UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT
TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of: November, 2004
Commission File Number: 000-50393
NEUROCHEM INC.
275 Armand-Frappier Boulevard
Laval, Quebec
H7V 4A7
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40 F. Form 20-F |_| Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
Yes |_| No [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Yes |_| No [X]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g-3 under the Securities Exchange Act of 1934.
Yes |_| No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEUROCHEM INC.
November 17, 2004
By: /s/ Lise Hebert
----------------------------------------
Lise Hebert, PhD
Vice President, Corporate Communications
[GRAPHIC OMITTED]
LISE HEBERT,PH.D.
275 Boul. Armand-Frappier Blvd. Vice-presidente, Communications d'entreprise
Laval, QC Canada H7V 4A7 Vice President, Corporate Communications
Courriel / E-mail lhebert@neurochem.com
TEL: (450) 680-4500
FAX: (450) 680-4501
WEB: www.neurochem.com
November 17, 2004
VIA SEDAR
TO: Securities Commissions or similar regulatory
authority in all provinces of Canada
RE: Neurochem Inc. (the "Company")
SEDAR project number 704025
To whom it may concern:
In this SEDAR project we are filing to correct the French and English versions
of the Company's Shareholders' report. On page 4, paragraph 1, the sentence "The
comparative figures presented are for the three-month and nine-month periods
ended September 30, 2004" now reads "The comparative figures presented are for
the three-month and nine-month periods ended September 30, 2003".
In the MD&A filed on November 4, 2004, the sentence on page 1, paragraph 2
reading "For the nine-month period ended September 30, 2004, net loss amounted
to $37,011,000 ($1.23 per share), compared to $15,866,000 ($0.55 per share) for
the same period last year" should read "For the nine-month period ended
September 30, 2004, net loss amounted to $37,011,000 ($1.23 per share), compared
to $15,866,000 ($0.68 per share) for the same period last year".
/s/ Lise Hebert
Lise Hebert, Ph.D.
Vice President, Corporate Communications
NEUROCHEM
THIRD QUARTER ENDED SEPTEMBER 30, 2004
Driven
to maximize
performance
[picture]
[logo]
Message to Shareholders
The Company has progressed well in the third quarter. For Fibrillex(TM), our
Phase II/III clinical program is on track to be completed by January 2005. For
Alzhemed(TM), we have enrolled a large number of patients required for our North
American Phase III clinical trial and we continue to see encouraging interim
data from the on-going open-label Phase II clinical trial, particularly among
mild Alzheimer's Disease (AD) patients whose conditions stabilize or even
improve based on a number of memory and functional assessment scales.
FIBRILLEX(TM)
To date 68 patients have completed the two-year Phase II/III clinical trial of
Fibrillex(TM). Of these, 66 (97%) have enrolled in the open-label Phase II/III
extension study that will run for two years.
This investigational product candidate was selected by the Cardio-Renal Drug
Product Division of the US Food and Drug Administration (FDA) to be part of the
Continuous Marketing Applications Pilot 2 program to further accelerate the
development and eventual marketing of this product candidate.
ALZHEMED(TM)
Following the June 2004 initiation of patient recruitment activities for our
18-month double-blind, placebo-controlled, randomized Phase III clinical trial
of Alzhemed(TM) for the treatment of AD in North America, so far Neurochem has
screened 337 mild-to-moderate AD. Of these, 163 patients are now randomized and
are receiving study medication, either placebo or one of the two doses of
Alzhemed(TM). The primary endpoints of this study include the evaluation of
cognitive and functional abilities with the Alzheimer's Disease Assessment
Scale, cognitive subpart (ADAS-cog) and Clinical Dementia Rating Scale-Sum of
Boxes (CDR-SB).
We also reported that our two-year on-going open-label Phase II extension study
for Alzhemed(TM) continues to produce promising interim results in AD patients.
During the third quarter, the 20-month data although not statistically
significant showed that the large majority of the mild AD patients responded
well to treatment with Alzhemed(TM) and continued to stabilize or improve as
measured by well validated cognitive and functional tests such as ADAS-cog, MMSE
(Mini Mental State Exam) and CDR-SB.
CEREBRIL(TM)
For Cerebril(TM), our investigational product candidate for the treatment of
Hemorrhagic Stroke due to Cerebral Amyloid Angiopathy (HS-CAA), we continue to
work towards the preparation of the Phase IIb protocol in collaboration with the
principal investigator and Clinical Advisory Board member for this product
candidate, Steven M. Greenberg, M.D., Co-Director of the Neurology Clinical Unit
of the Massachusetts General Hospital. The trial is expected to test the safety
and efficacy of Cerebril(TM) for the prevention of recurrence of HS-CAA.
FINANCIAL RESULTS HIGHLIGHTS
The following information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
three-month period ended September 30, 2004, contained herein.
For the three-month period ended September 30, 2004, net loss amounted to
$13,775,000 ($0.45 per share), compared to $6,787,000 ($0.28 per share) for the
same period last year. For the nine-month period ended September 30, 2004, net
loss amounted to $37,011,000 ($1.23 per share), compared to $15,866,000 ($0.68
per share) for the same period last year.
Research and development expenses, before research tax credits and grants,
amounted to $7,760,000 for the current quarter, compared to $3,840,000 for the
same period last year. The increase is mainly due to expenses incurred in
relation to the Alzhemed(TM) Phase III clinical trials, which began during the
quarter, to the Fibrillex(TM) clinical trials and to the hiring of additional
employees primarily in the clinical development group. For the nine-month period
ended September 30, 2004, research and development expenses amounted to
$20,260,000, compared to $13,172,000 for the same period last year. The increase
is attributable to expenses incurred to support the on-going Fibrillex(TM) Phase
II/III clinical trials and open-label extension study, to the on-going
Alzhemed(TM) Phase II open-label extension study and Phase III clinical trials,
as well as to on-going drug discovery programs.
General and administrative expenses for the quarter totaled $4,913,000, compared
to $3,018,000 for the same quarter last year. The increase is mainly due to the
expansion of the corporate infrastructure necessary to support growth and to the
increase in overall activity levels at the Company, including the costs related
to the facilities acquired during the second quarter. For the nine-month period
ended September 30, 2004, these expenses amounted to $13,502,000 compared to
$7,733,000 for the same period last year. For the nine-month period, the
increase is attributable to the growth in legal, administrative and marketing
activities, as well as additional senior management positions. More
specifically, the increase is due to higher legal fees incurred in relation to
the
1
Immtech litigation and other corporate matters, higher Directors' and Officers'
insurance costs resulting from our US financing and NASDAQ listing and increased
awareness, educational and medical conference activities related to AA
Amyloidosis, Fibrillex(TM)'s target indication, and Alzheimer's Disease,
Alzhemed(TM)'s target indication.
Acquisition of property and equipment
In May 2004, the Company acquired facilities for $10,500,000 and incurred
$421,000 of acquisition related expenses to relocate its operations. This
acquisition was necessary to support the growth of the Company and to regroup
corporate and scientific employees at the same location. Cash was used to
finance the acquisition. In July 2004, the Company entered into a revolving
decreasing term credit agreement in the amount of $10,500,000 to finance this
acquisition. The credit agreement expires in June 2009.
Liquidity and capital resources
As at September 30, 2004, the Company had cash, cash equivalents and marketable
securities in the amount of $44,219,000 compared to $77,594,000 at December 31,
2003. The decrease is due to use of funds for operating and investing
activities, (including the acquisition of facilities as previously discussed),
net of proceeds received from the revolving decreasing term credit agreement and
the issue of additional share capital pursuant to the exercise of employee stock
options.
As at October 31, 2004, the Company had 30,320,336 common shares outstanding,
2,390,159 options granted under the employee stock option plan and 4,000,000
warrants in issue.
CONCLUSION
We are pleased with the progress at Neurochem and, on behalf of the Board, I
wish to thank you, our shareholder, very much for your continued support.
[signed]
Dr. Francesco Bellini
Chairman and Chief Executive Officer
2
Management's Discussion and Analysis of Financial Condition And Results of
Operations for the Three and Nine-Month Periods Ended September 30, 2004
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31,
2003. FOR DISCUSSION REGARDING RELATED-PARTY TRANSACTIONS, CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS, CRITICAL ACCOUNTING POLICIES, RECENT
ACCOUNTING PRONOUNCEMENTS, AND RISKS AND UNCERTAINTIES, REFER TO THE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2003. IN 2003, THE
COMPANY CHANGED ITS FISCAL YEAR-END TO DECEMBER 31 FROM JUNE 30. THE COMPARATIVE
FIGURES PRESENTED ARE FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER
30, 2003. ALL DOLLAR FIGURES ARE CANADIAN DOLLARS, UNLESS SPECIFIED OTHERWISE.
RESULTS OF OPERATIONS
For the three-month period ended September 30, 2004, net loss amounted to
$13,775,000 ($0.45 per share), compared to $6,787,000 ($0.28 per share) for the
same period last year. For the nine-month period ended September 30, 2004, net
loss amounted to $37,011,000 ($1.23 per share), compared to $15,866,000 ($0.68
per share) for the same period last year.
Research and development expenses, before research tax credits and grants,
amounted to $7,760,000 for the current quarter, compared to $3,840,000 for the
same period last year. The increase is mainly due to expenses incurred in
relation to the Alzhemed(TM) Phase III clinical trials, which began during the
quarter, the Fibrillex(TM) clinical trials and the hiring of additional
employees primarily in the clinical development group. For the nine-month period
ended September 30, 2004, research and development expenses amounted to
$20,260,000, compared to $13,172,000 for the same period last year. The increase
is attributable to expenses incurred to support the on-going Fibrillex(TM) Phase
II/III clinical trials and open-label extension study, the on-going Alzhemed(TM)
Phase II open-label extension study and Phase III clinical trials, as well as
on-going drug discovery programs.
Research tax credits amounted to $301,000 this quarter ($922,000 for the
nine-month period), compared to $315,000 for the comparable quarter last year
($1,302,000 for the nine-month period last year). Research tax credits represent
tax credits earned under the Quebec Scientific Research and Experimental
Development program.
Research grants and other amounted to $98,000 this quarter, compared to $101,000
for the same quarter last year. For the nine-month period ended September 30,
2004, these grants amounted to $327,000, compared to $846,000 for the same
period last year. Research grants consist primarily of those grants received
from the US Food and Drug Administration for the development of Fibrillex(TM)
and from the Natural Sciences and Engineering Research Council (NSERC). During
the nine-month period ended September 30, 2003, research grants also included
contributions under the Technology Partnerships Canada (TPC) Program received by
the Company for the development of Alzhemed(TM).
General and administrative expenses for the quarter totaled $4,913,000, compared
to $3,018,000 for the same quarter last year. The increase is mainly due to the
expansion of the corporate infrastructure necessary to support growth and the
increase in overall activity levels at the Company, including the costs related
to the facilities acquired during the second quarter. For the nine-month period
ended September 30, 2004, these expenses amounted to $13,502,000 compared to
$7,733,000 for the same period last year. For the nine-month period, the
increase is attributable to the growth in the legal, administrative and
marketing activities, as well as additional senior management positions. More
specifically, the increase is due to higher legal fees incurred in relation to
the Immtech litigation and other corporate matters, higher Directors' and
Officers' insurance costs resulting from our US financing and NASDAQ listing and
increased awareness, educational and medical conference activities related to AA
Amyloidosis, Fibrillex(TM)'s target indication, and Alzheimer's Disease,
Alzhemed(TM)'s target indication.
Special charges of $2,085,000 in the nine-month period ended September 30, 2004,
were recorded in the second quarter and are related to the relocation to
facilities acquired in May 2004. These charges include $896,000 of future lease
payments due in connection with the former premises, net of estimated sublease
income that could reasonably be obtained for those premises. It also includes
the write-off of certain property and equipment, mainly leasehold improvements,
in the amount of $1,189,000.
Depreciation and amortization for the current quarter increased to $587,000
($1,454,000 for the nine-month period) from $323,000 for the comparable quarter
last year ($964,000 for the nine-month period last year). The
3
increase reflects the depreciation and amortization associated with the
acquisition of additional property and equipment, including the facilities
acquired in the second quarter, as well as increases in patent costs.
Interest income amounted to $247,000 ($822,000 for the nine-month period),
compared to $127,000 for the comparable quarter last year ($445,000 for the
nine-month period last year). The increase results from higher average cash
balances in the current period compared to the same period last year.
Foreign exchange losses amounted to $392,000 for the current quarter, compared
to $127,000 for the same quarter last year. For the nine-month period ended
September 30, 2004, foreign exchange gains amounted to $1,699,000 compared to
$2,000 for the same period last year. Foreign exchange gains realized in 2004
are mainly attributable to the conversion of US dollars into Canadian dollars.
Acquisition of property and equipment
In May 2004, the Company acquired facilities for $10,500,000 and incurred
$421,000 of acquisition related expenses to relocate its operations. This
acquisition was necessary to support the growth of the Company and to regroup
corporate and scientific employees at the same location. Cash was used to
finance the acquisition. In July 2004, the Company entered into a revolving
decreasing term credit agreement in the amount of $10,500,000 to finance this
acquisition. The credit agreement expires in June 2009.
Stock-based compensation
As of January 1, 2004, the Company implemented the new CICA accounting policy
requiring the use of the fair value-based method for recording stock options.
One of the transitional alternatives available to the Company was to
retroactively apply the fair value-based method to all employee stock options
granted on or after July 1, 2002, without restatement of prior periods. As a
result of adopting this alternative, an amount of $2,162,000 was recorded as an
adjustment to the opening deficit and additional paid-in capital at January 1,
2004. Furthermore, an expense in the amount of $666,000 was recorded during the
quarter ($3,329,000 for the nine-month period). See notes 2 and 6 of the interim
Consolidated Financial Statements.
Litigation
The Company continues to vigorously defend against the claims brought by Immtech
International, Inc. in its legal proceedings filed on August 12, 2003, with the
Federal District Court for the Southern District of New York, U.S.A. The Company
is seeking to enforce its rights under the agreement with Immtech International,
Inc. to have the dispute between the parties resolved by arbitration in
accordance with the terms of that agreement. The proceedings are at the early
stages and the outcome of this matter, or the likelihood and the amount of loss,
if any, is not determinable. No provision for possible loss has been recorded by
the Company in connection with this matter.
QUARTERLY RESULTS (UNAUDITED)
(In thousands of Canadian dollars, except per share data)
Net loss
per share
Basic and
Quarter Revenue Net Loss diluted
- -------------------------------------------------------------------------------------------------------------------
$ $ $
Year ended December 31, 2004
First - (9,164) (0.31)
Second - (14,072) (0.47)
Third - (13,775) (0.45)
Six-month period ended December 31, 2003
First - (6,787) (0.28)
Second - (9,986) (0.34)
Year ended June 30, 2003
First - (3,962) (0.20)
Second - (6,577) (0.31)
Third - (5,609) (0.25)
Fourth - (3,470) (0.15)
- -------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2004, the Company had cash, cash equivalents and marketable
securities in the amount of $44,219,000 compared to $77,594,000 at December 31,
2003. The decrease is due to use of funds for operating and investing
activities, (including the acquisition of facilities as previously discussed),
net of proceeds received
4
from the revolving decreasing term credit agreement and the issue of additional
share capital pursuant to the exercise of employee stock options.
As at October 31, 2004, the Company had 30,320,336 common shares outstanding,
2,390,159 options granted under the employee stock option plan and 4,000,000
warrants in issue.
5
Consolidated Balance Sheets
(Unaudited)
September 30, 2004 and December 31, 2003 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
SEPTEMBER 30, SEPTEMBER 30, December 31,
2004 2004 2003
- -------------------------------------------------------------------------------------------------------------------
(US$ -- (CDN$) (Cdn$)
NOTE 1) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 20,043 25,333 14,869
Marketable securities 14,943 18,886 62,725
Sales taxes and other receivables 399 504 721
Research tax credits receivable 640 809 2,111
Prepaid expenses and deposits 2,899 3,664 1,671
- -------------------------------------------------------------------------------------------------------------------
38,924 49,196 82,097
Long-term prepaid expenses and deposits 927 1,172 226
Long-term investment 3,498 4,421 4,421
Property and equipment (note 3) 13,220 16,709 4,539
Patent costs 3,102 3,920 2,942
- -------------------------------------------------------------------------------------------------------------------
59,671 75,418 94,225
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 2,929 3,702 2,070
Accrued liabilities 4,082 5,159 3,749
Current portion of obligations under capital leases 354 448 425
Current portion of long-term debt (note 4) 529 669 -
- -------------------------------------------------------------------------------------------------------------------
7,894 9,978 6,244
Long-term debt (note 4) 7,616 9,625 -
Obligations under capital leases 62 78 416
Long-term accrued liabilities (note 7) 449 568 -
- -------------------------------------------------------------------------------------------------------------------
16,021 20,249 6,660
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Share capital (note 5) 138,870 175,518 173,930
Additional paid-in capital (notes 2 and 6) 4,106 5,189 -
Deficit (99,326) (125,538) (86,365)
- -------------------------------------------------------------------------------------------------------------------
43,650 55,169 87,565
- -------------------------------------------------------------------------------------------------------------------
59,671 75,418 94,225
===================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
6
Consolidated Statements of Operations
(Unaudited)
Periods ended September 30, 2004 and 2003 (in thousands of Canadian dollars,
except per share data) (in accordance with Canadian GAAP)
Three months ended September 30, Nine months ended September 30,
2004 2004 2003 2004 2004 2003
- -------------------------------------------------------------------------------------------------------------------
(US$ -- (CDN$) (Cdn$) (US$ -- (CDN$) (Cdn$)
NOTE 1) NOTE 1)
EXPENSES (INCOME):
Research and development 6,140 7,760 3,840 16,030 20,260 13,172
Research tax credits (238) (301) (315) (729) (922) (1,302)
Research grants and other (78) (98) (101) (259) (327) (846)
- -------------------------------------------------------------------------------------------------------------------
5,824 7,361 3,424 15,042 19,011 11,024
General and administrative 3,887 4,913 3,018 10,683 13,502 7,733
Stock-based compensation (note 6) 527 666 - 2,634 3,329 -
Special charges (note 7) - - - 1,650 2,085 -
Depreciation of property
and equipment 415 525 280 1,016 1,284 826
Amortization of patent costs 49 62 43 134 170 138
Interest and bank charges 82 103 22 119 151 76
- -------------------------------------------------------------------------------------------------------------------
10,784 13,630 6,787 31,278 39,532 19,797
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT AND OTHER:
Interest income 195 247 127 650 822 445
Foreign exchange gain (loss) (310) (392) (127) 1,344 1,699 2
Gain on disposal of
intellectual property - - - - - 3,484
- -------------------------------------------------------------------------------------------------------------------
(115) (145) - 1,994 2,521 3,931
- -------------------------------------------------------------------------------------------------------------------
Net loss (10,899) (13,775) (6,787) (29,284) (37,011) (15,866)
===================================================================================================================
LOSS PER SHARE:
Basic (0.36) (0.45) (0.28) (0.97) (1.23) (0.68)
Diluted (0.36) (0.45) (0.28) (0.97) (1.23) (0.68)
===================================================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 30,281,440 30,281,440 24,034,052 30,103,171 30,103,171 23,328,076
Effect of dilutive options
and warrants 3,764,364 3,764,364 4,266,126 4,247,615 4,247,615 3,726,506
- -------------------------------------------------------------------------------------------------------------------
Diluted 34,045,804 34,045,804 28,300,178 34,350,786 34,350,786 27,054,582
===================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
7
Consolidated Statements of Deficit
(Unaudited)
Periods ended September 30, 2004 and 2003 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended September 30, Nine months ended September 30,
2004 2004 2003 2004 2004 2003
- -------------------------------------------------------------------------------------------------------------------
(US$ -- (CDN$) (Cdn$) (US$ -- (CDN$) (Cdn$)
NOTE 1) NOTE 1)
DEFICIT, BEGINNING OF PERIOD:
As previously reported (88,427) (111,763) (62,779) (68,332) (86,365) (53,566)
Adjustment to reflect change
in accounting for employee
stock options (note 2) - - - (1,710) (2,162) -
- -------------------------------------------------------------------------------------------------------------------
Deficit, beginning of period,
as restated (88,427) (111,763) (62,779) (70,042) (88,527) (53,566)
Net loss (10,899) (13,775) (6,787) (29,284) (37,011) (15,866)
Share issue costs - - (6,813) - - (6,947)
- -------------------------------------------------------------------------------------------------------------------
Deficit, end of period (99,326) (125,538) (76,379) (99,326) (125,538) (76,379)
===================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
8
Consolidated Statements of Cash Flows
(Unaudited)
Periods ended September 30, 2004 and 2003 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended September 30, Nine months ended September 30,
2004 2004 2003 2004 2004 2003
- -------------------------------------------------------------------------------------------------------------------
(US$ -- (CDN$) (Cdn$) (US$ -- (CDN$) (Cdn$)
NOTE 1) NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (10,899) (13,775) (6,787) (29,284) (37,011) (15,866)
ADJUSTMENTS FOR:
Depreciation and amortization 464 587 323 1,150 1,454 964
Stock-based compensation 527 666 - 2,634 3,329 -
Write-off of leasehold improvements
and other property and equipment - - - 941 1,189 -
Provision for lease exit obligations - - - 709 896 -
Gain on disposal of intellectual property - - - - - (3,484)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Sales taxes and other receivables (241) (305) 867 172 217 77
Research tax credits receivable 366 463 (315) 1,030 1,302 (348)
Prepaid expenses and deposits (88) (110) 92 (1,577) (1,993) (604)
Long-term prepaid expenses and deposits (551) (697) - (748) (946) -
Accounts payable and accrued liabilities (28) (36) 1,542 1,734 2,191 1,999
- -------------------------------------------------------------------------------------------------------------------
(10,450) (13,207) (4,278) (23,239) (29,372) (17,262)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of common shares 3 4 85,444 1,017 1,286 95,258
Share issue costs - - (6,813) - - (6,947)
Repayment of obligations
under capital leases (84) (106) (100) (250) (315) (359)
Proceeds from long-term debt 8,283 10,469 - 8,283 10,469 -
Repayment of long-term debt (138) (175) - (138) (175) -
- -------------------------------------------------------------------------------------------------------------------
8,064 10,192 78,531 8,912 11,265 87,952
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,544) (1,952) (349) (11,241) (14,208) (793)
Additions to patent costs (320) (404) (395) (859) (1,086) (933)
Long-term investment - - - - - (591)
Maturity (purchase) of
marketable securities (14,943) (18,886) (8,248) 34,685 43,839 (18,132)
Proceeds from disposal of property
and equipment 13 16 - 21 26 -
- -------------------------------------------------------------------------------------------------------------------
(16,794) (21,226) (8,992) 22,606 28,571 (20,449)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (19,180) (24,241) 65,261 8,279 10,464 50,241
Cash and cash equivalents,
beginning of period 39,223 49,574 6,450 11,764 14,869 21,470
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period 20,043 25,333 71,711 20,043 25,333 71,711
===================================================================================================================
CASH AND CASH EQUIVALENTS
ARE COMPRISED OF:
Cash balances with banks 272 344 1,660 272 344 1,660
Short-term investments 19,771 24,989 70,051 19,771 24,989 70,051
- -------------------------------------------------------------------------------------------------------------------
20,043 25,333 71,711 20,043 25,333 71,711
===================================================================================================================
Supplemental cash flow information (note 10)
See accompanying notes to unaudited consolidated financial statements.
9
Notes to Consolidated Financial Statements
(Unaudited)
Periods ended September 30, 2004 and 2003 (Amounts in thousands of Canadian
dollars, except per share data)
1. BASIS OF PRESENTATION:
These financial statements have been prepared by management in accordance with
Canadian generally accepted accounting principles. The unaudited consolidated
balance sheet as at September 30, 2004 and the unaudited consolidated statements
of operations and deficit and cash flows for the periods ended September 30,
2004 and 2003 reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented. The results of operations for any quarter are not necessarily
indicative of the results for the full year. The interim financial statements
follow the same accounting policies and methods of their application as
described in note 2 of the annual financial statements for the year ended
December 31, 2003, except for the change in accounting policy disclosed in note
2 below. The interim financial statements do not include all disclosures
required for annual financial statements and should be read in conjunction with
the most recent annual financial statements as at and for the year ended
December 31, 2003. In 2003, the Company changed its fiscal year-end to December
31 from June 30.
TRANSLATION OF CONVENIENCE:
The Company's functional currency is the Canadian dollar. As a convenience to
certain users, the Company has also presented the interim consolidated financial
statements in US dollars using the convenience translation method whereby all
Canadian dollar amounts were converted into US dollars at the noon exchange rate
quoted by the Bank of Canada at September 30, 2004, which was $0.7912 US dollar
per Canadian dollar. The information in US dollars is presented only for the
convenience of some readers and, thus, has limited usefulness. This translation
should not be viewed as a representation that such Canadian dollar amounts
actually represent such US dollar amounts or could be or would have been
converted into US dollars at the rate indicated.
2. CHANGE IN ACCOUNTING POLICY:
STOCK-BASED COMPENSATION:
Prior to January 1, 2004, the Company applied the fair value based method of
accounting prescribed by the Canadian Institute of Chartered Accountants
("CICA") to stock-based payments to non-employees, employee awards that were
direct awards of stock or called for settlement in cash or other assets, and to
employee stock appreciation rights; the Company applied the settlement method of
accounting to employee stock options. Under the settlement method, any
consideration paid by employees on the exercise of stock options or purchase of
stock was credited to share capital and no compensation expense was recognized.
The CICA has amended CICA Handbook Section 3870, Stock-based Compensation and
Other Stock-based Payments, to require entities to account for employee stock
options using the fair value based method, beginning January 1, 2004. Under the
fair value based method, compensation cost is measured at fair value at the date
of grant and is expensed over the award's vesting period. In accordance with one
of the transitional options permitted under amended Section 3870, the Company
has retroactively applied the fair value based method to all employee stock
options granted on or after July 1, 2002 without restatement of prior periods.
The cumulative effect of the change in accounting policy of $2,162 has been
recorded as an increase in the opening deficit and additional paid-in capital at
January 1, 2004.
3. PROPERTY AND EQUIPMENT:
In the second quarter of 2004, the Company entered into an agreement to purchase
property and equipment for a total cash consideration of $10,500, plus $421 of
acquisition-related costs. Assets acquired consisted of land in the amount of
$1,601, buildings including acquisition costs in the amount of $9,229 and
equipment of $91. As part of the purchase, the Company acquired a previously
negotiated in-place operating lease that had a nominal value. The tenant is a
company in which a shareholder has a share interest. This lease expires in April
2005.
All of the operations of the Company were moved into newly-acquired premises on
May 8, 2004. See notes 4 and 7.
COSTS ASSOCIATED WITH LEASE EXIT ACTIVITIES:
Costs associated with lease obligations for leased premises that are no longer
being used by the Company are recognized and measured at fair value as of the
cease-use date. The face value of the liability at the cease-use date is
determined based on the remaining lease rentals, reduced by estimated sublease
rentals that could reasonably be obtained for the property, measured using the
credit-adjusted risk-free rate.
DEPRECIATION OF BUILDINGS:
10
The buildings are being depreciated using the straight-line method over a period
of 20 years.
4. LONG-TERM DEBT:
In July 2004, the Company entered into a revolving decreasing term credit
agreement in the amount of $10,500 in order to finance the newly-acquired
premises (see note 3). The financing may be drawn in the form of either advances
or discounted bankers' acceptances. Advances will bear interest at the bank's
prime rate plus 0.25%, and the bankers' acceptances will bear interest at
bankers' acceptances rate plus stamping fees of 1.25%. Since the Company has a
contractual right, exercisable at its sole discretion, to continue to roll over
the short-term obligations for a period extending for more than a year from the
balance sheet date, the debt has been classified as long-term. Under the terms
of the agreements, the maximum authorized credit is reduced by $175 per quarter.
The loan is guaranteed by a first ranking hypothec on the universality of the
Company's movable and immovable property. The agreement is for a term of five
years and expires on June 30, 2009.
As of September 30, 2004, the credit was drawn in the form of discounted bankers
acceptances bearing interest at 2.43%, plus stamping fees. Principal repayments
for the next five years are as follows:
$
2005 669
2006 700
2007 700
2008 700
2009 7,525
- -------------------------------------------------------------------------------------------------------------------
10,294
===================================================================================================================
Interest on long-term debt including stamping fees amounted to $76 for the three
and nine-month periods ended September 30, 2004 (nil in 2003).
5. SHARE CAPITAL:
(a) ISSUED AND OUTSTANDING:
The issued and outstanding share capital consists of:
SEPTEMBER 30, December 31,
2004 2003
- -------------------------------------------------------------------------------------------------------------------
$ $
30,281,975 common shares (December 31, 2003 - 29,775,127) 175,518 173,930
===================================================================================================================
Changes in the issued and outstanding common shares for the period ended
December 31, 2003 and for the nine-month period ended September 30, 2004 were as
follows:
Common shares
- -------------------------------------------------------------------------------------------------------------------
Number Dollars
- -------------------------------------------------------------------------------------------------------------------
$
Balance, June 30, 2003 23,483,024 87,482
Issued for cash for public offering (i) 5,750,000 84,956
Exercise of warrants 106,785 192
Exercise of stock options 435,318 1,300
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 29,775,127 173,930
Exercise of stock options:
For cash 506,848 1,286
Ascribed value from additional paid-in capital - 302
- -------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 30,281,975 175,518
===================================================================================================================
(i)In September 2003, the Company completed a public offering for the issuance
and sale of 5.75 million common shares at a price of $14.77 (US$10.87) per
share. The total proceeds of the offering to the Company was $84,956. Total
share issuance costs of $6,813 were charged to the deficit.
11
(b) SHARE OPTION PLAN:
Changes in outstanding options granted under the Company's employee stock option
plan for the period ended December 31, 2003 and the nine-month period ended
September 30, 2004 were as follows:
Weighted
average
Number exercise price
- -------------------------------------------------------------------------------------------------------------------
$
Options outstanding, June 30, 2003 2,291,844 4.48
Granted 342,000 21.70
Exercised (335,318) 2.87
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 2003 2,298,526 7.23
Granted 712,000 26.04
Exercised (506,848) 2.54
Cancelled or expired (75,158) 8.93
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2004 2,428,520 13.68
===================================================================================================================
(c) WARRANTS:
Outstanding warrants at September 30, 2004 are as follows:
Warrants Exercise price Expiry
- -------------------------------------------------------------------------------------------------------------------
$
2,800,000 3.13 July 2005
1,200,000 7.81 February 2006
- -------------------------------------------------------------------------------------------------------------------
4,000,000
===================================================================================================================
(d) DILUTED LOSS PER SHARE:
At September 30, 2004, 818,500 options were not considered in the computation of
the diluted weighted average number of shares outstanding, since the exercise
price of these options was higher than the average market price.
6. STOCK-BASED COMPENSATION:
In the nine-month period ended September 30, 2004, the Company recorded total
stock-based compensation of $3,329 related to stock options granted to employees
after July 1, 2002 in accordance with the change in accounting policy detailed
in note 2, of which $666 relates to the three-month period ended September 30,
2004.
If the fair value-based accounting method had been used to account for and
measure stock-based compensation costs relating to options granted to employees
after July 1, 2002 but prior to January 1, 2004, date at which the fair value
method was applied to all stock-based compensation, the net loss and related
loss per share figures would be as follows:
Periods ended
September 30, 2003
- -------------------------------------------------------------------------------------------------------------------
(3 months) (9 months)
- -------------------------------------------------------------------------------------------------------------------
$ $
Reported net loss (6,787) (15,866)
Pro forma adjustments to compensation expense (348) (985)
- -------------------------------------------------------------------------------------------------------------------
Pro forma net loss (7,135) (16,851)
===================================================================================================================
PRO FORMA LOSS PER SHARE:
Basic (0.30) (0.72)
Diluted (0.30) (0.72)
===================================================================================================================
The fair value of the options granted were determined using the following method
and assumptions.
12
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes pricing model. The weighted average assumptions for the
nine-month periods ended September 30, 2004 and 2003 were as follows:
2004 2003
- -------------------------------------------------------------------------------------------------------------------
Risk free interest rate 3.78% 4.59%
Expected volatility 42% 61%
Expected life in years 7 7
Expected dividend yield NIL nil
===================================================================================================================
The following table summarizes the weighted average grant-date fair value per
share for options granted during the nine-month periods ended September 30, 2004
and 2003:
Weighted
average
Number of grant-date
options fair value
- -------------------------------------------------------------------------------------------------------------------
$
NINE-MONTH PERIODS ENDED:
September 30, 2004 712,000 12.81
September 30, 2003 526,000 5.33
===================================================================================================================
7. SPECIAL CHARGES:
Special charges consist of:
$
Provision for lease exit obligations 896
Write-off of leasehold improvements and other property and equipment 1,189
- -------------------------------------------------------------------------------------------------------------------
2,085
===================================================================================================================
The Company had previously entered into lease obligation contracts for space
located in the City of Montreal, through February 28, 2011. As a result of the
Company's move to new premises during the second quarter ended June 30, 2004
referred to in note 3, a liability of $896 was recognized in the second quarter
for the future lease costs of the vacated premises, net of estimated sublease
rentals that could reasonably be obtained for the properties. In addition, the
Company wrote off $965 of related leasehold improvements, $211 of furniture and
fixtures and $13 of lab equipment.
As at September 30, 2004, the remaining liability related to future lease
payments was $783, of which $568 is included in long-term accrued liabilities
and $215 is included in accrued liabilities.
8. RELATED PARTY TRANSACTIONS:
In the three and nine-month periods ended September 30, 2004, the Company
incurred fees of $240 and $720, respectively (2003 - $240 and $560) under the
terms of a management services agreement entered into in March 2003 with Picchio
International Inc., ("Picchio") a company related to a shareholder, director and
officer. These fees are included in "general and administrative expenses" on the
consolidated statement of operations. In addition, the Company purchased
property and equipment in the amount of $500 from a company in which Picchio
also has a share ownership interest. As at September 30, 2004, the Company had
an amount due to these companies of $458.
These transactions are in the normal course of operations and are measured at
the exchange amount of consideration established and agreed to by the related
parties.
9. LITIGATION:
The Company executed an agreement (the "CTA") with Immtech International, Inc.
("Immtech") of Vernon Hills, Illinois in 2002 pursuant to which Immtech provided
the Company with certain compounds for testing and granted the Company an option
to license such compounds. On August 12, 2003, Immtech filed certain legal
proceedings with the federal district court for the Southern District of New
York, U.S.A., with respect to the CTA. The Company is seeking to enforce its
rights under the CTA to have the dispute between the parties resolved by
arbitration in accordance with the terms of the CTA.
13
The Company continues to vigorously defend against the claims brought by the
plaintiffs. The proceedings are at the early stages and the outcome of this
matter, or the likelihood and the amount of loss, if any, is not determinable.
No provision for possible loss has been recorded by the Company in connection
with this matter.
10. SUPPLEMENTAL CASH FLOW DISCLOSURE:
Three months ended Nine months ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
$ $ $ $
Interest and stamping fees paid 104 22 132 58
- -------------------------------------------------------------------------------------------------------------------
Acquisition of property and equipment and intangibles included in accounts
payable and accrued liabilities amounted to $926 as at September 30, 2004 ($407
- - December 31, 2003).
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[picture]
[logo
Neurochem Inc.
275 Armand-frappier blvd.
Laval, Quebec, Canada
H7V 4A7
Telephone: (450) 680-4500
Toll-Free: 1 877 680-4500
Fax: (450) 680-4501
E-mail: info@neurochem.com
Website: www.neurochem.com
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