c) Common share issues
On April 9, 2002, pursuant to a private placement, the company issued
7,600,000 common shares at prices ranging from $7.40 to $7.45 per
share for gross proceeds of $56,253,333. Pursuant to the exercise of
stock options, the company issued 257,983 common shares at an average
price of $4.60 per share for proceeds of $1,188,722.
In 2001, pursuant to a public offering, the company issued 1,957,000
common shares at a price of $8.00 per share for gross proceeds of
$15,656,000. Pursuant to the exercise of stock options, the company
issued 802,170 common shares at an average price of $4.74 per share
for proceeds of $3,803,051.
On January 11, 2000, pursuant to the exercise of the over-allotment
granted to the underwriters following the 1999 public offering, the
company issued 375,000 common shares at a price of $6.00 per share
for gross proceeds of $2,250,000. Furthermore, in 2000, pursuant to a
bought deal, the company issued 1,215,095 common shares at a price of
$13.25 per share for gross proceeds of $16,100,009. Pursuant to the
exercise of stock options, the company issued 604,996 common shares
at an average price of $5.25 per share for proceeds of $3,176,925.
d) Pursuant to an agreement among the company, its transfer agent and
the holders of the multiple voting right shares, in the event of a
takeover bid, the holders of the multiple voting right shares have
agreed not to sell their shares unless the holders of the subordinate
voting right shares receive an offer with identical terms.
e) Company's stock option plan
In December 1995, the company's Board of Directors adopted a stock
option plan for its directors, senior executives, employees and other
collaborators providing services to the company. The number of shares
that are issuable under the plan shall not exceed 3,285,101. Options
granted under the plan expire after a maximum period of ten years
following the date of grant. Options granted under the plan generally
vest over a three-year period.
The following table summarizes the stock option activity under this
plan:
2002 2001 2000
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
NUMBER $ NUMBER $ NUMBER $
Balance - Beginning of
year 2,877,671 7.05 2,641,591 6.01 2,916,232 5.22
Granted 1,048,895 5.97 1,441,350 8.04 350,655 11.47
Exercised (257,983) 4.61 (802,170) 4.74 (604,996) 5.25
Expired (382,129) 6.19 (186,100) 9.35 - -
Forfeited (336,582) 7.35 (217,000) 7.56 (20,300) 8.49
-----------------------------------------------------------------------------------
Balance - End of year 2,949,872 6.96 2,877,671 7.05 2,641,591 6.01
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Options exercisable - End
of year 1,025,640 6.92 1,315,080 5.97 1,920,548 5.43
-----------------------------------------------------------------------------------
(21)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
The following table summarizes the stock options outstanding as at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS CURRENTLY EXERCISABLE
---------------------------------------------------- -------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICE NUMBER LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
$ $
$3.75 to $8.00 1,777,835 6.35 5.82 614,209 5.40
$8.01 to $10.00 1,057,038 6.31 8.39 327,433 8.62
$10.01 to $14.35 114,999 2.45 11.27 83,998 11.40
-------------------------------------------------------------------------------------------
2,949,872 6.18 6.96 1,025,640 6.92
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
In 2002, the company granted to certain collaborators 40,000 options
with a fair value of $107,032 which have been recorded as contributed
surplus.
Had compensation costs been determined using the fair value method at
the date of grant for awards granted since January 1, 2002 under this
stock option plan, the company's pro-forma net loss, basic and
diluted loss per share for the year ended December 31, 2002 would
have been $26,039,101 and $0.67, respectively. These pro-forma
amounts include a compensation cost based on a weighted-average grant
date fair value of $2.29 per stock option for 1,019,000 stock options
(net of cancellation) granted during the year ended December 31,
2002, as calculated using the Black-Scholes option pricing model with
the following assumptions: a risk-free interest rate of 3.72%,
dividends of nil, an expected volatility of 57% and an expected life
of 2.7 years. As permitted by CICA Handbook Section 3870, the
pro-forma disclosure omits the effect of awards granted before
January 1, 2002.
f) Subsidiary's stock option plan
On November 1, 2000, the Board of Directors of the subsidiary,
Atrium, adopted a stock option plan for its directors and employees
providing services to Atrium. The exercise price of these options is
equivalent to their fair value established annually from a specific
formula and approved by the Board of Directors. The number of shares
that are issuable under the plan shall not exceed 650,000. With the
consent of the optionees, the company's stock option plan was
modified on May 29, 2002. The option according to which employees and
directors could receive, at their option, a cash amount equivalent to
the difference between the fair value of the shares on the date of
exercise and the exercise price determined on the date of grant was
cancelled. Options granted under the plan generally vest over a
five-year period, with 20% vesting on an annual basis starting on the
first anniversary of the date of grant, and they expire after a
maximum period of ten years following the date of grant.
The company's ownership percentage of the subsidiary will change as a
result of future exercises of stock options and outstanding
subsidiary stock options may dilute the company's share of profits in
the calculation of loss per share.
(22)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
The following table summarizes the stock option activity under this
plan:
2002 2001
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE EXERCISE PRICE
NUMBER $ NUMBER $
Balance - Beginning of year 545,500 10.78 347,500 10.00
Granted 60,000 12.29 230,000 11.84
Forfeited (27,000) 10.00 (32,000) 10.00
----------------------------------------------------------------------------
Balance - End of year 578,500 10.97 545,500 10.78
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable -
End of year 155,500 10.36 66,500 10.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the stock options outstanding as at
December 31, 2002:
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
CONTRACTUAL PRICE PRICE
EXERCISE PRICE NUMBER LIFE $ NUMBER $
$10.00 333,500 7.21 10.00 131,000 10.00
$12.29 245,000 8.95 12.29 24,500 12.29
--------------------------------------------------------------------------------
578,500 7.94 10.97 155,500 10.36
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
g) Warrants
Pursuant to the April 9, 2002 private placement, the company issued
7,466,666 warrants for common shares of the company at a price of
$0.10 per warrant for an amount of $746,667. Expiring March 31, 2003,
3,800,000 warrants may be exercised at a price of $13.00 per share
and 3,666,666 warrants, expiring initially December 31, 2003 may be
exercised at a price of $20.00 per share subject to certain
conditions.
15 GRANTS
Under the federal contribution program called Technology Partnerships
Canada ("TPC"), the company received a grant equivalent to 30% of the
eligible expenses incurred by the company in the development of AE-941 in
oncology, dermatology and ophthalmology to a maximum of $29,400,000. This
contribution will be repaid only upon the marketing of AE-941 derived
products for each indication according to the corresponding generated
income. Royalties will be paid upon the marketing of AE-941 derived
products based on a percentage of gross project revenues under the terms
and conditions stipulated in the agreements entered into between TPC and
the company.
(23)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
As at December 31, 2002, grants in the amount of $103,125 ($4,354,839 in
2001; $5,846,668 in 2000) have been recognized, of which an amount of
$103,125 ($4,261,965 in 2001; $5,466,577 in 2000) has been recorded as a
grant in the statement of operations, nil ($36,098 in 2001; $99,408 in
2000) as a decrease in property, plant and equipment and nil ($56,776 in
2001; $280,683 in 2000) as a decrease in intangible assets. If the company
has to repay this contribution, the payments will be accounted for as an
expense or in addition to property, plant and equipment or intangible
assets in the period the condition for repayment has arisen. As at
December 31, 2002, a reimbursement of grants, in the amount of $323,599
has been accounted for in addition to intangible assets.
During the period from January 1, 1999 to December 31, 2002, the company
recognized total grants of $14,873,653 of which an amount of $14,038,624
has been recorded as a grant in the statement of operations, $756,898 as a
decrease in property, plant and equipment and $78,131 as a decrease in
intangible assets.
16 INCOME TAXES
The reconciliation of the combined Canadian federal and Quebec provincial
income tax rate to the income tax expense (recovery) is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
Combined federal and provincial statutory
income tax rate 35.16% 37.16% 38.13%
----------------------------------------------------------------
----------------------------------------------------------------
Income tax recovery based on statutory income (6,396) (5,516) (3,670)
tax rate $ $ $
Manufacturing and processing tax credit 1,162 691 483
Non-deductible interest expense - 162 197
Change in valuation allowance 9,487 (124) 3,652
Variation in statutory income tax rate of
foreign subsidiaries (50) 126 -
Change in promulgated rate 357 - -
Additional tax deduction (108) (12) (529)
Other (27) (79) (133)
----------------------------------------------------------------
$ 4,425 $ (4,752) $ -
----------------------------------------------------------------
----------------------------------------------------------------
Income tax expense (recovery) is represented
by:
Current $ 2,565 $ 922 $ 650
Future 1,860 (5,674) (650)
----------------------------------------------------------------
$ 4,425 $ (4,752) $ -
----------------------------------------------------------------
----------------------------------------------------------------
(24)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
Significant components of future income tax assets and liabilities are as
follows:
DECEMBER 31,
----------------------------------------------------------------
----------------------------------------------------------------
2002 2001 2000
$ $ $
Future income tax assets
Current assets 1,682 30 -
Research and development costs 9,064 6,498 1,533
Share issue expenses 1,016 1,071 876
Operating losses carried forward 14,914 2,858 86
Intangible assets and goodwill 4,390 5,780 7,614
Employee future benefits 425 - -
Deferred revenues 6,749 - -
----------------------------------------------------------------
38,240 16,237 10,109
Valuation allowance (19,309) (9,308) (8,827)
----------------------------------------------------------------
18,931 6,929 1,282
----------------------------------------------------------------
Future income tax liabilities
Property, plant and equipment 347 575 632
Deferred charges 556 - -
Intangible assets 34,372 - -
----------------------------------------------------------------
32,275 575 632
----------------------------------------------------------------
Future income tax assets (liabilities), net (16,344) 6,354 650
----------------------------------------------------------------
----------------------------------------------------------------
As at December 31, 2002, the company has non-refundable research and
development tax credits of $8,105,000 which can be carried forward to
reduce Canadian federal income taxes payable and expire at the latest in
2012. No tax benefit has been accounted for in connection with those
credits.
The carryforwards and the tax credits claimed could be subjected to a
review and a possible adjustment by the Canadian federal and Quebec
provincial tax authorities.
Loss carryforwards will expire no later than December 31, 2022.
(25)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
17 SEGMENT INFORMATION
The company manages its business and evaluates performance based on three
operating segments, which are the biopharmaceutical segment, the cosmetics
and nutrition segment and the distribution segment. The accounting
principles used for these three segments are consistent with those used in
the preparation of these consolidated financial statements.
INFORMATION BY GEOGRAPHIC REGION
Revenues by geographic region are detailed as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
$ $ $
Canada 1,301 481 533
United States 4,671 3,894 3,126
Europe
England 1,620 1,322 1,390
France 83,915 30,810 48
Other 4,830 2,699 938
Asia 4,385 4,317 2,030
Other 482 254 340
----------------------------------------------------------------
101,204 43,777 8,405
----------------------------------------------------------------
----------------------------------------------------------------
Revenues have been allocated to geographic regions based on the country of
residence of the related customers.
Long-lived assets by geographic region are detailed as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
$ $ $
Canada 20,688 16,025 16,610
United States 1,543 1,234 1,328
France 24,141 22,398 -
Germany 89,823 - -
----------------------------------------------------------------
136,195 39,657 17,938
----------------------------------------------------------------
----------------------------------------------------------------
Long-lived assets consist of property, plant and equipment, intangible
assets and goodwill.
(26)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
THE PRINCIPAL FINANCIAL INFORMATION FOR EACH OF THESE SEGMENTS IS AS
FOLLOWS:
2002
------------------------------------------------------------------------------
COSMETICS
BIOPHAR- AND CONSOLIDATED
MACEUTICAL NUTRITION DISTRIBUTION ADJUSTMENTS TOTAL
$ $ $ $ $
REVENUES 315 13,386 87,859 (356) 101,204
------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales - 2,308 75,476 (341) 77,443
General, selling and administrative 7,536 4,327 5,914 - 17,777
Research and development costs 25,269 793 - - 26,062
Research and development tax
credits and grants (1,599) (334) - - (1,933)
Depreciation and amortization 1,999 114 308 - 2,421
------------------------------------------------------------------------------
33,205 7,208 81,698 (341) 121,770
------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (32,890) 6,178 6,161 (15) (20,566)
INTEREST INCOME 2,513 249 141 - 2,903
INTEREST EXPENSE - - (527) - (527)
------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (30,377) 6,427 5,775 (15) (18,190)
INCOME TAX RECOVERY (EXPENSE) - (2,435) (1,990) - (4,425)
------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE
FOLLOWING ITEMS (30,377) 3,992 3,785 (15) (22,615)
Gain on dilution 424 - - - 424
Non-controlling interest - (1,482) (2,109) - (3,591)
------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR (29,953) 2,510 1,676 (15) (25,782)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SEGMENT ASSETS 244,709 25,016 62,411 (1,168) 330,968
------------------------------------------------------------------------------
------------------------------------------------------------------------------
GOODWILL - 1,519 22,733 - 24,252
------------------------------------------------------------------------------
------------------------------------------------------------------------------
ACQUISITION OF LONG-LIVED ASSETS 95,488 1,421 1,363 - 98,272
------------------------------------------------------------------------------
------------------------------------------------------------------------------
One customer from the distribution segment represents more than 10% of the
company's revenues for which the sales represent 13% (12% in 2001 and nil
in 2000). In 2000, two customers from the cosmetics and nutrition segment
represented more than 10% of the company's revenues for sales representing
37% for one customer and 14% for the other one.
2001
-------------------------------------------------------------------------------
COSMETICS
BIOPHAR- AND CONSOLIDATED
MACEUTI NUTRITION DISTRIBUTION ADJUSTMENTS TOTAL
$ $ $ $ $
REVENUES - 11,367 32,629 (219) 43,777
--------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales - 1,913 28,172 (135) 29,950
General, selling and administrative 6,542 3,983 2,514 - 13,039
Research and development costs 22,063 618 - - 22,681
Research and development tax
credits and grants (5,774) (215) - - (5,989)
Depreciation and amortization 1,437 179 234 - 1,850
--------------------------------------------------------------------------------
24,268 6,478 30,920 (135) 61,531
--------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (24,268) 4,889 1,709 (84) (17,754)
INTEREST INCOME 2,463 940 360 - 3,763
INTEREST EXPENSE (437) - (416) - (853)
--------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (24,242) 5,829 1,653 (84) (14,844)
INCOME TAX RECOVERY (EXPENSE) - 5,468 (716) - 4,752
--------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE
FOLLOWING ITEMS (22,242) 11,297 937 (84) (10,092)
Gain on dilution 10,223 - - - 10,223
Non-controlling interest - (3,186) (414) - (3,600)
--------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR (12,019) 8,111 523 (84) (3,469)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SEGMENT ASSETS 64,097 18,729 51,902 (376) 134,352
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
GOODWILL - 1,206 20,982 - 22,188
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ACQUISITION OF LONG-LIVED ASSETS 753 183 19,594 - 20,530
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<Page>
2000
------------------------------------------------
COSMETICS
BIOPHAR- AND
MACEUTICAL NUTRITION TOTAL
$ $ $
REVENUES - 8,405 8,405
------------------------------------------------
OPERATING EXPENSES
Cost of sales - 8,405 8,405
General, selling and administrative 5,931 2,575 8,506
Research and development costs 16,121 586 16,707
Research and development tax
credits and grants (6,665) (52) (6,717)
Depreciation and amortization 1,355 99 1,454
------------------------------------------------
16,742 4,331 21,073
------------------------------------------------
OPERATING INCOME (LOSS) (16,742) 4,074 (12,668)
INTEREST INCOME 2,696 919 3,615
INTEREST EXPENSE - (605) (605)
------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (14,046) 4,388 (9,658)
INCOME TAX RECOVERY (EXPENSE) - - -
------------------------------------------------
EARNINGS (LOSS) BEFORE THE
FOLLOWING ITEMS (14,046) 4,388 (9,658)
Gain on dilution - - -
Non-controlling interest - - -
------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR (14,046) 4,388 (9,658)
------------------------------------------------
------------------------------------------------
SEGMENT ASSETS 67,307 33,275 100,582
------------------------------------------------
------------------------------------------------
GOODWILL - 1,294 1,294
------------------------------------------------
------------------------------------------------
ACQUISITION OF LONG-LIVED ASSETS 1,823 1,415 3,238
------------------------------------------------
------------------------------------------------
(27)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
18 FINANCIAL INSTRUMENTS
FOREIGN CURRENCY RISK
Since the company operates on an international scale, it is exposed to
currency risks as a result of potential exchange rate fluctuations. As at
December 31, 2002, there were no significant outstanding forward
contracts. The total exchange gain (loss) included in the statements of
operations amounts to ($140,500) in 2002 ($127,010 in 2001 and $198,668 in
2000).
FAIR VALUE
Cash and cash equivalents, short-term investments, accounts receivable and
accounts payable and accrued liabilities are financial instruments whose
fair value approximates their carrying value due to their short-term
maturity. The fair value of short-term investments is $69,925,301 in 2002
($42,939,690 in 2001). The fair value of the long-term debt has been
established by discounting the future cash flows at an interest rate
corresponding to that which the company would currently be able to obtain
for loans with similar maturity dates and terms. The fair value of the
long-term debt is $13,427,346 in 2002 ($13,163,657 in 2001).
CREDIT RISK
Financial instruments which potentially subject the company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. Cash and cash
equivalents are maintained with high-credit quality financial
institutions. Short-term investments consist primarily of bonds issued by
high-credit quality corporations and institutions. Consequently,
management considers the risk of non-performance related to cash and cash
equivalents and short-term investments to be minimal.
Generally, the company does not require collateral or other security from
customers for trade accounts receivable; however, credit is extended
following an evaluation of creditworthiness. In addition, the company
performs on-going credit reviews of all its customers and establishes an
allowance for doubtful accounts when accounts are determined to be
uncollectible.
INTEREST RATE RISK
The company's exposure to interest rate risk is as follows:
Cash and cash equivalents Variable interest rate
Short-term investments Fixed interest rate
Accounts receivable Non-interest bearing
Unused line of credit Prime interest rate
Accounts payable and accrued liabilities Non-interest bearing
Long-term debt As described in note 11
19 LEASE COMMITMENTS
The company is committed to various operating leases totalling $2,928,000
(euro 1,768,000) in 2003 and $2,892,000 (euro 1,746,000) in 2004.
(28)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
20 SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES IN CANADA AND IN THE UNITED STATES
As a registrant with the Securities and Exchange Commission in the United
States, the company is required to reconcile its financial statements for
significant differences between generally accepted accounting principles
as applied in Canada (Canadian GAAP) and those applied in the United
States (U.S. GAAP).
Additional disclosures required under U.S. GAAP have been provided in the
accompanying financial statements and notes. In addition, the following
summarizes differences between Canadian and U.S. GAAP and other required
disclosures under U.S. GAAP.
The following summary sets out the material adjustments to the company's
reported net loss, net loss per share and shareholders' equity which would
be made to conform with U.S. GAAP:
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
$ $ $
Net loss for the year under Canadian GAAP (25,782) (3,469) (9,658)
Stock-based compensation costs a) (254) (256) (2,088)
Finished goods intended for clinical trials b) (450) - (90)
Interest expense c) - 437 605
Amortization of organization costs d) 87 41 -
--------------------------------------------------------------
Net loss for the year under U.S. GAAP (26.399) (3,247) (11,231)
--------------------------------------------------------------
Other comprehensive loss
Unrealized gains on short-term investments f) 885 869 616
Less: Reclassification of adjustments for gains
(losses) realized in net loss (1,390) - 2
--------------------------------------------------------------
Net unrealized losses (gains) (505) 869 618
--------------------------------------------------------------
Foreign currency translation adjustments 580 188 -
--------------------------------------------------------------
Comprehensive loss (26,324) (2,190) (10,613)
--------------------------------------------------------------
--------------------------------------------------------------
Basic and diluted net loss per share under U.S. GAAP (0.68) (0.10) (0.38)
--------------------------------------------------------------
--------------------------------------------------------------
Weighted average number of shares outstanding under
U.S. GAAP 38,584,537 30,968,710 29,502,301
--------------------------------------------------------------
--------------------------------------------------------------
(29)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
STATEMENTS OF DEFICIT
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
$ $ $
Deficit in accordance with Canadian GAAP (44,864) (19,082) (15,614)
Stock-based compensation costs
Current year a) (254) (255) (2,088)
Cumulative effect of prior years (4,644) (4,389) (2,300)
Finished goods intended for clinical trials
Current year b) (450) - (90)
Cumulative effect of prior years (204) (204) (113)
Amortization of organization costs
Current year d) 87 41 -
Cumulative effect of prior years 41 - -
---------------------------------------------------------------
Deficit in accordance with U.S. GAAP (50,288) (23,289) (20,205)
---------------------------------------------------------------
---------------------------------------------------------------
SHARE CAPITAL
DECEMBER 31,
-----------------------------------------
2002 2001
$ $
Share capital in accordance with Canadian GAAP 153,578 97,513
Stock-based compensation costs related to stock option plan granted for
underwriting compensation
Current year a) - (402)
Cumulative effect of prior years (896) (494)
-----------------------------------------
Share capital in accordance with U.S. GAAP 152,162 96,617
-----------------------------------------
-----------------------------------------
OTHER CAPITAL
DECEMBER 31,
-----------------------------------------
2002 2001
$ $
Other capital in accordance with Canadian GAAP 854 -
Stock-based compensation costs
Current year a) 254 255
Cumulative effect of prior years 4,644 4,389
Stock-based compensation costs related to stock option plan granted for
underwriting compensation
Current year a) - 402
Cumulative effect of prior years 896 494
-----------------------------------------
Other capital in accordance with U.S. GAAP 6,648 5,540
-----------------------------------------
-----------------------------------------
(30)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
$ $ $
Foreign currency translation adjustments
Balance - Beginning of year 188 - -
Change during the year 581 188 -
---------------------------------------------------------------
Balance - End of year 769 188 -
---------------------------------------------------------------
Unrealized gains (losses) on short-term investments
and forward exchange contracts
Balance - Beginning of year 1,390 521 (97)
Change during the year (505) 869 618
---------------------------------------------------------------
Balance - End of year 885 1,390 521
---------------------------------------------------------------
Accumulated other comprehensive income 1,654 1,578 521
---------------------------------------------------------------
---------------------------------------------------------------
STATEMENTS OF CASH FLOWS AND BALANCE SHEETS
For the years ended December 31, 2002, 2001 and 2000 and as at December
31, 2002 and 2001, there are no significant differences between the
statements of cash flows and balance sheets under Canadian GAAP as
compared to U.S. GAAP.
A) STOCK-BASED COMPENSATION
The company accounts for stock-based compensation related to options
granted to employees and directors using the intrinsic value method
prescribed in APB No. 25. The company provides additional pro-forma
disclosures as required under SFAS No. 123.
Under U.S. GAAP, transactions for which underwriters are issued
equity instruments should be recorded by the company based upon the
fair value of the equity instruments issued as an issuance of shares
in other capital. Under Canadian GAAP, equity instruments issued for
underwriters before January 1, 2002 are accounted for in share
capital.
The stock option plan for Atrium was considered to be a variable plan
under U.S. GAAP up to May 29, 2002. The compensation costs under the
variable plan have not been accounted for as expenses due to the
insignificant amount.
B) FINISHED GOODS INTENDED FOR CLINICAL TRIALS
Under U.S. GAAP, finished goods intended for clinical trials are
expensed when acquired since they are considered as research and
development costs. Under Canadian GAAP, finished goods intended for
clinical trials are accounted for as inventory.
(31)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
C) REDEEMABLE COMMON SHARES OF THE SUBSIDIARY
Under Canadian GAAP, redeemable common shares of the subsidiary,
issued in 2000, that are redeemable at the option of the holders are
classified as liabilities in accordance with the substance of the
contractual arrangement and the definition of a financial liability.
Under U.S. GAAP, those shares are considered as "mandatorily
redeemable", and are classified outside of shareholders' equity and
long-term liabilities, in the mezzanine section of the balance sheet.
Interest expense is charged to deficit.
D) ORGANIZATION COSTS
Under U.S. GAAP, all organization costs are expensed as incurred.
Under Canadian GAAP, organization costs are accounted for as
intangible assets and are amortized on a straight-line basis over a
five-year period.
E) RESEARCH AND DEVELOPMENT COSTS
Under U.S. GAAP, all development costs are expensed as incurred.
Under Canadian GAAP, development costs which meet generally accepted
criteria for deferral are capitalized and amortized. As at December
31, 2002, the company had not deferred any development costs.
F) SHORT-TERM INVESTMENTS
Short-term investments, which are classified as available-for-sale
securities, include the company's investment in bonds for which the
company does not have the positive intent or ability to hold to
maturity. Under U.S. GAAP, available-for-sale securities are carried
at fair value with unrealized gains and losses net of the related tax
effects as part of other comprehensive loss.
NEW ACCOUNTING STANDARDS
On June 15, 2001, the Financial Accounting Standards Board issued SFAS
143, "Accounting for Asset Retirement Obligation", which is effective for
fiscal years beginning on or after June 15, 2002. This standard requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The company has not yet assessed the impact of
the adoption of this new standard.
(32)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", which
supersedes SFAS 121 and the provisions of APB 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" with regard to reporting the effects of a disposal of a
business segment. SFAS 144 retains many of the provisions of SFAS 121, but
significantly changes the criteria that would have to be met to classify
an asset as held for disposal such that long-lived assets to be disposed
of other than by sale are considered held and used until disposed of. In
addition, SFAS 144 retains the basic provisions of APB 30 for presentation
of discontinued operations in the statement of operations but broadens
that presentation to a component of an entity. This new standard is
effective for fiscal years beginning on or after December 15, 2001.
Adopting this new standard is not expected to have significant impact on
the company's financial statements.
In December 2001, the CICA Accounting Standards Board issued Accounting
Guideline 13, "Hedging Relationships" (AcG 13), which is applicable to
fiscal years beginning on or after July 1, 2003. AcG 13 specifies the
circumstances in which hedge accounting is appropriate, including the
identification, documentation, designation and effectiveness of hedges and
the discontinuance of hedge accounting. The company will adopt AcG 13
prospectively effective January 1, 2004 and has not yet assessed the
impact of the adoption of this new standard.
In April 2002, the FASB issued SFAS 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statements No. 13 and Technical
Corrections". This new standard is effective for fiscal years beginning on
or after May 15, 2002, or for transactions occurring after May 15, 2002
related to SFAS 13, paragraph 8 and 9c). This statement rescinds SFAS 4
"Reporting Gains and Losses from Extinguishment of Debt" and an amendment
of that Statement, SFAS 64 "Extinguishments of Debt Made to Satisfy
Sinking-Funds Requirements". This Statement also rescinds SFAS 44
"Accounting for Intangible Assets of Motor Carriers". This Statement
amends SFAS 13 "Accounting for Leases" to eliminate an inconsistency
between the required accounting for sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The company adopted this new
standard prospectively on September 1, 2002, and its adoption had no
significant impact on the company's financial statements.
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF No. 94-3, "Liability Recognition of Certain
Employee Termination Benefits and Other Costs to Exit an Activity". This
Statement improves financial reporting by requiring that a liability for a
cost associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is incurred. This
Statement specifies that a liability for a cost associated with an exit or
disposal activity is incurred when the definition of a liability in SFAS 6
is met. This Statement is effective for exit or disposal activities that
are initiated after December 31, 2002. The company will adopt this new
standard prospectively on January 1, 2003, and its adoption will have no
impact on the company's financial statements.
(33)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
In November 25, 2002, the Financial Accounting Standards Board issued FIN
No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation
No. 34", with disclosure requirements effective for years ending after
December 15, 2002 and recognition and measurement requirements effective
on a prospective basis for guarantees that are issued or modified after
December 31, 2002.
FIN No. 45 provides a definition and examples of a guarantee and requires
disclosure of the nature of the guarantee, the maximum potential amount of
future payments, the carrying amount of the related liability, if any, the
recourse provisions and assets held as collateral under the terms of the
guarantee and the extent to which the proceeds of collateral would cover
the maximum potential liability.
FIN No. 45 clarifies the requirement of SFAS No. 5, "Accounting for
Contingencies", relating to the guarantor's accounting for, and disclosure
of, the issuance of certain types of guarantees. It requires that the
guarantor recognize a liability for the guarantee at its inception equal
to its fair value at that time and that the liability is reduced as the
risk under the guarantee reduces. The liability may be reduced at the end
of the guarantee period, on a systematic amortization basis or as the fair
value changes as appropriate.
The company has adopted the disclosure requirements of FIN No. 45 for the
year ended December 31, 2002 and the required disclosures are included in
notes 5 and 11 of these financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", revising the
transition and disclosure provisions of FAS 123. FAS 148 allows companies
to adopt FAS 123 under three different methods. In addition, FAS 148
requires increased disclosure for all companies, including those choosing
not to adopt the accounting provision of FAS 123. The transition and
disclosure changes are effective for fiscal years ending after December
15, 2002. The company has already disclosed the pro-forma information
required.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under U.S. GAAP, the company shall measure compensation cost related to
awards of stock options using the intrinsic value method of accounting. In
this instance, however, under SFAS 123, Accounting for Stock-Based
Compensation, the company is required to make pro forma disclosures of net
earnings (loss), basic net earnings (loss) per share and diluted net
earnings (loss) per share as if the fair value based method of accounting
had been applied.
The fair value of options granted was estimated using the Black-Scholes
options pricing model with the following weighted average assumptions: a
risk-free interest rate of 3.72% (5.1% for 2001 and 5.91% for 2000), an
expected volatility of 57% (60% for 2001 and 63.54% for 2000), dividends
of nil and an expected life of 2.7 years (4.7 years for 2001 and 2000).
The weighted average grant-date fair value of options granted during the
years ended December 31, 2002, 2001 and 2000 was $2.29, $4.16 and $5.92,
respectively.
(34)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
If the fair value based method had been used to account for stock-based
compensation costs related to stock options issued to employees, the net
loss and related net loss per share figures under U.S. GAAP would be as
follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
$ $ $
Pro-forma net loss for the year 26,656 3,916 12,936
Basic and diluted pro-forma net loss per share 0.69 0.13 0.44
RENTAL EXPENSES
Rental expenses amounted to approximately $171,000 in 2002, $121,000 in
2001 and $19,000 in 2000.
INCOME TAXES
As a result of adjustments from Canadian GAAP to U.S. GAAP, future income
tax assets under U.S. GAAP include an adjustment of $203,000 [$63,000 in
2001 and ($88,000) in 2000] related to the finished goods included in
research and development costs. This would result in a corresponding
adjustment in the valuation allowance under U.S. GAAP.
UNAUDITED PRO-FORMA INFORMATION ON BUSINESS ACQUISITIONS
Under U.S. GAAP, pro-forma information must be provided as though the
business acquisition had occurred at the beginning of 2002 and 2001.
The following unaudited pro-forma information reflects the results of
operations as if the 2002 acquisitions had been completed on January 1,
2001 and 2002 and the 2001 acquisition had been completed on January 1,
2001.
(35)
AETERNA LABORATORIES INC.
Notes to Consolidated Financial Statements
DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars,
except share/option and per share/option data and as otherwise noted)
Such information is not necessarily indicative of the actual results which
would have been achieved, nor is it necessarily indicative of future
consolidated results of the company:
2002 2001
$ $
Revenues 132,872 82,407
Net loss (37,435) (35,890)
Basic and diluted net loss per share (0.97) (1.16)
21 COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
current year presentation.
(36)