FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of April 2006
AETERNA ZENTARIS INC.
-------------------------------------
1405, boul. du Parc-Technologique
Quebec, Quebec
Canada, G1P 4P5
(Address of principal executive offices)
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 whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) 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): 82- ________
DOCUMENTS INDEX
DOCUMENTS DESCRIPTION
---------- ------------------------------------------------------------------- --------------
1. Business Acquisition Report dated February 21, 2006 - On
December 8, 2005, the Corporation announced the acquisition by
its subsidiary, Atrium Biotechnologies Inc., of HVL Parent
Incorporated and subsidiary, a company located in Pittsburgh, PA
and engaged in the manufacturing and marketing of health and
nutrition products to the healthcare practitioners' channel.
---------- ------------------------------------------------------------------- --------------
FORM 51-102F4
BUSINESS ACQUISITION REPORT
AETERNA ZENTARIS INC.
ITEM 1 -- IDENTITY OF THE REPORTING ISSUER
1.1 -- NAME AND ADDRESS OF REPORTING ISSUER
AEterna Zentaris Inc. (the "Corporation")
1405 boulevard du Parc-Technologique
Quebec, QC G1P 4P5
1.2 -- EXECUTIVE OFFICER
Further information regarding the matters described in this business
acquisition report may be obtained from Mario Paradis, Senior Finance
Director and Corporate Secretary of the Corporation. Mr. Paradis, who is
knowledgeable about the acquisition described herein, may be contacted at
tel. (418) 652-8525.
ITEM 2 -- DETAILS OF ACQUISITION
2.1 -- NATURE OF BUSINESS ACQUIRED
On December 8, 2005, the Corporation announced the acquisition by its
subsidiary, Atrium Biotechnologies Inc. ("Atrium"), of HVL Parent
Incorporated and subsidiary, a company located in Pittsburgh, PA and
engaged in the manufacturing and marketing of health and nutrition
products to the healthcare practitioners' channel ("HVL/Douglas").
Founded in 1955, HVL/Douglas directly markets some 960 products to
approximately 10,000 healthcare practitioners, such as physicians,
chiropractors and osteopaths. HVL/Douglas also sells supplements via
distributors that work with health professionals. HVL/Douglas, which has
approximately 250 employees, markets its products under its main brand
Douglas Laboratories and also under various well-known brand names,
including Advanced Medical Nutrition Incorporated (AMNI), Health Yourself
and Intelligent Health. In addition to manufacturing and marketing its
own exclusive brand name supplements, which make up the majority of its
business, HVL/Douglas also designs and manufactures products for others
in the industry. Products are sold mainly in North America and also in
Europe and Asia. It has two plants in Pittsburgh regrouping production
facilities, warehouse facilities, laboratories and its head office and it
has also a place of business in Holland.
2.2 -- DATE OF ACQUISITION
December 8, 2005.
1
2.3 -- CONSIDERATION
The price of the acquisition was US$86,922,000. A part of this purchase
price (US$8,632,000) was paid by the issuance of Atrium's subordinate
voting shares at a price of CAN$10.95 per share; thus, 917,532 shares of
the Atrium's capital stock were issued to some of the sellers. These
shares cannot be sold or transferred as per the following conditions. One
third of the shares will be allowed to be sold or transferred on the next
three anniversaries of the closing of the transaction. In addition,
Atrium reimbursed the existing debt of the HVL group of companies for an
amount of US$8,904,000 in principal.
The cash portion of the purchase price as well as the reimbursement by
Atrium of HVL's existing debt were funded by Atrium using cash on hand
and financed through a credit facility provided and arranged by National
Bank of Canada, Royal Bank of Canada and HSBC Bank Canada.
2.4 -- EFFECT ON FINANCIAL POSITION
N/A.
2.5 -- PRIOR VALUATIONS
N/A.
2.6 -- PARTIES TO THE TRANSACTION
The Corporation's subsidiary, Atrium, was the acquirer of HVL/Douglas. No
other informed person, associate or affiliate of the Corporation was
involved in the acquisition of HVL/Douglas.
2.7 -- DATE OF REPORT
February 21, 2006.
ITEM 3 -- FINANCIAL STATEMENTS
The financial statements required by Part 8 of National Instrument 51-102
are attached hereto.
2
HVL PARENT INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
September 30, 2005 and 2004
(With Independent Auditors' Report Thereon)
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HVL Parent Incorporated and Subsidiary:
We have audited the accompanying consolidated balance sheets of HVL Parent
Incorporated and subsidiary (the Company) as of September 30, 2005 and 2004
and the related consolidated statements of operations and comprehensive
income, stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. 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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HVL
Parent Incorporated and subsidiary as of September 30, 2005 and 2004 and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
[KPGM SIGNATURE]
December 16, 2005
[KPMG LETTERHEAD]
HVL PARENT INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 2005 and 2004
ASSETS 2005 2004
----------- ----------
Current assets:
Cash and cash equivalents $ 2,924,907 2,445,255
Accounts receivable, net of allowance for uncollectible
accounts of $290,236 and $356,189, respectively 9,809,019 11,150,432
Inventories, net (note 2) 11,011,361 8,531,783
Deferred income taxes (note 8) 429,000 249,800
Notes receivable 50,787 11,277
Other current assets 370,925 349,415
----------- ----------
Total current assets 24,595,999 22,737,962
----------- ----------
Property, plant, and equipment (note 3) 10,546,443 9,663,519
Less accumulated depreciation 7,125,597 6,214,995
----------- ----------
3,420,846 3,448,524
----------- ----------
Goodwill, net of accumulated amortization of $4,281,732 10,034,586 10,034,586
Debt issuance costs, net of accumulated amortization of
$879,911 and $674,603, respectively 273,744 479,052
----------- ----------
Total assets $38,325,175 36,700,124
----------- ----------
----------- ----------
2
(Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 2005 and 2004
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
----------- ----------
Current liabilities
Current portion of long-term debt (notes 4 and 13) $ 515,587 2,864,990
Accounts payable 2,651,203 5,421,141
Accrued liabilities 1,556,316 1,164,452
Income taxes payable 281,263 420,200
----------- ----------
Total current liabilities 5,004,369 9,870,783
----------- ----------
Deferred income taxes (note 8) 547,000 644,000
Long-term debt, excluding current portion (note 4) 9,776,707 10,659,298
----------- ----------
Total long-term liabilities 10,323,707 11,303,298
----------- ----------
Total liabilities 15,328,076 21,174,081
----------- ----------
Stockholders' equity (note 5):
Common stock -- par value $0.01 per share; 9,600,000
shares authorized, 5,000,000 shares issued and
outstanding 50,000 50,000
Common stock Class A nonvoting -- par value $0.01 per share;
883,240 shares authorized, 146,000 shares issued and
outstanding 1,460 1,460
Convertible participating preferred stock Series A -- par value
$0.01 per share; 344,744 shares authorized, issued and
outstanding 3 3
Convertible participating preferred stock Series B -- par value
$0.01 per share; 38,456 shares authorized, issued and
outstanding 1 1
Redeemable preferred stock Series A -- par value $0.01 per share;
287,287 shares authorized, no shares issued -- --
Redeemable preferred stock Series B -- par value $0.01 per share;
32,047 shares authorized, no shares issued -- --
Redeemable preferred stock Series C -- par value $0.01 per share;
30,000 shares authorized, no shares issued -- --
Additional paid-in capital 11,862,355 11,862,355
Notes receivable for shares sold (note 12) (132,592) (132,592)
Accumulated other comprehensive income (loss) (93,033) (33,126)
Retained earnings 11,308,905 3,777,942
----------- ----------
Total stockholders' equity 22,997,099 15,526,043
----------- ----------
Total liabilities and stockholders' equity $38,325,175 36,700,124
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
3
HVL PARENT INCORPORATED AND SUBSIDIARY
Consolidated Statements of Operations and Comprehensive Income
Years ended September 30, 2005 and 2004
2005 2004
----------- ----------
Net sales $69,252,572 67,723,674
Costs of goods sold 43,844,955 42,643,046
----------- ----------
Gross profit 25,407,617 25,080,628
----------- ----------
Selling, general, and administrative expenses 13,308,753 14,314,444
Depreciation expense -- administrative 156,060 132,691
----------- ----------
13,464,813 14,447,135
----------- ----------
Income from operations 11,942,804 10,633,493
----------- ----------
Other expense (income):
Interest income (75,650) (11,776)
Interest expense (including amortization of debt
issuance costs of $205,308 in 2005 and $259,641 in 2004 1,052,830 857,276
Other (note 4) (405,649) (332,082)
----------- ----------
Total other expense 571,531 513,418
----------- ----------
Income before taxes 11,371,273 10,120,075
----------- ----------
Income tax expense (note 8):
Federal 3,341,941 3,111,327
State 417,444 252,155
Foreign 80,925 114,284
----------- ----------
Total income tax expense 3,840,310 3,477,766
----------- ----------
Net income 7,530,963 6,642,309
Other comprehensive income:
Foreign currency translation adjustments (59,907) (178,567)
----------- ----------
Comprehensive income $ 7,471,056 6,463,742
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
4
HVL PARENT INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 30, 2005 and 2004
COMMON CONVERTIBLE CONVERTIBLE NOTES ACCUMULATED
STOCK PREFERRED PREFERRED ADDITIONAL RECEIVABLE OTHER
COMMON CLASS A STOCK STOCK PAID-IN FOR COMPREHENSIVE
STOCK NONVOTING SERIES A SERIES B CAPITAL SHARES SOLD INCOME (LOSS)
------- --------- ----------- ----------- ---------- ----------- --------------
Balance as of September 30, 2003 $50,000 1,460 3 1 11,862,355 (132,592) 145,441
Foreign currency translation -- -- -- -- -- -- (178,567)
Net income -- -- -- -- -- -- --
------- ----- ---- ---- ---------- -------- --------
Balance as of September 30, 2004 50,000 1,460 3 1 11,862,355 (132,592) (33,126)
Foreign currency translation -- -- -- -- -- -- (59,907)
Net income -- -- -- -- -- -- --
------- ----- ---- ---- ---------- -------- --------
Balance as of September 30, 2005 $50,000 1,460 3 1 11,862,355 (132,592) (93,033)
------- ----- ---- ---- ---------- -------- --------
------- ----- ---- ---- ---------- -------- --------
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------ -------------
Balance as of September 30, 2003 (2,864,367) 9,062,301
Foreign currency translation -- (178,567)
Net income 6,642,309 6,642,309
---------- ----------
Balance as of September 30, 2004 3,777,942 15,526,043
Foreign currency translation -- (59,907)
Net income 7,530,963 7,530,963
---------- ----------
Balance as of September 30, 2005 11,308,905 22,997,099
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
5
HVL PARENT INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 2005 and 2004
2005 2004
----------- ----------
Cash flows from operating activities:
Net income $ 7,530,963 6,642,309
Adjustments to reconcile net income to net cash
provided by operating activities:
Inventory obsolescence reserve 210,771 --
Depreciation and amortization 1,211,650 1,036,589
Loss on disposal of fixed assets 6,913 --
Foreign currency loss (59,907) (178,567)
Deferred income taxes (276,200) 49,200
Changes in assets and liabilities:
Accounts receivable 1,341,413 (2,801,404)
Inventories (2,690,349) (842,003)
Notes receivable (39,510) (3,068)
Other current assets (21,510) 260,252
Accounts payable (2,769,938) 174,551
Accrued liabilities 391,864 (70,860)
Income taxes payable (138,937) (107,767)
----------- ----------
Net cash provided by operating activities 4,697,223 4,159,232
----------- ----------
Cash flows from investing activities:
Capital expenditures (967,298) (403,471)
----------- ----------
Net cash used in investing activities (967,298) (403,471)
----------- ----------
Cash flows from financing activities:
Repayment under Term Loan A (2,800,000) (3,157,890)
Repayment under Term Loan B (60,000) (60,000)
Net repayments under line-of-credit agreement (375,000) (645,851)
Repayments of mortgage payable (15,273) (4,895)
----------- ----------
Net cash used in financing activities (3,250,273) (3,868,636)
----------- ----------
Net increase (decrease) in cash and cash
equivalents 479,652 (112,875)
Cash and cash equivalents at beginning of year 2,445,255 2,558,130
----------- ----------
Cash and cash equivalents at end of year $ 2,924,907 2,445,255
----------- ----------
----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 864,833 614,230
----------- ----------
----------- ----------
Income taxes $ 4,193,650 3,505,494
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
6
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
HVL Parent Incorporated and subsidiary (the Company) is a manufacturer
and distributor of quality nutritional supplements with customers
worldwide. The Company's business activity is primarily with
alternative health care providers and distributors.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements, presented in United
States dollars, include the consolidated accounts of HVL Parent
Incorporated (HVL) and its wholly owned subsidiary HVL, Incorporated
(Inc.); Inc.'s nonincorporated trading divisions: Douglas
Laboratories, Professional Series, and Doctor's Care and its wholly
owned subsidiaries: Hi-Vidomin Laboratories, Inc of Delaware, HVL -
FSC, Inc., Douglas Laboratories Europe, B.V., and Advanced Medical
Nutrition, Inc., (AMNI). All intercompany balances and transactions
have been eliminated. The consolidated group is herein referred to as
"the Company".
(c) REVENUE RECOGNITION
The Company recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable.
(d) CASH AND CASH EQUIVALENTS
The Company considers money market accounts with original maturities of
less than three months as cash equivalents.
(e) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market.
(f) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost less accumulated
depreciation. For financial statement purposes, the Company provides
for depreciation using the straight-line method, based on the estimated
useful lives of the related assets as follows:
YEARS
------
Building and improvements 5 - 40
Equipment and machinery 3 - 15
Automobiles 5
Maintenance and repairs, which are not considered to extend the useful
lives of the assets, are charged to operations as incurred.
Expenditures for additions and improvements are capitalized. Upon sale
or retirement, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gains or losses are
included in other income (expense) for the year.
7 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(g) GOODWILL
Goodwill represents the excess of the purchase price paid over the fair
value of the net assets of businesses acquired. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS, which was adopted on October 1, 2002 (the
beginning of HVL's fiscal year 2003), goodwill and purchased
intangibles with indefinite useful lives are no longer amortized but
are reviewed periodically (at least annually) for impairment.
Accordingly, HVL ceased to amortize approximately $10 million of net
goodwill during fiscal 2003.
(h) DEBT ISSUE COSTS
The Company incurred legal, consulting, and bank fees related to the
issuance of debt (note 4). These debt issue costs are amortized over
the remaining life of the respective loans. Amortization expense was
$205,308 and $259,641 during 2005 and 2004, respectively.
(i) FOREIGN CURRENCY TRANSLATION
Foreign exchange gains and losses as a result of translating a foreign
entity's balance sheet from its functional currency into U.S. dollars
are included as other comprehensive income in the consolidated
statements of operations and comprehensive income. Accumulated other
comprehensive income (loss) is reported in the consolidated statements
of stockholders' equity. The functional currency for all of the
Company's foreign operations is the Euro.
(j) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR
INCOME TAXES (Statement 109). Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) CREDIT AND PRODUCT CONCENTRATION RISK
Sales of $11,702,181 or 17% of the Company's 2005 total net sales, were
accounted for by one customer and one product. Accounts receivable
relating to this customer were $1,150,550 as of September 30, 2005.
Sales of $16,851,932 or 25% of the Company's 2004 total net sales were
accounted for by one customer and one product. Accounts receivable
relating to this customer were $2,151,258 as of September 30, 2004.
(l) IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying
8 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
amount of the asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of an asset exceeds the fair value
of the asset.
(m) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under APB
25. For stock options granted, the option price was not less than the
fair market value of shares on the grant date, therefore, no
compensation cost has been recognized. Had compensation cost been
determined under the provisions of SFAS No. 123, the Company's net
income would have been the following on a pro forma basis:
Net income, as reported $7,530,963 6,642,309
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards,
net of tax (26,455) (63,446)
---------- ---------
Pro forma net income $7,504,508 6,578,863
---------- ---------
---------- ---------
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
(o) RECLASSIFICATION
Certain amounts in the 2004 financial statements have been reclassified
to conform with the current year's presentation.
9 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(2) INVENTORIES
Inventories as of September 30, 2005 and 2004 are as follows:
2005 2004
----------- ---------
Raw materials $ 2,790,111 2,800,327
Work-in-process 706,334 515,970
Finished goods 7,725,687 5,215,486
----------- ---------
11,222,132 8,531,783
Less: Reserve for obsolescence 210,771 -
----------- ---------
$11,011,361 8,531,783
----------- ---------
----------- ---------
(3) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are comprised of the following:
2005 2004
----------- ---------
Land $ 67,173 67,173
Building and improvements 936,377 937,112
Equipment and machinery 9,542,893 8,659,234
----------- ---------
10,546,443 9,663,519
Less accumulated depreciation 7,125,597 6,214,995
----------- ---------
Net property, plant,
and equipment $ 3,420,846 3,448,524
----------- ---------
----------- ---------
Depreciation expense was $1,006,342 and $776,948 during 2005 and 2004,
respectively.
10 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(4) LONG-TERM DEBT
Long-term debt consists of the following as of September 30, 2005 and 2004:
2005 2004
----------- ----------
Term Loan A - provides for borrowings of
$14,000,000, principal payments of $700,000
quarterly at either a rate of LIBOR plus 4%
(6.10% as of September 30, 2005) or prime rate
plus 3% (9.75% as of September 30, 2005), due
through January 1, 2007, collateralized by
substantially all the assets of the Company. $ 455,587 3,255,587
Term Loan B - provides for borrowings of
$6,000,000, principal payments of $15,000
quarterly at either a rate of LIBOR plus 4.5%
(6.60% as of September 30, 2005) or prime rate
plus 3.5% (10.25% as of September 30, 2005) and
a balloon payment of $5,715,000 due January 1,
2007, collateralized by substantially all the
assets of the Company. 5,790,000 5,850,000
Revolving line of credit - provides for
borrowings up to $10,000,000, interest only
payments quarterly at either a rate of LIBOR
plus 4% (6.10% as of September 30, 2005), or
prime rate plus 3% (9.75% as of September 30, 2005),
no principal payments required until maturity on
January 30, 2007, collateralized by substantially
all the assets of the Company. 3,979,149 4,354,149
Mortgage payable - bank - payable in quarterly
installments including interest at 9% through
September 2014, collateralized by building
and land. 49,279 64,552
Note payable - vehicle - payable in monthly
installments at 0% interest, due through
August 2007. 18,279 -
----------- ----------
10,292,294 13,524,288
Less current maturities 515,587 2,864,990
----------- ----------
$ 9,776,707 10,659,298
----------- ----------
----------- ----------
The credit agreements for both the line-of-credit facility and the term
loans contain restrictive convenants which, among other things, require the
Company to maintain certain leverage and debt service ratios as well as
certain levels of earnings and cash flows. The credit agreements have
cross-collateral and cross-default provisions. The term loan agreement
requires excess cash flows, as defined in the agreement, to be paid against
the Term Loan A. The Company plans to finance such additional payment of
$81,032 due for fiscal 2005 by borrowing against the revolving line of
credit. The Company was in compliance with all covenants as of September
30, 2005 and 2004. Accrued interest outstanding totaled $31,369 and $48,679
as of September 30, 2005 and 2004, respectively.
11 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
The future maturities on long-term debt based on the credit agreements are
as follows as of September 30, 2005:
2006 $10,238,265
2007 14,130
2008 4,990
2009 34,909
2010 and thereafter -
-----------
$10,292,294
-----------
-----------
(5) STOCKHOLDERS' EQUITY
During 2002, 2000, and 1998, the Board authorized the grant of stock
options for 152,000, 332,500, and 424,000 shares, respectively, of Class A
nonvoting common stock in accordance with the Company's Stock Option and
Grant Plan. Of the 1998 stock options issued, 120,000 were for restricted
shares (as defined below). All options were issued with an exercise price
equal to fair market value at the date of grant, based on an appraisal. All
options vest at a rate of 25% per year (although options on restricted
shares may be exercised early subject to various restrictions) with
immediate vesting upon the occurrence of certain defined transactions and
expire ten years from the date of grant.
Subsequent to issuance, the options were exercised for the 120,000 of
restricted shares, bringing the total number of issued restricted shares of
Class A nonvoting common stock to 240,000. These restricted total shares
were issued to Company officers and members of management. Various
restrictions exist as to the transferability of the shares. In addition,
upon termination of the management member's employment with the Company,
any nonvested shares must be sold back to the Company. During 1999, 94,000
shares were repurchased by the Company. These shares were cancelled as
part of the merger and reorganization during 2002. The restricted shares
vest at the rate of 25% per year with 100% immediate vesting upon the
occurrence of certain defined transactions.
NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------
Outstanding September 30, 2003 532,000 $1.00 - 3.15
Granted - -
Exercised - -
Forfeited - -
----------------- --------------
Outstanding September 30, 2004 532,000 1.00 - 3.15
Granted - -
Exercised - -
Forfeited - -
----------------- --------------
Outstanding September 30, 2005 532,000 $1.00 - 3.15
----------------- --------------
----------------- --------------
12 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
As of September 30, 2005, 494,000 of the outstanding options were vested
and exercisable. All options granted in 1998 have a remaining contractual
life of 2.75 years as of September 30, 2005. All options granted in 2000
have a remaining contractual life of 4.6 years as of September 30, 2005.
All options granted in 2002 have a remaining contractual life of 6.8 years
as of September 30, 2005.
The liquidation preference for the Series A and Series B convertible
participating preferred stock is $9,208,000 and $792,000, respectively.
Dividends are not cumulative, and the stock has voting rights. The stock
has various conversion features into shares of common stock, Class A
nonvoting common stock, and redeemable preferred stock, if 66-2/3% of the
voting power of outstanding convertible participating preferred stock votes
to have a conversion take place. The stock also has automatic conversion
features in certain circumstances. The stock is redeemable by the Company
on or after August 22, 2002, if 66-2/3% of the voting power of outstanding
convertible participating preferred stock votes to have a conversion. The
stock was redeemable prior to August 22, 2002, if certain "extraordinary
transactions" (as defined) took place.
The Series A and Series B redeemable preferred stock, if issued, would
provide for 5% cumulative dividends.
The Class C redeemable preferred stock provided for a cumulative dividend
of $10 per share per annum commencing as of December 31, 1999, and the
stock had no voting rights. The stock was redeemable by the Company on or
after July 31, 2004 if a majority of the outstanding Class C redeemable
preferred stock elected to have a redemption. The stock was redeemable
prior to July 31, 2004, if certain "extraordinary transactions" (as
defined) take place. During 2003, the bank issued an original,
fully-executed consent with respect to the redemption of Class C redeemable
preferred stock in the amount of $3,000,000. During 2003, the Class C
redeemable preferred stock was redeemed in the amount of $3,000,000.
See subsequent events note 13.
(6) DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401(k) and profit sharing plan
covering substantially all of its employees who have met certain
eligibility requirements. Employees are allowed to contribute up to 15% of
their compensation for the plan year to the 401(k) plan. The Company's
matching contributions to the 401(k) plan as well as the contributions to
the profit sharing plan are at the discretion of the board of directors and
are allocated at 50% of the first 10% of the contributions made by each
employee. Matching contributions to the 401(k) plan were $143,298 and
$133,136 in 2005 and 2004, respectively.
(7) LITIGATION AND CLAIMS
The Company is party to various ongoing, pending, and threatened litigation
along with other contingencies arising out of the normal course of
business. Certain of these claims are against a major customer for product
liability to which the Company has been named as a co-defendant. The
ultimate disposition of these claims cannot be determined at this time.
Management believes that these claims, when resolved, will not have any
material adverse effect on the consolidated financial position or results
of operations of the Company.
13 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(8) INCOME TAXES
Income before taxes for the years ended September 30, 2005 and 2004
includes domestic and foreign income as follows:
2005 2004
----------- ----------
Domestic $10,836,679 9,783,945
Foreign 534,594 336,130
----------- ----------
Total income before tax $11,371,273 10,120,075
----------- ----------
----------- ----------
Income tax expense attributable to pretax income for the years ended
September 30, 2005 and 2004 includes current and deferred taxes as follows:
2005 2004
----------- ----------
Current:
Federal $ 3,484,969 3,064,587
State 550,616 249,695
Foreign 80,925 114,284
----------- ----------
Total current 4,116,510 3,428,566
----------- ----------
Deferred:
Federal (143,028) 46,740
State (133,172) 2,460
----------- ----------
Total deferred expense (276,200) 49,200
----------- ----------
Total income tax expense $ 3,840,310 3,477,766
----------- ----------
----------- ----------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
September 30, 2005 and 2004 are presented below:
2005 2004
----------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 83,000 53,800
Accrued expenses 157,000 107,000
Inventory 189,000 89,000
----------- ----------
Total gross deferred tax assets 429,000 249,800
----------- ----------
Deferred tax liabilities:
Property, plant and equipment 547,000 640,000
Other -- 4,000
----------- ----------
Total gross deferred tax liabilities 547,000 644,000
----------- ----------
Net deferred tax assets/(liability) $ (118,000) (394,200)
----------- ----------
----------- ----------
14 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment.
It is the Company's intention to continue to reinvest the undistributed
earnings of its foreign subsidiaries; and, as such, no provision has been
made for U.S. taxes on $2,545,000 of cumulative undistributed earnings of
these foreign subsidiaries. Determination of the potential deferred tax
liability is not practicable as foreign tax credits are expected to be
available to offset any U.S. tax if and when these earnings are
distributed.
The provision for income taxes allocated to pretax income differs from tax
calculated by applying the U.S. statutory federal income tax rate to pretax
income due principally to state income taxes, net of the federal income tax
benefit, foreign income taxed at rates other than the federal income tax
rate, nondeductible expenses, extraterritorial income exclusion, and
research and development tax credits.
There was no tax expense or benefit allocated to the components of
comprehensive income.
(9) LEASING ARRANGEMENTS
The Company leases various facilities, equipment, and vehicles through
noncancelable operating leases. Approximate future minimum lease
obligations under the noncancelable operating leases are as follows:
Year ending September 30:
2006 $1,160,926
2007 1,010,729
2008 635,790
2009 9,422
2010 and thereafter -
----------
$2,816,867
----------
----------
The total rent and lease expense charged to operations was approximately
$1,284,824 and $1,521,412 in 2005 and 2004, respectively.
(10) RESEARCH AND DEVELOPMENT
In the course of normal operations, the Company routinely incurs various
costs that are related to the development and testing of new products. The
total research and development expense charged to operations was
approximately $1,540,083 and $1,482,953 in 2005 and 2004, respectively.
(11) RELATED PARTY TRANSACTIONS
The Company conducts its manufacturing operations at facilities leased from
one of the Company's major stockholders. The lease, accounted for as an
operating lease, provides for an approximate annual base rent of $764,000.
The lease expires on May 31, 2008.
15 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(12) NOTES RECEIVABLE FOR SHARES SOLD
Certain employees exercised their options to purchase Class A nonvoting
common stock in exchange for an interest-bearing note (5.9%) secured by the
shares. The principal balance and any unpaid interest shall be due and
payable on the earlier of July 6, 2008 or when the related shares are
redeemed. The outstanding principal balances of these notes amounted to
$132,592 as of September 30, 2005 and 2004 and are classified as a
reduction of stockholders' equity.
(13) SUBSEQUENT EVENTS
In August 2005, the Company signed a non-binding letter of intent to sell
all of the outstanding stock of the Company to Atrium Biotechnologies, Inc.
(Atrium). As a result of this transaction, the outstanding debt of the
Company will be paid in full, the shareholders of the Company will receive
consideration in cash and shares of Atrium common stock, and the Company
will become a wholly-owned subsidiary of Atrium.
Subsequent to the balance sheet date, on December 8, 2005, all of the
outstanding shares of common stock, common stock Class A nonvoting, and
Series A and Series B convertible participating preferred stock were
acquired by Atrium Biotechnologies, Inc. (Atrium). Atrium paid
approximately $94,000,000 for the Company, of which approximately
$9,000,000 was used to pay the balances outstanding on the revolving line
of credit, term loan A, and term loan B (see note 4), and to pay for legal
expenses related to the sale. Approximately $7,000,000 of the proceeds was
placed in escrow pending resolution of various open items. Upon settlement
of such open items, the remaining escrow amounts will be distributed to the
stockholders of the Company. The remaining $78,000,000 was distributed to
the stockholders of the Company based on their pro rata ownership after
satisfaction of the liquidation preference related to the Series A and
Series B convertible participating preferred stock (see note 5). The
distribution to the stockholders of the Company consists of approximately
$69,000,000 in cash and approximately $9,000,000 in shares of Atrium for
certain of the stockholders.
The balances outstanding on the revolving line of credit, term loan A, and
term loan B were paid in full subsequent to the balance sheet date.
As a result of this transaction, the Company became a wholly owned
subsidiary of Atrium effective December 8, 2005.
(14) RECONCILIATION OF UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of
America (US GAAP). For the year ended September 30, 2005 and 2004, these
principles do not differ materially from Canadian generally accepted
accounting principles (Canadian GAAP) except:
16 (Continued)
HVL PARENT INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
The Series A and Series B convertible participating preferred stock is
convertible, at the option of the holder, into redeemable preferred stock.
Therefore, pursuant to Canadian GAAP, the Series A and Series B convertible
participating preferred stock is classified as a current liability. For US
GAAP purposes, the Series A and Series B convertible participating
preferred stock is classified as equity. In accordance with Canadian GAAP,
the balance sheet would reflect an increase in current liabilities of
$10,000,000 and an equivalent decrease in additional paid-in capital in
stockholders' equity. The consolidated statement of operations and
comprehensive income and consolidated statement of cash flows for the years
ended September 30, 2005 and 2004 would not differ under Canadian GAAP.
17
Unaudited pro forma consolidated financial statements of
AETERNA ZENTARIS INC.
See compilation report
As at September 30, 2005 and for the nine-month period
then ended and for the year ended December 31, 2004
18
COMPILATION REPORT
TO THE DIRECTORS
AETERNA ZENTARIS INC.
We have read the accompanying unaudited consolidated pro forma balance sheet of
AETERNA ZENTARIS INC. (the "Company") as at September 30, 2005 and the unaudited
consolidated pro forma statement of earnings for the nine-month period ended
September 30, 2005 and the year ended December 31, 2004, and have performed the
following procedures:
1. Concerning the unaudited consolidated pro forma balance sheet as at
September 30, 2005:
o Compared and recalculated the figures in the column captioned "AEterna
Zentaris" to the unaudited consolidated balance sheet of the Company as
at September 30, 2005, translated from Canadian dollars into US dollars
using the appropriate CAN to US dollars exchange rate as at
September 30, 2005 and found them to be in agreement;
o Compared the figures in the column captioned "Douglas" to the audited
consolidated balance sheet of HVL Parent Incorporated and subsidiary
("Douglas") as at September 30, 2005, taking into account the US to
Canadian GAAP difference described in the notes thereto, and found them
to be in agreement.
2. Concerning the unaudited consolidated pro forma statement of earnings for
the nine-month period ended September 30, 2005:
o Compared and recalculated the figures in the column captioned "AEterna
Zentaris" to the unaudited consolidated statement of earnings of the
Company for the nine-month period ended September 30, 2005, translated
from Canadian into US dollars using the appropriate CAN to US dollars
average exchange rate for that period and found them to be in
agreement;
o Compared the figures in the column captioned "Douglas - Year ended
September 30, 2005" to the audited statement of earnings of Douglas for
the year ended September 30, 2005, and found them to be in agreement;
o Compared the figures in the column captioned "Douglas - Three-month
period ended December 31, 2004" to the unaudited internal statement of
earnings of Douglas, for the three-month period ended December 31,
2004, and found them to be in agreement.
3. Concerning the unaudited consolidated pro forma statement of earnings for
the year ended December 31, 2004:
o Compared and recalculated the figures in the column captioned "AEterna
Zentaris" to the audited consolidated statement of earnings of the
Company for the year ended December 31, 2004, translated from CAN into
US dollars using the appropriate CAN to US dollars average exchange
rate for that year and found them to be in agreement;
o Compared the figures in the column captioned "Douglas" to the audited
statement of earnings of Douglas, for the year ended September 30,
2004, and found them to be in agreement;
19
4. Made enquiries of certain officials of the Company who have responsibility
for financial and accounting matters about:
(a) the basis for determination of the pro forma adjustments; and
(b) whether the consolidated pro forma financial statements comply as to
form in all material respects with Canadian generally accepted
accounting principles.
The officials:
(a) described to us the basis for determination of the pro forma
adjustments; and
(b) stated that the consolidated pro forma financial statements comply as
to form in all material respects with Canadian generally accepted
accounting principles.
5. Read the notes to the consolidated pro forma financial statements, and
found them to be consistent with the basis described to us for
determination of the pro forma adjustments.
6. Recalculated the application of the pro forma adjustments to the aggregate
of the amounts in the columns captioned "AEterna Zentaris" and "Douglas",
and found the amounts in the column captioned "AEterna Zentaris Pro forma"
to be arithmetically correct.
The consolidated pro forma financial statements are based on management
assumptions and adjustments which are inherently subjective. The foregoing
procedures are substantially less than either an audit or a review, the
objective of which is the expression of assurance with respect to management's
assumptions, the pro forma adjustments and the application of the adjustments to
the historical financial information. Accordingly, we express no such assurance.
The foregoing procedures would not necessarily reveal matters of significance to
the consolidated pro forma financial statements, and we therefore make no
representation about the sufficiency of the procedures for the purposes of a
reader of such financial statements.
[PRICEWATERHOUSECOOPERS SIGNATURE]
CHARTERED ACCOUNTANTS
Quebec, Quebec, Canada
February 21, 2006
20
AETERNA ZENTARIS INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
(Unaudited - See Compilation Report as at September 30, 2005)
(expressed in thousands of US dollars)
AETERNA PRO FORMA AETERNA
ZENTARIS DOUGLAS ADJUSTMENTS ZENTARIS
$ $ $ PRO FORMA
(NOTE 1) (NOTE 1) (NOTE 2) $
-------- -------- ----------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 17,871 2,925 - 20,796
Short-term investments 30,017 - 30,017
Accounts receivable 48,875 9,860 - 58,735
Inventory 22,246 11,011 - 33,257
Prepaid expenses 2,300 371 - 2,671
Future income tax assets 2,629 429 - 3,058
-------- -------- ----------- ---------
123,938 24,596 - 148,534
PROPERTY, PLANT AND EQUIPMENT 16,415 3,421 - 19,836
DEFERRED CHARGES 5,715 273 (273) g) 6,434
719 g)
INTANGIBLE ASSETS 63,372 - 47,800 a) 111,172
GOODWILL 77,574 10,035 32,650 b) 120,259
FUTURE INCOME TAX ASSETS 11,908 - - 11,908
-------- -------- ----------- ---------
298,922 38,325 80,896 418,143
-------- -------- ----------- ---------
-------- -------- ----------- ---------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 42,674 4,207 719 g) 47,600
Income taxes 5,000 281 - 5,281
Redeemable preferred stock - 10,000 (10,000) d) -
Convertible term loans 24,987 - 24,987
Current portion of long-term debt 2,896 516 (516) f) 2,896
-------- -------- ----------- ---------
75,557 15,004 (9,797) 80,764
DEFERRED REVENUES 14,070 - 14,070
LONG-TERM DEBT 18,937 9,777 (9,709) f) 107,520
88,515 f)
EMPLOYEE FUTURE BENEFITS 5,873 - - 5,873
FUTURE INCOME TAX LIABILITIES 19,020 547 16,252 a) 35,819
NON-CONTROLLING INTEREST 56,481 - 6,192 e) j) 62,673
-------- -------- ----------- ---------
189,938 25,328 91,453 306,719
-------- -------- ----------- ---------
SHAREHOLDERS' EQUITY
SHARE CAPITAL 165,699 51 (51) d) 165,699
OTHER CAPITAL 11,573 - 11,573
PAID IN CAPITAL - 1,730 (1,730) d) -
RETAINED EARNINGS (DEFICIT) (57,602) 11,309 (11,309) d) (55,162)
2,440 j)
CUMULATIVE TRANSLATION ADJUSTMENT (10,686) (93) 93 d) (10,686)
-------- -------- ----------- ---------
108,984 12,997 (10,557) 111,424
-------- -------- ----------- ---------
298,922 38,325 80,896 418,143
-------- -------- ----------- ---------
-------- -------- ----------- ---------
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
21
AETERNA ZENTARIS INC.
CONSOLIDATED PRO FORMA STATEMENT OF EARNINGS
(Unaudited- See Compilation Report
for the nine-month period ended September 30, 2005)
(expressed in thousands of US dollars, except per share data)
AETERNA
ZENTARIS DOUGLAS
NINE-MONTH DOUGLAS 3 MONTH-
PERIOD ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, PRO FORMA AETERNA
2005 2005 2004 ADJUSTMENTS ZENTARIS
$ $ $ $ PRO FORMA
(NOTE 1) (NOTE 1) (NOTE 1) (NOTE 2) $
------------- ------------- ------------ ----------- ---------
REVENUES 174,917 69,253 (14,408) - 229,762
------------- ------------- ------------ ----------- ---------
OPERATING EXPENSES
Cost of sales 109,818 43,845 (9,036) (613) i) 144,014
Selling general and administrative 29,790 13,309 (3,239) - 39,860
Research and development costs 19,161 - - 19,161
Research and development tax credits,
grants and other revenues (464) - - - (464)
Depreciation and amortization
Property, plant and equipment 1,695 156 (33) 613 i) 2,431
Intangible assets 3,972 - - 710 c) 4,682
------------- ------------- ------------ ----------- ---------
163,972 57,310 (12,308) 710 209,684
------------- ------------- ------------ ----------- ---------
EARNINGS FROM OPERATIONS 10,945 11,943 (2,100) (710) 20,078
------------- ------------- ------------ ----------- ---------
OTHER REVENUES (EXPENSES)
Interest income 1,070 76 (7) - 1,139
Interest expense (7,067) (1,053) 262 (3,802) f) (11,840)
(180) g)
Foreign exchange gain (loss) (352) 405 (146) - (93)
------------- ------------- ------------ ----------- ---------
(6,349) (572) 109 (3,982) (10,794)
------------- ------------- ------------ ----------- ---------
EARNINGS BEFORE THE FOLLOWING ITEMS 4,596 11,371 (1,991) (4,692) 9,284
INCOME TAX EXPENSE
Current 4,504 4,116 (744) (1,595) h) 6,281
Future 1,915 (276) 47 - 1,686
------------- ------------- ------------ ----------- ---------
6,419 3,840 (697) (1,595) 7,967
------------- ------------- ------------ ----------- ---------
EARNINGS (LOSS) BEFORE THE FOLLOWING ITEMS (1,823) 7,531 (1,294) (3,097) 1,317
GAIN ON DILUTION OF INVESTMENTS 16,505 - - - 16,505
NON-CONTROLLING INTEREST (5,048) - - (1,507) e) (6,555)
------------- ------------- ------------ ----------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD 9,634 7,531 (1,294) (4,604) 11,267
------------- ------------- ------------ ----------- ---------
------------- ------------- ------------ ----------- ---------
NET EARNINGS PER SHARE
Basic 0.21 0.24
------------- ---------
------------- ---------
Diluted 0.21 0.24
------------- ---------
------------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S)
Basic 46,140 46,140
------------- ---------
------------- ---------
Diluted 46,459 46,459
------------- ---------
------------- ---------
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
22
AETERNA ZENTARIS INC.
CONSOLIDATED PRO FORMA STATEMENT OF EARNINGS
(Unaudited - See Compilation Report
for the twelve-month period ended December 31, 2004)
(expressed in thousands of US dollars, except per share data)
AETERNA
ZENTARIS DOUGLAS
YEAR ENDED YEAR ENDED
DECEMBER SEPTEMBER 30, PRO FORMA AETERNA
31, 2004 2004 ADJUSTMENTS ZENTARIS PRO
$ $ $ FORMA
(NOTE 1) (NOTE 1) (NOTE 2) $
---------- ------------- ----------- ------------
REVENUES 179,212 67,724 - 246,936
---------- ------------- ----------- ------------
OPERATING EXPENSES
Cost of sales 103,368 42,643 (724) i) 145,287
Selling, general and administrative 32,422 14,315 46,737
Research and development costs 24,365 - - 24,365
Research and development tax credits, grants and
other revenues (1,034) - - (1,034)
Depreciation and amortization
Property, plant and equipment 2,451 133 724 i) 3,308
Intangible assets 4,447 - 947 c) 5,394
---------- ------------- ----------- ------------
166,019 57,091 947 224,057
---------- ------------- ----------- ------------
EARNINGS FROM OPERATIONS 13,193 10,633 (947) 22,879
---------- ------------- ----------- ------------
OTHER REVENUES (EXPENSES)
Interest income 1,044 12 - 1,056
Interest expense (6,276) (857) (5,062) f) (12,435)
(240) g)
Foreign exchange gain (loss) (707) 332 - (375)
---------- ------------- ----------- ------------
(5,939) (513) (5,302) (11,754)
---------- ------------- ----------- ------------
EARNINGS (LOSS) BEFORE THE FOLLOWING ITEMS 7,254 10,120 (6,249) 11,125
INCOME TAX EXPENSE
Current 10,526 3,429 (2,125) h) 11,830
Future (4,160) 49 - (4,111)
---------- ------------- ----------- ------------
6,366 3,478 (2,125) 7,719
---------- ------------- ----------- ------------
EARNINGS (LOSS) BEFORE THE FOLLOWING ITEMS 888 6,642 (4,124) 3,406
LOSS ON DILUTION OF INVESTMENT (485) - - (485)
NON-CONTROLLING INTEREST (4,828) - (1,025) e) (5,853)
---------- ------------- ----------- ------------
NET EARNINGS (LOSS) FOR THE PERIOD (4,425) 6,642 (5,149) (2,932)
---------- ------------- ----------- ------------
---------- ------------- ----------- ------------
NET LOSS PER SHARE
Basic and diluted (0.10) (0.06)
---------- ------------
---------- ------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
(000'S) 45,569 45,569
---------- ------------
---------- ------------
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
23
AETERNA ZENTARIS INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
(expressed in thousands of US dollars)
1. BASIS OF PRESENTATION
The unaudited consolidated pro forma financial statements of AEterna
Zentaris Inc. (the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles to give effect to the
transactions described below as if they had occurred on September 30, 2005
for the unaudited consolidated pro forma balance sheet and on January 1,
2005 or January 1, 2004 for the unaudited consolidated pro forma statement
of earnings.
On December 8, 2005, the Company's subsidiary, Atrium Biotechnologies Inc.
("Atrium"), acquired all of the outstanding shares of HVL Parent
Incorporated ("Douglas") whose main brand is Douglas Laboratories. This
company markets health and nutrition products through healthcare
practitioners mainly in the United States.
This acquisition was made for a total consideration of $86,922,000 of which
an amount of $75,365,000, including all acquisition-related costs, was paid
in cash and $8,632,000 was paid by Atrium's subordinate voting shares
issued to certain Douglas management shareholders at the price of CAN$10.95
per share. The cash portion came from cash on hand and from the newly
renegotiated revolving credit facility.
This acquisition has been accounted for using the purchase method whereby
the purchase price was allocated between the assets acquired and
liabilities assumed based on management's estimate of the fair value on the
date of acquisition. The excess of the price over the net identifiable
tangible assets acquired has been included in the identifiable and
non-identifiable intangible assets according to management's best estimate.
The purchased price allocation will be finalized upon the reception of an
independent valuation report.
On November 8, 2005, Atrium amended its revolving credit facility, to
increase the authorized amount from $64,488,000 (CAN$75,000,000) to
$107,481,000 (CAN$125,000,000) and concluded in the same period an interest
swap for an amount of $43,003,000 (CAN$50,000,000) converting a variable
interest rate to a fixed interest rate.
The unaudited consolidated pro forma balance sheet as at September 30, 2005
has been prepared by combining the unaudited consolidated balance sheet of
AEterna Zentaris as at September 30, 2005 translated from CAN to US dollars
using the appropriate exchange rate stated below and the audited
consolidated balance sheet of Douglas as at September 30, 2005 prepared in
accordance with accounting principles accepted in the United States
(U.S.GAAP) and taking into account the reconciliation to Canadian Generally
Accepted Accounting Principles (CAN GAAP) disclosed in Note 14 thereto. The
unaudited consolidated pro forma statement of earnings for the nine-month
period ended September 30, 2005 has been prepared by combining the
unaudited consolidated statement of earnings for the nine-month period
ended September 30, 2005 of the Company, translated from CAN to US dollars
using the appropriate exchange rate stated below, plus the Douglas audited
consolidated statement of earnings for the year ended September 30, 2005
less the Douglas internal unaudited consolidated statement of earnings for
the three-month period ended December 31, 2004. As indicated in note 14 to
the audited financial statements of Douglas, no adjustments are necessary
from U.S.GAAP to CAN GAAP in the statements of earnings for the periods
presented in such financial statements. The unaudited consolidated pro
forma statement of earnings for the year ended December 31, 2004 has been
prepared by combining the audited consolidated statement of earnings of the
Company for the same period, translated from CAN to US dollars using the
appropriate exchange rate stated below and the audited statement of
earnings of Douglas for the year ended September 30, 2004.
24
AETERNA ZENTARIS INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
(expressed in thousands of US dollars)
In December 2005, the Company decided to change its reporting currency from
Canadian dollars to US dollars to provide more relevant information considering
its predominant operations in the United States and its US dollar denominated
debt. Accordingly, the unaudited consolidated balance sheet of the Company as at
September 30, 2005, the unaudited consolidated statement of earnings for the
nine-month period ended September 30, 2005 and the audited consolidated
statement of earnings ended December 31, 2004 of the Company had been translated
to US dollars using the current rate method using the exchange rates disclosed
below. Under this method, assets and liabilities are translated into US dollars
using the exchange rate in effect at the balance sheet date. Revenues and
expenses are translated at the average rate in effect during the period. Gains
and losses are included in cumulative translation adjustments account in the
shareholders' equity. The functional currencies of the Company and each of its
subsidiaries remained unchanged.
Rate as at September 30, 2005 1.1627
Average rate for the nine-month period ended September 30, 2005 1.2240
Average rate for 2004 1.3015
The unaudited consolidated pro forma financial statements should be read in
conjunction with the audited financial statements of the Company for the year
ended December 31, 2004 with the audited financial statements of Douglas for the
year ended September 30, 2005 and 2004 incorporated in the Business Acquisition
Report.
The unaudited consolidated pro forma financial statements have been prepared for
illustrative purposes only and are based on the assumptions set forth in the
accompanying notes to such statements. These financial statements are not
necessarily indicative of the operating results that would have been obtained or
the financial position that would have prevailed had the applicable transactions
actually taken place on the date indicated or of actual operating results or
financial position of the stand-alone or combined entities. The pro forma
adjustments are based on currently available information and management's
estimates and assumptions. Actual adjustments will differ from the pro forma
adjustments. Management believes that such adjustments provide reasonable basis
for presenting all the significant effects of the transactions.
25
AETERNA ZENTARIS INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
(expressed in thousand of US dollars)
2. PRO FORMA ASSUMPTIONS
ACQUISITION OF DOUGLAS
The preliminary purchase price allocation has been based on best estimates
from Atrium's management. The final allocation will be made by an
independent valuation firm and may differ from the figures used for the
preparation of the unaudited consolidated pro forma financial statements.
The assets acquired and liabilities assumed in the unaudited consolidated
pro forma balance sheet are as follows:
The preliminary purchase price allocation of Douglas, on a pro forma basis,
is summarized as follows:
$
--------
Assets
Current assets 24,596
Property, plant and equipment 3,421
Intangible assets
Customer relationships 8,000
Trademarks 39,800
--------
75,817
--------
Liabilities
Current liabilities 5,004
Long-term liabilities 9,777
Future income tax liabilities 16,799
--------
31,580
--------
Net identified assets acquired 44,237
Goodwill 42,685
--------
Purchase price 86,922
Less
Cash and cash equivalent acquired 2,925
Atrium subordinate voting shares issued 8,632
--------
Net cash used for the acquisition 75,365
--------
--------
(a) To reflect intangible assets identified totalling $47,800,000 for
Customer relationships and Trademarks and related future income tax
liabilities totalling $16,252,000.
(b) To reflect the net increase in Goodwill.
(c) To reflect the preliminary amortization of Customer relationships
amortized over a period of 5 to 15 years. An amortization expense
totalling $710,000 for the nine-month period ended September 30, 2005
and $947,000 for the year ended December 31, 2004 is accounted for in
the unaudited consolidating financial statements of earnings.
Trademarks acquired are indefinite-lived intangible assets and are not
amortized.
(d) Shareholder's equity of Douglas is eliminated on a consolidated basis.
(e) To reflect the non-controlling interest.
26
AETERNA ZENTARIS INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
(expressed in US dollars)
FINANCING OF THE ACQUISITION OF DOUGLAS
(f) This acquisition was financed by Atrium's amended revolving credit
facility. For the pro forma, the old debt of Douglas totalling
$10,225,000 (short term of $516,000 and long-term of $9,709,000) has
been repaid and an increase of Atrium's amended revolving credit
facility has been recorded for a total amount of $88,515,000. An
interest rate of 6.27 % has been used, which is the current rate of
borrowing under this revolving credit facility as of December 31,
2005. This increase of long term debt, taking into account the
reimbursement of the old Douglas debt by Atrium's amended credit
facility produces a net interest expense increase of $3,802,000 in the
pro forma consolidated statement of earnings for the nine-month period
ended September 30, 2005 and $5,062,000 for the year ended December
31, 2004.
(g) The interest expense adjustment takes into account the amortization
related to financing fees. The old debt of Douglas related deferred
financing costs totalling $273,000 has not been considered in the
purchased price allocation. For the new amended credit facility, the
financing cost totals $719,000 and is amortized over the new revolving
credit facility period of 3 years. An amortization expense totalling
$180,000 for the nine-month period ended September 30, 2005 and
$240,000 for the year ended December 31, 2004 is accounted for in the
pro forma consolidated statement of earnings as interest expense. The
net increase of the deferred financing costs is therefore $446,000 for
the adjustment in the pro forma consolidated balance sheet as of
September 30, 2005.
(h) The income tax expense has been adjusted by of $1,595,000 for the
nine-month period ended September 30, 2005 and of $2,125,000 for the
year ended December 31, 2004 to reflect the increase of interest
expense deductible for income tax purposes and the tax effect on
amortization of intangible assets with finite lives.
RECLASSIFICATION OF DEPRECIATION
(i) The depreciation included in the cost of goods of Douglas has been
reclassified on the line Depreciation of the pro forma consolidated
statements of earnings to reflect the same presentation used by the
Company.
GAIN ON DILUTION
(j) Pursuant to the issuance of Atrium's subordinate voting shares, a gain
on dilution of investments was recognized in the balance sheet and due
to the non-recurring nature, the gain on dilution was not reflected in
the proforma statements of earnings.
27
SIGNATURE
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.
AETERNA ZENTARIS INC.
DATE: APRIL 28, 2006 By: /S/ MARIO PARADIS
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Mario Paradis
Senior Finance Director and Corporate Secretary