1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO __________. COMMISSION FILE NUMBER: 0-4829-03 NABI (Exact name of registrant as specified in its charter) DELAWARE 59-1212264 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5800 PARK OF COMMERCE BOULEVARD N.W., BOCA RATON, FL 33487 (Address of principal executive offices, including zip code) (561) 989-5800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of registrant's common stock at July 28, 2001 was 38,044,796 shares.
2 NABI - ------------------------------------------------------------------------------- INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ........................................................................3 - Consolidated Balance Sheets, June 30, 2001 and December 30, 2000.......................3 - Consolidated Statements of Income for the three months and six months ended June 30, 2001 and July 1, 2000...................................................4 - Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and July 1, 2000..................................................5 - Notes to Consolidated Financial Statements.............................................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS...........................................................................14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................15 SIGNATURES..................................................................................16 </TABLE> 2
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NABI - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) JUNE 30, DECEMBER 30, 2001 2000 ------------- ------------ (Amounts in Thousands, Except per Share Data) <S> <C> <C> ASSETS CURRENT ASSETS: Cash $ 1,954 $ 1,554 Trade accounts receivable, net 34,435 38,315 Inventories, net 30,261 32,602 Prepaid expenses and other current assets 3,312 5,405 --------- --------- TOTAL CURRENT ASSETS 69,962 77,876 PROPERTY AND EQUIPMENT, NET 124,243 120,188 OTHER ASSETS: Goodwill 12,145 12,509 Intangible assets, net 6,896 7,091 Other, net 6,535 6,823 --------- --------- TOTAL ASSETS $ 219,781 $ 224,487 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 12,921 $ 15,923 Accrued expenses 23,305 21,359 Notes payable 1,000 1,000 --------- --------- TOTAL CURRENT LIABILITIES 37,226 38,282 NOTES PAYABLE 101,978 108,535 OTHER LIABILITIES 241 276 --------- --------- TOTAL LIABILITIES 139,445 147,093 --------- --------- STOCKHOLDERS' EQUITY: Convertible preferred stock, par value $.10 per share: 5,000 shares authorized; no shares outstanding -- -- Common stock, par value $.10 per share: 75,000 shares authorized; 38,041 and 37,833 shares issued and outstanding, respectively 3,804 3,783 Capital in excess of par value 153,363 152,642 Accumulated deficit (76,831) (79,031) --------- --------- TOTAL STOCKHOLDERS' EQUITY 80,336 77,394 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 219,781 $ 224,487 ========= ========= </TABLE> See accompanying notes to consolidated financial statements 3
4 NABI - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> (UNAUDITED) FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2001 2000 2001 2000 --------- --------- --------- --------- (Amounts in Thousands, Except per Share Data) <S> <C> <C> <C> <C> SALES $ 65,288 $ 57,581 $ 125,466 $ 113,421 COSTS AND EXPENSES: Costs of products sold 44,764 39,888 88,941 78,350 Royalty expense 3,113 2,809 5,477 5,730 Selling, general and administrative expense 11,086 8,687 20,015 17,121 Research and development expense 3,900 3,781 6,878 7,777 Other operating expense, principally freight and amortization 431 457 887 957 --------- --------- --------- --------- OPERATING INCOME 1,994 1,959 3,268 3,486 INTEREST INCOME 7 10 13 136 INTEREST EXPENSE (410) (980) (944) (2,005) OTHER INCOME (EXPENSE), NET 3 3 (22) 74 --------- --------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY GAIN 1,594 992 2,315 1,691 PROVISION FOR INCOME TAXES (79) (45) (115) (67) --------- --------- --------- --------- INCOME BEFORE EXTRAORDINARY GAIN 1,515 947 2,200 1,624 EXTRAORDINARY GAIN, NET OF INCOME TAXES -- 340 -- 340 --------- --------- --------- --------- NET INCOME $ 1,515 $ 1,287 $ 2,200 $ 1,964 ========= ========= ========= ========= BASIC EARNINGS PER SHARE: INCOME BEFORE EXTRAORDINARY GAIN $ 0.04 $ 0.03 $ 0.06 $ 0.05 EXTRAORDINARY GAIN 0.00 0.01 0.00 0.01 --------- --------- --------- --------- NET INCOME $ 0.04 $ 0.04 $ 0.06 $ 0.06 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE: INCOME BEFORE EXTRAORDINARY GAIN $ 0.04 $ 0.03 $ 0.06 $ 0.04 EXTRAORDINARY GAIN 0.00 0.01 0.00 0.01 --------- --------- --------- --------- NET INCOME $ 0.04 $ 0.04 $ 0.06 $ 0.05 ========= ========= ========= ========= BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 37,939 35,761 37,889 35,573 ========= ========= ========= ========= DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 39,179 36,735 38,933 36,781 ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements 4
5 NABI - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (unaudited) FOR THE SIX MONTHS ENDED ----------------------------- JUNE 30, 2001 JULY 1, 2000 ------------- ------------ <S> <C> <C> (Dollars in Thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 2,200 $ 1,964 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,308 5,036 Provision for doubtful accounts 7 (28) Provision for slow moving or obsolete inventory 2,096 717 Non-cash compensation 835 -- Extraordinary gain -- (340) Other 95 14 Changes in assets and liabilities: Decrease in trade accounts receivable 3,873 1,765 Decrease in inventories 245 1,790 Decrease in prepaid expenses and other assets 2,093 1,262 Increase in other assets (6) (87) Decrease in accounts payable and accrued liabilities (1,556) (8,386) -------- -------- Total adjustments 12,990 1,743 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,190 3,707 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures (8,406) (9,667) Expenditures for other assets (199) -- -------- -------- NET CASH USED BY INVESTING ACTIVITIES (8,605) (9,667) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: (Repayments) borrowings under line of credit (6,057) 3,780 Repayments of term debt (500) (167) Other debt repayments -- (39) Proceeds from exercise of employee stock options 372 3,166 -------- -------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (6,185) 6,740 -------- -------- NET INCREASE IN CASH 400 780 CASH AT BEGINNING OF PERIOD 1,554 806 -------- -------- CASH AT END OF PERIOD $ 1,954 $ 1,586 ======== ======== </TABLE> See accompanying notes to consolidated financial statements 5
6 NABI - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. OVERVIEW Nabi is focused on the discovery, development and commercialization of products that prevent and treat infectious and autoimmune diseases. We are nearing completion of a multi-year transition from being a leading provider of antibody products into becoming a vertically integrated biopharmaceutical company. We currently have an extensive pipeline of innovative drugs and vaccines in clinical and pre-clinical development and have four marketed biopharmaceutical products: Nabi-HB(TM) [Hepatitis B Immune Globulin (Human)], WinRho SDF(R) [Rho (D) Immune Globulin Intravenous (Human)], Autoplex(R) T (Anti-Inhibitor Coagulant Complex, Heat Treated) and Aloprim(TM) [(Allopurinol sodium) for injection]. We are also one of the largest collectors and suppliers of specialty and non-specific antibody products in the world. We collect these products from an extensive donor base in the U.S. Some of these antibodies are used in the production of our biopharmaceutical products. Most are supplied to other biopharmaceutical and diagnostic companies for the manufacture of numerous products. On June 25, 2001, we signed a definitive agreement to sell the operating assets of a majority of our antibody collection business to CSL Limited (CSL). The agreement covers 47 of our total 56 antibody collection centers and the majority of our testing laboratory. In return, we will receive a cash payment of $152 million from CSL subject to closing adjustments. We will retain accounts receivable and accounts payable at the closing date and retain certain inventory that will be used in the production of our biopharmaceutical products. The transaction is subject to customary closing conditions and is scheduled to close by the end of the third quarter of 2001. The consolidated financial statements include the accounts of Nabi and its subsidiaries. All significant intercompany accounts and transactions were eliminated during consolidation. These statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2000. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary to present fairly, our consolidated financial position as of June 30, 2001 and the consolidated results of our operations for the three months and six months ended June 30, 2001 and July 1, 2000 and our cash flows for the six months ended June 30, 2001 and July 1, 2000. The interim results of operations are not necessarily indicative of the results that may occur for the fiscal year. NOTE 2. INVENTORIES The components of inventories, stated at the lower of cost or market with cost determined on the first-in first-out (FIFO) method, are as follows: JUNE 30, DECEMBER 30, 2001 2000 -------- ------------ (Dollars in Thousands) Finished goods $26,937 $28,852 Work in process 1,171 1,055 Raw materials 2,153 2,695 ------- ------- TOTAL $30,261 $32,602 ======= ======= 6
7 NOTE 3. EARNINGS PER SHARE The following is a reconciliation between basic and diluted earnings per share: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ------------------------------------------------ -------------------------------------------------- Effect of Effect of Dilutive Dilutive Securities: Securities: Basic EPS Stock Options Diluted EPS Basic EPS Stock Options Diluted EPS ------------- -------------- --------------- ---------------- -------------- --------------- (Amounts in Thousands, Except per Share Data) <S> <C> <C> <C> <C> <C> <C> JUNE 30, 2001 Net income $ 1,515 -- $ 1,515 $ 2,200 -- $ 2,200 Shares 37,939 1,240 39,179 37,889 1,044 38,933 Per share $ 0.04 -- $ 0.04 $ 0.06 -- $ 0.06 ------- ------- ------- ------- ------- ------- JULY 1, 2000 Net income $ 1,287 -- $ 1,287 $ 1,964 -- $ 1,964 Shares 35,761 974 36,735 35,573 1,208 36,781 Per share $ 0.04 -- $ 0.04 $ 0.06 -- $ 0.05 ======= ======= ======= ======= ======= ======= </TABLE> NOTE 4. OPERATING SEGMENT INFORMATION The following table presents information related to our two operating business segments: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ---------------------------------- ---------------------------------- JUNE 30, 2001 JULY 1, 2000 JUNE 30, 2001 JULY 1, 2000 ------------- ------------ ------------- ------------ (Dollars in Thousands) <S> <C> <C> <C> <C> SALES: Biopharmaceutical products $ 18,860 $ 17,781 $ 33,974 $ 34,002 Antibody products 46,428 39,800 91,492 79,419 --------- --------- --------- --------- TOTAL $ 65,288 $ 57,581 $ 125,466 $ 113,421 ========= ========= ========= ========= OPERATING INCOME (LOSS): Biopharmaceutical products $ 1,827 $ 3,828 $ 3,627 $ 5,753 Antibody products 167 (1,869) (359) (2,267) --------- --------- --------- --------- TOTAL $ 1,994 $ 1,959 $ 3,268 $ 3,486 ========= ========= ========= ========= </TABLE> 7
8 The following summary reconciles reportable segment operating income to income before provision for income taxes and extraordinary gain: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ----------------------------- ---------------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2001 2000 2001 2000 ------- ------- ------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY GAIN: Reportable segment operating income $ 1,994 $ 1,959 $ 3,268 $ 3,486 Unallocated interest income 7 10 13 136 Unallocated interest expense (410) (980) (944) (2,005) Unallocated other income (expense), net 3 3 (22) 74 ------- ------- ------- ------- Income before provision for income taxes and extraordinary gain $ 1,594 $ 992 $ 2,315 $ 1,691 ======= ======= ======= ======= </TABLE> NOTE 5. NEW ACCOUNTING PRONOUNCEMENT In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," (SFAS No. 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 eliminated the pooling of interest method of accounting for business combinations initiated after June 30, 2001. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangibles acquired prior to July 1, 2001, companies are required to adopt SFAS No. 142 in their fiscal year beginning after December 15, 2001. The adoption of SFAS No. 142 for fiscal year 2002 will result in our discontinuation of amortization of our goodwill which was $0.4 million for the first six months of 2001. We will be required to test our goodwill for impairment under the new standard beginning in the first quarter of 2002. NOTE 6. OTHER INFORMATION We have advised Baxter Healthcare Corporation (Baxter) that we are terminating a contract to supply antibodies to Baxter. The contract, by its terms, extends until December 31, 2004. We believe the contract permits us to terminate it if it becomes commercially unreasonable for us to perform under the contract. Baxter is contesting this termination and has invoked an arbitration provision in the contract to resolve the controversy. We have asserted counterclaims against Baxter in the arbitration proceeding. Pending the resolution of the arbitration, we are continuing to supply antibodies to Baxter as if the contract had not been terminated. 8
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On June 25, 2001, we signed a definitive agreement to sell the operating assets of a majority of our antibody collection business to CSL Limited (CSL). The agreement covers 47 of our total 56 antibody collection centers and the majority of our testing laboratory. In return, we will receive a cash payment of $152 million from CSL subject to closing adjustments. We will retain accounts receivable and accounts payable at the closing date and retain certain inventory that will be used in the production of our biopharmaceutical products. The transaction is subject to usual closing conditions and is scheduled to close by the end of the third quarter of 2001. The following is a discussion and analysis of the major factors contributing to our financial condition and results of operations for the three months and six months ended June 30, 2001 and July 1, 2000. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto. All dollar amounts are expressed in thousands, except per share data. RESULTS OF OPERATIONS The following table sets forth our results of operations expressed as a percentage of sales: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2001 2000 2001 2000 -------- ------- -------- -------- <S> <C> <C> <C> <C> SALES 100.0% 100.0% 100.0% 100.0% Costs of products sold 68.5% 69.3% 70.9% 69.1% Royalty expense 4.8% 4.9% 4.4% 5.0% Selling, general and administrative expense 17.0% 15.1% 15.9% 15.1% Research and development expense 6.0% 6.5% 5.5% 6.9% Other operating expense, principally amortization and freight 0.7% 0.8% 0.7% 0.8% ----- ----- ----- ----- OPERATING INCOME 3.0% 3.4% 2.6% 3.1% INTEREST INCOME 0.0% 0.0% 0.0% 0.0% INTEREST EXPENSE (0.6)% (1.7)% (0.8)% (1.8)% OTHER INCOME (EXPENSE), NET 0.0% 0.0% 0.0% 0.2% ----- ----- ----- ----- INCOME BEFORE PROVISION FOR INCOME TAXES AND 2.4% 1.7% 1.8% 1.5% EXTRAORDINARY GAIN PROVISION FOR INCOME TAXES (0.1)% (0.1)% (0.1)% (0.1)% ----- ----- ----- ----- INCOME BEFORE EXTRAORDINARY GAIN 2.3% 1.6% 1.7% 1.4% EXTRAORDINARY GAIN, NET 0.0% 0.6% 0.0% 0.3% ----- ----- ----- ----- NET INCOME 2.3% 2.2% 1.7% 1.7% ===== ===== ===== ===== </TABLE> 9
10 Information concerning our sales by operating segments is set forth in the following table: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED --------------------------------------------------------- JUNE 30, 2001 JULY 1, 2000 ------------------------- ------------------------- (Dollars in Thousands) <S> <C> <C> <C> <C> BIOPHARMACEUTICAL PRODUCTS $ 18,860 28.9% $ 17,781 30.9% -------- ------ -------- ------ ANTIBODY PRODUCTS: -Specialty antibodies 14,961 22.9 15,620 27.1 -Non-specific antibodies 31,467 48.2 24,180 42.0 -------- ------ -------- ----- 46,428 71.1 39,800 69.1 -------- ------ -------- ------ Total $ 65,288 100.0% $ 57,581 100.0% ======== ====== ======== ====== </TABLE> <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED --------------------------------------------------------- JUNE 30, 2001 JULY 1, 2000 ------------------------- ------------------------- (Dollars in Thousands) <S> <C> <C> <C> <C> BIOPHARMACEUTICAL PRODUCTS $ 33,974 27.1% $ 34,002 30.0% -------- ------ -------- ------ ANTIBODY PRODUCTS: -Specialty antibodies 29,587 23.6 29,829 26.3 -Non-specific antibodies 61,905 49.3 49,590 43.7 -------- ------ -------- ------ 91,492 72.9 79,419 0.0 -------- ------ -------- ------ TOTAL $125,466 100.0% $113,421 100.0% ======== ====== ======== ====== </TABLE> FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JULY 1, 2000 SALES. Sales for the second quarter of 2001 were $65.3 million compared to $57.6 million for the second quarter of 2000, an increase of $7.7 million or 13%. Biopharmaceutical product sales increased in the second quarter of 2001 by approximately 6% from the 2000 second quarter due to higher sales of WinRho SDF(R) [Rho (D) Immune Globulin Intravenous (Human)] and Aloprim(TM) [(Allopurinol sodium) for injection], offset by lower sales of Nabi-HB(TM) [Hepatitis B Immune Globulin (Human)]. We believe that lower Nabi-HB sales in the second quarter of 2001 compared to the second quarter of 2000 primarily reflect inventory management by our wholesaler customers, including consolidation within the industry. We believe patient demand has increased for Nabi-HB based on our review of end user data. Total antibody sales increased $6.6 million from the comparable quarter in 2000 and was driven by non-specific antibody product sales increases resulting from almost equal parts higher pricing and increased volume. GROSS PROFIT MARGIN AFTER ROYALTY EXPENSE. Gross profit and related margin for the second quarter of 2001 was $17.4 million, or 27% of sales, compared to $14.9 million, or 26% of sales, in the second quarter of 2000. Gross profit increases reflected sales increases for biopharmaceutical sales and antibody product sales. Gross profit margin from biopharmaceutical sales in the second quarter of 2000 benefited from a non-performance penalty due to us as a result of contractual delivery shortfalls by the supplier of Autoplex(R) T (Anti-Inhibitor Coagulant Complex, Heat Treated). Royalty expense as a percentage of biopharmaceutical sales was essentially even for the second quarters of 2001 and 2000. 10
11 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense was $11.1 million, or 17% of sales, for the second quarter of 2001 compared to $8.7 million, or 15% of sales, in the second quarter of 2000. These increased expenses reflect one-time costs related to management changes and certain consulting expenses related to advancing our partnering discussions as well as other compensation expense. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was $3.9 million, or 6% of sales, for the second quarter of 2001 compared to $3.8 million, or 7% of sales, in the second quarter of 2000. Research and development expense in the second quarter of 2001 included expenses for initiation of a booster study and planning for the second Phase 3 clinical trial for Nabi(R) StaphVAX(R) (STAPHYLOCOCCUS AUREUS Polysaccharide Conjugate Vaccine). INTEREST EXPENSE. Interest expense for the second quarter of 2001 was $0.4 million, or 1% of sales, compared to $1.0 million, or 2% of sales, in the second quarter of 2000. The decrease is primarily attributable to lower interest rates for short term borrowings and a lower average bank borrowing for the quarter. Capitalized interest relating to construction of our biopharmaceutical manufacturing facility in Boca Raton, Florida was approximately $1.6 million and $1.4 million for the quarters ending June 30, 2001 and July 1, 2000, respectively. Once our Boca Raton, Florida facility is ready for its intended use, which is the manufacture for sale of Nabi-HB in an FDA approved environment, interest and other cash costs of operating the plant currently being capitalized will become expenses. Licensure of the Boca Raton, Florida facility for the manufacture of Nabi-HB is expected to occur in 2001. At that time, we will also begin to depreciate the capitalized cost of the plant. The total capitalized value of the facility was approximately $86.6 million at June 30, 2001. OTHER FACTORS. The provision for income taxes was $79 thousand for the second quarter of 2001 compared to a provision of $45 thousand in the second quarter of 2000. The 12% effective tax rate in the second quarter of 2001 differs from the statutory rate of 35% due to our expectation of realizing a current year benefit from the use of a portion of our net operating loss carryforwards from prior years. FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JULY 1, 2000 SALES. Sales for the first six months of 2001 were $125.5 million compared to $113.4 million for the comparable period of 2000, an increase of $12.1 million or 11%. Biopharmaceutical product sales were essentially even in the first half of 2001 compared to the first half of 2000. During the 2001 period, the increase in sales of WinRho SDF and Aloprim was offset by lower sales of Nabi-HB and Autoplex T. We believe that lower Nabi-HB sales in the first six months of 2001 compared to the first six months of 2000 primarily reflect inventory management by our wholesaler customers, including consolidation within the industry. We believe patient demand has increased for Nabi-HB based on our review of end user data. Sales of Autoplex T continued to be limited by contract production issues at the manufacturer for this product. Total antibody sales increased $12.1 million from the comparable first six months of 2000 driven by non-specific antibody product sales resulting primarily from higher pricing accounting for approximately two-thirds of the sales increase, and some increased volumes. GROSS PROFIT MARGIN AFTER ROYALTY EXPENSE. Gross profit after royalty expense and related margin for the first half of 2001 was $31.0 million, or 25% of sales, compared to $29.3 million, or 26% of sales, in the first half of 2000. Gross profit increases reflected increases in biopharmaceutical sales and antibody product sales. Gross profit margin from biopharmaceutical sales in the first six months of 2001 was impacted by an inventory reserve primarily related to product dating. Gross profit margin from biopharmaceutical sales for the six months of 2000 benefited from a greater non-performance penalty due to us as a result of contractual delivery shortfalls by the supplier of Autoplex T than the first six months of 2001. Royalty expense as a percentage of biopharmaceutical sales was essentially even for the first six months of 2001 and 2000. 11
12 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense was $20.0 million, or 16% of sales, for the first six months of 2001 compared to $17.1 million, or 15% of sales, in the comparable period of 2000. The increased expenses primarily reflect one-time costs related to management changes and certain consulting expenses related to advancing our partnering discussions as well as other compensation expense. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was $6.9 million, or 5% of sales, for the first six months of 2001 compared to $7.8 million, or 7% of sales, in the comparable period of 2000 and included expenses for initiation of a booster study and planning for the second Phase 3 clinical trial for Nabi StaphVAX. Research and development expense in the first six months of 2001 benefited from reimbursement under a grant from the National Institute of Health for the Nabi(R) NicVAX(TM) (Nicotine Conjugate Vaccine) program. INTEREST EXPENSE. Interest expense for the first half of 2001 was $1.0 million, or 1% of sales, compared to $2.0 million, or 2% of sales, in the first half of 2000. The decrease is attributable to lower interest rates for short term borrowings, a lower average bank borrowing and higher amounts of interest capitalized during the first six months of 2001 as compared to the first six months of 2000. Capitalized interest relating to construction of our biopharmaceutical manufacturing facility in Boca Raton, Florida was approximately $3.2 million and $2.7 million for the six months ending June 30, 2001 and July 1, 2000, respectively. Once our Boca Raton, Florida facility is ready for its intended use, which is the manufacture for sale of Nabi-HB in an FDA approved environment, interest and other cash costs currently being capitalized will become expenses. Licensure of the Boca Raton, Florida facility for the manufacture of Nabi-HB is expected to occur in 2001. At that time, we will also begin to depreciate the capitalized cost of the plant. The total capitalized value of the facility was approximately $86.6 million at June 30, 2001. OTHER FACTORS. The provision for income taxes was $115 thousand for the first half of 2001 compared to a provision of $67 thousand in the first half of 2000. The 9% effective tax rate in the first six months of 2001 differs from the statutory rate of 35% due to our expectation of realizing a current year benefit from the use of a portion of our net operating loss carryforwards from prior years. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, our credit agreement provided for a revolving credit facility of up to $45.0 million subject to certain borrowing base restrictions, and a $3.8 million term loan. The credit agreement matures in September 2002. Borrowings under the revolving credit and term loan agreement totaled $24.5 million at June 30, 2001 as compared to $31.0 million at December 30, 2000, and additional availability was approximately $9.3 million at June 30, 2001. The credit agreement is secured by substantially all of our assets, requires the maintenance of certain financial covenants and prohibits the payment of dividends. As of June 30, 2001, our current assets exceeded current liabilities by $32.7 million as compared to a net working capital position of $39.6 million at December 30, 2000. Cash at June 30, 2001 was $2.0 million compared to $1.6 million at December 30, 2000. Cash provided from operations for the six months ended June 30, 2001 was $15.2 million versus $3.7 million for the six months ended July 1, 2000. During the first half of each of 2001 and 2000, reductions in accounts receivable and inventory were offset by a reduction of accounts payable and accrued liabilities. The primary uses of cash during the six months ended June 30, 2001 were capital expenditures of $8.4 million principally associated with our biopharmaceutical manufacturing facility in Boca Raton, Florida, and a reduction of borrowings under the revolving credit facility and term loan of $6.6 million. The primary use of cash during the six months ended July 1, 2000 was capital expenditures of $9.7 million primarily associated with our biopharmaceutical manufacturing facility in Boca Raton, Florida. Additionally, in the six months ended July 1, 2000, we realized $3.2 million of proceeds from the exercise of stock options and had increased borrowings under the credit facility of $3.8 million. The biopharmaceutical manufacturing facility requires FDA licensure to produce biopharmaceutical products for sale in the U.S. Projected capital expenditures of $8.7 million for the remainder of 2001 include the anticipated costs to prepare the facility for its intended use of approximately $3.2 million, 12
13 including capitalized interest. We believe that cash flow from operations and our available bank credit facilities will be sufficient to meet our anticipated cash requirements for 2001. On June 25, 2001, we signed a definitive agreement to sell the operating assets of a majority of our antibody collection business to CSL Limited (CSL). The agreement covers 47 of our total 56 antibody collection centers and the majority of our testing laboratory. In return, we will receive a cash payment of $152 million from CSL subject to closing adjustments. We will retain accounts receivable and accounts payable at the closing date and retain certain inventory that will be used in the production of our biopharmaceutical products. As a result of the closing of the transaction, we anticipate a gain, net of taxes, in the range of $85 million to $90 million and expect to realize net cash in excess of $120 million before repayment of bank debt. In addition, we expect to realize approximately $20 million upon liquidation of the retained net current assets. The funds received from this sale will be used to repay our bank debt and provide resources for advancing our product pipeline and for the further growth of our biopharmaceutical business. The transaction is subject to customary closing conditions and is scheduled to close by the end of the third quarter of 2001. We are also seeking additional cash to fund the development of our biopharmaceutical product pipeline from strategic alliances and may seek additional funding from new or existing credit facilities. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," (SFAS No. 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 eliminated the pooling of interest method of accounting for business combinations initiated after June 30, 2001. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangibles acquired prior to July 1, 2001, companies are required to adopt SFAS No. 142 in their fiscal year beginning after December 15, 2001. The adoption of SFAS No. 142 for fiscal year 2002 will result in our discontinuation of amortization of our goodwill which was $0.4 million for the first six months of 2001. We will be required to test our goodwill for impairment under the new standard beginning in the first quarter of 2002. FORWARD LOOKING STATEMENTS The parts of this Quarterly Report on Form 10-Q captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" contain certain forward-looking statements, which involve risks and uncertainties. These statements are based on current expectations, estimates and projections about the industries in which we operate, management's beliefs and assumptions made by management. Readers should refer to a discussion under "Factors to be Considered" contained in Nabi's Annual Report on Form 10-K for the year ended December 30, 2000 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. Said discussion is hereby incorporated by reference into this Quarterly Report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or "other than trading" instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. Our primary market risk exposure is that 13
14 of interest rate risk on borrowings under our credit facility, which are subject to interest rates based on the bank's base rate. INTEREST RATE RISK. Our outstanding revolving credit facility and term loan are sensitive to changes in U.S. interest rates, specifically the U.S. prime lending rate, and expire in September 2002. Outstanding variable rate debt under the revolving credit facility at June 30, 2001 was $24.5 million. Based on the outstanding balance, a change of 1% in the interest rate would cause a change in interest incurred of approximately $0.1 million for the six months ended June 30, 2001. At June 30, 2001, we had outstanding debt in the form of convertible subordinated notes in the amount of $78.5 million, which are due February 1, 2003. The notes bear interest at a fixed rate of 6.5% and have no interest rate risk. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to litigation in the ordinary course of business. We do not believe that such litigation will have a material adverse effect on our future business, financial position or results of operations. We are a co-defendant with various other parties in one suit filed in the U.S. by, or on behalf of, individuals who claim to have been infected with HIV as a result of either using HIV-contaminated products made by the defendants other than us or having familial relations with those so infected. The claims against us are based on negligence and strict liability. Several similar suits previously pending against us, including a purported class action, have been dismissed. We deny all claims against us in these suits and intend to defend these cases vigorously. We believe that any such litigation will not have a material adverse effect on our future business, financial position or results of operations. We have advised Baxter Healthcare Corporation (Baxter) that we are terminating a contract to supply antibodies to Baxter. The contract, by its terms, extends until December 31, 2004. We believe the contract permits us to terminate it if it becomes commercially unreasonable for us to perform under the contract. Baxter is contesting this termination and has invoked an arbitration provision in the contract to resolve the controversy. We have asserted counterclaims against Baxter in the arbitration proceeding. Pending the resolution of the arbitration, we are continuing to supply antibodies to Baxter as if the contract had not been terminated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matter was approved at our annual stockholder's meeting, which was held on May 18, 2001: a) Election of the following to the Board of Directors: VOTES For Withheld -------------------- ------------------ David L. Castaldi 34,507,662 144,628 Geoffrey F. Cox 34,494,851 157,438 George W. Ebright 34,492,276 160,013 David J. Gury 34,346,834 305,455 Richard A. Harvey, Jr. 34,529,411 122,878 Linda Jenckes 34,524,608 127,681 Thomas H. McLain 34,396,764 255,525 14
15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.40* Amended and Restated By-Laws of Nabi dated May 18, 2001 (b) Reports on Form 8-K: On July 10, 2001, the Company filed a current report on Form 8-K, reporting under Item 5 thereof, Other Events. - ------------- * Filed herewith 15
16 NABI - ------------------------------------------------------------------------------- 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. NABI Date: August 9, 2001 By: /s/ MARK L. SMITH ------------------------------------ MARK L. SMITH Senior Vice President, Finance and Chief Financial Officer 16