UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

      (Mark One)
      [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       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 1-10451

                          NORTH AMERICAN VACCINE, INC.
                          ----------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  CANADA                                      98-0121241
                  ------                                      ----------
      (STATE OR OTHER JURISDICTION OF                      (IRS EMPLOYER
      INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

      10150 OLD COLUMBIA ROAD
         COLUMBIA, MARYLAND                                     21046
       ------------------                                       -----
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)

Registrant's telephone number, including area code: (410) 309-7100

Securities registered pursuant to Section 12(b) of the Act:

     TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED

  COMMON STOCK, NO PAR VALUE                   AMERICAN STOCK EXCHANGE
  --------------------------                   -----------------------

Securities registered pursuant to Section 12(g) of the Act:

                                      NONE
                                      ----
                                (Title of class)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __


<PAGE>

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified date within the past 60 days.

     SPECIFIED DATE -- MARCH 27, 2000; AGGREGATE MARKET VALUE -- $63,394,759

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

    COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF MARCH 27, 2000 - 32,870,350








                                        2
<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

      None.


                                TABLE OF CONTENTS


ITEM        DESCRIPTION                                                 PAGE


            PART I

1     Business...............................................................4
2     Properties............................................................37
3     Legal Proceedings.....................................................38
4     Submission of Matters to a Vote of Security Holders...................39


            PART II

5     Market For Registrant's Common Equity And Related Stockholder Matters.39
6     Selected Financial Data...............................................41
7     Management's Discussion and Analysis of Financial Condition
       and Results of Operation.............................................43
7A    Quantitative and Qualitative Disclosures about Market Risk............57
8     Financial Statements and Supplementary Data...........................58
9     Changes in and Disagreements with Accountants on Accounting
       and Financial Disclosure.............................................91


            PART III

10    Directors and Executive Officers of the Registrant....................92
11    Executive Compensation................................................96
12    Security Ownership of Certain Beneficial Owners and Management.......101
13    Certain Relationships and Related Transactions.......................103


            PART IV


14    Exhibits, Financial Statement Schedules, and Reports on form 8-K.....107


Signatures.................................................................108

                                       3
<PAGE>



                                     PART I

ITEM 1.   BUSINESS

      EXCEPT  FOR  HISTORICAL  INFORMATION,  THE  FOLLOWING  DESCRIPTION  OF THE
COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS
OR ITS FUTURE FINANCIAL PERFORMANCE.  THESE STATEMENTS ARE ONLY PREDICTIONS, AND
ACTUAL EVENTS OR RESULTS MAY BE MATERIALLY  DIFFERENT FROM THE  PREDICTIONS.  IN
EVALUATING THESE STATEMENTS,  YOU SHOULD CONSIDER THE VARIOUS FACTORS IDENTIFIED
IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING BUT NOT LIMITED TO THE MATTERS SET
FORTH BELOW UNDER THE HEADING,  "RISK FACTORS." THE COMPANY DISCLAIMS ANY INTENT
OR OBLIGATION TO CONTINUALLY UPDATE THESE FORWARD-LOOKING STATEMENTS.

THE COMPANY

      INTRODUCTION.  The  Company  is  engaged  in  the  research,  development,
manufacture and sale of vaccines for the prevention of infectious diseases.  The
Company's mission is to develop and market superior vaccine products intended to
prevent infectious diseases,  improve the quality of life of children and adults
and lower total  health care costs.  The Company  currently  has three  licensed
products  that  contain  its  acellular  pertussis  ("aP")  vaccine,   including
Certiva(R), its combined diphtheria, tetanus and acellular pertussis vaccine for
infants  and  children,  as well as 12  other  products  in  various  stages  of
development to prevent meningococcal,  streptococcal, pneumococcal, E. coli, and
HAEMOPHILUS INFLUENZAE type b infections.

      The Company's present focus is on the introduction of  NeisVac-C(TM),  its
vaccine for the prevention of group C  meningococcal  infections,  in the United
Kingdom late in the second  quarter or early in the third  quarter of 2000.  The
U.K.  National  Health Service ("NHS") has committed to purchase 3 million doses
of  NeisVac-C(TM)  in 2000 for  approximately  (British  pound) 40  million  (or
approximately  $64  million  at  March  23,  2000),  with  shipments  that  were
originally  scheduled to begin in April 2000 and now are expected to begin early
in the third  quarter of 2000,  subject to UK  regulatory  approval  and certain
other  conditions.  Upon  completion  of the  production of  NeisVac-C(TM),  the
Company will recommence manufacture of aP vaccines,  including Certiva(R), after
the  Company  meets  its   contractual   obligations  in  the  United   Kingdom.
Accordingly, the Company expects limited sales of aP containing vaccine products
from existing  inventories  in 2000 and 2001 until such time as the Company's aP
products are  available  for sale.  See Item 7 -  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operation."

      The Company  filed its  marketing  authorization  application  with the UK
regulatory  authorities  on  January  24,  2000,  and  is  seeking  approval  of
NeisVac-C(TM)  for  administration  to  children  12  months  of age and  older,
adolescents and adults. During the fourth quarter of 1999, the Company commenced
the change over from production of Certiva(R) and its aP vaccines to produce the
group C meningococcal conjugate vaccine in anticipation of the commercial launch
of the product in the United Kingdom.  The Company has experienced some problems
in  scaling up bulk  manufacturing  of  NeisVac-C(TM)  and  believes  that these
problems  have been  addressed;  however,  there can be no  assurances  that the
Company will not experience  further  production  disruptions  or failures.  The
Company  currently  expects to receive  regulatory  approval and have commercial
product  available for delivery late in the second quarter or early in the third
quarter of 2000.  See "Products  Under  Development -  Meningococcal  Vaccines -
NeisVacC(TM)"  and Item 7 -  Management's  Discussion  and Analysis of Financial
Condition  and Results of Operation  for a more  complete  discussion  regarding
NeisVac-C(TM).  See also "Risk Factors Risks Associated with  Manufacturing  and
Scale-up."


                                       4
<PAGE>


      In November 1999, the Company signed a definitive Share Exchange Agreement
(the "Share  Exchange  Agreement") to be acquired by Baxter  International  Inc.
("Baxter")  in a  taxable  stock-for-stock  transaction  pursuant  to a plan  of
arrangement  under the Canada Business  Corporations Act valued at approximately
$390 million.  Under the Share Exchange  Agreement,  the Company's  shareholders
will receive $7 per share,  comprised of $6.97 of Baxter  common stock and $0.03
in cash. The number of Baxter shares to be issued to the Company's  shareholders
under the Share Exchange  Agreement  will be set based upon the average  closing
sale price of Baxter  common  stock for the ten trading days ending on the fifth
trading  day  prior  to  consummation  of  the  transaction.   As  part  of  the
transaction, Baxter has agreed to purchase, as promptly as practicable after the
closing, the Company's outstanding 6.50% Convertible  Subordinated Notes due May
1, 2003 (the "6.5% Notes") and its 4.5%  Convertible  Secured Notes due November
13,  2003  (the  "4.5%  Notes")  pursuant  to  the  terms  of  their  respective
indentures.  The  Company's  principal  shareholders  also have  entered  into a
shareholder  agreement with Baxter pursuant to which they have agreed to vote to
approve the transaction. The transaction is subject to a number of conditions to
closing,  including,  among  others,  receipt of U.K.  regulatory  approval  for
NeisVac-C(TM),  the Company's group C meningococcal vaccine, and the manufacture
of a two-month supply of NeisVac-C(TM) for the Company's  contract with the NHS,
both before April 1, 2000.  The agreement  calls for closing in April 2000.  The
Company  currently  does not expect to have received UK regulatory  approval for
NeisVac-C(TM) or to have manufactured the requisite two-month supply of vaccines
available  by April 1, 2000.  Baxter has advised  the  Company  that it will not
close on the  acquisition  transaction  under  the  current  terms of the  Share
Exchange  Agreement  unless all  conditions to closing are satisfied in the time
frame specified. Based upon the Company's failure to meet required conditions on
April 1 and other  developments  of concern to Baxter,  Baxter has proposed that
the  parties  modify the Share  Exchange  Agreement.  The  parties  have been in
discussions regarding proposals that involve, among other things, a reduction in
the  purchase  price,  the  terms  under  which  additional  financing  would be
available  to the  Company,  an  extension  of the date by which  conditions  to
closing are to be  satisfied,  additional  conditions  to closing and changes to
existing  conditions to closing,  the outside date for  termination of the Share
Exchange  Agreement,  and an early termination of the Share Exchange  Agreement.
There can be no  assurances  as to whether  the Company and Baxter will reach an
agreement  with  respect  to a  mutually  acceptable  modification  to the Share
Exchange Agreement or mutually acceptable termination  arrangements or as to the
timing  of any such  agreement.  If the  parties  are  unable  to reach  such an
agreement and Baxter determines not to waive the conditions to closing which the
Company  is  unable  to  meet,  Baxter  will  not be  obligated  to close on the
acquisition  transaction  and the Company will continue to be bound by the terms
of the Share  Exchange  Agreement  through  at least May 31,  2000.  Baxter  has
advised  the  Company  that it does not wish to  terminate  the  Share  Exchange
Agreement.  If the parties cannot agree upon a mutually acceptable  modification
of the Share Exchange Agreement or mutually acceptable termination arrangements,
the  Company's  credit  facility  with the Bank of America  will  become due and
payable on March 31,  2000.  The line of credit is secured by a pledge of all of
the Company's  otherwise  unencumbered  assets.  In such event,  there can be no
assurances  that the Company  will be able to  refinance  this  indebtedness  or
obtain  financing for its  continued  operations.  If the Company  cannot obtain
financing,  there  can  be no  assurance  that  the  Company  can  continue  its
operations  for any period of time without  seeking  bankruptcy  protection.  In
addition,  there can be no  assurances  that  litigation  will not be  commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient  funds
to defend such  litigation,  whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation for a more complete  description of
the  transaction.  See also  "Risk  Factors  Risk  Associated  with  the  Baxter
Transaction."

      The Company was incorporated as a Canadian corporation on August 31, 1989,
for the purpose of  acquiring  American  Vaccine  Corporation,  a publicly  held
Delaware corporation ("American Vaccine"),  and certain assets of BioChem Pharma
Inc.  ("BioChem"),  in a share  purchase  and merger  transaction  (collectively
described  as the  "Merger").  On February 28,  1990,  shareholders  of American
Vaccine approved the Merger.  The Company had no operations prior to the Merger.
Pursuant to the  Merger,  the  shareholders  of American  Vaccine  received  50%
ownership in the Company.  Simultaneously,  BioChem  purchased a 50% interest in
the  Company in  exchange  for cash,  shares of BioChem  common  stock,  and the
license  or  assignment  and  transfer  of certain  rights and other  intangible
assets. See Item 13 - Certain Relationships and Related Transactions.

      The Company  maintains its executive  offices at 10150 Old Columbia  Road,
Columbia,  Maryland 21046,  and its telephone  number is (410) 309-7100.  Unless
otherwise  indicated  or  the  context  otherwise  requires,  references  to the
"Company" or to "North American Vaccine"  contained herein are to North American
Vaccine, Inc. and its consolidated subsidiaries.


                                       5
<PAGE>

OVERVIEW OF VACCINE MARKET

      PEDIATRIC  VACCINES.  Due to the  potential  for  epidemic  disease,  most
countries consider  vaccinations to be a matter of national  importance.  In the
United  States,   the  ten  vaccines   generally  required  by  state  pediatric
vaccination  programs are intended to prevent  diphtheria,  tetanus,  pertussis,
measles, mumps, rubella, polio, Hib, hepatitis B and varicella (chicken pox). In
addition to these ten vaccines, the Advisory Committee on Immunization Practices
("ACIP") of the CDC and the American Academy of Pediatrics ("AAP")  periodically
review  current  immunization  practices  and issue  their  recommendations  for
additional  pediatric  vaccinations.  In  Western  Europe,  vaccination  against
diphtheria,  tetanus and pertussis is generally  recommended,  with each country
establishing its own vaccination schedules and requirements.

      Children in the United States receive immunizations from public providers,
such as local  health  departments,  and from private  providers.  Immunizations
provided by public  providers are generally  paid for through  federal and state
government funding under public health programs.  These programs are intended to
reduce barriers to immunization and to improve  immunization  rates by providing
free  vaccine  to  qualifying   infants  and  children.   Government   purchases
historically  have been at  prices  substantially  below  those  offered  to the
private sector and presently account for a substantial proportion of the vaccine
doses distributed in the United States.

      In  addition,  the  government  promotes the  availability  of an adequate
supply of necessary pediatric vaccines for United States public health programs.
In order to achieve this objective, the National Childhood Vaccine Injury Act of
1986 ("NCVI Act") created a no-fault  insurance  program  designed to compensate
those  who  suffer  specified   vaccine-related  injuries  associated  with  the
administration  of one or more  of the  vaccines  generally  required  by  state
pediatric  vaccination  programs.  This insurance  program is funded through the
levy of an excise tax paid by the manufacturers on the sale of certain pediatric
vaccines, including combined diphtheria-tetanus-pertussis vaccines.

      ADULT VACCINES.  Adults,  especially older persons who are at greater risk
of contracting and succumbing to disease and infection, can benefit greatly from
immunizations.  In 1994,  the  United  States  Department  of  Health  and Human
Services estimated that the costs to society of diseases for which vaccines then
currently  existed  exceeded $10 billion each year.  In addition,  vaccines have
been widely  recognized as highly  cost-effective in preventing the incidence of
disease and infection.  Moreover,  it is becoming  widely  recognized  that many
childhood  vaccine-preventable  infections and diseases, such as pertussis,  are
also found among younger  adults,  who serve as  reservoirs  for, and sources of
pediatric  exposure to, these  infections  and  diseases.  While the size of the
target  populations for adult vaccines may vary and adult vaccination rates have
been  historically  low,  some of these  markets are much larger than the target
population  for  pediatric  vaccines.  The Company  believes that the market for
adult  vaccines  will expand as  health-care  providers  increasingly  recognize
vaccines as a cost-effective  method for preventing the incidence of disease and
infection.

PRODUCTS UNDER DEVELOPMENT

      The  Company  currently  has three  licensed  products  that  contain  the
Company's  aP  vaccine  and more  than 12 others in its  product  pipeline.  The
Company's   vaccine  products  are  intended  for  use  in  infants,   children,
adolescents  and adults.  The Company's  present focus is the  manufacturing  of
NeisVac-C(TM),   its  vaccine  for  the  prevention  of  Group  C  meningococcal
infections,  under a contract  with the NHS. The NHS has committed to purchase 3
million doses of  NeisVac-C(TM)  in 2000,  with shipments that were scheduled to
begin in April 2000 and are now  expected to begin early in the third  quartr of
2000, subject to UK regulatory approval and certain other conditions.

      The Company also is developing  combination  vaccines that incorporate the
Company's patented monocomponent aP product. The Company's first such product is
Certiva(R),  which was licensed by the U.S. Food and Drug Administration ("FDA")
in July  1998  and is  marketed  in the  United  States  under  the  trade  name
Certiva(R). The Company is also developing combination vaccines using Certiva(R)
as the  foundation  or "anchor,"  such as  Certiva(R)-inactivated  polio vaccine
("IPV") for the prevention of diphtheria, tetanus, whooping cough and polio, and
Certiva(R)-IPV-Hib,  which  adds a vaccine  for the  prevention  of  HAEMOPHILUS
INFLUENZAE type b ("Hib"),  which can cause  meningitis in infants and children.
The Company has also developed  Amvax(R),  a combined  tetanus,  diphtheria,  aP
("TdaP") vaccine for booster immunization of adolescents and adults.


                                       6
<PAGE>

      In  Europe,  the  Company's  aP  vaccine  has  been  approved  both  as  a
stand-alone product and as DTaP and DTaP-IPV combinations for use in infants and
children.  One or more  of  these  products  is  licensed  in  several  European
countries,  including Denmark, Sweden, Finland, Poland, Germany and Austria, and
applications  are  pending  to  expand  regulatory  approval  in other  European
jurisdictions.

      Beyond the aP vaccine  products,  the  Company  has a broad  portfolio  of
polysaccharide-protein   conjugate  vaccines  for  use  in  infants,   children,
adolescents  and adults.  These  vaccines  will be  targeted to prevent  disease
caused  by:  Groups  B,  C  and Y  meningococci;  Groups  A and B  streptococci;
STREPTOCOCCUS  PNEUMONIAE;  and Hib. The vaccines may be developed  initially in
standalone formulations, and later in various combinations.

      The Company has access to a number of patented,  novel carrier proteins to
be  included  in  its  polysaccharide-protein  conjugate  vaccines.  Use  of the
Company's  novel  carrier  proteins  is  intended  to  avoid  adverse  reactions
associated with the overuse of conventional protein carriers, such as diphtheria
and tetanus toxoids. These novel carrier proteins also have exhibited additional
benefits,  such as adjuvant activity in the Hib and meningococcal  vaccines, and
an enhanced  protection  elicited by the proteins  themselves  in the  Company's
group B streptococcal and pneumococcal vaccines.

      Given the Company's current financial resources,  the Company will have to
establish  collaborations for certain products in selected  territories in order
to maximize the potential of this rich product  pipeline.  Such  collaborations,
however,  cannot be established without Baxter's consent. Under the terms of the
Share Exchange Agreement,  the Company may not enter into any new or alternative
collaborative arrangements for third parties to distribute,  research or develop
its products  without  Baxter's consent until either the transaction with Baxter
is completed or the Share Exchange Agreement is terminated.

      The  Company is  focusing  its  research  and  development  efforts on the
vaccines  set forth in Table 1 below.  The Company  spent $16.2  million,  $18.0
million and $19.9 million on research and  development  of its products in 1999,
1998 and 1997,  respectively.  See Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation.

      The  summary  information  included  in  Table 1 is  provided  solely  for
convenience  of  reference  and is  qualified  in its  entirety by the  detailed
discussion  of each of the  Company's  products  that  follows.  There can be no
assurance  that any of these  vaccines  will be  developed  successfully  by the
Company or licensed by the FDA or any other regulatory  authority for commercial
sale.   See   "Risk   Factors-Need   for   Regulatory   Approvals"   and   "Risk
Factors-Uncertainties Related to Clinical Trials."





                                       7
<PAGE>




--------------------------------------------------------------------------------
                      TABLE 1 - PRODUCTS UNDER DEVELOPMENT

PRODUCT                  TARGET MARKET                    STATUS (1)

---------------------                               ----------------------------
                      PEDIATRIC  ADOLESCENT  ADULTS
--------------------------------------------------------------------------------
ACELLULAR PERTUSSIS VACCINES
--------------------------------------------------------------------------------
Certiva(R) (DtaP)         X                         Licensed in United States,
                                                    Sweden, Denmark, Germany
                      ----------------------------------------------------------
Stand-alone aP            X          X              Licensed in Sweden
                      ----------------------------------------------------------
Certiva(R) - IPV          X                         Licensed in Germany,
                                                    Denmark, Poland, Sweden,
                                                    Finland and Austria;
                                                    Phase I/II trials in U.S.
                                                    expected to commence in 2000
                      ----------------------------------------------------------
Certiva(R)- IPV- Hib      X                         Preclinical; commenced
                                                    trials of Hib vaccine in
                                                    1999; Phase II trial of Hib
                                                    vaccine expected to be
                                                    completed in 2000.
                      ----------------------------------------------------------
Amvax(R) (TdaP)                      X         X    Phase I and Phase II/III
                                                    trials expected to begin in
                                                    U.S. in 2000; Phase I trials
                                                    in U.K. expected in 2000
--------------------------------------------------------------------------------
CONJUGATE VACCINES
--------------------------------------------------------------------------------
NeisVac-C(TM) -           X          X         X    UK license application
 Group C Meningococcal                              filed in January 2000;
                                                    expect to begin Phase I/II
                                                    trial in U.S. in 2000
                      ----------------------------------------------------------
NeisVac-B(TM)             X          X         X    Phase I trial expected to
 Group B Meningococcal                              begin in 2000
                      ----------------------------------------------------------
NeisVac-BCY(TM)           X          X         X    Preclinical
 Group B/C/Y
 Meningococcal
                      ----------------------------------------------------------
Group B Streptococcal                X         X    Phase I/II trials  completed
                                                    on  monovalent  vaccine  (2)
                                                    Clinical      trials      on
                                                    multivalent vaccine expected
                                                    to begin in 2000

                      ----------------------------------------------------------
Pneumococcal              X          X         X    Preclinical
                      ----------------------------------------------------------
Group A Streptococcal     X                    X    Preclinical
--------------------------------------------------------------------------------
OTHER VACCINES
--------------------------------------------------------------------------------
E. Coli                              X         X    Preclinical
 (urinary tract
 infections)
                      ----------------------------------------------------------
Cancer                                         X    Preclinical

(1)  Preclinical   development   denotes  work  to  refine  product  performance
characteristics  and  to  conduct  studies  relating  to  product   composition,
stability,  scale-up,  toxicity  and  efficacy  in order to  create a  prototype
formulation  in  preparation  for the  filing  of an  investigational  new  drug
application  or IND with the FDA for  authority  to  commence  testing in humans
(clinical studies). Phase I-III clinical trials denote safety and efficacy tests
in human patients in accordance with FDA guidelines as follows:
Phase I: Safety, immunogenicity,  and optimal dosage studies.
Phase II: Detailed evaluations of safety, immunogenicity and  optimal dosage  in
limited  number of  subjects in target  population.
Phase III:  Evaluation  of safety and  efficacy in expanded target population.
See "Government Regulation."
(2) Proof of principal  clinical trial  for monovalent  vaccine  manufactured by
a third party utilizing technology licensed to the Company.
--------------------------------------------------------------------------------



                                       8
<PAGE>

ACELLULAR PERTUSSIS VACCINES

      BACKGROUND. Immunization against diphtheria, tetanus and pertussis using a
combined  vaccine  during  infancy and  childhood  is a routine  practice in the
United  States and most  countries  throughout  the world,  and the  vaccination
program is  considered  to be a major factor in reducing the  incidence  of, and
number of deaths  associated  with, each of these diseases.  Vaccination for the
prevention of  diphtheria,  tetanus and  pertussis  currently is required in the
majority of states within the United States and is scheduled to be  administered
to children at the ages of 2, 4, 6, 15 to 18 months, and 4 to 6 years of age. In
addition,  immunization  against  diphtheria,  tetanus  and  pertussis  is  also
required in many countries outside of the United States.

      Since the late 1940s,  the widespread use of "whole cell" DTP vaccines led
to a rapid decline in  disease-related  morbidity and  mortality,  especially in
children.  These  "whole  cell"  DTP  vaccines  include  the  entire  BORDETELLA
PERTUSSIS  bacterium that has been inactivated in the production process by heat
or  chemicals,  and it is  generally  believed  that the use of the "whole cell"
BORDETELLA PERTUSSIS bacterium has been a leading cause of the adverse reactions
associated with the existing "whole cell" DTP vaccines.  These adverse reactions
range from minor local reactions to more serious  systemic  reactions.  Clinical
trials  have  established  that  acellular   pertussis   vaccines  should  offer
advantages  over  licensed  "whole  cell"  pertussis  vaccines  with  respect to
improved  tolerability and fewer serious adverse  reactions.  DTaP vaccines have
now  substantially  replaced the "whole cell" DTP vaccines and are preferred for
all  doses  in the  immunization  schedule  recommended  by the  ACIP  and  AAP.
Currently, four DTaP vaccines,  including Certiva(R),  have been licensed by the
FDA for use in the United States.  See "Products  Under  Development - Acellular
Pertussis Vaccines - Certiva(R)" and "Competition."

      CERTIVA(R). In July 1998, the Company received FDA approval to manufacture
and market  Certiva(R)  in the United States for use in infants and children six
weeks to seven years of age.  The  product  launch for  Certiva(R)  began in the
fourth quarter of 1998. The Company markets Certiva(R) in the U.S. to government
purchasers,  including  state  governments  and the  CDC.  Under a  distribution
agreement,  Abbott  Laboratories  ("Abbott")  previously  marketed Certiva(R) to
private  physicians  and managed  care  markets in the United  States;  however,
Abbott  terminated the agreement in September 1999. After Abbott's  termination,
the  Company  has  sold  limited  quantities  of  Certiva(R)  to  non-government
purchasers  through  direct  arrangements  with  distributors.   See  Item  7  -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation. See also "Risk Factors - No Assurance of Effective Marketing."

      Certiva(R)  combines the  Company's  proprietary  monocomponent  acellular
pertussis  vaccine with  diphtheria and tetanus  toxoids,  for use as a combined
DTaP  vaccine  in  childhood  immunization  programs.  The  Company's  acellular
pertussis  vaccine is unique and distinct from all other  pertussis  vaccines in
that it contains  only  pertussis  toxoid (i.e.,  pertussis  toxin that has been
purified and chemically inactivated by hydrogen peroxide), instead of the entire
BORDETELLA  PERTUSSIS  bacterium or two or more of its  components.  In clinical
trials,  this single toxoid has been shown to induce immunity with fewer serious
adverse  reactions  than the  "whole  cell"  pertussis  vaccine.  The  method of
manufacture  for this  pertussis  toxoid are the  subject  of United  States and
foreign   patents   licensed   exclusively   to  the  Company.   See   "Business
Relationships."

      FDA  approval  followed  prior  approvals  of a  European  formulation  of
Certiva(R)  ("Certiva(R)-EU").  In February  1996,  a license was granted to the
Company's European partner,  Statens Serum Institut ("SSI"), to market in Sweden
Certiva(R)-EU for all recommended doses for infants and children.  Subsequently,
regulatory  applications  were  filed  under  the  European  mutual  recognition
procedures in other selected  European  countries based on the Swedish approval.
Certiva(R)-EU  has been  licensed  in  Denmark,  Germany,  Poland,  Austria  and
Finland.  SSI holds the  product  rights and  registration,  and will market the


                                       9
<PAGE>

product in the  Scandinavian  and Baltic  countries and certain other  countries
comprising  its territory  ("SSI's  Territory").  The Company does not currently
have a salesforce  or partner to market  products in the European  countries not
included in SSI's Territory.  See Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operation.  See also "Marketing of Vaccines,"
"Business   Relationships"  and  "Risk  Factors  -  No  Assurance  of  Effective
Marketing."

      As a result of a recent  assessment  of potential  health risks related to
mercury  contained in food and drugs  conducted by the FDA, in cooperation  with
the Environmental Protection Agency, the continued use of thimerosal in vaccines
has been questioned.  Thimerosal is a mercury-containing  preservative  commonly
used in vaccines packaged in multi-dose vials. Thimerosal is approved for use by
the FDA and is  currently  included  in more than 30  licensed  vaccines  in the
United States.  Vaccines  containing this preservative have been administered to
hundreds of millions of children and adults  worldwide,  with no  scientific  or
medical data to suggest that it poses an  individual  or public  health risk. In
July 1999, the Company decided to follow the  recommendations  of these agencies
and move toward the  discontinued  use of thimerosal in Certiva(R).  The Company
intends to introduce a thimerosal-free formulation of the product in single-dose
syringes in the United States. See Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation for discussion  regarding impact
on  operations.  The Company  will  submit data to the FDA on a  thimerosal-free
formulation  of  Certiva(R),  including  data  on the  European  formulation  of
Certiva(R) that does not  contain  thimerosal by  the end of  the second quarter
of 2000 or shortly  thereafter, and the Company will work expeditiously with the
FDA to obtain approval;  however,  there can be no assurances that such approval
will be granted by the FDA or that FDA review will not involve delays that would
adversely affect the Company's ability to market thimerosal-free Certiva(R). The
AAP has called for the FDA to expedite the review of manufacturers' supplemental
applications  to  eliminate or reduce the mercury  content of vaccine  products;
however,  there can be no  assurances  that such approval will be granted by the
FDA or that FDA review will not involve delays that would  adversely  affect the
Company's ability to market the thimerosal-free  formulation of Certiva(R).  See
"Risk Factors - Government  Regulation;  Regulatory  Approvals." The U.S. Public
Health  Service,  the CDC and the AAP  continue to  recommend  that all children
should  be  immunized   against  the  diseases   indicated  in  the  recommended
immunization schedule. Until regulatory approval is obtained for thimerosal-free
Certiva(R), the Company will only be able to sell previously produced thimerosal
containing  Certiva(R)  from  its  limited  inventory  on  hand.  See  Item  7 -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation.

      The Company has experienced  production problems in the manufacture of the
aP component for Certiva(R).  In order to address these production  limitations,
the Company has implemented a capacity  enhancement  program with respect to its
production  of  Certiva(R)  and aP  vaccines.  The  first  step is to  eliminate
bottlenecks  and  streamline  and  strengthen  the  product  testing and release
process,  thereby reducing production disruptions and failures and enhancing the
reliability of the production  process.  This work will continue to be performed
off-line during the first half of 2000, while NeisVac-C(TM) is being produced in
the  manufacturing  facility.  Second,  the Company has  modified  its  existing
facilities and operations in a manner intended to expand production capacity and
efficiency.  The Company filed the appropriate documentation with the FDA in the
fourth quarter of 1999 in seeking the approval for these enhancements;  however,
there can be no assurances that such approval will be granted by the FDA or that
FDA review will not involve  delays that would  adversely  affect the  Company's
ability to market Certiva(R) made with these  enhancements.  See "Risk Factors -
Government  Regulation;  Regulatory Approvals." Upon completion of both of these
programs,  the Company  expects that unit  production  costs (before filling and
packaging)  will be  reduced.  In prior  years,  the  production  costs  for the
Company's aP products  exceeded their net realizable  value, and there can be no
assurances  that the enhanced  production  and testing  processes  will increase
capacity  or  lower  the unit  production  costs,  particularly  in light of the
increased   filling  and  packaging  costs   associated  with  the  decision  to
manufacture Certiva(R) without the preservative thimerosal, as discussed in Item


                                       10
<PAGE>

7 - Management's  Discussion and Analysis of Financial  Condition and Results of
Operation.   See  "Risk  Factors  -  Risk  Associated  With  Limited  Production
Capacity."

      AMVAX(R).  Amvax(R),  the Company's TdaP vaccine, is the adult formulation
of Certiva(R).  Within the U.S.,  TdaP vaccines are likely to be recommended for
use in all  adolescents  and adults as a booster  immunization to be given every
ten years, and will replace the currently recommended tetanus, diphtheria ("Td")
vaccine.  Historically,  pertussis has been  recognized as a disease  limited to
infants and children;  however,  more recently  adolescents and adults have been
recognized as an important  reservoir of infection,  albeit with pertussis cases
usually  in a milder  form  that is  indistinguishable  from  other  respiratory
infections.  Scientists  believe that waning immunity after natural infection or
immunization  during  childhood may contribute to disease in these older groups.
The CDC has  reported  that the  proportion  of  pertussis  cases  occurring  in
adolescents  and adults  increased  from 15.1% of the total  during 1977 through
1979 to 26.9% during 1992 through 1993.

      Currently,  there are no pertussis  vaccines licensed in the United States
for  administration to adolescents or adults; the risk of adverse reactions from
"whole-cell"  vaccines outweighed the benefits of preventing the milder forms of
pertussis  disease  experienced  by these  groups.  The  recognition  of  waning
immunity in adolescents and adults,  coupled with less reactogenic profile of aP
vaccines, have altered this risk/benefit calculus in favor of immunization.  The
FDA's  Vaccine and Related  Biological  Products  Advisory  Committee  has begun
discussions regarding a recommendation for adolescent and adult booster doses of
vaccine as an ideal way to ensure protective immunity throughout  adulthood.  In
addition,  the ACIP is now considering a revision to the current  recommendation
of a Td  booster  every ten years to  include  an aP  vaccine  in a TdaP for all
adolescents and adults in the United States.

      The Company  intends to conduct safety and  immunogenicity  adult clinical
trials in the United States and the United Kingdom using its TdaP vaccine.

      AP COMBINATION VACCINES

      As new vaccines for additional  childhood diseases are developed and added
to the  recommended  immunization  schedule,  the number of  immunizations  will
increase. Delivering protection using fewer injections, at a reasonable cost, in
a  convenient  manner that will  enhance  compliance,  is a problem  that may be
solved with one simple solution - combination vaccines.  The market is moving in
this  direction  because the ACIP/AAP  recommended  schedules for many childhood
vaccines are compatible. For example, the immunization schedules for diphtheria,
tetanus,  pertussis,  polio and Hib vaccines overlap, so a DTaP-IPV-Hib  vaccine
could be recommended for up to four immunizations. See Table 2 below. Therefore,
combination vaccines will likely replace most, if not all, stand-alone vaccines.
In  addition,  healthcare  providers  and parents have rising  expectations  for
combination  vaccines.  In  fact,  the ACIP has  issued  a policy  statement  on
combination vaccines that recommends  combination vaccines, in general, over the
separate injection of their equivalent component vaccines.

      The Company is  developing  combination  vaccines  using  Certiva(R) as an
"anchor."  Additional  vaccines  would  be  added  to  Certiva(R)  to  form  the
combination  vaccine.  The Company's  combination vaccines under development are
described below.



                                       11
<PAGE>




--------------------------------------------------------------------------------
            TABLE 2 - RECOMMENDED CHILDHOOD IMMUNIZATION SCHEDULE IN
               THE UNITED STATES FOR DTAP, HIB AND POLIO VACCINES
                          JANUARY 2000 - DECEMBER 2000
--------------------------------------------------------------------------------
         AGE      2        4       6       12       15       18       4-6
                 MOS.     MOS.    MOS.     MOS.     MOS.     MOS.     YRS.

    VACCINE
--------------------------------------------------------------------------------




  Diphtheria,
    Tetanus,
   Pertussis     DTaP     DTaP    DTaP                  DTaP          DTaP


--------------------------------------------------------------------------------




       H.
   INFLUENZAE
     type b      Hib (1)  Hib (1) Hib (1)       Hib

--------------------------------------------------------------------------------




     Polio       IPV      IPV                   IPV                   IPV

--------------------------------------------------------------------------------
  SOURCE:  ACIP,  AAP AND  AMERICAN  ACADEMY  OF FAMILY  PHYSICIANS  (AAFP).  IN
  ADDITION  TO  THE   VACCINES   LISTED  IN  THE  TABLE   ABOVE,   THE  ACIP/AAP
  RECOMMENDATIONS ALSO INCLUDE VACCINES TO PREVENT HEPATITIS B, MEASLES,  MUMPS,
  RUBELLA,   VARICELLA   (CHICKENPOX)   AND  HEPATITIS  A.  IN  WESTERN  EUROPE,
  VACCINATION AGAINST THESE DISEASES IS ALSO GENERALLY RECOMMENDED, EACH COUNTRY
  ESTABLISHING ITS OWN VACCINATION SCHEDULES AND REQUIREMENTS.

  (1) Two  or  three  dose  primary regimen  (depending  on  vaccine  used) with
      primary doses  administrated at the ages of 2, 4 and 6 months, and booster
      administered at between 12-15 months of age.

      CERTIVA(R)-IPV  VACCINE.  The Company  believes that a single  vaccination
program for  diphtheria,  tetanus,  pertussis  and polio can be  established  by
combining an enhanced,  injectable IPV with Certiva(R).  The Company anticipates
that a DTaP-IPV  vaccine can become a  generally  accepted  multivalent  vaccine
because the polio  vaccination  schedule is compatible with the DTaP vaccination
schedule,  and because a polio  vaccination  program that  includes IPV has been
accepted as both safe and  efficacious.  In July 1999, the ACIP and AAP issued a
revised  recommendation  related to polio  vaccination.  Now, IPV is recommended
over oral polio vaccination  ("OPV") for all four doses in the routine childhood
polio vaccination schedule in the United States.

      In  September  1996,  the  Danish  National  Board of Health  granted  SSI
regulatory  approval to market a combined DTaP-IPV vaccine,  which  incorporates
the  Company's  aP toxoid,  for all  primary  and  booster  doses in infants and
children. This combination vaccine was developed jointly by SSI and the Company,
and is presently  licensed in Denmark,  Poland,  Sweden and  Finland.  Under the
European mutual recognition procedures, Germany and Austria agreed in


                                       12
<PAGE>

the first half of 1999 to recognize the Danish marketing  authorization  for the
DTaP-IPV  vaccine  pending  the  completion  of labeling  issues  related to the
distribution  of the  product.  SSI holds the  product  registrations  under the
European mutual recognition procedures, and the Company had previously appointed
Chiron-Behring  GmbH & Co.  ("Chiron-Behring")  to market the  Certiva(R)-EU-IPV
product in Germany and Austria.  In January 2000, the Company and Chiron-Behring
terminated  the  marketing  arrangement.  The Company  does not expect to market
Certiva(R)-EU-IPV  in  Germany  and  Austria  until  it can  secure  alternative
distribution   arrangements.   See  Item  3  -  Legal  Proceedings  and  Item  7
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation. See also "Risk Factors - Risk Associated with Lack of Availability of
Capital."

      In  addition,  the  Company  expects to file an  investigational  new drug
application  with the FDA to  conduct  Phase II  clinical  trials in the  United
States  with a  Certiva(R)-IPV  vaccine.  There  can be no  assurance  that  the
clinical trials will commence, that data from the clinical trials will support a
regulatory filing or that any regulatory filings for the Certiva(R)-IPV  will be
accepted,  or receive regulatory  approval in a timely fashion or at all, by the
FDA or other regulatory agencies. See "Government  Regulation" and "Risk Factors
- Need for Regulatory Approvals."

      CERTIVA(R)-IPV-HIB  VACCINE.  The  Company is also  developing  a combined
single injectable  DTaP-IPV-Hib vaccine in stable liquid form for the prevention
of  diphtheria,  tetanus,  pertussis,  polio  and  infection  caused  by Hib.  A
Certiva(R)-IPV-Hib  combination  vaccine  is  compatible  with  the  recommended
pediatric  immunization  schedule.  As indicated  in Table 2 above,  the current
immunization  schedule  for  diphtheria,   tetanus,  pertussis,  polio  and  Hib
recommends as many as thirteen  injections  to protect an individual  from these
diseases.  The proposed combination vaccine may allow for protection against all
five diseases in as few as five injections.

      Pre-clinical studies demonstrated no significant immunologic  interference
between the  Company's  Hib and aP  vaccines  in  combination.  In  addition,  a
previous clinical trial in Sweden of Certiva(R)-IPV combined with a commercially
available  Hib vaccine  found no serious  adverse  reactions  and no  clinically
significant  immunologic  interference.  Immunologic  interference  is an effect
observed in products  that combine aP and Hib vaccines that  suppresses  the Hib
antibody response,  and therefore may lower protection  against Hib disease.  In
the  preclinical  studies,  the Company's  Hib vaccine  produced a high level of
functional  antibodies such that effective protection from Hib disease is likely
to be maintained in combination with aP vaccine.

      The  Company  believes  that the ability of its Hib  conjugate  vaccine to
produce  excellent  antibody  response  while avoiding  significant  immunologic
interference  is  due  primarily  to the  use  of a  novel  carrier  protein,  a
recombinant  meningococcal porin ("rPorB"). This protein facilitates the desired
immune  response to the attached  Hib  polysaccharide.  In addition,  use of the
novel  protein is  expected  to reduce the risk of adverse  reactions  that some
individuals  may  develop  to other  common  carrier  proteins.  The  Company is
presently  planning  clinical  trials  of the  Certiva(R)-IPV-Hib  vaccine.  See
"Products Under Development - Conjugate Vaccines - HAEMOPHILUS INFLUENZAE Type b
Vaccine" for a description of the Company's Hib vaccine. See also "Competition."

      CONJUGATE VACCINES

      The Company,  using patented and proprietary  technologies,  is developing
several conjugate vaccines for prevention of infectious diseases in children and
adults. Conjugate vaccines are formed by chemically linking (i.e.,  conjugating)
polysaccharides to a "carrier" protein. This procedure has been shown to enhance
the  immunogenic  properties of the  polysaccharides,  particularly  in infants.
Conjugate  vaccines  may be  useful  in  preventing  several  serious  diseases,


                                       13
<PAGE>

including  meningitis,  pneumonia  and  strep  throat in all  groups,  including
infants and children. Vaccines are not currently available for the prevention of
several of these diseases.

      In recent  decades,  vaccines have been  developed  for certain  bacterial
diseases using  polysaccharides  (long-chained  sugars) that coat or encapsulate
certain  bacteria's outer membranes.  While these  polysaccharide  vaccines have
generally  proven  to be safe,  many of them do not  elicit an  adequate  immune
response, particularly in infants whose immature immune systems do not recognize
or respond to these  polysaccharides.  In addition,  questions  have been raised
about the  effectiveness of  polysaccharide  vaccines in the elderly and persons
with  immunocompromised  immune  systems.  The Company  believes that  conjugate
vaccines  address  these  problems  and  will  prove  to be as safe as and  more
effective than polysaccharide vaccines in the target populations.

      The Company holds exclusive  worldwide rights  (excluding  Canada) for the
development,   production  and  sale  of  vaccines  against  certain   bacterial
infections under a license granted by the National Research Council of Canada, a
Canadian  federal  government  agency  ("NRC"),  for certain  conjugate  vaccine
technology.  United States and, in some cases,  foreign patents relating to this
technology  have been issued and applied for. The Company also holds,  either as
assignee or licensee,  several  other  patents  related to the  development  and
manufacture of conjugate vaccines, including several novel carrier proteins. Use
of the  Company's  novel  carrier  proteins  reduces the risk of adverse  events
associated with the overuse of conventional carrier proteins, such as diphtheria
and tetanus  proteins.  These novel protein  carriers have exhibited  additional
benefits,  such as adjuvant  activity  in the  Company's  Hib and  meningococcal
vaccines. In addition,  these proprietary protein carriers have been designed in
some cases to have the ability to serve as immunogenic antigens on their own.

      The Company is developing  conjugate  vaccines for the diseases  discussed
below  and,  where  appropriate,  intends to  combine  certain of its  conjugate
vaccines with Certiva(R) and its  Certiva(R)-IPV  vaccines.  See "Products Under
Development - aP Combination Vaccines" and "Business Relationships."

      MENINGOCOCCAL  VACCINES.  Meningitis is a serious infection  involving the
membranes  surrounding the brain and spinal cord,  which can lead to significant
central  nervous system damage in all age groups.  In the United  States,  those
most often  stricken are children and young adults.  Serogroups A, B, C and Y of
NEISSERIA  MENINGITIDIS  (meningococcus)  cause a significant number of cases of
meningitidis and systemic meningococcemia. The incidence of meningitis caused by
Group A, B, C and Y meningococcus  varies from country to country,  with Group B
and C  meningococcus  generally  accounting  for nearly all disease in developed
countries.  In recent years,  the  epidemiology has shifted in the United States
such that Group Y meningococcus  is now reported in one third of all cases (with
Groups B and C evenly splitting the other two thirds of reported cases).

      Currently,  a  polysaccharide  vaccine for the prevention of Group A, C, Y
and W-135  meningococcal  infections  is  licensed  in the United  States.  This
vaccine is  predominantly  used  selectively  in the adult  population  and,  in
particular,  is routinely administered to United States military personnel. This
vaccine has not been  demonstrated  to be  protective  in children less than two
years of age. In addition,  there is currently no licensed conjugate vaccine for
the prevention of Group B meningococcal infection.

      NEISVAC-C(TM).   In  January   2000,   the   Company   filed  a  marketing
authorization  application in the United Kingdom for NeisVac-C(TM),  its Group C
meningococcal   conjugate   vaccine.   The   Company  is  seeking   approval  of
NeisVac-C(TM)  for  administration  to  children  12  months  of age and  older,
adolescents and adults. In the fourth quarter of 1999, the UK's NHS committed to


                                       14
<PAGE>


purchase 3 million doses of  NeisVac-C(TM)  in 2000 for  approximately  (British
pound)40  million  (or  approximately  $64 million as of March 23,  2000),  with
shipments  that were scheduled to begin in early April 2000 and are now expected
to begin early in the third quarter of 2000, subject to UK regulatory  approval.
The NHS contract is intended to support a national  immunization campaign in the
United Kingdom to prevent Group C  meningococcal  disease.  The UK Public Health
Laboratory  Service  ("PHLS") has  received  reports of more than 1,000 cases of
meningoccocal  meningitis  annually since 1991,  with 2,882 cases in England and
Wales for the 1998/1999 reporting period.  Group C meningococci  account for 35%
to 45% of all  cases  and  caused  an  estimated  150  deaths  in the  1998/1999
reporting period, more than half of all meningococcal related deaths. The number
of reported  cases of  meningococcal  disease in UK teenagers  has doubled since
1994.

      The Company does not expect to meet the first  delivery date in April 2000
under the NHS contract.  Currently,  the Company expects to have initial product
quantities  released  and  available  for  delivery to NHS by early in the third
quarter of 2000, although there can be no assurances in this regard. The Company
has had informal discussions with NHS regarding the possible delays in licensure
and product  delivery and believes  that,  based on these  discussions,  the NHS
would be willing to reschedule deliveries through the end of 2000 for the entire
3 million doses,  without penalty,  if the regulatory approval for NeisVac-C(TM)
is issued within a few months of April 2000, although there can be no assurances
in this regard. In addition,  there can be no assurances that further production
disruptions  or  failures  will not  impact  the  Company's  ability  to deliver
NeisVac-C(TM)  timely or in sufficient  quantities to meet its obligations under
the NHS contract.  See Item 7 Management's  Discussion and Analysis of Financial
Condition  and Results of Operation  for a more  complete  discussion  regarding
NeisVac-C(TM). See also "Risk Factors - Lack of Profitability."

      In clinical trials  supported by the PHLS,  NeisVac-C(TM)  demonstrated an
excellent   safety   and   immunogenicity   profile.    NeisVac-C(TM)   elicited
significantly higher antibody levels in several clinical studies compared to two
other Group C meningococcal conjugate vaccines.  Antibody levels are accepted as
correlates  to  protective  efficacy.   Previous  studies  have  demonstrated  a
correlation  between  vaccine  efficacy and its ability to generate  immunologic
response and to stimulate bactericidal activity. The Company expects to complete
clinical  trials  for,  and  file  for UK  regulatory  approval  of,  an  infant
indication  in 2000.  See "Risk  Factors  -  Government  Regulation;  Regulatory
Approvals."

      NEISVAC-B  (TM) VACCINE.  Currently,  there is no vaccine  against Group B
meningococcal   disease   licensed  for  routine  use.  Between  30-50%  of  all
meningococcal   disease  is  caused  by  this   serogroup   with  no   available
intervention.  Everyone is vulnerable to the disease,  but the most  susceptible
age group is the  infant  population  under one year of age.  Fatality  rates in
infants are the highest with 10-27 cases per 10,000  versus 1 per 100,000 in the
older population.  As antibiotic therapy is unsuccessful if not applied early, a
vaccine to prevent Group B meningococcal  infections,  including meningitis,  is
highly desirable.

      The  Company  has  developed  a Group B  meningococcal  conjugate  vaccine
utilizing  a  unique  carrier  protein  which  appears  to  reduce  many  of the
previously  reported  problems  associated  with the development of an effective
Group B  meningococcal  polysaccharide  vaccine.  Since late 1995,  the  Company
worked with Aventis  Pasteur  (formerly  Pasteur  Merieux  Connaught) to jointly
develop this conjugate vaccine. The two companies  successfully  collaborated in
1997 on preclinical  primate  studies for this Group B  meningococcal  conjugate
vaccine that confirmed its safety and immunogenicity. These studies demonstrated
that the  conjugate  vaccine made using the Company's  proprietary  technologies
elicited  IN  VIVO   superior   bactericidal   responses  to  another   Group  B
meningococcal  conjugate vaccine. In February 2000, Aventis Pasteur informed the
Company of its decision to terminate its collaboration  principally because of a
change in strategic direction by Aventis Pasteur. See "Business  Relationships -
Aventis Pasteur Agreements" and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation. The Company is planning to file in


                                       15
<PAGE>

the second quarter of 2000 an investigational  new drug application with the FDA
to begin a Phase I clinical trial in adults.

      COMBINATION   MENINGOCOCCAL  VACCINES.  The  Company  is  also  developing
combination  conjugate  vaccines  against  Group  B/C,  and B/C/Y  meningococcal
disease  for  adults  and  infants.   The  Company  has  completed   preclinical
development  and  testing of its Group A and Group A/C  meningococcal  conjugate
vaccines, although combination vaccines including the Group A polysaccharide are
to be  developed.  The clinical  development  and testing of these  vaccines are
expected to take several years to complete.

      GROUP B STREPTOCOCCAL  VACCINE.  Group B streptococcal  ("GBS")  infection
affects  all age groups in the United  States  and is the most  common  cause of
life-threatening  infections,  including sepsis and meningitis in newborns.  GBS
infections  in infants  occur  principally  during the first three  months after
birth and can result in serious  complications,  including  death,  pneumonia or
permanent  brain damage from  meningitis.  Disease in newborns  during the first
week of life generally is caused by infection of the infant passing  through the
mother's  colonized  birth  canal.  GBS  disease  is also a  prominent  cause of
peripartum maternal infections.  Since there is no vaccine for the prevention of
GBS disease in adults or infants,  the CDC has issued  guidelines  for detecting
and treating GBS  infections  in pregnant  women as a means of reducing the risk
and incidence of disease in newborns. These guidelines,  which have been adopted
by the AAP and the American College of Obstetricians and Gynecologists,  include
diagnostic testing during the third trimester and, for those infected,  a course
of intravenous  antibiotics  during and after labor. A primary target market for
this vaccine will be women of child-bearing  age. A principal benefit to such an
immunization  program  is  that  the  vaccine  has  the  potential  to  generate
protective antibodies for both the mother and the infant and, therefore, prevent
a large portion of newborn infections.

      A vaccine against GBS infection,  utilizing patented technologies that the
Company has licensed from the NRC, the Brigham and Women's Hospital, and Harvard
University,  has been tested in a Phase I/II clinical trial  conducted under the
sponsorship  of the  NIAID.  In that  trial,  the  monovalent  vaccine  was well
tolerated with minimal  reactogenicity  and no serious  side-effects in healthy,
nonpregnant women subjects.  Antibodies  elicited by immunization with different
conjugate vaccine serotypes displayed  protective activity IN VITRO and IN VIVO.
The  administration  of a GBS  polysaccharide  conjugate  vaccine to  adolescent
females may be a realistic approach to the prevention of perinatal GBS infection
since antibodies transported through the placenta to the fetus during subsequent
pregnancies  may confer  protective  immunity  even to infants born  prematurely
between 34 and 37 weeks of  gestation.  Trials of  monovalent  GBS vaccines have
been expanded,  and the vaccines are currently in Phase II clinical trials.  The
Company is presently  planning  clinical  studies of its multivalent  vaccine in
nonpregnant adolescent girls and women.

      HAEMOPHILUS  INFLUENZAE  TYPE B VACCINE.  Hib has been a frequent cause of
meningitis  and other serious  infections in infants and children.  The ACIP has
issued a  recommendation  for universal  vaccination  of children for protection
against diseases caused by Hib. Vaccination against Hib consists of either a two
or three dose primary  regimen  (depending on vaccine used),  with primary doses
administrated  at the ages of 2, 4 and 6 months and a booster dose  administered
at between 12 to 15 months of age. See Table 2 above. Children infected with Hib
bacteria can develop meningitis, which can lead to blindness, deafness, acquired
mental  retardation or death.  The peak incidence of Hib infection in the United
States occurs in children  between 6 and 18 months of age.  Three  manufacturers
are currently  licensed by the FDA to sell Hib conjugate vaccines for use in all
primary and booster doses. See "Competition."


                                       16
<PAGE>

      At the end of 1999, the Company  completed  Phase I clinical trial for its
Hib  conjugate  vaccine  using rPorB as the  protein  carrier.  The  preliminary
results  of  that  trial  indicate  that  the  vaccine  was  well-tolerated  and
immunogenic.  The  Company  expects to begin a Phase II  clinical  trial of this
vaccine in toddlers in 2000.  See "Products  Under  Development - aP Combination
Vaccines."

      GROUP A STREPTOCOCCAL VACCINE. Group A streptococcal disease occurs in all
age groups with a predominance  in school-age  children.  Group A  streptococcus
causes  infections  ranging  from  severe  sore  throat and sinus  infection  to
pneumonia and toxic  streptococcal  syndrome.  Sequelae of Group A streptococcal
infections include rheumatic fever and glomerulonephritis.  Currently,  there is
no vaccine licensed by the FDA to prevent Group A streptococcal  infection.  The
Company is engaged in the research  and  development  of a conjugate  vaccine to
prevent this infection. Activities on this vaccine are in the preclinical stage.

      PNEUMOCOCCAL VACCINE.  There are in excess of 20 serotypes of pneumococcal
bacteria that cause pneumonia,  a respiratory infection that affects individuals
of all ages, as well as other infections.  The present pneumococcal vaccine is a
multivalent polysaccharide vaccine recommended for adults,  particularly elderly
and other patients with a high risk of contracting  pneumonia.  Otitis media, or
middle  ear  infection,  is a common  illness in the  United  States  afflicting
children  under  five  years  of  age.  The  majority  of  bacterial  cases  are
attributable to pneumococcal organisms. Chronic otitis media can lead to hearing
defects and associated learning and language  disabilities.  There is no vaccine
licensed by the FDA that prevents otitis media caused by pneumococcal  bacteria.
The  Company is  currently  in the  preclinical  stage of the  development  of a
multivalent conjugate vaccine against pneumococcus  infection,  including otitis
media.

      OTHER VACCINES

      The  Company,   utilizing  patented  and  proprietary   technologies,   is
performing research on and developing other adult and pediatric vaccines,  which
it  selects  for  development  based on the  anticipated  need for a  particular
product,  the  nature of the  competition,  and the  ability  of the  Company to
develop the product, among other factors. The Company's research and development
efforts are being conducted independently and in conjunction or in collaboration
with governmental agencies and universities. There are no assurances that any of
these  vaccines  will enter  clinical  trials or  successfully  be  developed or
licensed by the FDA or any other regulatory authority for commercial sale.

MARKETING OF VACCINES

      The Company's  mission is to develop and market superior  vaccine products
intended to prevent infectious diseases, improve the quality of life of children
and adults and lower total health care costs.  In pursuing this  objective,  the
Company considers,  among other things,  collaborations  with pharmaceutical and
other  vaccine  manufacturers  where  appropriate  to maximize  the value of the
Company's products and technologies.

      To maximize market  penetration for its first  commercial  products within
the least amount of time, the Company has aimed to establish marketing alliances
in the United States, Europe and other territories with  well-established  local
partners on a country-by-country  basis. Toward this end, the Company previously
entered into marketing  alliances for certain  products in the United States and
selected countries within Europe. Two of these  relationships were terminated in
1999. Under a marketing  agreement between Abbott and the Company,  Abbott began
to market  Certiva(R)  in October  1998 to private  physicians  and managed care
markets in the United States for  immunization  of infants and children.  Abbott


                                       17
<PAGE>

terminated the agreement in September 1999. The Company is currently selling out
of limited  inventories  of  Certiva(R)  to  non-government  purchasers  through
wholesale  distributors.  In  addition,  effective  as of the end of  1999,  the
Company and Chiron-Behring terminated their collaboration whereby Chiron-Behring
would  distribute  the  Company's  DTaP and  DTaP-IPV  vaccines  in Germany  and
Austria. The Company will continue to evaluate  distribution,  marketing,  joint
venture and similar  arrangements  with third parties in its territories and for
products  where,  in the judgment of the  Company,  such  arrangements  would be
beneficial to the successful  commercialization of its products;  however, under
the terms of the Share Exchange  Agreement,  the Company currently may not enter
into any new or  alternative  collaborative  arrangements  for third  parties to
distribute,  research and develop its products  without  Baxter's  consent until
either the transaction with Baxter is completed or the Share Exchange  Agreement
is terminated. See "Business Relationships" and Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operation.

      The  Company  also  has  sold  vaccines  directly  to  federal  and  state
government programs,  with Texas and California  constituting  approximately 44%
and 11% of sales in 1999. In the United  States,  federal and state  governments
currently purchase a substantial portion of pediatric vaccines sold. The Company
is  selling  Certiva(R)  directly  to  federal  and  state  governments  through
established   purchasing   programs.   The  Company  participates  in  the  U.S.
government's   multiple   contract   awards  for  the  purchase  of  its  annual
requirements of DTaP vaccine.  Under these contracts,  the Company and the other
vaccine   suppliers   effectively  are  not  guaranteed  any  minimum   purchase
requirements,  but they are provided the  opportunity  to revise their  contract
proposals  on a  quarterly  basis.  The  Company  also is  competing  to  supply
Certiva(R)  to state  government  programs.  See "Risk Factors - No Assurance of
Effective  Marketing"  and  "Risk  Factors - Changes  in  Government  Purchasing
Policies."  The Company  expects to have  limited  sales of  Certiva(R)  in 2000
principally  because  of the  Company's  focus  on  fulfilling  its  contractual
commitments under the NHS contract for NeisVac-C(TM).  See Item 7 - Management's
Discussion  and Analysis of Financial  Condition  and Results of Operation for a
more complete discussion.

      For  financial  information  regarding  the  segments in which the Company
operates,  see  Item 7 -  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operation,  and Note 3 of the Notes to the Consolidated
Financial  Statements in Item 8 Financial Statements and Supplementary Data. All
of the Company's sales are made in U.S. dollars.  The backlog of orders believed
to be firm for the Company's  products was  approximately  $1.9 million and $1.6
million as of December  31, 1999 and 1998,  respectively.  The Company  does not
consider orders for any of the Company's  products to be firm until such time as
regulatory  approval is obtained  for each  product.  To date,  sales of bulk aP
vaccines to SSI have constituted the Company's exports.  In 1999, 1998 and 1997,
the  Company's  product  sales to SSI were $2.4  million,  $1  million  and $1.7
million, respectively.

      In 2000,  sales of  NeisVac-C(TM)  are  expected  to be  solely  to the UK
government under the NHS contract as part of a national immunization campaign of
all newborns to young adults to prevent  Group C  meningococcal  disease.  These
sales represent a one-time opportunity,  because upon completion of the national
campaign,  the UK market  for  NeisVac-C(TM)  generally  will be  limited to the
annual birth count of approximately  700,000 infants.  Accordingly,  the Company
will  undertake  to use  the  European  mutual  recognition  procedures  to have
NeisVac-C(TM) approved for marketing in additional European countries,  although
there can be no assurances  that these marketing  authorizations  will be issued
timely  or at  all.  See  "Risk  Factors  -  Government  Regulation;  Regulatory
Approvals."

      To successfully commercialize Certiva(R) in the United States, the Company
will be required,  among other things, to continue  participation in established
purchasing  programs of federal and state  governments,  to maintain an identity
and reputation for the Company and its products,  to maintain an awareness among
pediatricians  of the safety and efficacy of the  vaccine,  to  distinguish  the
Company's products from those of its competitors,  to maintain the Company as an
effective  and  reliable  supplier  of  vaccines,   to  maintain  efficient  and
consistent  production  of  sufficient  quantities  of vaccine and to  establish


                                       18
<PAGE>

effective distribution channels. There can be no assurance that the Company will
be able to continue to successfully market its vaccine products, or that it will
successfully  negotiate  and  execute  any  commercial  arrangements  with third
parties.  See  "Business  Relationships,"  "Competition"  and "Risk Factors - No
Assurance of Effective Marketing."

BUSINESS RELATIONSHIPS

      PERTUSSIS LICENSE AGREEMENT.  The process by which the Company's pertussis
toxin is inactivated is the subject of a United States patent held by the United
States  Government,  which has been  licensed  exclusively  to the Company.  The
patent is scheduled to expire on August 9, 2005; however,  the Company has filed
an application  with the U.S.  Patent and Trade Office to extend the patent term
and has received a preliminary  determination that the extension will be through
2010.  The  Company's  exclusive  rights will expire on October  29,  2005.  The
Company is required to pay the United  States  Government a royalty based on net
sales of a  vaccine  that  utilizes  the  patented  technology.  Foreign  patent
applications  covering this  technology  have been filed and fourteen  unexpired
foreign patents are issued with expiration  dates ranging from 2002 to 2009. The
Company  has  acquired a  royalty-bearing  exclusive  license for the use of the
patented  technology in all such foreign  jurisdictions for the full term of the
patents. See "Products Under Development - Acellular Pertussis Vaccines."

      CANADIAN GOVERNMENT LICENSE AGREEMENTS.  The Company is the assignee under
two license agreements between BioChem and the Canadian  Government covering the
conjugate  technology being developed by the Company.  These license  agreements
currently  cover a total of  thirty-one  issued  patents with  expiration  dates
ranging  from 2005 to 2016,  and the Company and the  Canadian  Government  have
applied  for  additional  patents,  which,  if issued,  would be licensed to the
Company  under these  agreements.  The  Company is required to pay the  Canadian
Government royalties on the sale of licensed vaccines.  In the event of a change
in  control  of the  Company,  the  Canadian  Government  retains  the  right to
terminate  both  agreements if it believes such change in control is detrimental
to  the  Canadian  Government;   however,  the  Company  does  not  expect  that
acquisition by Baxter to trigger this provision  under the applicable  licenses.
The  Canadian  Government  also can  terminate  the  license  agreements  if all
reasonable  efforts  are not being used to exploit the  technology  commercially
with due diligence.  Under one license agreement,  the Company has the exclusive
worldwide rights (excluding Canada) for the development,  production and sale of
vaccines produced in accordance with the conjugate vaccine technology covered by
the  license.  The  vaccines  covered  include,   among  others,  those  against
meningococcal,   HAEMOPHILUS  INFLUENZAE  type  b,  Group  B  streptococcal  and
pneumococcal  infections.  The term of the license is co-extensive with the term
of the  patents.  Currently,  the  last-to-expire  patent  licensed  under  this
agreement is scheduled to expire in 2016.  Under the second  license  agreement,
the  Company  has the  exclusive  worldwide  rights  (excluding  Canada) for the
development,  production  and sale of a vaccine  against  Group B  meningococcal
disease  produced in accordance  with the licensed  technology.  The term of the
license  is  co-extensive  with  the  terms  of  the  patents.   Currently,  the
last-to-expire  patent  licensed  under this agreement is scheduled to expire in
2016. See also "Products Under Development - Conjugate Vaccines."

      STATENS SERUM  INSTITUT  SUPPLY  AGREEMENTS.  In 1991, the Company and SSI
executed a supply  agreement  under  which SSI is required to supply the Company
with its  requirements  of  diphtheria  and  tetanus  toxoids  to be used by the
Company for developing,  producing and selling the DTaP vaccine, either alone or
as a  combination  vaccine.  The  Company has been using  these  diphtheria  and
tetanus  toxoids  in  producing  its DTaP  vaccine.  In the  event  SSI fails to
continue  to supply  the  Company  with  these  components,  the  Company  has a
royalty-bearing  license to produce  the  diphtheria  and tetanus  toxoids.  The
Company's  right to purchase  diphtheria  and  tetanus  toxoids for sale of such
products is exclusive in certain  designated  countries and  nonexclusive in the
rest of the world with the exception of SSI's Territory. The contract has a term


                                       19
<PAGE>

of 20 years. The Company and SSI also have entered into another supply agreement
pursuant to which the Company has agreed,  on an exclusive  basis, to supply SSI
with the pertussis  toxoid for  combination  with diphtheria and tetanus toxoids
either alone or together with other antigens for sale in SSI's Territory.

      In February 1992, the Company signed two additional supply agreements with
SSI.  Under the first  supply  agreement,  SSI has agreed to provide the Company
with  diphtheria  and  tetanus  toxoids  for  use  as  carrier  proteins  in the
development and manufacture of the Company's conjugate vaccines. If SSI fails to
continue  to supply  the  Company  with  these  components,  the  Company  has a
royalty-bearing  license to produce  diphtheria  and  tetanus  toxoids  for this
purpose. Under the second supply agreement, the Company has agreed to supply SSI
with its conjugate  vaccines that utilize SSI's diphtheria or tetanus toxoids as
a carrier  protein solely for use by SSI in  combination  with DTaP and DTaP-IPV
vaccines in SSI's  Territory.  SSI's right to market and sell these  products is
exclusive in SSI's Territory. These agreements have a term of 20 years.

      STATENS SERUM INSTITUT  RESEARCH AND DEVELOPMENT  AGREEMENT.  In 1991, the
Company entered into a research and  development  agreement with SSI under which
the parties agreed to collaborate on the development of a DTaP-IPV vaccine.  See
"Products Under  Development - aP Combination  Vaccines." The agreement  permits
either  party to add other  antigens to the DTaP-IPV  product.  Once the Company
obtains  regulatory  approval,  and commences sales of the DTaP-IPV product,  it
will be required to make royalty payments to SSI. SSI is required to sell to the
Company all of its requirements of IPV for the purpose of developing,  producing
and selling the DTaP-IPV product,  either alone or together with other antigens.
The contract has a term of 20 years.

      STATENS  SERUM  INSTITUT  DISTRIBUTION  AGREEMENTS.  The  Company has been
designated the exclusive distributor in North America and the United Kingdom for
SSI's  diphtheria,  tetanus  and IPV  vaccines.  Additionally,  SSI  will be the
exclusive   distributor  in  various   countries  for  the  conjugate   vaccines
manufactured  using  the  components  supplied  to the  Company  by  SSI.  These
agreements  were executed in February  1992, and each agreement has a term of 10
years.

      TECHNOLOGY  TRANSFER  AGREEMENT WITH BIOCHEM.  In 1990, in addition to the
conjugate  vaccine  technologies  described  above,  BioChem  transferred to the
Company all rights to certain vaccine  technologies and granted to the Company a
paid-up exclusive right (excluding Canada) and license to other technologies for
vaccine  applications,   including  those  relating  to  monoclonal  antibodies,
synthetic  peptides and  adjuvants.  The licenses  granted under this  agreement
generally  will not terminate  until the  expiration of the last valid patent or
copyright anywhere in the world for the licensed  technologies or until the last
portion of the technologies  protected by trade secrecy enters the public domain
everywhere in the world, whichever occurs last. Currently, this agreement covers
one U.S.  patent that expires in 2015 and two European  patents  which expire in
2011.

      AVENTIS PASTEUR AGREEMENTS. At the end of 1995, the Company entered into a
clinical  development  agreement and a license  agreement  with Aventis  Pasteur
(formerly  Pasteur  Merieux  Connaught)  under which both parties  would jointly
develop the Company's new conjugate  vaccine against Group B  meningococcus  for
both  adult  and  pediatric  indications.   In  addition,  Aventis  Pasteur  was
responsible  for all  costs  associated  with the  clinical  development  of the
vaccine through the completion of Phase II clinical trials.  See "Products Under
Development - Conjugate  Vaccines -  Meningococcal  Vaccines." In February 2000,
Aventis  Pasteur   informed  the  Company  of  its  decision  to  terminate  the
arrangement  principally  because of a change in strategic  direction by Aventis
Pasteur.  Under the terms of the  agreements,  Aventis  Pasteur had the right to
terminate at any time.  With  termination of the  agreements,  all rights to the


                                       20
<PAGE>

products and technology developed in collaboration with Aventis Pasteur reverted
immediately back to the Company. Through the termination date of the agreements,
the Company  received  payments  from Aventis  Pasteur in  connection  with this
project in the amount of  approximately  $18 million.  See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.

      ABBOTT  LABORATORIES  AGREEMENT.  In October 1996,  the Company and Abbott
signed a  definitive  agreement  under  which  Abbott  would  market  Certiva(R)
following  FDA  approval.  Abbott began to market  Certiva(R) in October 1998 to
private   physicians   and  managed  care  markets  in  the  United  States  for
immunization  of infants and children.  Abbott  terminated the  relationship  in
September  1999.  The Company is currently  considering  selling  Certiva(R)  to
non-government  purchasers in the United States through direct arrangements with
distributors, although no formal agreements have been completed.

      Under the agreement, Abbott provided the Company with clinical development
funding  for its  combination  vaccines.  The Company  recognized  approximately
$850,000  of  revenues  under this  contract  in 1999 prior to its  termination.
During the course of the  agreement,  the Company  received total payments of $6
million. In addition,  the Company received revenues from Abbott as it purchased
Certiva(R).  See Item 7 -  Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operation.

      OTHER  RELATIONSHIPS.  The  Company  holds  licenses  and other  rights to
additional  technologies  that the  Company  is  researching  and/or  developing
jointly with various research institutions.

COMPETITION

      Competition  in  the  vaccine  industry  is  intense.  The  Company  faces
competition  from many  companies,  including  a number of large  companies  and
specialized  firms in the  United  States  and  abroad  that are  engaged in the
development  and  production of vaccines,  and major  universities  and research
institutions.  Many of the  Company's  competitors  have  substantially  greater
financial and other resources,  more extensive experience in conducting clinical
testing and obtaining regulatory approvals for their products, greater operating
experience,  larger research and development and marketing  staffs,  and greater
production capabilities than those of the Company.

      The Company  believes that the  principal  methods of  competition  in the
vaccine  marketplace  are price,  product  quality  (measured  by the safety and
efficacy of a vaccine  product)  and  introduction  of new  products  (including
vaccines against diseases for which no vaccine was previously  available as well
as new combination  vaccines that combine existing vaccines for several diseases
into a single product).  Combination  vaccines  frequently are favored by public
health authorities, medical practitioners and patients, particularly in the case
of pediatric vaccines,  because they reduce the need for multiple injections and
may increase overall compliance with recommended  vaccination schedules.  As new
combination  vaccines are  introduced,  older  combinations  and single products
often become obsolete. See "Marketing of Vaccines."

      The Company  believes that its principal  competitors in the United States
are  Wyeth-Lederle  (a  subsidiary  of  American  Home  Products),  Merck & Co.,
SmithKline  Beecham  plc, and Aventis  Pasteur,  most of which are active in the
development  of aP,  combination  and conjugate  vaccines for use in infants and
children.  For example,  Certiva(R) currently competes in the United States with
three other DTaP vaccines,  and most, if not all, manufacturers of DTaP vaccines
are expected to compete in the TdaP vaccine market.  In addition,  NeisVac-C(TM)
is expected to compete in the United Kingdom  against at least two other Group C
meningococcal conjugate vaccines, one of which is already licensed there. To the
extent  that these  competitors  are  successful  in  developing  and  marketing
combination   vaccines    that  include   DTaP   vaccines,    these  combination


                                       21
<PAGE>

vaccines  may gain market  share at the expense of  stand-alone  DTaP  vaccines,
including Certiva(R). One of these competitors has licensed in the United States
a vaccine that combines by  reconstitution  that  company's Hib vaccine with its
DTaP vaccine for  administration at 15-18 months of age. Another  competitor has
reported that it is in clinical trials for a DTaP-Hib  combination  vaccine.  In
addition,  several  competing  DTaP  vaccines and certain  combination  vaccines
incorporating  DTaP, IPV, Hepatitis B and/or Hib vaccines have been licensed for
sale  outside  of the  United  States.  See  "Risk  Factors  -  Competition  and
Technological Change."

PATENTS AND PROPRIETARY INFORMATION

      The Company actively  pursues a strategy of seeking patent  protection for
valuable  patentable  subject matter. The Company believes that patent and trade
secret  protection is an important  element of its business and that its success
will depend in part on its ability to obtain strong  patents,  to maintain trade
secret  protection,  and to operate without infringing the proprietary rights of
third  parties.  The Company  holds as assignee and licensee a number of patents
and patent applications. See "Business Relationships" and "Risk Factors - Patent
Protection and Proprietary Information."

      The Company  also  relies  upon trade  secrets,  know-how  and  continuing
technological  advancement  to develop and  maintain its  competitive  position.
Disclosure  and use of the  Company's  know-how is  generally  controlled  under
agreements   with  the  parties   involved.   In   addition,   the  Company  has
confidentiality  agreements with its employees,  consultants and officers. There
can be no assurance  that  disclosure  of the  Company's  trade secrets will not
occur,  or that others  will not  independently  develop  and patent  equivalent
technology.

GOVERNMENT REGULATION

      The Company and its products are subject to  comprehensive  regulation  by
the FDA in the United States and by comparable  authorities in other  countries.
These  national  agencies  and  other  federal,  state,  and  local  authorities
regulate,  among other things,  the  preclinical and clinical  testing,  safety,
effectiveness,   approval,  manufacturing,   labeling,  advertising,  promotion,
export, and marketing of the Company's  products.  In the United States, the FDA
regulates human vaccine products under the Federal Food, Drug, and Cosmetic Act,
the Public Health Service Act, and other laws.

      The steps  required  before a human  vaccine  product may be approved  for
marketing in the United States generally include: (i) preclinical laboratory and
animal  testing;  (ii)  submission  to the FDA of an  Investigational  New  Drug
Application  ("IND") for human  clinical  testing,  which must become  effective
before human clinical trials may commence; (iii) human clinical trials and other
studies to establish the safety and efficacy of the product; (iv) the submission
to the FDA of license applications;  (v) FDA review of the license applications;
and (vi)  satisfactory  completion  of an FDA  inspection  of the  manufacturing
facility or  facilities at which the product is made to assess  compliance  with
Good Manufacturing  Practices ("GMP"). The testing and approval process requires
substantial time, effort and financial resources,  and there can be no assurance
that any  approval  will be  granted  on a timely  basis,  if at all.  See "Risk
Factors - Government Regulation; Regulatory Approvals."


                                       22
<PAGE>

      Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess its safety, immunogenicity, and potential efficacy. The
results of preclinical  tests,  together with the manufacturing  information and
analytical  data,  are submitted to the FDA as part of an IND, which must become
effective  before human  clinical  trials may begin.  An IND will  automatically
become  effective 30 days after receipt by the FDA,  unless before that time the
FDA raises  concerns or questions.  If it does, the FDA's concerns and questions
must be resolved before clinical trials can proceed.

      Clinical  trials involve the  administration  of the  investigational  new
vaccine  to  healthy  volunteers  or to  patients,  under the  supervision  of a
qualified  investigator.  Clinical  trials are conducted  under  protocols  that
detail  the  objectives  of the study and the  parameters  to be used to monitor
efficacy  and safety.  Each  clinical  study must be reviewed by an  independent
Institutional Review Board ("IRB"), and the IRB must approve the study before it
begins.  In its  review,  the IRB will  consider,  among other  things,  ethical
factors and the safety of human subjects.

      Clinical trials are typically  conducted in three sequential  phases,  but
the phases may overlap. In Phase 1, the initial introduction of the vaccine into
human subjects  (usually healthy  volunteers),  the vaccine is tested for safety
(adverse effects),  optimal dosage, and its ability to induce an immune response
(immunogenicity).   Phase  II  involves   studies  in  limited   target  patient
populations  to further  evaluate  immunogenicity  and  optimal  dosage,  and to
identify  possible  adverse effects and safety risks.  Phase III clinical trials
are  undertaken  to evaluate  clinical  efficacy or some measure  thereof and to
further test for safety within an expanded target patient population, usually at
geographically  dispersed  clinical study sites.  There can be no assurance that
Phase I, Phase II or Phase III testing of any of the Company's  products will be
successfully  completed within any specific time period,  if at all, or, that if
they are completed, that the results of the trial will be sufficient to serve as
the basis of a license application  submission to the FDA. Furthermore,  FDA may
suspend clinical trials at any time on various grounds, including a finding that
the subjects in the trial are being exposed to an unacceptable  health risk. See
"Risk Factors - Uncertainties Related to Clinical Trials."

      The results of  preclinical  testing and clinical  trials,  together  with
detailed  information  on the  manufacture  and  composition  of a product,  are
submitted to the FDA in the form of a Biologics License Application ("BLA"). The
FDA may  deny a BLA if  applicable  regulatory  criteria  are not  met,  require
additional  testing or information,  and/or require  post-marketing  testing and
surveillance to monitor the safety or efficacy of a product.  Before approving a
BLA, the FDA will inspect the facilities at which a product is manufactured, and
will not approve the product unless GMP compliance is satisfactory.

      Both  before and after  approval is  obtained,  violations  of  regulatory
requirements,  including the preclinical and clinical testing  process,  the BLA
review process, or thereafter (including after approval),  may result in various
adverse  consequences,  including  the FDA's  delay in  approving  or refusal to
approve a product,  withdrawal of an approved product from the market,  seizure,
injunction,  and/or the  imposition  of criminal  penalties  against the license
holder. For example,  each holder of an IND or FDA license is required to report
certain  adverse  reactions to the FDA, and to comply with certain  requirements
concerning  advertising  and  promotional  labeling  for their  products.  Also,
quality  control and  manufacturing  procedures  must continue to conform to GMP
regulations  after approval,  and the FDA  periodically  inspects  manufacturing
facilities  to assess  compliance  with  GMP.  Accordingly,  manufacturers  must
continue  to expend  time,  moneys,  and  effort in the area of  production  and
quality control to maintain GMP compliance.  In addition,  discovery of problems
may result in  restrictions  on a product,  including  withdrawal of the product
from the market. Also, new government requirements may be established that could
delay  or  prevent   regulatory   approval  of  the  Company's   products  under
development.


                                       23
<PAGE>

      The Company is also subject to a variety of foreign regulations  governing
clinical trials and sales of its products.  Whether or not FDA approval has been
obtained,  approval of a product by the  comparable  regulatory  authorities  of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries.  The approval process varies from country to country
and the time may be longer or shorter than that required for FDA approval.

      Requirements similar to FDA's are also in effect in the European Union and
other  foreign  countries  where  the  Company  has  applied  or may  apply  for
regulatory  approval for clinical studies and/or marketing of its vaccines.  The
Company's  research  and  operations  also  are  subject  to  regulation  by the
Occupational Safety and Health Agency, the Environmental  Protection Agency, the
Department of  Agriculture,  and the Department of  Transportation.  The Company
also is  subject to  regulation  under the Toxic  Substances  Control  Act,  the
Resource  Conservation and Recovery Act, and other regulatory statutes,  and may
in the future be subject to other federal,  state, local or foreign regulations.
The Company's compliance with laws that regulate the discharge of materials into
the environment or otherwise relate to the protection of the environmental  does
not have a material effect on the ongoing operations of the Company. The Company
has not made any material expenditures for environmental control facilities, nor
does it anticipate any such expenditures during the current fiscal year.

RAW MATERIALS

      Laboratory  supplies  utilized in the Company's  research and  development
generally are available from several  commercial  suppliers under standard terms
and conditions.  Most raw materials necessary for process development,  scale-up
and commercial  manufacturing are generally  available from multiple  commercial
suppliers. However, certain processes require raw materials from sole sources or
materials  that are  difficult  for  suppliers  to  produce  and  certify to the
Company's  specifications.  In addition, the Company may experience temporary or
permanent shortages of critical raw materials necessary for continued production
of its vaccines.  Accordingly,  given the specific  nature of, and critical need
for, certain raw materials,  there is a risk that material shortages could delay
production  efforts,  adversely  impact  production  costs and yields,  and even
necessitate  the use of substitute  materials.  Any of these events could have a
significant adverse impact on the Company's operations. See also "Risk Factors -
Dependence on Suppliers."

PRODUCT LIABILITY

      The testing and  marketing of vaccines  entail an inherent risk of product
liability  attributable to unwanted and potentially serious health effects.  The
extent of this risk was  sufficiently  great in the United  States that,  by the
mid-1980s, many manufacturers ceased production of pediatric vaccines because of
liability exposure.

      In response to these withdrawals from the vaccine market, Congress enacted
the NCVI  Act to  ensure  the  availability  of  government  mandated  pediatric
vaccines by addressing the liability of manufacturers  for  immunization-related
injuries. Among other things, the NCVI Act created a trust fund, supported by an
excise tax on each dose of vaccine sold, to compensate eligible injured parties.
Compensation  awards are statutorily  established  and are generally  limited to
actual  and  projected   unreimbursed  medical,   rehabilitative  and  custodial
expenses,  lost  earnings,  and pain and  suffering,  together  with  reasonable
attorneys' fees.  Injured parties are not allowed to bring a lawsuit against the
manufacturer  unless they have filed a claim with the program,  received a final
determination  and  rejected  it in favor of  litigation.  The NCVI Act may not,
however,  protect vaccine  manufacturers  against liability if the conditions of
the NCVI Act are not satisfied, or against suits by family members of an injured
party.


                                       24
<PAGE>

      As  the  vaccines  covered  by the  NCVI  Act  include  vaccines  for  the
prevention of diphtheria, tetanus, pertussis, polio and Hib, the Company's DTaP,
IPV and Hib vaccines have certain  protection from liability claims.  While none
of the Company's other products are presently covered by the NCVI Act, from time
to time there are  legislative  and  regulatory  proposals to expand the list of
vaccines covered by, and to reduce the excise taxes that fund, the program.  The
Company  is unable  to  predict  whether  any other  legislative  or  regulatory
proposal  will  ultimately  be enacted or the effect any of these  proposals may
ultimately have on the Company's business or results of future operations.

      The testing and marketing of vaccine  products involve an inherent risk of
product liability. The Company has limited product liability insurance coverage.
There can be no assurance that adequate  additional  insurance  coverage will be
available at acceptable cost, if at all, or that a product liability claim would
not materially  adversely affect the Company's business or financial  condition.
If not covered by insurance, the Company faces potential liability that could be
substantial in the event of claims.

EMPLOYEES

      As of December 31, 1999,  the Company had 267 full-time  employees of whom
29 have Ph.D. degrees and three have M.D. degrees. Of these employees,  171 were
engaged in research,  development and production activities,  34 were engaged in
administration, and 62 were engaged in quality/regulatory and related aspects of
the Company's operations.  The Company considers its relationship with employees
to be satisfactory.






                                       25
<PAGE>

RISK FACTORS

      IN ADDITION  TO THE OTHER  INFORMATION  INCLUDED IN THIS ANNUAL  REPORT ON
FORM 10-K,  READERS  SHOULD  CONSIDER THE FOLLOWING  RISK  FACTORS.  THIS ANNUAL
REPORT ON FORM 10-K  CONTAINS  FORWARD  LOOKING  STATEMENTS  COVERED BY THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS  INVOLVE  RISKS  AND  UNCERTAINTIES  THAT MAY  AFFECT  THE  COMPANY'S
BUSINESS AND PROSPECTS.  THE COMPANY'S  ACTUAL RESULTS MAY DIFFER  SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS
SECTION.

      RISK  OF  FAILURE  TO  COMPLETE  THE  ARRANGEMENT  WITH  BAXTER.   If  the
arrangement is not completed for any reason,  NAVA may be subject to a number of
material risks, including the following:

      o   the  Company is required to repay  amounts  borrowed  under the credit
          facility with Bank of America and  guaranteed  by Baxter.  As of March
          21, 2000 the principal amount  outstanding  under this credit facility
          was $19.5 million;

      o   the Company may be  required  to pay Baxter a  termination  fee of $14
          million and reimburse Baxter for expenses up to $1 million;

      o   the price of the Company's Common Stock may decline to the extent that
          the  current  market  price  of the  Common  Stock  reflects  a market
          assumption that the arrangement will be completed; and

      o   costs  related  to the  arrangement,  such as  legal,  accounting  and
          financial  advisor fees,  must be paid even if the  arrangement is not
          completed.

See also "Risk Factors - Risk Associated with Lack of Availability of Capital."

      In  addition,  current  and  prospective  employees  of the Company may be
uncertain  about their future roles with Baxter until Baxter's  strategies  with
regard to the Company are announced or executed.  This may adversely  affect the
Company's  ability to attract and retain key  management,  sales,  marketing and
technical personnel.  Also, concern about the financial prospects of the Company
and the uncertainty  related to the closing of the  arrangement  with Baxter has
contributed  to employees  leaving the Company and may  contribute to additional
loss of personnel.

      Further,  if the  arrangement  is terminated  and the  Company's  board of
directors determines to seek another arrangement or business combination,  there
can be no  assurance  that it will be able to find a partner  willing  to pay an
equivalent or more attractive price than the price to be paid in the arrangement
or sufficient  financing on acceptable  terms that will be necessary to fund the
Company's continuing operations. In addition, while the Share Exchange Agreement
is in effect,  the Company is prohibited,  subject to certain  exceptions,  from
soliciting,  initiating or  encouraging  or entering into certain  extraordinary
transactions,  such  as  an  arrangement,  sale  of  assets  or  other  business
combination, with any party other than Baxter without becoming  responsible  for
paying a  termination fee and reimbursing  Baxter for expenses up to $1 million.

      RISK  ASSOCIATED  WITH LACK OF  AVAILABILITY  OF CAPITAL.  To maintain the
Company's production,  research and development at current levels,  present cash
and cash equivalents,  expected product sales of Certiva(R),  NeisVac-C(TM), and
the Company's other products are not expected to provide sufficient cash to fund
the Company's operations, debt service payments and capital expenditures in 2000
and into 2001. To address the cash needs,  the Company obtained in November 1999
a $30 million secured  revolving line of credit from Bank of America,  N.A. This
line of credit is  guaranteed  by Baxter and is secured by all of the  Company's


                                       26
<PAGE>

otherwise  unencumbered  assets,  including  patents,  patent  applications  and
receivables.  The  Company  expects  that  this  line of  credit  will  fund its
operations  through March 31 and through April 2000 if extended by the bank with
Baxter's  consent.  If the  acquisition by Baxter does not close timely in early
April 2000, the Company will have to secure  alternative  interim  financing and
could be required to repay any  outstanding  balances on March 31, 2000. In this
case,  there  can be no  assurances  that  the  Company  will be able to  obtain
additional debt or equity  financing on favorable  terms in amounts  required to
meet cash  requirements  or that  litigation will not result with Baxter arising
out of the  Company's  efforts  to secure  such  financing.  The Share  Exchange
Agreement  prohibits  the Company  from  entering  into  certain debt and equity
financing arrangements.

      In this case,  the Company  will be required to raise up to  approximately
$62 million,  or $77 million  should the Company be required to pay breakup fees
to  Baxter,  of new  financing  in the second  quarter  of 2000 to  finance  its
operations,  service its debt and repay the lines of credit guaranteed by Baxter
and  BioChem.  See Item 7 -  Management's  Discussion  and Analysis of Financial
Condition and Results of  Operations.  The  foregoing  include  forward  looking
statements  and the factors which affect the actual cash required for operations
could  include,  among  other  things:  vaccine  production  levels;  regulatory
authorization to commence clinical  investigations;  timing for the commencement
of planned  clinical  trials;  and the level of  expenditures  for the Company's
ongoing research and development program.

      In addition, the Company currently cannot secure any funding through third
party  collaborations,  because under the terms of the Share Exchange Agreement,
the Company may not enter into any new or alternative collaborative arrangements
for third  parties to  distribute,  research  and develop its  products  without
Baxter's  consent until either the  transaction  with Baxter is completed or the
Share Exchange Agreement is terminated.

      If the Company is unable to extend the March 31,  2000,  maturity  date of
its credit  facility  with the Bank of America or to obtain  other  financing to
repay the  facility,  then the  Company  would be in  default  under the Bank of
America  credit  facility,  and the bank  and/or  Baxter  (as  guarantor)  could
foreclose on the Company's assets,  including patents,  patent  applications and
receivables,  securing the credit facility.  The $30 million line of credit with
Bank of America,  N.A.  guaranteed  by Baxter is secured by all of the Company's
otherwise  unencumbered  assets,  including  patents,  patent  applications  and
receivables.  If an event of default occurs under the loan agreement,  Baxter is
obligated to purchase all of Bank of America's rights and obligations  under the
loan agreement  with the Company.  A default that is not timely cured would also
trigger defaults and, therefore, repayment obligations under the Company's other
financing  facilities,  as well as the possible  foreclosure  upon the remaining
Company  assets  by  creditors.  The 4.5%  Notes  are  secured  by a  pledge  of
collateral,  which includes certain of the Company's  equipment and other assets
at the Company's  principal  manufacturing  facility and the Company's ownership
rights  in  U.S.  Patent  No.  5,425,946,  entitled  "Vaccines  Against  Group C
NEISSERIA  MENINGITIDIS." Any foreclosure on the collateral would  substantially
impair the Company's  ability to operate its business,  if it could do so at all
without seeking bankruptcy protection.  See Item 6 - Selected Financial Data and
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operation.


                                       27
<PAGE>

      RISK RELATED TO SIGNIFICANT  LEVEL OF INDEBTEDNESS.  The Company currently
has a significant level of indebtedness.  As of December 31, 1999, the Company's
consolidated    indebtedness   and   capitalized   lease   obligations   totaled
approximately  $119  million,   including  $75.3  million  of  6.5%  Convertible
Subordinated Notes ("6.5% Notes"), $25 million of 4.5% Convertible Secured Notes
("4.5% Notes"),  $6 million under a line of credit guaranteed by BioChem and $10
million under a $30 million line of credit  guaranteed by Baxter.  The Company's
total assets as of December 31, 1999 are approximately $34 million.  As of March
21, 2000,  the Company had drawn down a total of $19.5 million under the line of
credit guaranteed by Baxter,  which matures on March 31, 2000. Until the Company
begins to receive significant revenues from product sales of NeisVac-C(TM) under
the NHS  contract,  the Company will continue to incur  additional  indebtedness
under the line of credit guaranteed by Baxter,  which is the Company's principal
source of financing for its operations.

      This  level of  indebtedness  could  have  material  consequences  for the
Company such as:

      o   impairing the  Company's  ability to obtain  additional  financing for
          working capital, capital expenditures,  and general corporate or other
          purposes, and

      o   limiting the  availability  of a substantial  portion of the Company's
          future cash flow from  operations,  if any, as it will be required for
          payment of the principal and interest on its indebtedness.

      The  Company  will not  generate  sufficient  increases  in cash flow from
operations  to service its  indebtedness;  accordingly  the Company  must secure
additional  financing.  There can be no assurance,  however,  that any financing
would be available  to the Company.  See Item 7 -  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations.

      In early May 2000,  the Company is  obligated  to pay  approximately  $3.0
million in  interest  payments  to the holders of the 6.5% Notes and 4.5% Notes.
The $6 million  line of credit  guaranteed  by BioChem  also  expires on May 31,
2000; although as part of the Baxter transaction, BioChem has agreed to maintain
in effect and not to terminate in any respect its guaranty  until the  effective
date for  closing  on the  transaction  and to loan the  Company,  if the  Share
Exchange  Agreement  is  still  in  effect,  up to $5  million  on  commercially
reasonable  terms if the line of credit  becomes due prior to the effective date
on the closing of the transaction.  In addition,  Baxter is the guarantor of the
$30 million  line of credit from the Bank of America,  N.A.  This line of credit
matures on March 31,  2000,  unless  extended by the bank at  Baxter's  request.
Under the terms of the Share Exchange  Agreement,  the transaction was scheduled
to close by mid-April 2000. The transaction is subject to a number of conditions
to closing,  including,  among others,  receipt of UK regulatory approval of the
NeisVac-C(TM) and the manufacture of a two-month supply of NeisVac-C(TM) for the
Company's contract with the UK's National Health Service ("NHS") before April 1,
2000.  The Company  currently  does not expect to have  received  UK  regulatory
approval for  NeisVac-C(TM) or to manufacture the requisite  two-month supply of
vaccines by April 1, 2000.

      Baxter has advised the Company  that it will not close on the  acquisition
transaction  under the current terms of the Share Exchange  Agreement unless all
conditions to closing are satisfied in the time frame specified.  Based upon the
Company's failure to meet required  conditions on April 1 and other developments
of concern to Baxter,  Baxter has  proposed  that the  parties  modify the Share
Exchange  Agreement.  The parties have been in discussions  regarding  proposals
that involve,  among other things,  a reduction in the purchase price, the terms
under which additional financing would be available to the Company, an extension
of the date by which  conditions  to  closing  are to be  satisfied,  additional
conditions to closing and changes to existing conditions to closing, the outside
date for termination of the Share Exchange  Agreement,  and an early termination
of the Share  Exchange  Agreement.  There can be no assurances as to whether the
Company and Baxter will reach an agreement with respect to a mutually acceptable
modification to the Share Exchange Agreement or mutually acceptable  termination


                                       28
<PAGE>

      arrangements or as to the timing of any such agreement. If the parties are
unable  to reach  such an  agreement  and  Baxter  determines  not to waive  the
conditions  to closing  which the Company is unable to meet,  Baxter will not be
obligated to close on the acquisition  transaction and the Company will continue
to be bound by the terms of the Share  Exchange  Agreement  through at least May
31, 2000.  Baxter has advised the Company that it does not wish to terminate the
Share Exchange Agreement. If the parties cannot agree upon a mutually acceptable
modification of the Share Exchange Agreement or mutually acceptable  termination
arrangements, the Company's credit facility with the Bank of America will become
due and payable on March 31, 2000.  The line of credit is secured by a pledge of
all of the Company's otherwise  unencumbered assets. In such event, there can be
no assurances  that the Company will be able to refinance this  indebtedness  or
obtain  financing for its  continued  operations.  If the Company  cannot obtain
financing,  there  can  be no  assurance  that  the  Company  can  continue  its
operations  for any period of time without  seeking  bankruptcy  protection.  In
addition,  there can be no  assurances  that  litigation  will not be  commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient  funds
to defend such  litigation,  whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.

      LACK OF  PROFITABILITY.  The  Company  has  operated  at a loss  since its
inception  and  its  net  loss  for  the  year  ended   December  31,  1999  was
approximately $49.6 million.  The Company expects additional losses during 2000,
although not at the same magnitude,  based upon a number of factors. The factors
included in  assessing  the  projected  losses  are,  among  others:  timing and
magnitude  of  product   sales  for   NeisVac-C(TM)   under  the  NHS  contract,
difficulties  experienced in scaling up bulk  manufacturing of NeisVac-C(TM) the
expensing  of costs to  produce  NeisVac-C(TM)  prior  to  regulatory  approval,
limited  product sales from the limited  inventory of Certiva(R) and aP vaccines
on  hand,  manufacturing  limitations  for  the  Company's  acellular  pertussis
vaccines,  limitations on the Company's  ability to negotiate and enter into new
collaborative  arrangements and alternative  financings pursuant to the terms of
the Share  Exchange  Agreement,  all as discussed in greater  detail in Item 7 -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.  In addition, there can be no assurance that the Company will become
profitable after 2000. To become profitable, the Company must:

      o   timely receive regulatory approval of, and timely and efficiently
          manufacture, NeisVac-C(TM) to meet the Company's contractual
          commitments under the NHS contract to supply 3 million doses for
          approximately (British pound) 40 million (or approximately $64 million
          as of March 23, 2000),
      o   timely and efficiently expand production capacity and output for its
          acellular pertussis vaccine products,
      o   obtain regulatory approvals for new products, and produce and market
          those products efficiently, successfully and in sufficient quantities,
      o   secure milestone and other payments under new collaborative
          agreements, and
      o   reduce current levels of indebtedness.

      The  magnitude  of the  Company's  losses in 2000 will  greatly  depend on
whether the Company receives the  approximately (British  pound) 40  million (or
approximately  $64 million at March 23, 2000) for the sale of 3 million doses of
NeisVac-C(TM)  under the NHS contract,  with  shipments  that were  scheduled to
begin in early  April  2000,  subject  to UK  regulatory  approval.  Under  that
agreement,   if  the  Company  does  not  receive  the  requisite  UK  marketing
authorization  before its first  scheduled  delivery date in April 2000, NHS has
the right to (1) reschedule the deliveries  without reducing the minimum volumes
to be  supplied  by the  Company,  (2) reduce the  volumes to be supplied by the
Company by an amount that NHS  considers  reasonable to reflect the shorter life
of the  agreement,  or (3) terminate the contract.  The Company has had informal
discussions  with NHS  regarding  the possible  delays in licensure  and product
delivery and believes that,  based on these  discussions  and the strong profile
demonstrated by NeisVac-C(TM)  in clinical  trials,  the NHS would be willing to
reschedule  deliveries  through the end of 2000 for the entire 3 million  doses,
without penalty, if the regulatory approval for NeisVac-C(TM) is issued within a
few months of April 2000, although there can be no assurances in this regard. If


                                       29
<PAGE>

the NHS  significantly  reduces the number of doses  purchased or terminates the
contract, the Company would experience substantially greater losses and its cash
resources  (and its  ability to invest in  research  and  development)  would be
severely impacted.

See "Risk Factors - Risk Related to Significant  Level of  Indebtedness,"  "Risk
Factors Risk  Associated  with Lack of Availability of Capital," "Risk Factors -
No Assurance of Effective  Marketing,"  "Risk  Factors - Risks  Associated  with
Limited Production  Capacity" and Item 7 - Management's  Discussion and Analysis
of Financial Condition and Results of Operation.

      NO ASSURANCE OF  EFFECTIVE  MARKETING.  The Company  sells  Certiva(R)  to
government  purchasers in the United States through a small internal salesforce.
Under a distribution agreement, Abbott previously marketed Certiva(R) to private
physicians  and  managed  care  markets in the United  States;  however,  Abbott
terminated  the agreement in September  1999.  The Company is currently  selling
Certiva(R) to non-government  purchasers from limited  inventories in the United
States  through  wholesale  distributors.  There  can be no  assurance  that the
Company  will  successfully   implement  its  sales  and  marketing  strategies,
particularly  with  respect to the private  physician  and managed  care markets
given the limited size of its internal salesforce.

      Factors  affecting  commercial  success of the  Company's  vaccines in the
United States include:

      o   establishing the Company as an effective and reliable supplier of
          vaccines,
      o   establishing efficient and consistent production of sufficient
          quantities of vaccine,
      o   establishing effective distribution channels,
      o   maintaining an identity and reputation for the Company and its
          products, and
      o   increasing awareness among pediatricians of the safety and efficacy of
          the Company's vaccines, and
      o   distinguishing the Company's products from those of its competitors.

      In  addition,   the  Company  has  entered  into  supply,   marketing  and
distribution  agreements  with SSI under which SSI has to market  certain of the
Company's  products,  such as Certiva(R)-EU and the DTaP-IPV  vaccine,  in SSI's
Territory. The Company does not currently have a salesforce or partner to market
products in the European countries not included in SSI's Territory. Although the
national  marketing  authorization for the sale and distribution of its DTaP-IPV
vaccine in Germany  and  Austria  has been  completed,  the  Company and Chiron-
Behring  terminated  at the end of 1999 the  distribution  agreement  for  sales
within these countries.  The Company is considering  possible  arrangements with
distributors to market the Company's products in these territories,  although no
formal agreements have been completed. Consequently, the Company's revenues from
product  sales  in  Europe  and  other  territories   depend  upon  the  timing,
implementation  and  effectiveness  of the  sales,  marketing  and  distribution
efforts of others. In addition, the Company may not be successful in negotiating
and executing additional marketing and/or distribution agreements with any other
third  parties  and these  other  third  parties  may be  unable  to market  the
Company's products successfully. See "Business - Business Relationships."

      RISKS ASSOCIATED WITH LIMITED  PRODUCTION  CAPACITY.  The Company has only
one manufacturing facility through which it alternates production of its various
products,  such as  Certiva(R), and given that products  cannot be  manufactured
concurrently in the facility,  the Company  experiences  shortages of supply for
commercial  products if  inventories  are not sufficient to carry over until the
next scheduled  production  cycle for each product.  This results in the loss of
sales for that product.  NeisVac-C(TM) is presently in commercial  production in
the  manufacturing  facility,  so the Company will only have its current limited
inventories  of Certiva(R) and aP vaccines  available for commercial  sale until
such time as lots of those products are  manufactured and released for sale. See


                                       30
<PAGE>

Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.

      The Company's  manufacturing facility also has limited production capacity
based on the present size, configuration,  equipment, processes and methods used
to produce its products.  In addition,  production expenses are mainly fixed and
consist  primarily  of expenses  relating  to the  operation  of its  production
facilities and maintaining a ready work force.  Further,  from time to time, the
Company experiences  disruptions and production failures.  These disruptions and
failures  increase  unit  production  costs as units are lost in the  production
process.  These  factors have  contributed  to higher  production  costs for the
Company's  acellular  pertussis  products,  which costs  currently  exceed their
respective  net selling  prices.  In  addition,  the Company is  commencing  the
production of NeisVac(TM) in this facility on a commercial  scale, and there can
be no assurances  that there will not be  disruptions or product  failures.  See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.

      In order to  address  production  limitations  for  Certiva(R)  and its aP
vaccines,  the Company has implemented a two-step capacity  enhancement program.
The first step is to eliminate  bottlenecks  and  streamline  and strengthen the
product testing and release process, thereby reducing production disruptions and
failures and enhancing the reliability of the production process. This work will
continue  to be  performed  off-line  during  the  first  half  of  2000,  while
NeisVac-C(TM)  is being  produced in the  manufacturing  facility.  Second,  the
Company has modified its existing facilities and operations in a manner intended
to expand production capacity and efficiency.  The Company filed the appropriate
documentation with the FDA in the fourth quarter of 1999 in seeking the approval
for these enhancements;  however,  there can be no assurances that such approval
will be granted by the FDA or that FDA review will not involve delays that would
adversely  affect the  Company's  ability to market  Certiva(R)  made with these
enhancements. See "Risk Factors - Government Regulation;  Regulatory Approvals."
Upon  completion  of both of these  programs,  the  Company  expects  that  unit
production costs (before filling and packaging) will be reduced. In prior years,
the production costs for the Company's  acellular  pertussis  products  exceeded
their net  realizable  value,  and there can be no assurances  that the enhanced
production  and  testing  processes  will  increase  capacity  or lower the unit
production  costs,  particularly in light of the increased filling and packaging
costs  associated  with the  decision  to  manufacture  Certiva(R)  without  the
preservative  thimerosal,  as discussed in Item 7  Management's  Discussion  and
Analysis of Financial  Condition and Results of  Operation.  See "Risk Factors -
Risk Associated With Limited Production Capacity."

      In addition,  the Company's  ability to timely and efficiently  expand its
production capacity depends, in large part, upon the following:

      o   adequacy of engineering designs,
      o   manufacturing experience with these enhancements,
      o   timeliness of regulatory review of modifications, and
      o   acceptability of the  modifications to applicable regulatory
          authorities.

      The  Company's  plans to  increase  production  capacity  and  output  for
Certiva(R)  and its aP  vaccines  could  be  ineffective  or may not  result  in
production  efficiencies that cover future production costs. Failure to increase
production  capacity and output could limit the Company's ability to meet market
demand or achieve profitability.

      RISKS  ASSOCIATED  WITH  MANUFACTURING  AND  SCALE-UP.  The  production of
vaccines is a highly complex,  biological process involving many steps from seed
culture through final production.  Thus, the Company's  production process could


                                       31
<PAGE>

fail or become  subject to  substantial  disruptions  that impede its ability to
meet production requirements.

      From time to time,  the Company  experiences  disruptions  and  production
failures.  There is no assurance  that the Company can  adequately  address such
failures or that  production  failures  will not  continue in the future.  These
disruptions and failures:

      o   limit the Company's production capacity,
      o   increase  its  production  costs,  which  would  affect the  Company's
          prospects for profitability,
      o   could  have  a  negative  impact  on the  Company's  ability  to  meet
          commitments to provide product under its supply agreements; and
      o   could have a negative  impact on the Company's  existing  licenses for
          its  products  and delay or inhibit its  ability to obtain  additional
          regulatory approvals for its products.

      In  addition,  the Company may not  consistently  produce its  vaccines in
quantity  and quality  sufficient  to achieve  competitive  commercial  sales or
profitability.

      The Company's manufacturing  operations for NeisVac-C(TM),  Certiva(R) and
its acellular  pertussis  vaccine are located  principally in one facility.  Any
condition or event that  adversely  affects the operation of this facility would
have a material adverse effect on the Company's  financial  condition and future
results of operations.

      DEPENDENCE  ON  SUPPLIERS.   While  the  Company  produces  the  pertussis
component of Certiva(R) and the polysaccharide  component for NeisVac-C(TM),  it
has purchased, and intends to continue to purchase, from SSI required diphtheria
and tetanus toxoids and enhanced IPV for Certiva(R) and the combination vaccines
and  tetanus  toxoids  for  NeisVac-C(TM).  SSI may not  fulfill  the  Company's
requirements,  its  components  may not be supplied on  commercially  reasonable
terms,  or it may  experience  difficulties  in obtaining  necessary  regulatory
approvals or disruptions in their  production of diphtheria and tetanus  toxoids
or  IPV.  Any  of  the  foregoing  could  significantly   affect  the  Company's
operations.

      In late March 2000,  the  Company was  notified by SSI that SSI is seeking
changes in the terms,  primarily  with regards to pricing and  quantity,  of its
supply  agreements  with the Company.  The Company  currently does not know what
specific  changes are being  requested  and has  scheduled a meeting with SSI to
discuss its concerns.

      Certain of the Company's  production  processes require raw materials from
sole  sources or  materials  that are  difficult  for  suppliers  to produce and
certify  to the  Company's  specifications.  The  Company  also  may  experience
temporary  or  permanent  shortages  of critical  raw  materials  necessary  for
continued  production of its  vaccines.  Any shortage of these  materials  could
delay  production  efforts,  adversely impact  production  costs and yields,  or
necessitate  the  use  of  substitute  materials,  any  of  which  could  have a
significant adverse impact on the Company's operations.

      In addition,  the Company has  contracted  with third  parties for certain
product testing and for the sterile fill,  labeling and packaging of its vaccine
products.  Failure of any such  contractor  to meet the  Company's  requirements
could have a material  adverse effect on the Company,  may involve costly delays
and significant expense, and would require additional regulatory approval as the
Company seeks alternative arrangements.

      COMPETITION AND TECHNOLOGICAL CHANGE.  Competition in the vaccine industry
is  intense.   Competitors  of  the  Company  both  in  the  United  States  and
internationally include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of these
competitors are actively developing competing vaccines.


                                       32
<PAGE>

      Certiva(R)  currently  competes in the United States with three other DTaP
vaccines,  and most, if not all,  manufacturers of DTaP vaccines are expected to
compete in the TdaP vaccine market.  In addition,  NeisVac-C(TM)  is expected to
compete in the United Kingdom against two other Group C meningococcal  conjugate
vaccines,  one of which is already  licensed  there.  If these  competitors  are
successful in developing  and marketing  combination  vaccines that include DTaP
vaccines,  these  combination  vaccines  may gain market share at the expense of
stand-alone DTaP vaccines,  including  Certiva(R).  One of these competitors has
licensed in the United  States a vaccine that  combines by  reconstitution  that
company's Hib vaccine with its DTaP vaccine for  administration  at 15-18 months
of age and that it continues to seek FDA  approval  for  administration  of this
combination  vaccine at two, four and six months of age. Another  competitor has
reported that it is in clinical  trials for a DTaP-Hib combination  vaccine.  In
addition,  several  competing  DTaP  vaccines and certain  combination  vaccines
incorporating  DTaP, IPV and/or Hib vaccines have been licensed for sale outside
of the United States.

      Many of these  competitors  have  substantially  greater  resources,  more
extensive  experience in conducting  clinical  testing and obtaining  regulatory
approvals for their products, greater operating experience,  larger research and
development and marketing staffs, and greater  production  capabilities than the
Company.  These  factors may be  particularly  advantageous  because the vaccine
industry is subject to significant technological change.

      The  Company's  competitors  could also gain a  competitive  advantage  by
designing around the Company's patents, and developing technologies and products
that are as or more effective than any that have been or are being  developed by
the Company. They could also develop technologies and products that would render
the Company's technology and products obsolete and noncompetitive.

      CHANGES IN GOVERNMENT  PURCHASING POLICIES.  Children in the United States
receive immunizations from private providers and public providers, such as local
health  departments.  Immunizations  provided by public  providers are generally
funded through federal and state government  public health programs.  Government
purchases  historically have been at prices substantially below those offered to
the  private  sector and  presently  account  for a  substantial  portion of the
vaccine doses  distributed in the United States.  In the United States,  federal
and state  governments  historically have purchased DTaP and other vaccines from
multiple suppliers. There can be no assurances that this practice will continue.

      From time to time,  legislative  and regulatory  initiatives  are proposed
that, if adopted, could significantly modify government vaccine programs.  These
initiatives  could  materially  affect  the  federal   government's   purchasing
authority,  the contract award process,  or the funding available for government
vaccine   purchases.   The  Company  is  unable  to  predict  which  legislative
initiative, if any, will ultimately be enacted or the effect any such initiative
may ultimately have on the Company's  business or results of future  operations.
In  addition,  proposals  for  health-care,  insurance  and  tax  reform  may be
considered  in the future by  federal  and state  governments  and some of these
proposals,   if  adopted,   may  limit   government  or   third-party,   private
reimbursement   policies,  or  prices  charged  by  pharmaceutical  and  vaccine
manufacturers for their products.

      GOVERNMENT  REGULATION;   REGULATORY  APPROVALS.   The  Company's  vaccine
products,  product  development  activities  and  manufacturing  facilities  and
processes  are subject to  extensive  and  rigorous  regulation  by the FDA. FDA
regulation includes preclinical and clinical testing requirements and inspection
and approval processes.  To date, the Company has received FDA approval for only
one product.


                                       33
<PAGE>

      Commercial  introduction  of the  Company's  products in the United States
currently  requires a separate license for each product.  Obtaining licenses can
be costly and time  consuming.  There can be no assurance that the licenses will
be  granted,  or that FDA review will not  involve  delays that would  adversely
affect the Company's ability to market products.  There also can be no assurance
that any products under  development by the Company will  demonstrate the safety
or efficacy profiles  necessary for regulatory  approval,  or that the Company's
products  under  development  or its  production  facilities  will  receive  the
requisite regulatory approvals and licenses in a timely fashion or at all.

      Moreover,  FDA-granted  licenses  may impose  limitations  that affect the
commercialization  of the  product,  including  limitations  on product  use and
requirements for post-licensure  testing.  The FDA can withdraw approvals at any
time by following appropriate regulatory  procedures.  The FDA can also limit or
prevent the manufacture or  distribution  of the Company's  products both in the
United States and abroad and can require  recalls of products.  FDA  regulations
depend  heavily on  administrative  and scientific  interpretation  and advisory
committee  determinations.  Such interpretations,  with possible prospective and
retroactive  effect,  could adversely  affect the Company.  For example,  recent
assessments of the potential  health risks related to mercury  contained in food
and  drugs  conducted  by the FDA,  in  cooperation  with the EPA,  have  raised
questions  about the continued use of thimerosal in vaccines.  In July 1999, the
Company decided to follow the  recommendations of these agencies and move toward
the discontinued use of thimerosal in Certiva(R), which is licensed in multidose
vials. This change has required the Company to file for regulatory approval on a
thimerosal-free  formulation  of the product in single-dose  syringes;  however,
there can be no assurances that such approval will be granted by the FDA or that
FDA review will not involve  delays that would  adversely  affect the  Company's
ability to market Certiva(R) made with these enhancements.

      In addition,  the FDA and various state  agencies  inspect the Company and
its  facilities  from  time to time  to  determine  whether  the  Company  is in
compliance with regulations,  including manufacturing,  testing,  recordkeeping,
quality control and labeling  practices.  If such entities find that the Company
is in material violation of these regulations,  the Company could be subject to,
among other things,  product  recalls,  suspensions  or withdrawals of licenses,
revocation or suspension  of export  authorizations,  and denials of any pending
applications.

      UNCERTAINTIES  RELATED TO CLINICAL  TRIALS.  Before  obtaining  regulatory
approval for the commercial sale of any products under development,  the Company
must  demonstrate  through  pre-clinical  studies and clinical trials that these
products are safe and effective. The results from pre-clinical studies and early
clinical  trials  may not be  predictive  of  results  obtained  in  large-scale
clinical trials.  There can be no assurance that large-scale clinical trials for
any  of  the  Company's  products  will  demonstrate  safety  and  efficacy,  be
sufficient to support application for regulatory approval, or lead to marketable
products.  A number of companies in the  biotechnology  industry  have  suffered
significant  setbacks in advanced clinical trials even after achieving promising
results in earlier trials.

      PATENT PROTECTION AND PROPRIETARY INFORMATION.  Traditionally, the vaccine
industry has placed  importance  on obtaining and  maintaining  patent and trade
secret protection for significant new technologies,  products and processes. The
Company believes that this protection will be an important factor in its success
and may require the expenditure of substantial resources.

      Many companies,  universities and research  institutions  have applied for
and/or  obtained  patents  for vaccine  products  and  technologies  that may be
competitive or  inconsistent  with those held by or licensed to the Company.  No
assurances  can be given that the degree and range of  protection of any patents
will be sufficient,  that additional  patents will be issued to the Company,  or
that the Company will not  infringe  upon  patents  granted to others.  Further,
others have or may  independently  develop or otherwise  properly gain access to


                                       34
<PAGE>

technology  or  information  that is  substantially  similar  to that  which  is
unpatented yet considered proprietary by the Company.

      The Company also may desire or be required to obtain  licenses from others
to effectively develop, produce and market commercially viable products. Failure
to  obtain  those  licenses  could  have a  significant  adverse  effect  on the
Company's  ability  to  commercialize  its  vaccine  products.  There  can be no
assurance that the Company can obtain these licenses on commercially  reasonable
terms, if at all, that the patents  underlying  these licenses will be valid and
enforceable  or  that  the  proprietary  nature  of  the  unpatented  technology
underlying these licenses will remain proprietary.

      There has been, and the Company  believes that there may be in the future,
significant  litigation in the industry  regarding patent and other intellectual
property rights. If the Company becomes involved in this type of litigation,  it
could consume substantial resources.

      RISK OF PRODUCT LIABILITY AND LIMITED INSURANCE. The testing and marketing
of vaccine products involve an inherent risk of product  liability.  The Company
has limited product liability insurance coverage. There can be no assurance that
adequate additional  insurance coverage will be available at acceptable cost, if
at all, or that a product liability claim would not materially  adversely affect
the Company's business or financial condition. If not covered by insurance,  the
Company faces  potential  liability  that could be  substantial  in the event of
claims.

      DEPENDENCE ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL.  The Company's
success in developing  marketable products and achieving a competitive  position
will depend, in part, on its ability to attract and retain qualified  personnel.
Competition  for such  personnel is intense.  No assurance can be given that the
Company  will  continue  to attract or retain  such  personnel.  The loss of key
personnel could adversely affect the Company.

      DIVIDENDS AND TAXATION.  The Company has never paid cash  dividends on its
Common Stock.  The Company  intends to retain  earnings,  if any, to finance the
growth and  development  of its  business  and does not  anticipate  paying cash
dividends  in the  foreseeable  future.  Moreover,  any  profits  earned  by the
Company's  U.S.  subsidiary  will be  declared  and  paid as a  dividend  to the
Company,  and the  Company  will  in turn  declare  and  pay a  dividend  to its
shareholders. Each such dividend would be subject to a withholding tax. See Item
5 - Market for Registrant's Common Equity and Related Stockholder  Matters,  and
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.

      IMPACT OF BECOMING A PASSIVE FOREIGN  INVESTMENT  COMPANY.  If more than a
certain  percentage  of the  Company's  assets or income  becomes  passive,  the
Company would be classified as a passive foreign investment company ("PFIC") for
U.S.  federal  income tax  purposes.  As a result,  U.S.  taxpayers  who receive
certain  dividends  from the Company or who sell shares of the Company's  Common
Stock would be subject to additional federal income tax. See Item 5 - Market for
Registrant's  Common  Equity  and  Related  Stockholder  Matters,  and  Item 7 -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation.

      VOTING CONTROL BY PRINCIPAL  SHAREHOLDERS.  The principal  shareholders of
the  Company,  BioChem  and  Dr.  Phillip  Frost,  either  directly  or  through
affiliates,  are parties to a  shareholders'  agreement  requiring,  among other
things,  that the  Company's  Common  Stock  covered by the  agreement  be voted
together for the election of directors.  As of January 31, 2000, these principal
shareholders  beneficially  owned  approximately  20.7  million  shares  of  the
Company's outstanding Common Stock, which represented approximately 52.7% of the
then  outstanding  shares of the Company's  Common Stock.  See Item 13 - Certain
Relationships and Related Transactions.


                                       35
<PAGE>

      VOLATILITY  OF STOCK  PRICE.  The  market  prices for  securities  of many
biotechnology and  pharmaceutical  companies,  including the Company,  have been
highly  volatile.  Many  factors  have  historically  had,  and are  expected to
continue to have,  a  significant  impact on the  Company's  business and on the
market price of the Company's securities, including:

      o   financial results,
      o   announcements  by the  Company  and others  regarding  the  results of
          regulatory approval filings, clinical trials or other testing,
      o   technological innovations or new commercial products by the Company or
          its competitors, government regulations,
      o   developments concerning proprietary rights,
      o   public  concern as to safety of vaccine and  pharmaceutical  products,
          and
      o   economic or other external factors.

      SHARES  ELIGIBLE  FOR FUTURE  SALE.  Sales of  substantial  amounts of the
Company's Common Stock in the public market following the exercise of options or
the  conversion of  convertible  securities  could have an adverse effect on the
price of the Company's  securities.  If either of the two principal  shareholder
groups  decides to sell a substantial  number of shares of the Company's  Common
Stock,  these sales could  significantly  increase the  volatility of the market
price of the Company's issued and outstanding  securities.  In addition,  one of
the  principal  shareholders  has  registration  rights  for the  shares  of the
Company's Common Stock that it owns.

      YEAR 2000 ISSUES.  The Year 2000 Issue is the result of computer  programs
being written using two digits rather than four to define the  applicable  year.
Management  has  completed a  Company-wide  program that  prepared the Company's
computer  systems and programs for the Year 2000.  To date,  the Company has not
experienced any Year  2000-related  problems that could have a material  adverse
effect on the  future  results  of  operations  or  financial  condition  of the
Company,  and the Company is  continuing  to monitor its  software  and hardware
systems for continued compliance;  however,  there can be no assurances that the
Company will not experience future Year 2000-related problems. Additionally, the
failure of suppliers  and other  companies  doing  business  with the Company to
maintain  Year 2000  qualification  in a manner  compatible  with the  Company's
systems could also have a material  adverse effect on the Company.  See Item 7 -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation.




                                       36
<PAGE>

ITEM 2.   PROPERTIES

      The  production  of  vaccines  is a  highly  complex,  biological  process
involving many steps, commencing from seed culture through final production. The
Company's vaccine production processes involve the use of patented  technologies
and  proprietary  rights and trade  secrets  at the  Company's  facilities.  The
Company's facilities are briefly described below:

Facility/Function      Location        Square Feet      Own/Lease
--------------------------------------------------------------------------------

Production Facility    Beltsville, MD  26,000        Leased until February 2009
                                                     (ten-year renewal option)

Production Facility    Beltsville, MD  35,000        Leased until February 2001
                                                     (two five-year renewal
                                                     options)

Warehouse and Support  Beltsville, MD  31,000        Leased until September 2009
Services for                                         (two five-year renewal
Production Facility                                  options)

Executive Offices and  Columbia, MD    75,500        Leased until June 2008
Research and                                         (with two five-year renewal
Development                                          options)
Laboratory Facility

      The  Company's  production  facilities  have  been  designed  and built to
produce  vaccines for large scale  clinical  trials and  commercial  sales after
product  licensing.  The Company has modified and continues to modify its 26,000
square foot production  facility to expand  production  capacity for Certiva(R).
The lease on this  facility  expires  in  February  2009,  subject to a ten-year
renewal  option.  See Item I -  Business  - "Risk  Factors -  Manufacturing  and
Scale-Up."

      In 1996, the Company acquired a 35,000 square foot production  facility in
Beltsville,  Maryland.  The  acquisition  included  the  purchase  and  lease of
equipment and leasehold  improvements  and the  assumption of real estate leases
underlying the facility,  which are scheduled to expire in 2001,  subject to two
five-year  extensions.  The facility is dedicated to the  production of vaccines
for clinical trials and commercial sale.

      In September 1999, the Company  completed a  sale/leaseback  of a building
located adjacent to its current production  facility.  The approximately  31,000
square foot facility  which is used as a warehousing  and testing  facility,  is
leased for an initial term of ten years, with two five-year renewal options. See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.

      In the second quarter of 1998, the Company leased an approximately  75,500
square  foot  facility  for a period of ten years,  with two  five-year  renewal
options.  At the end of the fifth year of the initial term,  the Company has the
right to terminate the lease for a specified  fee. In addition,  the Company has
an option to purchase the facility during  specified  periods of the lease term.
The  Company has  consolidated  the  research  and  development  groups and most
general and administrative functions in this facility. See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.


                                       37
<PAGE>

ITEM 3.     LEGAL PROCEEDINGS

      In March 2000, the Company settled a claim filed by its former  president.
The  Company  has  agreed  not to  disclose  the  terms of the  settlement.  The
settlement will not have a materially adverse impact on the Company's  financial
position or results of operations.

      The Company and Chiron  Behring  agreed to terminate,  effective as of the
end of 1999, a distribution  arrangement whereby Chiron Behring would supply the
Company's  DTAP-IPV  vaccine in Germany and  Austria.  As part of winding up the
collaboration,  the  Company  made a  nominal  payment  to  Chiron  Behring  for
reimbursement of amounts then outstanding and owing to Chiron Behring as of such
date.  In October  1999,  Chiron  Behring had  notified  the Company that Chiron
Behring was seeking to terminate  the  distribution  arrangement.  At that time,
Chiron  Behring had demanded that the Company repay $3 million of  nonrefundable
payments that Chiron Behring made under the agreement.

      The  Company  is, and from time to time  becomes,  involved  in claims and
lawsuits that are  incidental  to its business.  In the opinion of the Company's
management,  there are no other material legal  proceedings  pending against the
Company.








                                       38
<PAGE>



ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
          ---------------------------------------------------

      None.

                                          PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
          ---------------------------------------------------------------------

      The  Company's  Common  Stock is listed  on the  American  Stock  Exchange
("AMEX")  under the symbol  "NVX."  The table  below sets forth the high and low
closing  sales prices as reported on the AMEX  composite  tape for each calendar
quarter of 1998 and 1999:


                                   HIGH         LOW
                                   ----         ---
          1998
          First Quarter            25           16 5/8
          Second Quarter           20 1/4       15 1/4
          Third Quarter            17 7/16      6 5/8
          Fourth Quarter           15 7/8       7 3/8

          1999
          First Quarter            8 9/16       6 1/8
          Second Quarter           6 7/8        4
          Third Quarter            9            5
          Fourth Quarter           7 5/8        4


      On February  29,  2000,  the last  reported  sales price of the  Company's
Common Stock on the AMEX was $5.625 per share.  The number of record  holders of
the Company's Common Stock as of February 29, 2000 was approximately 221.

      The  transfer  agent  and  registrar  for the  Company's  Common  Stock is
American Stock  Transfer and Trust Company,  which is located at 40 Wall Street,
New York, New York 10005.

      The  Company  has  never  paid  cash  dividends  on its  Common  Stock and
anticipates  that its earnings,  if any, will be retained for development of the
Company's business.  Therefore, it is not anticipated that any cash dividends on
its Common Stock will be declared in the foreseeable  future. The payment of any
future  dividends will be at the discretion of the Company's  Board of Directors
and will depend upon, among other things, future earnings,  operations,  capital
requirements,  the general financial condition of the Company,  general business
conditions and tax considerations.

      Any  profits  earned  by its U.S.  subsidiary  will  not be  distributable
directly  to  shareholders.  Instead,  for those  profits to be  distributed  to
shareholders,  the  subsidiary  must declare a dividend to the Company,  and the
Company in turn must declare a dividend to its shareholders. Because the Company
is a Canadian corporation, this will subject each dividend to a withholding tax.
First,  the dividend from the  subsidiary to the Company will be subject to a 5%
withholding  tax  imposed  by the  United  States  on the  gross  amount  of the
dividend. Pursuant to the Canada-United States Income Tax Convention (1980) (the
"Treaty"), the subsequent dividend paid by the Company to a shareholder resident
in the United States will be subject to Canadian  withholding tax at the rate of
15% on the gross amount of the  dividend.  The rate of  withholding  tax will be
reduced to 5% in respect of  dividends  paid to a company  that is a resident of


                                       39
<PAGE>

the United States for purposes of the Treaty and owns at least 10% of the voting
stock of the Company. Each shareholder should consult his or her own tax advisor
as to tax  consequences  associated  with  dividends  received on the  Company's
Common Stock.

      If more than a certain  percentage  of the  Company's  assets or income is
passive,  the Company  will be  classified  for United  States tax purposes as a
passive foreign  investment company or PFIC, and a United States taxpayer may be
subject to an additional  federal income tax on receiving certain dividends from
the Company or selling Common Stock.  Certain interest,  dividend,  capital gain
and royalty income may be considered passive income for PFIC purposes, which, in
the absence of  sufficient  other  income,  would  result in the  Company  being
classified as a PFIC.

      If the Company becomes a PFIC, a United States taxpayer will be subject to
special rules with respect to  transactions  involving  the Common Stock.  Under
these rules, all gains realized on  disposition of the United States  taxpayer's
Common  Stock will be  allocated  pro rata over the number of years in which the
shareholder  held the Common  Stock.  The gain that is allocated to a prior year
(subsequent  to  December 31,  1986) in  which the  Company  was a PFIC,  or any
subsequent year other than the year of disposition, will be taxed at the highest
marginal  rate for that year and such tax will be subject to an interest  charge
as if it had originally been due in that year. In addition, gain realized on the
disposition  of the United States  taxpayer's  Common Stock that is allocated to
the  current  year or to a prior  year  before  the  Company  was a PFIC will be
treated as ordinary income.  Similar rules will apply to  distributions  made by
the Company. The above rules will not apply if the United States taxpayer elects
to treat the Company as a  qualified  electing  fund and the  Company  agrees to
provide certain  information to the United States Internal Revenue  Service.  In
such case,  the United  States  taxpayer  will include in his or her income each
year his or her pro rata share of the ordinary  income and capital  gains of the
Company. The Company has not been classified as a PFIC to date, and during 2000,
the Company  intends to, and believes  that it can,  generate  sufficient  other
income and will hold sufficient  non-passive assets to avoid being classified as
a PFIC. See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation.

      In July 1999 the Company  obtained a $6 million  revolving  line of credit
with a commercial  bank that is guaranteed by BioChem.  Under the agreement with
BioChem,  the  Company  agreed to issue up to 750,000  warrants to BioChem as it
drew down on the line of credit.  During the second  half of 1999,  the  Company
drew  down the  entire  $6  million  under  the  revolving  line of  credit  and
accordingly  issued  warrants  to  purchase  750,000  shares of Common  Stock to
BioChem.  In October 1999,  250,000 of these warrants were issued in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), related
to a draw of the  last $2  million  available  under  the line of  credit.  Each
warrant  has a term of two  years  from  the  date of  issuance.  The per  share
exercise price under each warrant is approximately  $5.14,  which is the average
of the  closing  price  of the  Company's  Common  Stock on the  American  Stock
Exchange over five trading days that began on June 28 and ended on July 2, 1999.
Each warrant contains  anti-dilution  provisions and registrations  rights among
other provisions.  See Item 13 - Certain  Relationships and Related Transactions
- Guarantee of Line of Credit for more information regarding the line of credit.

      In addition,  the Company has been notified by the American Stock Exchange
("Exchange")   that  it  was  considering   delisting  the  Company  because  of
non-compliance  with its listing  requirements.  The  Exchange  has deferred its
judgment on delisting  until it has reviewed this Annual Report on Form 10-K. If
the proposed transaction with Baxter is not progressing or consummated, then the
Exchange has requested that the Company provide it with  additional  information
regarding its financial condition.



                                       40
<PAGE>



ITEM 6.   SELECTED FINANCIAL DATA
          -----------------------

      Selected consolidated  financial data for the Company are set forth below.
The selected  financial data as of December 31, 1999 and 1998, and for the years
ended December 31, 1999, 1998 and 1997 have been derived from, and are qualified
by reference to, the audited  financial  statements  included  elsewhere in this
Annual Report.  The selected  financial  data as of December 31, 1997,  1996 and
1995 and for the years ended  December  31, 1996 and 1995 have been derived from
the audited  financial  statements  of the  Company not  included in this Annual
Report. The selected  consolidated  financial data should be read in conjunction
with the  financial  statements of the Company and other  financial  information
included in this Annual Report.








                                       41
<PAGE>


                               SELECTED CONSOLIDATED FINANCIAL DATA
                              (IN THOUSANDS, EXCEPT PER SHARE DATA)

NORTH AMERICAN VACCINE, INC.
AND SUBSIDIARIES
                                           FISCAL YEARS ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA:     1999      1998      1997      1996     1995
                                  ----      ----      ----      ----     ----
Revenues:
  Marketing, research and
   development agreements          $5,909    $6,149    $8,001   $9,656    $3,000
  Product sales                     5,049     2,230     1,699      892        --
                                  -------   -------   -------  -------  --------
Total revenues                     10,958     8,379     9,700   10,548     3,000

Operating Expenses:
  Production and cost of sales     22,950    19,196    18,662   14,764     6,317
  Research and development         16,179    17,986    19,860   11,594    10,206
  General and administrative       12,900    10,800    11,386    6,753     6,696
                                   ------   -------   -------  -------   -------
    Total operating expenses       52,029    47,982    49,908   33,111    23,219
                                   ------   -------    ------   ------   -------

Operating loss                   (41,071)  (39,603)  (40,208) (22,563)  (20,219)

Gain on sale of investments in
 affiliates                           952        --        --    4,228    14,429
Interest and dividend income          513     1,497     3,140    2,934       804
Interest expense                  (9,967)  (18,503)   (6,772)  (4,088)        --
                                  -------  --------   ------- --------   -------

Net Loss                        $(49,573) $(56,609) $(43,840) $(19,489) $(4,986)
                                ========= ========= ========= ========= ========

Basic and diluted net loss per
 share                           $ (1.52)  $ (1.76)  $ (1.39) $ (0.63)  $ (0.17)
                                =========  ========  ======== ========  ========


Weighted-average number
  of common shares outstanding     32,595    32,152    31,641   30,764    29,745

BALANCE SHEET DATA:

Cash and cash equivalents           $ 563   $22,953   $45,502  $70,881   $10,443
Investment in affiliate, at
 market                                --     1,554       843    1,281     9,065
Total assets                       33,591    64,525    84,508  122,962    41,249
6.5% convertible subordinated
 notes                             75,326    83,734    83,734   86,250        --
4.5% convertible secured notes     25,000    25,000        --       --        --
Long-term portion of capital
 lease                                 79     2,356     4,110    5,871        --
Preferred stock                     6,538     6,538     6,538    6,538     6,538
Common stock                       90,550    80,824    78,509   71,357    58,474
Additional Paid-in capital         13,593    11,956        --       --        --
Cumulative comprehensive
 income excluded from net loss         --       926       215      653     7,466
Accumulated deficit             (208,791) (159,218) (102,609) (58,769)  (39,280)
Dividends                              --        --        --       --        --



                                       42
<PAGE>


ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATION
            -------------------------------------------------

      THE FOLLOWING PARAGRAPHS IN THIS FORM 10-K CONTAIN CERTAIN FORWARD LOOKING
STATEMENTS, WHICH ARE WITHIN THE MEANING OF AND MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS  OF THE  PRIVATE  SECURITIES  LITIGATION  REFORM  ACT OF 1995.  THESE
FORWARD LOOKING  STATEMENTS  INCLUDE,  WITHOUT  LIMITATION,  THOSE REGARDING THE
PROSPECTS  AND  TIMING FOR FILING FOR AND  OBTAINING  REGULATORY  APPROVAL,  THE
PROSPECTS FOR AND TIMING OF MARKETING AND DISTRIBUTION OF VACCINE PRODUCTS,  THE
PROSPECTS  FOR AND FACTORS  AFFECTING  FUTURE  REVENUES AND  PROFITABILITY,  THE
AVAILABILITY OF FUNDS UNDER EXISTING CREDIT  FACILITIES,  THE ABILITY TO SERVICE
THE  COMPANY'S  DEBT AND TO MEET THE  COMPANY'S  CASH FLOW NEEDS,  PROSPECTS FOR
PRODUCTION  CAPACITY,  REDUCED  PRODUCTION  COSTS,  AND THE  ABILITY TO CAMPAIGN
PRODUCTS THROUGH ITS PRODUCTION FACILITY,  LIKELIHOOD OF ADDITIONAL FUNDING FROM
FURTHER  FINANCINGS  OR UNDER ANY NEW LICENSE,  MARKETING,  DISTRIBUTION  AND/OR
DEVELOPMENT  AGREEMENTS,  PROSPECTS OF AND TIMING FOR COMPLETING THE ACQUISITION
OF THE COMPANY,  CASH REQUIREMENTS FOR FUTURE  OPERATIONS,  PROJECTED RESULTS OF
OPERATIONS, AND PROJECTED CAPITAL EXPENDITURES AND COST REDUCTIONS.  READERS ARE
CAUTIONED THAT FORWARD  LOOKING  STATEMENTS  INVOLVE RISKS,  UNCERTAINTIES,  AND
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND PROSPECTS,  INCLUDING WITHOUT
LIMITATION THOSE DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: OBTAINING
REGULATORY  APPROVAL OF PRODUCTS AND FACILITIES BY REGULATORY AGENCIES INCLUDING
THE U.S. FOOD AND DRUG ADMINISTRATION ("FDA"); THE  PRODUCTION OF VACCINES;  THE
TIMING FOR AND EFFICIENCIES  RECOGNIZED FROM PRODUCT CAPACITY IMPROVEMENTS;  THE
NATURE OF COMPETITION;  NEED FOR EFFECTIVE  MARKETING;  DEPENDENCE ON SUPPLIERS,
INCLUDING  STATENS  SERUM  INSTITUT  ("SSI"),  AND  DISTRIBUTORS;  UNCERTAINTIES
RELATING  TO  CLINICAL  TRIALS;   UNCERTAINTIES  RELATING  TO  CONSUMMATING  THE
ACQUISITION OF THE COMPANY; AND THE TIMING AND NECESSITY FOR EXPENDITURES AND/OR
COST  REDUCTIONS,  ALL AS  DISCUSSED  IN THE  COMPANY'S  FILINGS  WITH  THE U.S.
SECURITIES AND EXCHANGE COMMISSION ("SEC").

BACKGROUND

      The Company is engaged in the research, development,  manufacture and sale
of vaccines for the prevention of infectious diseases.  The Company's mission is
to develop and market superior vaccine products  intended to prevent  infectious
diseases,  improve the  quality of life of  children  and adults and lower total
health care costs.  The  Company  currently  has three  licensed  products  that
contain its acellular  pertussis  vaccine,  including  Certiva(R),  its combined
diphtheria,  tetanus  and  acellular  pertussis  (DTaP)  vaccine for infants and
children,  as well as 12 other  products  in various  stages of  development  to
prevent  meningococcal,  streptococcal,  pneumococcal,  E. coli, and HAEMOPHILUS
INFLUENZAE type b infections.

      In November 1999, the Company signed a definitive Share Exchange Agreement
(the "Share  Exchange  Agreement") to be acquired by Baxter  International  Inc.
("Baxter")  in a  taxable  stock-for-stock  transaction  pursuant  to a plan  of
arrangement  under the Canada Business  Corporations Act valued at approximately
$390 million.  Under the Share Exchange  Agreement,  the Company's  shareholders
will receive $7 per share,  comprised of $6.97 of Baxter  common stock and $0.03
in cash. The number of Baxter shares to be issued to the Company's  shareholders
under the Share Exchange  Agreement  will be set based upon the average  closing
sale price of Baxter  common  stock for the ten trading days ending on the fifth
trading  day  prior  to  consummation  of  the  transaction.   As  part  of  the
transaction, Baxter has agreed to purchase, as promptly as practicable after the
closing, the Company's outstanding 6.50% Convertible  Subordinated Notes due May
1, 2003 (the "6.5% Notes") and its 4.5%  Convertible  Secured Notes due November
13,  2003  (the  "4.5%  Notes")  pursuant  to  the  terms  of  their  respective
indentures.

      The transaction is subject to the prior  satisfaction or waiver of certain
conditions  in the  Share  Exchange  Agreement,  including,  among  others,  the
following:


                                       43
<PAGE>


      o   the arrangement must be approved by the Company's shareholders;
      o   the plan of arrangement must be approved by a Canadian court in
          accordance with the CBCA;
      o   Baxter's and the Company's respective representations and warranties
          contained in the Share Exchange Agreement must be true and correct in
          all material respects and Baxter and the Company must perform and
          comply in all material respects with their respective covenants in the
          Share Exchange Agreement, including, among other things, the Company's
          covenant to use reasonable efforts to file the marketing authorization
          application for NeisVac-C(TM)with UK regulatory authorities by January
          21, 2000 (the Company believes that it met this obligation when it
          filed this application with UK regulatory authorities on January 24,
          2000);
      o   the Company must not be in default under its financing agreements
          relating to a $30 million line of credit from Bank of America, N.A.
          and guaranteed by Baxter;
      o   the Company must (i) obtain the regulatory approvals for NeisVac-C(TM)
          its vaccine for the prevention of group C meningococcal infections,
          necessary for the Company to perform its obligations under its
          agreement with the U.K. government; (ii) manufacture, fill and prepare
          a two-month supply of NeisVac-C(TM); and (iii) ensure that it will not
          be prohibited by U.S. governmental authorities from exporting
          NeisVac-C(TM) in each case prior to April 1, 2000;
      o   certain affiliates of the Company must amend the Indemnification
          Agreement;
      o   the Company must demonstrate to Baxter that the licensor of the
          technology relating to the rPorB invention has taken the requisite
          steps to retain its title to this invention; and
      o   Baxter must receive a favorable tax ruling from the Canada Customs and
          Revenue Agency. This favorable ruling was obtained on January 11,
          2000.

      The Company also agreed that,  until the completion of the  arrangement or
unless  Baxter  consents  in  writing  or as  otherwise  permitted  by the Share
Exchange Agreement, the Company will conduct its business in the ordinary course
consistent with past practices and will use reasonable efforts to keep available
the services of its  officers,  significant  employees and  consultants,  and to
preserve its relationships  with corporate  partners,  customers,  suppliers and
other  persons  with which it has  significant  business  relations  in order to
preserve  substantially  intact its  business  organization.  In  addition,  the
Company agreed to conduct its business,  until the completion of the arrangement
or unless  Baxter  consents in writing,  in  compliance  with  certain  specific
restrictions which prohibit, among other things:

      o   issuing shares of its capital stock or securities convertible into its
          capital stock, except for limited issuances of securities in
          connection with outstanding options or warrants;
      o   disposing of any material properties or assets other than in
          connection with existing contracts or dispositions in the ordinary
          course of business consistent with past practice;
      o   incurring additional indebtedness subject to certain exceptions;
      o   entering into or modifying or terminating material contracts;
      o   soliciting, initiating, encouraging or agreeing to any takeover
          proposal or other extraordinary transaction proposal by a third party
          subject to certain exceptions; or
      o   negotiating with, entering into or maintaining discussions with any
          person regarding a takeover or extraordinary transaction proposal, or
          permit any of its representatives to take such action subject to
          certain exceptions.

An  "extraordinary  transaction"  for  these  purposes  includes  (1) a  merger,
consolidation or similar  transaction;  (2) a proposal to acquire 10% or more of
the Company's outstanding capital stock or assets; or (3) a license,  sublicense
or  sale  of the  Company's  intellectual  property.  See "Liquidity and Capital
Resources; Outlook."


                                       44
<PAGE>

      Baxter and the Company may mutually  agree to terminate the Share Exchange
Agreement without  completing the arrangement.  In addition,  either company may
terminate the Share Exchange Agreement upon certain events, including:

      o   the arrangement is not completed, without the fault of the terminating
          party, by May 31, 2000;
      o   a final court or governmental order prohibiting the arrangement is
          issued and is not appealable;
      o   the Company's shareholders fail to approve the arrangement; or
      o   one company breaches any of its representations, warranties or
          covenants in the Share Exchange Agreement in any material respect,
          such that it is unable to satisfy the conditions to the completion of
          the arrangement, and the breach is not cured within ten days after
          receiving written notice of the breach.

Furthermore,  Baxter may  terminate the Share  Exchange  Agreement if any of the
following occurs:

      o   the Company's board withdraws or modifies, in a manner adverse to
          Baxter, its recommendation as to the Share Exchange Agreement or the
          arrangement resolution, or resolves to do so;
      o   the Company fails to comply with certain nonsolicitation provisions
          contained in the Share Exchange Agreement regarding "extraordinary
          transactions," as discussed above;
      o   the Company's board recommends an alternative transaction, fails to
          recommend against such a transaction or fails to reconfirm its
          approval and recommendation of the arrangement; or
      o   a default occurs under the Company's financing agreements with Bank of
          America, and the Company does not cure this default within ten days
          after receiving written notice of the default.

      The Company may be required to pay Baxter a termination fee of $14 million
and may be required  to  reimburse  Baxter's  out-  of-pocket  expenses up to $1
million  if  the  share   exchange   agreement  is  terminated   under  specific
circumstances. See "Liquidity Capital Resources; Outlook."

      In connection with the Baxter transaction,  the Company's present focus is
on the  introduction of  NeisVac-C(TM)  in the United Kingdom early in the third
quarter  of  2000.  The NHS  has  committed  to  purchase  3  million  doses  of
NeisVac-C(TM)  in  2000  for  approximately   (British  pound)  40  million  (or
approximately $64 million at March 23, 2000), with shipments that were scheduled
to begin in April 2000,  subject to UK  regulatory  approval  and certain  other
conditions.  The Company filed its marketing authorization  application with the
UK  regulatory  authorities  on  January  24,  2000 and is seeking  approval  of
NeisVac-C(TM)  for  administration  to  children  12  months  of age and  older,
adolescents  and adults.  The Company does not expect to meet the first delivery
date in April 2000 under the NHS  contract.  Currently,  the Company  expects to
have initial product quantities released and available for delivery to NHS early
in the  third  quarter  of 2000,  although  there can be no  assurances  in this
regard. The Company has had informal discussions with NHS regarding the possible
delays in  licensure  and product  delivery and  believes  that,  based on these
discussions,  the NHS would be willing to reschedule  deliveries through the end
of 2000 for the  entire 3 million  doses,  without  penalty,  if the  regulatory
approval  for  NeisVac-C(TM)  was  issued  within a few  months  of April  2000,
although there can be no assurances in this regard.

      With only one manufacturing facility, the Company currently must alternate
the production of its various  products.  During the fourth quarter of 1999, the
Company  commenced  the  change  over  from  production  of  Certiva(R)  and its
acellular pertussis ("aP") vaccines to produce  NeisVac-C(TM) in anticipation of


                                       45
<PAGE>

its commercial  launch of the product in the U.K.  Accordingly,  the Company has
been selling Certiva(R) and its aP vaccines out of limited inventories  produced
prior to the  change over.  The  Company  expects  to  return to  production  of
Certiva(R) and  aP vaccines in 2000 once  NeisVac-C(TM) production  requirements
are completed.

      The Company's  revenues  historically have been derived from product sales
of Certiva(R) and the aP vaccines and from payments  received  under  marketing,
research and development  agreements.  The product launch for Certiva(R),  which
was licensed by the FDA in July 1998,  began in the fourth  quarter of 1998. The
Company markets Certiva(R) in the U.S. to government purchasers, including state
governments and the Centers for Disease Control and Prevention ("CDC").  Under a
distribution  agreement,  Abbott  Laboratories  ("Abbott")  previously  marketed
Certiva(R) to private  physicians and managed care markets in the United States;
however,  Abbott  terminated  the agreement in September  1999.  After  Abbott's
termination,   the   Company  has  sold   limited   quantities of  Certiva(R) to
non-government purchasers through direct arrangements with distributors.

      The Company also has derived  product  sales from sales of aP vaccines for
use in European  formulations  of  Certiva(R)  and  DTaP-IPV  (polio)  vaccines,
principally  in  Scandinavian  countries  within the  territory of the Company's
European  partner,  Statens Serum  Institut  ("SSI").  Regulatory  approvals for
Certiva(R)-EU  and  DTaP-IPV  were  granted  in  1996  in  Sweden  and  Denmark,
respectively.  In April 1997,  regulatory approval for the Company's  monovalent
acellular  pertussis  ("aP")  vaccine to vaccinate  children was also granted in
Sweden.  In June 1998, the Company was advised that,  under the European  mutual
recognition procedure,  the regulatory authorities in Germany,  Austria,  Sweden
and Finland agreed to recognize the marketing  authorization  granted by Denmark
for the DTaP-IPV  vaccine.  In the first half of 1999,  both Germany and Austria
issued  their  national  marketing  authorizations  for the  Company's  DTaP-IPV
vaccine pending the completion of labeling issues related to distribution of the
product. Under a marketing agreement between the Company and Chiron-Behring GmbH
& Co. ("Chiron  Behring"),  Chiron Behring was to market the DTaP-IPV vaccine in
Germany and Austria.  In January 2000, the Company and Chiron Behring terminated
the  marketing  agreement  in Germany  and Austria  for the  Company's  DTaP-IPV
vaccine.  The Company does not expect to market  DTaP-IPV in Germany and Austria
until it can secure alternative distribution arrangements.

      Revenues from marketing,  research and development agreements historically
have been derived principally from collaborations with Aventis Pasteur (formerly
Pasteur Merieux  Connaught) and Abbott,  both of which have been terminated.  In
February 2000,  Aventis  Pasteur  notified the Company that Aventis  Pasteur was
exercising  its  option  to  terminate  the  license  and  clinical  development
agreements for the Company's Group B meningococcal  vaccine  principally because
of a change in strategic  direction by Aventis Pasteur.  Under these agreements,
Aventis Pasteur reimbursed the Company for certain clinical development costs as
incurred  and  the  Company  also  was  entitled  to  milestone   payments  upon
achievement  of  prescribed  events,  principally  measured  by  progress in the
regulatory  process for the group B meningococcal  vaccine.  Under the marketing
agreement  with Abbott,  the Company  received  milestone  payments upon the FDA
approval of Certiva(R),  and Abbott supported certain of the Company's  clinical
development  activities for the combination  vaccines,  such as the DTaP-IPV and
DTaP-IPV-Hib   vaccines.   During  1999  and  1998,   the   Company   recognized
approximately  $9.1  million  of revenue  related  to  support of the  Company's
clinical development activities from Abbott and Aventis Pasteur. Under the terms
of the Share Exchange Agreement, the Company currently cannot enter into any new
or  alternative  collaborative  arrangements  for third  parties to  distribute,
research or develop its  products  without  Baxter's  consent  until  either the
transaction  with  Baxter  is  completed  or the  Share  Exchange  Agreement  is
terminated.


                                       46
<PAGE>

      The Company has a significant  level of  indebtedness.  As of December 31,
1999, the Company's consolidated  indebtedness and capitalized lease obligations
totaled approximately $131.7 million, including $75.3 million represented by the
6.5% Notes,  $25 million  represented by the 4.5% Notes, $6 million under a line
of  credit  guaranteed  by  BioChem  and $10  million  under  a line  of  credit
guaranteed  by Baxter.  The  Company's  total  assets at December  31, 1999 were
approximately $34 million.  See Item 8 - Financial  Statements and Supplementary
Data - Note 10 to the Company's  financial  statements  for a description of the
6.5% Notes and the 4.5% Notes and Note 11 to the Company's financial  statements
for a  description  of the lines of credit  guaranteed  by BioChem  and  Baxter,
respectively. See also Item 13 - Certain Relationships and Related Transactions.

      The Company retired $8.4 million of the principal amount of the 6.5% Notes
in exchange for 550,000  shares of Common  Stock in June 1999.  The exchange was
privately  negotiated  with a single  holder of the notes,  and  resulted in the
recognition of an approximately  $940,000  one-time non-cash expense included in
interest  expense for the quarter  ended June 30, 1999. As of December 31, 1999,
the principal amount of the outstanding 6.5% Notes was $75.3 million.

      The  Company  also  obtained in July 1999 a $6 million  revolving  line of
credit from a commercial bank at an interest rate of LIBOR plus 2.65%.  The line
of credit  currently  matures on May 31, 2000 and is guaranteed  by BioChem,  an
affiliate of the Company. BioChem's guarantee will remain in place for a maximum
of two  years,  unless  there is a change of  control  such as the  contemplated
acquisition by Baxter. In return for the guarantee,  the Company granted BioChem
warrants to  purchase  up to 750,000  shares of the  Company's  Common  Stock at
approximately  $5.14 per share. During the second half of 1999, the Company drew
down the entire $6 million  under the revolving  line of credit and  accordingly
issued warrants to purchase 750,000 shares of Common Stock to BioChem.  See Item
13 - Certain  Relationships and Related  Transactions.  A total of approximately
$1.6 million of interest expense was generated by the issuance of these warrants
and was  recognized in total in the last two quarters of 1999,  beginning at the
issuance  date of the warrants  and ending on December  31,  1999,  the original
repayment date for the line of credit.

      In connection with the Baxter transaction,  the Company entered into a $30
million  secured  revolving  line of credit  from Bank of America,  N.A.,  at an
interest  rate of LIBOR plus 0.625%.  The line of credit is guaranteed by Baxter
and is secured by all of the Company's otherwise unencumbered assets,  including
patents, patent applications and receivables.  As of March 21, 2000, the Company
had  drawn  down a total of $19.5  million.  The  maturity  date for the line of
credit is March 31, 2000, unless extended by Bank of America or otherwise waived
by Baxter as  guarantor.

      To raise  cash,  the  Company  completed  in the third  quarter  of 1999 a
sale/leaseback of its only owned facility.  The approximately 31,000 square foot
facility,  which is used as a  warehousing  and  testing  facility  was sold for
approximately  $2.1  million,  resulting  in a  non-cash  loss  on the  sale  of
$378,000.  The lease for the facility is for an initial term of ten years,  with
two five-year  renewal options.  The initial base annual rent under the lease is
approximately $237,000 with minimum annual escalations.

      The Company had 271 and 313  employees  as of December  31, 1999 and 1998,
respectively.


                                       47
<PAGE>

RESULTS OF OPERATION
--------------------

YEARS ENDED DECEMBER 31, 1999 AND 1998

      In 1999,  the Company  recognized  total revenue of $10.9 million of which
approximately  $2.3 million was from product  sales of  Certiva(R) to government
agencies  and  $300,000  was  from  sales to  Abbott  and  another  distributor,
approximately  $2.4  million was from sales of product to SSI and  approximately
$5.9 million was under collaborative agreements. Sales of Certiva(R) were higher
in 1999 than in 1998 due  primarily  to the launch of this product in the fourth
quarter of 1998.  Sales of Certiva(R)  declined in the last two quarters of 1999
as  compared  to the  first  two  quarters  of 1999 due to lower  than  expected
production and a longer than expected  release time for product that requires an
FDA release before sale. Revenue for 1999 from collaborative agreements consists
primarily of approximately $5 million of development funding under the Company's
agreement  with Aventis  Pasteur and  recognition of  approximately  $900,000 of
development funding from Abbott.  Revenue in 1998 totaled $8.4 million, of which
approximately $1.1 million was from sales of Certiva(R) to government  agencies,
$51,000 was from sales to Abbott,  approximately  $1.0 million was from sales of
product to SSI,  and the  remaining  amount was from  collaborative  agreements.
Revenue for 1998 from collaborative agreements consists primarily of a milestone
payment and  development  funding from Abbott and to a lesser  extent  milestone
payments under a supply and distribution agreement with Chiron Behring.

      Production  expenses  were $22.9 million in 1999 compared to $19.2 million
in 1998.  The increase in these expenses in 1999 is primarily  attributable  to:
facility,  labor and  material  costs  incurred but not  capitalized  during the
changeover  from aP to  NeisVac-C(TM)  production  beginning  late in the  third
quarter of 1999, aP production  under  enhanced  production  processes that were
expensed  during the period,  writedowns  of $1.3 million of raw  materials  for
Certiva(R) production, a total of $900,000 of write-offs of finished product due
to  production  failures  and to a  lesser  extent  nonconforming  product,  FDA
post-marketing  licensing  and  surveillance  expenses,  and higher  filling and
testing  contractor  expenses.  These  increases were partially  offset by lower
depreciation  related  to the  use of an  accelerated  depreciation  method  for
equipment  purchased prior to 1998, and lower repair and maintenance and royalty
expenses.  Costs  attributable  to Certiva(R)  production  were  expensed  until
regulatory  approval was obtained in the third quarter of 1998;  however,  costs
attributable to Certiva(R)  production under optimized  production processes are
being expensed until regulatory approval is obtained for such new processes.
See "Liquidity and Capital Resources; Outlook."

      Research and development expenses were $16 million in 1999 compared to $18
million in 1998. The decrease is  attributable  primarily to lower  depreciation
expenses related to the use of an accelerated  depreciation method for equipment
acquired prior to 1998,  regulatory consulting costs incurred in 1998 as part of
the FDA approval process for Certiva(R), lower facility related costs associated
with the new facility  obtained in the second  quarter of 1998 because in 1999 a
smaller portion of this facility was occupied by the research  group,  and lower
materials and supply expense, offset in part by higher labor costs attributed to
a higher  average number of employees for product  development  projects and the
reimbursement of expenses under a collaborative agreement in 1998.

      Selling,  general and  administrative  expenses were $12.9 million in 1999
compared to $10.8  million in 1998.  In 1999,  there was an increase in building
costs  associated  with the new facility  occupied  beginning  late in the third
quarter  of 1998,  an  increase  primarily  in  deferred  compensation  costs of
approximately $1.2 million as part of an employee retention program estimated to
cost  approximately  an additional $1 million in 2000,  the non-cash loss on the
sale of a  Company-owned  building,  legal  fees and  expenses  associated  with
litigation  related  to the  Company's  former  president  and  with  partnering
opportunities  and the Baxter  transaction,  a write-off of  professional  costs
related to delays in the  implementation of a computer system,  and supplies and


                                       48
<PAGE>

services costs.  These increases were partially  offset by a decrease in outside
marketing related costs and the termination of the lease of the Company's former
headquarters in July 1999, which were the result of management's  plan to reduce
costs.

      In March  1999,  the  Company  sold the  remaining  125,000  shares of its
investment in IVAX  Corporation  ("IVAX") Common Stock generating gross proceeds
of approximately $1.6 million and income of $952,000.

      Interest  and  dividend  income  decreased  to  $513,000 in 1999 from $1.5
million in 1998.  This  reduction is due  primarily to a decrease in the average
cash balance. The average cash balance is expected to decline further in 2000.

      Interest  expense  decreased to $9.9 million in 1999 from $18.5 million in
1998.  The decrease is due  primarily  to the  recognition  of a  non-recurring,
non-cash $12.0 million  interest  charge in 1998 due to a beneficial  conversion
feature of the 4.5% Notes,  the conversion of $8.4 million  principal  amount of
6.5%  Notes in  exchange  for  550,000  shares of Common  Stock in June 1999 and
principal  payments made on a capital equipment lease. The decrease is offset in
part by the $1.6  million of interest  expense  associated  with the issuance of
750,000 warrants under the BioChem line of credit guarantee, $940,000 of expense
recognized  on the  conversion of $8.4 million  principal  amount of 6.5% Notes,
increased  debt as a result of the issuance of the 4.5% Notes in November  1998,
and the interest expense under the Company's two guaranteed lines of credit.

      The factors  cited above  resulted in a net loss of $49.6 million or $1.52
per share in 1999 as compared to a net loss of $56.6  million or $1.76 per share
in 1998.  The  weighted-average  number of common  shares  outstanding  was 37.6
million for 1999 compared to 32.1 million for 1998.  Without the gain on sale of
the investment in an affiliate, the expense recognized on the conversion of some
of the 6.5% Notes, the expense  recognized on the issuance of 750,000  warrants,
and the loss on the sale of the  building,  the net loss in 1999 would have been
$47.6  million  or $1.46 per  share.  Without  the  effect of the  non-recurring
non-cash  interest  charge of $12.0  million,  the loss in 1998  would have been
$44.6 million or $1.39 per share. The increase in the number of weighted-average
shares outstanding for 1999 as compared to 1998 is attributable primarily to the
conversion of some of the 6.5% Notes into 550,000 shares of the Company's Common
Stock in June 1999 and to a lesser  extent the exercise of stock  options  after
September 30, 1998.

YEARS ENDED DECEMBER 31, 1998 AND 1997

      In the fourth quarter of 1998,  the Company  realized its first sales from
the launch of Certiva(R) in the U.S. to government  purchasers and to Abbott for
distribution  in  the  private   market.   Total  product  sales  in  1998  were
approximately  $2.2 million of which  approximately $1.2 million were from sales
of Certiva(R) to several  government  agencies and approximately $1 million were
from sales of product to SSI. In addition,  during 1998, the Company  recognized
$6.1 million consisting  primarily of milestone payments and development funding
under the  Company's  agreement  with  Abbott and to a lesser  extent  milestone
payments under a supply and distribution agreement with Chiron Behring.  Revenue
in 1997  consisted of $1.7 million from product sales to SSI and $8.0 million of
revenue  from  collaborative  agreements  of  which  $6.0  million  was  from an
agreement with Aventis Pasteur.

      Production  expenses  were $19.2 million in 1998 compared to $18.7 million
in 1997. The increase in these expenses in 1998 is primarily  attributable to an
increase  in the  number of  production  and  service-related  employees  as the
Company prepared for regulatory approval of Certiva(R).  The increase was offset
in part by  lower  depreciation  expense  related  to the use of an  accelerated
depreciation  method and to the capitalization of Certiva(R)  inventory for sale


                                       49
<PAGE>

in the United States  following FDA approval.  Costs  attributable to Certiva(R)
production  were expensed until  regulatory  approval was obtained in July 1998.
Since FDA approval,  production  costs have exceeded the net realizable value of
inventory  produced,  which  excess has been  recorded  as  production  expenses
incurred in 1998.

      Research and  development  expenses were $18.0 million in 1998 compared to
$19.9  million  in  1997.  The  decrease  is  attributable  primarily  to  lower
depreciation  expense related to the use of an accelerated  depreciation method,
reduced expenses for clinical trials,  and  reimbursements  for expenses under a
collaborative  agreement.  These  decreases  were offset in part by higher labor
expenses  as a result of an  increase  in the  number of  employees  and  higher
building costs.

      General and administrative expenses were $10.8 million in 1998 as compared
to $11.4 million in 1997.  The decrease is due to the  recognition of a non-cash
compensation  expense of approximately $1.3 million and a non-recurring  royalty
payment  both  incurred in 1997,  offset in part by higher  labor  expenses as a
result of an increase in the number of employees.

      Interest and dividend  income  decreased to $1.5 million in 1998 from $3.1
million in 1997.  This  reduction is due  primarily to a decrease in the average
cash balance.

      Interest  expense  increased to $18.5 million in 1998 from $6.8 million in
1997.  Approximately  $12.0  million  of this  increase  is due to a  beneficial
conversion  feature of the 4.5% Notes  resulting  in a  non-recurring,  non-cash
interest  expense  charge.  See "Tax and  Reporting  Matters,"  below.  Interest
expense also increased as a result of the accrual of interest on the 4.5% Notes.
These  increases  were  partially  offset due to principal  payments made on the
equipment  lease, as well as to the conversion of $2.5 million  principal amount
of the 6.5% Notes into shares of the Company's Common Stock in December 1997.

      The factors  cited above  resulted in a net loss of $56.6 million or $1.76
per share in 1998.  Without the effect of the  non-recurring  non-cash  interest
charge of $12.0 million, the loss in 1998 would have been $44.6 million or $1.39
per share.  This  compares to a net loss of $43.8  million or $1.39 per share in
1997. Without the effect of the $1.3 million non-cash  compensation expense, the
loss  in  1997  would  have  been  $42.5   million  or  $1.34  per  share.   The
weighted-average  number of shares of the Company's Common Stock outstanding was
32.2  million  for 1998 compared to 31.6  million for 1997.  The increase in the
number of  weighted-average  shares  outstanding for 1998 as compared to 1997 is
attributable  primarily to the exercise of stock  options and the  conversion of
$2.5  million  principal  amount of the 6.5%  Notes into  101,207  shares of the
Company's Common Stock in December 1997.

LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK
----------------------------------------

      The Company's cash  requirement  for operations for the fourth quarter and
year ended 1999 was $12.8 million and $43.2 million,  respectively,  as compared
to $12.6 million and $42.7  million for the same periods in 1998,  respectively.
The Company's cash  requirement for operations is the net cash used in operating
activities  for the period being  reported less amounts  received under license,
marketing,  distribution  and/or development  agreements and further adjusted by
the timing of proceeds from the sale of an investment in an affiliate.

      At  December  31,  1999,  the  Company  had cash and cash  equivalents  of
approximately  $563,000  and $20  million  available  under  the line of  credit
guaranteed by Baxter. In addition, the Company had approximately $3.2 million of
restricted  cash  pledged as  collateral  under the letter of credit  agreement,


                                       50
<PAGE>

which will be reduced in amount as payments are made under the capital equipment
lease  described in Note 9 of the financial  statements.  See Item 8 - Financial
Statements and Supplementary Data.

      PROJECTED  RESULTS FROM OPERATIONS.  The Company  anticipates that it will
report a net loss of between $14 and $16 million for the first  quarter of 2000.
It will likely incur a quarterly net  operating  loss at least through the first
two  quarters  of 2000,  and it is likely  that  there will be net income in the
second  half of 2000 with a  possible  return to losses in the first  quarter of
2001,  based upon  several  factors.  The  factors  included  in  assessing  the
projected  losses are,  among others:  the sale of a total of 3 million doses of
Certiva(R)  under the NHS contract  along with the timing and  magnitude of such
sales,   difficulties   experienced   in  scaling  up  bulk   manufacturing   of
NeisVac-C(TM), the expensing of costs to produce  Certiva(R) prior to regulatory
approval, acquisition of additional approvals and contracts to supply Certiva(R)
in 2001,  limited product sales from the limited  inventory of Certiva(R) and aP
vaccines  on  hand;  manufacturing   limitations  for  the  Company's  acellular
pertussis vaccines,  limitations on the Company's ability to negotiate and enter
into new collaborative  arrangements and alternative  financings pursuant to the
terms of the Share Exchange Agreement,  all as more completely  discussed in the
following paragraphs.

      The  principal  source of revenues in 2000 is expected to be product sales
of NeisVac-C(TM)  to the NHS. Under the NHS contract,  the Company has committed
to supply NHS with 3 million doses of NeisVac-C(TM)  beginning in April 2000 for
approximately  (British pound) 40 million (or approximately $64 million at March
23,  2000).   The  Company   experienced   some  problems  in  scaling  up  bulk
manufacturing  of  Certiva(R)  which have  impacted the  Company's  schedule for
commercial  production of NeisVac-C(TM).  The Company believes that progress has
been made to address all material production problems, and that the Company will
be able to deliver the full 3 million doses of NeisVac-C(TM) to the NHS in 2000,
although  the Company  will not meet the first  delivery  date in April 2000 and
there can be no assurances that further production  disruptions or failures will
not  impact  the  Company's  ability  to  deliver  NeisVac-C(TM)  timely  or  in
sufficient  quantities  to meet its  obligations  under  the NHS  contract.  The
Company  currently  expects to have  initial  product  quantities  released  and
available for delivery to NHS early in the third quarter of 2000, although there
can be no assurances in this regard.

      Under the terms of the NHS  contract,  if the Company does not receive the
requisite marketing  authorization before its first delivery date in April 2000,
NHS has the right to (1) reschedule the deliveries  without reducing the minimum
volumes to be supplied by the Company,  (2) reduce the volumes to be supplied by
the Company by an amount that NHS  considers  reasonable  to reflect the shorter
life  of  the  agreement,   or  (3)  terminate  the  contract.   Moreover,  once
NeisVac-C(TM)  is  licensed,  the terms of the  contract  require,  among  other
things,  that the Company  reimburse  the NHS and its  affiliates  for any costs
associated  with delays  caused by the  Company  should the Company be unable to
meet agreed-upon  delivery schedules.  The Company has had informal  discussions
with NHS  regarding  the delays in licensure  and product  delivery and believes
that  based  on  these  discussions  and  the  strong  profile  demonstrated  by
NeisVac-C(TM)  in  clinical  trials,  the NHS  would be  willing  to  reschedule
deliveries  through  the end of 2000 for the  entire 3  million  doses,  without
penalty,  if the regulatory  approval for  NeisVac-C(TM)  is issued within a few
months of April 2000, although there can be no assurances in this regard. If the
NHS revises or terminates  its  commitment to purchase  NeisVac-C(TM)  under the
contract,  the quarterly  operating results will be directly impacted,  for this
contract represents the Company's principal source of projected revenue in 2000.
Moreover, as discussed below,  additional acellular pertussis products will only
be available in limited quantities for sale in 2000 because of time required for
the change over in  production  following  the  NeisVac-C(TM)  campaign  and the
product cycle time for producing and releasing acellular pertussis products.


                                       51
<PAGE>

      All costs associated with the production of NeisVac-C(TM)  are expensed as
incurred until the vaccine receives regulatory approval.  Therefore, the Company
will   continue  to  record   significant   production   expenses   without  any
corresponding  revenues until that time. The Company also expects  initial sales
of  NeisVac-C(TM)  to be  made  from  inventory  produced  prior  to  regulatory
approval.  Accordingly,  as such  inventory  is  sold,  the  cost of goods to be
reported by the Company  would be lower than in  subsequent  periods.  Following
regulatory  approval,  production expenses for NeisVac-C(TM) will be capitalized
in accordance with generally  accepted  accounting  principles and recognized as
expense when product is sold.

      Quarterly operating results also will be affected by various manufacturing
limitations.  As noted above,  the Company has experienced  some problems in the
commercial  production of NeisVac-C(TM).  The production of vaccines is a highly
complex, biological process involving many steps from seed culture through final
production.   From  time  to  time,  the  Company  experiences  disruptions  and
production  failures  and  there can be no  assurances  that  there  will not be
disruptions or product  failures.  Any  disruptions  and failures  increase unit
production  costs as units are lost in the  production  process,  as well as may
limit the Company's  ability to meet its supply  obligations  for  NeisVac-C(TM)
under the NHS contract.  In addition,  production  expenses are mainly fixed and
consist  primarily of expenses  relating to the  operation of the  Company's one
manufacturing facility and maintaining a ready work force.

      During the first half of 2000, the Company expects to have limited product
sales of Certiva(R) and its aP vaccine from the minimal,  remaining  inventories
on hand. The majority of this  remaining  inventory was made under the Company's
new production  enhancement program designed to increase production capacity and
efficiency,  and  cannot  be sold in the  United  States  or  Europe  until  the
appropriate regulatory authorities approve the enhancements.  Accordingly, these
lots were previously expensed when made, and the cost of goods to be reported by
the  Company  upon  sale of  these  products  will be lower  than in  subsequent
periods.  The Company filed the  appropriate  documentation  with the FDA in the
fourth  quarter  of 1999  seeking  regulatory  approval  and  believes  that FDA
approval of the  enhancements  will be granted in the second quarter of 2000. In
mid-2000, SSI, the Company's European partner, will file for regulatory approval
in its  territory  for the DTaP and  DTaP-IPV  products  containing  the bulk aP
vaccine  manufactured with the enhanced production process.  The Company expects
that SSI will obtain regulatory  approval in its territories by the end of 2000.
There can be no  assurances  that any of these  regulatory  approvals  for these
production enhancements will be forthcoming in a timely manner or at all.

      The Company also has been working to eliminate  bottlenecks and streamline
and  strengthen  the  product  testing and  release  process  for its  acellular
pertussis  vaccines,  thereby reducing  production  disruptions and failures and
enhancing the reliability of the production process.  This work will continue to
be performed  off-line  during the first half of 2000,  while  NeisVac-C(TM)  is
being produced in the manufacturing  facility.  When the enhanced production and
testing  processes  are  fully  implemented,  the  Company  believes  that  unit
production  costs before filling and packaging will be reduced.  In prior years,
the production costs for the Company's  acellular  pertussis  products  exceeded
their net  realizable  value,  and there can be no assurances  that the enhanced
production and testing  processes will lower the unit production costs or permit
the  Company to produce  sufficient  quantities  of vaccine to  generate a gross
profit,  particularly  in light of the  increased  filling and  packaging  costs
associated with the decision to manufacture  Certiva(R) without the preservative
thimerosal, as discussed below.

      After the Company produces  sufficient  quantities of the NeisVac-C(TM) to
fulfill its contractual  obligations in the United Kingdom,  the Company expects
to return to the  manufacturing  of  acellular  pertussis  vaccines in the third
quarter of 2000,  utilizing  the  enhanced  production  and  testing  processes.
Because of the lengthy  manufacturing  and  testing  cycle,  product  from these
manufacturing  runs will not be  available  for sale  until at least the  fourth
quarter of 2000.  Until such time as product is  available,  sales of  acellular


                                       52
<PAGE>

pertussis-containing  products will be made from the limited  product  inventory
currently  on hand.  Accordingly,  the Company  expects  reduced  sales of these
products  through the third quarter of 2000.  Sales could be further  limited in
the second half of 2000 if the enhanced  production and testing processes do not
work  properly  upon startup of acellular  pertussis  production  or  regulatory
approval for these  enhancements  is not received in a timely  manner or at all.
Given that the  Company  expects to  continue  to  alternate  NeisVac-C(TM)  and
acellular  pertussis  production  through at least 2001,  the Company  will have
limited time to manufacture acellular pertussis vaccines, so the Company intends
first to satisfy SSI's agreed-upon requirements, then supply acellular pertussis
vaccine for clinical trials of the Company's new combination  vaccines,  such as
DTaP-IPV and AMVAX(R),  its tetanus,  diphtheria and acellular pertussis booster
vaccine  for  adults,  and  then  use  any  remaining  capacity  to  manufacture
Certiva(R) without thimerosal.  Therefore,  the Company anticipates having lower
sales of Certiva(R)  in 2000 and into 2001,  and any such sales could be further
diminished if the Company is unable to reach suitable distribution  arrangements
to sell Certiva(R) to non-government  purchasers in the United States. Moreover,
the Company does not expect to have any sales of DTaP-IPV vaccine in Germany and
Austria  until such time as  product  is  available  and the  Company  secures a
distributor for the vaccine.  Any such distribution  arrangements  would require
the consent of Baxter under the terms of the Share Exchange Agreement.  Although
the  national  marketing  authorization  for the  sale and  distribution  of its
DTaP-IPV  vaccine in Germany  and Austria  has been  completed,  the Company and
Chiron  Behring  terminated  at the end of 1999 the  distribution  agreement for
sales within these countries.

      As a result of a recent  assessment  of potential  health risks related to
mercury  contained in food and drugs  conducted by the FDA, in cooperation  with
the Environmental Protection Agency, the continued use of thimerosal in vaccines
has been questioned.  Thimerosal is a mercury-containing  preservative  commonly
used in vaccines packaged in multi-dose vials. Thimerosal is approved for use by
the FDA and is  currently  included  in more than 30  licensed  vaccines  in the
United States.  In July 1999, the Company decided to follow the  recommendations
of  these  agencies  and move  toward  the  discontinued  use of  thimerosal  in
Certiva(R), which is licensed in multi-dose vials. The Company intends to submit
data to the FDA on Certiva(R)-EU,  the European formulation of Certiva(R), which
does not contain thimerosal,  to facilitate the approval and introduction in the
United States of a  thimerosal-free  formulation  of the product in  single-dose
syringes.  The Company previously filled Certiva(R) in multi- dose vials, so the
added costs  associated  with filling and  packaging  single-dose  syringes will
substantially  increase  production costs on a per-dose basis. If the Company is
not  able to  pass on  those  additional  costs  in the  United  States  through
increases in the current  selling price of Certiva(R),  then the Company may not
recognize a gross profit on sales of Certiva(R),  even with full  implementation
of the enhanced  production  and test  processes  described  above.  The Company
expects to submit data to the FDA on a thimerosal-free formulation of Certiva(R)
before the end of the second  quarter  of 2000 or  shortly  thereafter,  and the
Company will work expeditiously with the FDA to obtain approval,  although there
can be no assurances that such regulatory approval will be received timely or at
all.  The AAP has called for the FDA to  expedite  the review of  manufacturers'
supplemental  applications to eliminate or reduce the mercury content of vaccine
products.  As noted  above,  the Company  will in the  interim  continue to sell
previously produced thimerosal containing Certiva(R) that it has on hand.

      The  Company  does not  anticipate  receiving  any  revenue  in 2000  from
collaborations unless the Company enters into any new collaborative arrangements
for the research,  development,  marketing and distribution of its products.  In
past years,  the Company has  recognized  revenue  for  milestone  payments  and
development  funding  primarily under  collaborative  agreements with Abbott and
Aventis Pasteur;  however,  with the termination of both of these relationships,
the  Company  will not  receive any  further  funding  under  these  agreements.
Moreover,  under the terms of the Share Exchange Agreement,  the Company may not
enter into any  collaborative  arrangement  without  Baxter's  consent until the
transaction  with  Baxter  is  completed  or the  Share  Exchange  Agreement  is
terminated.



                                       53
<PAGE>

      The foregoing  paragraphs  include  forward looking  statements  including
statements as to: revenue projections,  earnings (losses); timing and likelihood
of  further  regulatory  approvals;  the  ability  of the  Company to timely and
efficiently   expand  its   production   capacity   and  lower  unit  costs  for
NeisVac-C(TM)  and  Certiva(R);  the prospects  for and timing of  NeisVac-C(TM)
production  and  regulatory  filings;  and the ability of the Company to address
production failures relating to NeisVac-C(TM) and Certiva(R)  production,  among
others.  The factors that affect the level of future revenues from product sales
include,  among other things, the ability of the Company to obtain  distribution
partners, subject to Baxter's consent, for its products in the United States and
Europe,  the  ability  of the  Company to  effectively  position  the  Company's
products against competitive products (including safety, efficacy, and pricing),
the Company's  ability to manufacture  and deliver  NeisVac-C(TM)  and pertussis
vaccine  products in accordance with customer  orders,  the timing and amount of
product  orders,  and the timing of future  product  launches.  The factors that
affect the ability of the  Company to timely and  efficiently  expand  acellular
pertussis production capacity include, among others, the adequacy of engineering
designs, the manufacturing experience with these enhancements, the timeliness of
regulatory review of modifications,  the acceptability of such  modifications to
the applicable  regulatory  authorities,  and the ability to successfully stream
line and strengthen  the product  testing and release  process.  There can be no
assurances that the Company's plans to increase  production  capacity and output
will be effective or result in anticipated  production  efficiencies and reduced
unit cost or will be acceptable to any regulatory  agency. The factors affecting
timing for  commercialization  of  NeisVac-C(TM)  include,  among other  things,
overcoming production problems in scaling up commercial  production,  results of
ongoing clinical trials, and expedited UK regulatory review. In addition,  there
are no  assurances  that the steps  taken by the  Company to address  production
disruptions   and  failures  and  quality   testing   inefficiencies   for  both
NeisVac-C(TM) and the pertussis  vaccines will be effective or that disruptions,
failures,  and  inefficiencies  will  not  continue  in the  future.  Production
disruptions,  failures or inefficiencies could have a material adverse effect on
the Company's future operating  results and could affect the Company's  existing
licenses as well as any applications for approval for its products or the timing
of such approval. No assurances can be given that the Company will be successful
in maintaining  consistent and continuous commercial production of its products.
Further,  because the Company's manufacturing operations are located principally
in one facility,  any condition or event that adversely affects the condition or
operation of such facility would have a material adverse effect on the Company's
financial condition and future results of operations.

      PROJECTED CASH REQUIREMENTS FOR OPERATIONS AND FINANCING  ACTIVITIES.  The
Company  will be  required  to raise up to  approximately  $62  million,  or $77
million  should the Company be required  to pay breakup  fees to Baxter,  of new
financing in the second quarter of 2000 to finance its  operations,  service its
debt and repay  its  lines of credit  guaranteed  by  Baxter  and  BioChem.  The
breakdown of this required  financing is as follows.  The cash  requirements for
operations  in the first quarter of 2000 are projected to be between $12 and $14
million.  This range could be  affected  by the timing and amount of  additional
cash  requirements  associated  with the  status  of  commercial  production  of
NeisVac-C(TM).  The first quarter 2000 cash  requirement  is  anticipated  to be
about that  incurred in the fourth  quarter of 1999 due  primarily  to projected
increased   spending  related  to  NeisVac-C(TM)   production,   offset  by  the
semi-annual  interest  payment  of  $2.4  million  on the  6.5%  Notes  and  the
approximately $600,000 payment for the 4.5% Notes both paid in November 1999. In
the second quarter of 2000, the Company's cash  requirements  for operations are
projected  to be between $20 and $25  million,  which  includes  $3.0 million in
interest  payments  to the  holders of the 6.5% Notes and 4.5% Notes  payable in
early May 2000, and estimated payments of approximately $2.2 million in May 2000
for "stay" bonuses under an employee  retention  program.  Finally,  outstanding
balances under the lines of credit  guaranteed by Baxter and the $6 million line
of credit  guaranteed  by BioChem must be repaid in the second  quarter of 2000.
See "Funding  Sources." The foregoing include forward looking statements and the
factors  which affect the actual cash  required for  operations  could  include,
among other things:  vaccine  production  levels;  regulatory  authorization  to
commence clinical investigations;


                                       54
<PAGE>

timing  for the  commencement  of  planned  clinical  trials;  and the  level of
expenditures for the Company's ongoing research and development program.

      CAPITAL  EXPENDITURES.  Total  capital  expenditures  for 1999  were  $3.1
million,  which amount  includes a $260,000  capital lease for equipment.  These
expenditures  were principally  associated with work on the enhanced  production
process  for  the  acellular   pertussis   vaccines   described  above  and  the
acceleration of the production for  NeisVac-C(TM).  The Company expects to spend
approximately  $2.5 million in 2000 for capital  expenditures  on minor  ongoing
facilities' modifications,  equipment,  systems and other capital additions. The
foregoing  include  forward  looking  statements.  The  amount of and timing for
capital  expenditures  could fluctuate based upon a number of factors including,
without  limitation,  the  equipment  purchases  required  in order  to  produce
NeisVac-C(TM);  and the amount and timing of  unanticipated  costs to replace or
repair existing  equipment and systems in order to keep  facilities  operational
and in compliance with regulatory requirements.

      FUNDING SOURCES.  Given the Company's  limited  projected  revenues in the
first half of 2000 and with the termination of the Company's collaborations with
Abbott and Aventis Pasteur,  the Company's principal source of financing will be
the revolving line of credit with Bank of America,  N.A., which is guaranteed by
Baxter.  The outstanding  principal balance under the line of credit totaled $10
million at December  31,  1999 and may be  increased  up to $30 million  through
March 31, 2000. As of March 21, 2000, the  outstanding  principal  balance under
the line of credit was $19.5 million.

      This line of credit matures on March 31, 2000, unless extended by the bank
at  Baxter's  request.  Under  the terms of the Share  Exchange  Agreement,  the
transaction was scheduled to close in mid-April 2000. The transaction is subject
to a number of conditions to closing,  including,  among others, receipt of U.K.
regulatory  approval of the  NeisVac-C(TM)  and the  manufacture  of a two-month
supply of NeisVac-C(TM) for the Company's contract with the UK's National Health
Service  ("NHS") before April 1, 2000. The Company  currently does not expect to
have  received  UK  regulatory  approval  for  NeisVac-C(TM)  or  the  requisite
two-month supply of vaccines  available by April 1, 2000. Baxter has advised the
Company that it will not close on the acquisition  transaction under the current
terms of the Share  Exchange  Agreement  unless all  conditions  to closing  are
satisfied in the time frame specified.  Based upon the Company's failure to meet
required  conditions  on April 1 and other  developments  of  concern to Baxter,
Baxter has proposed that the parties  modify the Share Exchange  Agreement.  The
parties have been in discussions  regarding proposals that involve,  among other
things,  a reduction in the  purchase  price,  the terms under which  additional
financing  would be available to the Company,  an extension of the date by which
conditions to closing are to be satisfied,  additional conditions to closing and
changes to existing  conditions to closing,  the outside date for termination of
the Share  Exchange  Agreement,  and an early  termination of the Share Exchange
Agreement.  There can be no assurances as to whether the Company and Baxter will
reach an agreement  with respect to a mutually  acceptable  modification  to the
Share Exchange Agreement or mutually acceptable  termination  arrangements or as
to the timing of any such agreement.  If the parties are unable to reach such an
agreement and Baxter determines not to waive the conditions to closing which the
Company  is  unable  to  meet,  Baxter  will  not be  obligated  to close on the
acquisition  transaction  and the Company will continue to be bound by the terms
of the Share  Exchange  Agreement  through  at least May 31,  2000.  Baxter  has
advised  the  Company  that it does not wish to  terminate  the  Share  Exchange
Agreement.  If the parties cannot agree upon a mutually acceptable  modification
of the Share Exchange Agreement or mutually acceptable termination arrangements,
the  Company's  credit  facility  with the Bank of America  will  become due and
payable on March 31,  2000.  The line of credit is secured by a pledge of all of
the Company's  otherwise  unencumbered  assets.  In such event,  there can be no
assurances  that the Company  will be able to  refinance  this  indebtedness  or
obtain  financing for its  continued  operations.  If the Company  cannot obtain
financing,  there  can  be no  assurance  that  the  Company  can  continue  its
operations  for any period of time without  seeking  bankruptcy  protection.  In
addition,  there can be no  assurances  that  litigation  will not be  commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient  funds
to defend such  litigation,  whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.





                                       55
<PAGE>


      Under the Share  Exchange  Agreement,  the Company  also has agreed to pay
Baxter's out-of- pocket expenses up to $1 million if Baxter terminates the Share
Exchange  Agreement as a result of either the Company's  breach of a covenant in
the Share  Exchange  Agreement  or an  intentional  breach by the Company of any
representation or warranty in the Share Exchange Agreement. The Company has also
agreed to pay Baxter a termination  fee of $14 million and reimburse  Baxter for
its out-of-pocket  expenses up to $1 million if the Share Exchange  Agreement is
terminated under any of the following circumstances:

      o   Baxter  terminates the Share Exchange  Agreement because the Company's
          board  withdraws  or  modifies  its  recommendation  as to  the  Share
          Exchange Agreement or the arrangement resolution or resolves to do so,
          or the Company fails to comply with the non-solicitation provisions of
          the Share  Exchange  Agreement or the  Company's  board  recommends an
          alternative  transaction or fails to reconfirm its  recommendation  of
          the arrangement;

      o   either Baxter or the Company  terminates the Share Exchange  Agreement
          after May 31,  2000 or  because  the  Company's  shareholders  fail to
          approve  the  arrangement,  and,  in each  case,  at the  time of such
          termination  or failure to approve  the  transaction,  an  alternative
          transaction exists; or

      o   Baxter terminates the Share Exchange Agreement as a result of either a
          breach by the Company of a covenant in the Share Exchange Agreement or
          an intentional  breach by the Company of a representation  or warranty
          in the  Share  Exchange  Agreement  and,  at the time of  termination,
          either an  alternative  transaction  exists or has been  proposed,  or
          within one year after termination,  the Company is acquired by another
          entity or enters into an acquisition agreement with another entity.

      In addition,  the Company has been notified by the American Stock Exchange
("Exchange")   that  it  was  considering   delisting  the  Company  because  of
non-compliance  with its listing  requirements.  The  Exchange  has deferred its
judgment on delisting  until it has reviewed this Annual Report on Form 10-K. If
the proposed transaction with Baxter is not progressing or consummated, then the
Exchange has requested that the Company provide it with  additional  information
regarding its financial condition.

      While the  foregoing  paragraphs  contain  a  description  of the  factors
affecting the Company's  business  prospects and risk factors  affecting  future
operations,  reference also is made to Item 1 - Business - Risk Factors, as well
as the risk factors and other  information  described  elsewhere in this Item 7,
including in the first paragraph hereof, and in the Company's other filings with
the  SEC,  for a more  complete  description  of  the  risks  and  uncertainties
affecting the Company and its business.

TAX AND REPORTING MATTERS
-------------------------

      At December 31, 1999, the Company and its subsidiaries had income tax loss
carry forwards of  approximately  $52.4 million to offset future Canadian source
income and  approximately  $114.3 million to offset future United States taxable


                                       56
<PAGE>

income subject to the alternative minimum tax rules in the United States.

      If more  than a  certain  percentage  of the  Company's  assets  or income
becomes  passive,  the Company  will be  classified  for U.S.  tax purposes as a
passive foreign investment company ("PFIC"),  and a U.S. taxpayer may be subject
to an additional  Federal  income tax on receiving  certain  dividends  from the
Company  or  selling  the  Company's  Common  Stock.  The  Company  has not been
classified  as a PFIC to date,  and it  intends  to, and  believes  that it can,
generate  sufficient other income to avoid being classified as a PFIC. This is a
forward looking statement and the factors affecting this classification include,
among other  things,  the timing and amount of revenue from product  sales;  the
timing and amount of license fees,  milestone  payments and development  funding
under  license,   marketing,   distribution  and  development  agreements;   the
classification of payments received by the Company as active or passive; and the
classification of the Company's assets as active or passive.

      In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company implemented SFAS No. 131 for
the year ended December 31, 1998 and has  determined  that it currently does not
have reportable segments. Product sales in the United States for the years ended
December 31, 1999, 1998 and 1997, were approximately $2.6 million, $2.2 million,
and $0 million,  respectively.  Product sales to Europe,  which were all made to
SSI, were  approximately $2.4  million,  $1.0 million,  and $1.7 million for the
years ended December 31, 1999,  1998, and 1997,  respectively.  All products are
currently  being  manufactured  at the Company's one production  facility in the
United  States.  The production  process,  and ultimately  product  costing,  is
primarily the same for all of the Company's acellular pertussis vaccine products
sold in the  United  States  and  Europe.  Because  of  this,  and the  relative
consistency in selling prices, as well as the nature of the distribution methods
utilized by the  Company,  the  Company  does not  differentiate  and manage its
business along geographic lines.

IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY
--------------------------------------------

      The Year 2000 issue is the result of computer programs being written using
two  digits  rather  than four to define the  applicable  year.  Management  has
completed a Company-wide  program that prepared the Company's  computer  systems
and programs for the Year 2000.  The internal  systems used to run the Company's
business run  principally  on  third-party  hardware and software.  To date, the
Company has not  experienced  any Year  2000-related  problems that could have a
material  adverse  effect on the  future  results  of  operations  or  financial
condition of the Company; however, there can be no assurances such problems will
not surface in the next few months.  Additionally,  the failure of suppliers and
other   companies  doing  business  with  the  Company  to  maintain  Year  2000
qualification in a manner  compatible with the Company's systems could also have
a material  adverse effect on the Company.  The Company does not believe that it
will incur any material costs in the future because of date related problems.



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
          ----------------------------------------------------------

      The Company does not have significant  exposure to changing interest rates
on invested  cash at December 31,  1999.  The Company  invests in U.S.  Treasury
bills and investment grade commercial paper that have maturities of three months
or  less.  As a  result,  the  interest  rate  market  risk  implicit  in  these
investments at December 31, 1999, is low, as the investments mature within three
months.


                                       57
<PAGE>

      The Company had $25 million of 4.5% Notes at December 31, 1999, which bear
interest at 4.5% per annum and mature in  November  2003.  The Company  does not
have significant  exposure to changing  interest rates related to the 4.5% Notes
because the interest rate on these notes is fixed.

      The Company had $75.3  million of 6.5% Notes at December 31,  1999,  which
bear  interest at 6.5% per annum and mature in May 2003.  The  Company  does not
have significant  exposure to changing  interest rates related to the 6.5% Notes
because the interest rate on these notes is fixed.

      The Company has drawn down a total of $6 million under the revolving  line
of credit guaranteed by BioChem. The loans bear interest at LIBOR plus 265 basis
points, which are currently between 8.06% and 8.09%. Each draw under the line is
an individual  revolving loan. New interest rates and periods will be determined
when these loans mature. The entire principal balance on the line of credit must
be repaid no later than May 31,  2000.  The  Company  has  exposure  to changing
interest  rates  related to the $6 million of debt but does not deem it material
due to the time limitations on the borrowing.

      The Company  had drawn down $10  million as of  December  31, 1999 under a
revolving line of credit guaranteed by Baxter.  The loan bears interest at LIBOR
plus .625%.  The Company has exposure to changing  interest rates related to the
$10 million of debt but does not deem it material due to the time limitations on
the borrowing.

      The Company has not undertaken  any actions to cover interest  market risk
and is not a party to any interest rate market risk management activities.

      A hypothetical  ten percent  change in the market  interest rates over the
next year would not materially impact the Company's earnings or cash flow as the
interest  rates on the Company's  long-term  convertible  debt are fixed and its
revolving line of credit and cash investments are short term. A hypothetical ten
percent change in the market interest rate over the next year, by itself,  would
not have a material adverse effect on the fair value of the Company's  long-term
convertible debt, revolving line of credit or its short-term cash investments.

      The Company does  principally all of its  transactions in U.S. dollars and
currently has limited  payment  obligations  in Swedish Krona and Danish Kroner;
however,  such  obligations  are not material to the Company's  operations.  The
Company's  contract with the U.K. for sale of  NeisVac-C(TM)  is  denominated in
British Pounds Sterling.  The value of this contract is  approximately  (British
Pound)40 million or approximately $64 million at March 23, 2000. The contract is
contingent upon the Company receiving  regulatory  approval for NeisVac-C(TM) in
the U.K. The Company has exposure to changing  exchange rates between the dollar
and the British Pound Sterling.  A hypothetical ten percent change in the market
exchange  rate over the nine months  ending  December 31, 2000 could result in a
reduction of up to  approximately  $6.4  million in potential  revenue from this
contract.  The Company  intends to reduce  risk to possible  changes in exchange
rates between the currencies by entering into a hedging  transaction  before the
effective date of the contract.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
          -------------------------------------------

      The Financial  Statements and accompanying Notes thereto, the Accountants'
Report, required Supplementary Data, and certain other financial information are
set forth on pages 59 to 91 of this Annual  Report  immediately  following.  The
table of contents to the Financial  Statements and accompanying Notes appears on
page 107 of this Annual Report.




                                       58
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NORTH AMERICAN VACCINE, INC.
AND SUBSIDIARIES:

      We have  audited the  accompanying  consolidated  balance  sheets of North
American Vaccine,  Inc. (a Canadian corporation) and Subsidiaries as of December
31,  1999 and 1998,  and the  related  consolidated  statements  of  operations,
shareholders'  deficit  and cash flows for each of the three years in the period
ended December 31, 1999. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards  require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North American Vaccine, Inc.
and  Subsidiaries  as of December  31,  1999 and 1998,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.

      The accompanying financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company may be required to repay  balances due under
its lines of credit  as early as March 31,  2000,  does not have cash on hand to
satisfy its near-term cash requirements for operations,  has suffered  recurring
losses  from  operations  and has a net capital  deficiency,  all of which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 1. The  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of asset carrying  amounts or the amount and  classification  of
liabilities  that might  result  should the  Company be unable to  continue as a
going concern.



Arthur Andersen, LLP

Baltimore, Maryland
March 30, 2000




                                       59
<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)    DECEMBER 31,  DECEMBER 31,
                                                       1999          1998
                                                   ------------  ------------
ASSETS
------
CURRENT ASSETS:
  Cash and cash equivalents                             $     563     $  22,953
  Accounts receivable                                       3,537         1,625
  Inventory                                                 3,285         4,067
  Prepaid expenses and other current assets                   753           998
                                                      -----------   -----------
          Total current assets                              8,138        29,643

Property, plant and equipment, net                         19,668        25,315
Investment in affiliate, at market                             --         1,554
Deferred financing costs, net                               1,773         2,505
Cash restricted for lease obligation                        3,185         4,877
Other assets                                                  827           631
                                                      -----------   -----------
     TOTAL ASSETS                                       $  33,591     $  64,525
                                                      ===========   ===========

LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
  Accounts payable                                      $   5,456     $   3,881
  Short-term debt                                          16,000            --
  Deferred revenue                                             --           850
  Obligation under capital lease, current portion           2,400         1,754
  Other current liabilities                                 7,208         5,848
                                                      -----------   -----------
         Total current liabilities                         31,064        12,333

6.5% Convertible subordinated notes, due May 1, 2003       75,326        83,734
4.5% Convertible secured notes, due November 13, 2003      25,000        25,000
Obligation under capital lease, net of current portion         79         2,356
Deferred rent credits, net of current portion                 232            76
                                                      -----------   -----------
     Total liabilities                                    131,701       123,499

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT:
 Preferred stock, no par value; unlimited shares
  authorized-Series A, convertible; issued and
  outstanding 2,000,000 shares; entitled to
  Can $2.50 per share (or U.S. $3.5 million in the
  aggregate) in liquidation                                 6,538         6,538
 Common stock, no par value; unlimited shares
  authorized; issued 32,870,350 shares at
  December 31, 1999 and 32,216,096 shares
  at December 31, 1998                                     90,550        80,824
 Additional paid-in capital                                13,593        11,956
 Cumulative comprehensive income excluded from net loss        --           926
 Accumulated deficit                                    (208,791)     (159,218)
                                                      -----------   -----------
     Total shareholders' deficit                         (98,110)      (58,974)
                                                      ===========   ===========

     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT       $   33,591     $  64,525
                                                      ============  ============

The accompanying notes are an integral part of these consolidated financial
statements.


                                       60
<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)


                                                  YEARS ENDED DECEMBER 31,
                                               1999         1998         1997
                                           ------------ ------------  ----------

 REVENUES:
      Product sales                          $   5,049   $    2,230    $   1,699
      Marketing, research and
       development agreements                    5,909        6,149        8,001
                                           -----------  -----------   ----------
           Total revenues                       10,958        8,379        9,700
                                           -----------  -----------   ----------

 OPERATING EXPENSES:
     Production and cost of sales               22,950       19,196       18,662
     Research and development                   16,179       17,986       19,860
     Selling, general and administrative        12,900       10,800       11,386
                                           -----------  -----------   ----------
           Total  operating expenses            52,029       47,982       49,908
                                           ------------ ------------  ----------

 OPERATING LOSS                               (41,071)     (39,603)     (40,208)


 OTHER INCOME (EXPENSES):
     Gain on sale of investment in
      affiliate                                    952           --           --
     Interest and dividend income                  513        1,497        3,140
     Interest expense                          (9,967)     (18,503)      (6,772)
                                           ------------ ------------  ----------
 NET LOSS                                    $(49,573)   $(56,609)     $(43,840)
                                           ============ ============  ==========


 BASIC AND DILUTED NET LOSS PER SHARE        $  (1.52)   $  (1.76)     $  (1.39)

 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
      OUTSTANDING                               32,592       32,152       31,641


The accompanying notes are an integral part of these consolidated financial
statements.



                                       61
<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                    CUMULATIVE
                         SERIES A                                  COMPREHENSIVE              TOTAL
                       CONVERTIBLE                                    INCOME                 SHARE-
                     PREFERRED STOCK   COMMON STOCK    ADDITIONAL    EXCLUDED      ACCUM-    HOLDER'S
                    ----------------- ---------------- PAID-IN         FROM        ULATED     EQUITY
                     SHARES   AMOUNT  SHARES  AMOUNT   CAPITAL       NET LOSS     DEFICIT   (DEFICIT)
                    -------- -------- ------- -------- --------    -------------  ------- -----------
<S>                   <C>    <C>       <C>    <C>       <C>         <C>         <C>          <C>

Balance,
  December 31, 1996   2,000  $  6,538  31,407 $ 71,357  $    --     $     653   $ (58,769)   $  19,779

Net loss                 --        --      --       --       --            --     (43,840)    (43,840)
Decrease in market
 value of investment     --        --      --       --       --         (438)           --       (438)
                                                                                             ---------
Comprehensive loss                                                                            (44,278)
Exercises of stock
 options                 --        --     498    5,036       --            --           --       5,036
Retirement of stock
used to exercise
 options                 --        --    (80)  (1,890)       --            --           --     (1,890)
Shares issued under
 401(k) plan             --        --      11      238       --            --           --         238
Stock option
compensation             --        --      --    1,313       --            --           --       1,313
Conversion of
subordinated
 convertible notes
into common stock        --        --     101    2,455       --            --           --       2,455
Balance,            -------  --------  ------ --------  -------     ---------   ----------   ---------
 December 31, 1997    2,000  $  6,538  31,937 $ 78,509  $    --     $     215   $(102,609)   $(17,347)


Net loss                 --        --      --       --       --            --     (56,609)    (56,609)
Increase in market
 value of investment     --        --      --       --       --           711           --         711
                                                                                             ---------
Comprehensive loss                                                                            (55,898)
Exercises of stock
 options                 --        --     462    5,452       --            --           --       5,452
Retirement of stock
 used to exercise
 options                 --        --   (201)  (3,429)       --            --           --     (3,429)
Beneficial conversion
 feature of 4.5% Notes   --        --      --       --   11,956            --           --      11,956
Shares issued under
  401(k) plan            --        --      18      292       --            --           --         292
Balance,            -------  --------  ------ --------  -------     ---------   ----------   ---------
 December 31, 1998    2,000  $ 6,538   32,216 $ 80,824  $11,956     $     926   $(159,218)   $(58,974)

Net loss                 --        --      --       --       --            --     (49,573)    (49,573)
Increase in market
 value of investment     --        --      --       --       --            26           --          26
Realized investment
 holding gain            --        --      --       --       --         (952)           --       (952)
                                                                                             ---------
Comprehensive loss                                                                            (50,499)
Exercises of stock
 options                 --        --      58      169       --            --           --         169
Shares issued under
 401(k) plan             --        --      46      329       --            --           --         329
Warrant issuance         --        --      --       --    1,637            --           --       1,637
Conversion of 6.5%
 subordinated
 convertible
 notes into common
stock                    --        --     550    9,228       --            --           --       9,228
Balance,            -------  --------  ------ --------  -------     ---------   ----------   ---------
 December 31, 1999    2,000  $  6,538  32,870 $ 90,550  $13,593     $      --   $(208,791)   $(98,110)
                    =======  ========  ====== ========  =======     =========   ==========   =========

        The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                                  62
<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>

                                                         YEARS ENDED DECEMBER 31,
                                                       1999        1998       1997
                                                    ---------   ---------  ---------
<S>                                                 <C>        <C>        <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                           $(49,573)  $(56,609)  $(43,840)
 Adjustments to reconcile net loss to net cash
 used in operating activities:
  Gain on sale of investment in affiliate               (952)         --         --
  Loss on disposal of property, plant, and
   equipment                                              671        181        131
  Depreciation and amortization                         6,217      8,177     11,017
  Amortization and reduction of deferred
   financing costs                                      2,179        498        520
  Recognition of beneficial conversion
   feature of 4.5% Notes                                   --     11,956         --
  Contribution of common stock to 401(k) plan             329        292        238
  Stock option compensation                                --         --      1,313
  Debt conversion expense                                 940         --         --
  (Increase) decrease in other assets                   (196)      (168)         43
  Increase (decrease) in deferred rent                    138       (24)       (91)
  Cash flows provided by (used in) other
   working capital items                                1,287    (4,760)      5,756
                                                    ---------   --------   --------
    Net cash used in operating activities            (38,960)   (40,457)   (24,913)
                                                    ---------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                 (3,091)    (2,245)    (2,132)
 Proceeds from sale of investment in affiliate          1,581         --         --
 Proceeds from sale/leaseback                           2,110         --         --
 Proceeds from sale of equipment                           --         --        225
                                                    ---------   --------   --------
    Net cash provided by (used in)
    investing activities                                  600    (2,245)    (1,907)
                                                    ---------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of convertible notes               --     25,000         --
 Deferred financing costs of convertible notes             --      (400)         --
 Borrowings under revolving credit facilities          16,000         --         --
 Proceeds from exercises of stock options, net            169      2,023      3,146
 Loan to a former officer related to the
  purchase of common stock                                 --    (1,228)         --
 Repayment of loan from the former officer                 --      1,228         --
 Principal payments on capital lease obligations      (1,891)    (1,593)    (1,705)
 Cash restricted for capital lease obligation           1,692    (4,877)         --
                                                    ---------   --------   --------
    Net cash provided by financing activities          15,970     20,153      1,441
                                                    ---------   --------   --------

NET DECREASE IN CASH AND CASH EQUIVALENTS            (22,390)   (22,549)   (25,379)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD         22,953     45,502     70,881
                                                    ---------   --------   --------
CASH AND CASH EQUIVALENTS, END OF PERIOD              $   563    $22,953    $45,502
                                                    =========   ========   ========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



                                         63
<PAGE>


NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)

                                                      YEARS ENDED DECEMBER 31,
                                                     1999       1998      1997
                                                    --------  -------  ---------

CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:

 (Increase) decrease in:
   Accounts receivable                              $(1,912) $(1,301)   $ 3,842
   Inventory                                            782   (1,337)      (948)
   Prepaid expenses and other current assets            245     (383)       (81)

 Increase (decrease) in:
   Accounts payable                                   1,575      538      1,431
   Deferred revenue and other current liabilities       597   (2,277)     1,512
                                                    --------  -------  --------
 Net cash provided by (used in) other working
  capital items                                     $ 1,287  $(4,760)   $ 5,756
                                                    ======= ========   ========



 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 Cash paid for interest                             $ 6,812  $ 5,936    $ 6,249
                                                    ======= ========   ========

 Equipment acquired through capital lease           $   260  $    --    $    --
                                                    ======= ========   ========

 Conversion of subordinated notes to common stock   $ 8,408  $    --    $ 2,516
                                                    ======= ========   ========

 Use of stock to exercise stock options             $    --  $ 3,429    $ 1,890
                                                    ======= ========   ========

The accompanying notes are an integral part of these consolidated financial
statements.



                                         64
<PAGE>
                  NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

      North American  Vaccine,  Inc. and Subsidiaries (the "Company") is engaged
in  the  research,  development,  production,  and  sale  of  vaccines  for  the
prevention of infectious diseases in children and adults.

      The Company was  incorporated  in Canada on August 31, 1989 to consolidate
the  assets,   liabilities  and  operations  of  American  Vaccine   Corporation
("American  Vaccine"),  and certain assets and  vaccine-related  technologies of
BioChem Pharma Inc. ("BioChem"), in a share purchase and merger transaction (the
"Merger").  On February 28, 1990, the  shareholders of American Vaccine approved
the Merger. Prior to February 28, 1990, the Company had no operations.

      Pursuant to the Merger,  shareholders of American Vaccine  exchanged their
shares  for  50  percent  ownership  of  the  Company.  Simultaneously,  BioChem
purchased  a 50 percent  interest  in the  Company  for cash,  shares of BioChem
common stock, and certain rights in BioChem's vaccine-related technologies.  The
net assets of  American  Vaccine,  common  stock of  BioChem,  and the rights in
vaccine-related  technologies transferred by BioChem were carried forward to the
Company at their  previously  recorded  amounts as reflected  in the  historical
financial statements of BioChem and American Vaccine.

      In November 1999, the Company signed a definitive Share Exchange Agreement
(the "Share  Exchange  Agreement") to be acquired by Baxter  International  Inc.
("Baxter")  in a  taxable  stock-for-stock  transaction  pursuant  to a plan  of
arrangement  under the Canada Business  Corporations Act valued at approximately
$390 million.  Under the Share Exchange  Agreement,  the Company's  shareholders
will receive $7 per share,  comprised of $6.97 of Baxter  common stock and $0.03
in cash. The number of Baxter shares to be issued to the Company's  shareholders
under the Share Exchange  Agreement  will be set based upon the average  closing
sale price of Baxter  common  stock for the ten trading days ending on the fifth
trading day prior to consummation of the transaction. The transaction is subject
to a number of  conditions  to closing,  including,  among  others,  the Company
receipt of U.K.  regulatory  approval of the  NeisVac-C(TM) and manufacture of a
two-month supply of NeisVac-C(TM)  for the U.K.  National Health Service ("NHS")
contract  before April 1, 2000.  Baxter has advised the Company that it will not
close on the  acquisition  transaction  under  the  current  terms of the  Share
Exchange  Agreement  unless all  conditions to closing are satisfied in the time
frame specified. Based upon the Company's failure to meet required conditions on
April 1 and other  developments  of concern to Baxter,  Baxter has proposed that
the  parties  modify the Share  Exchange  Agreement.  The  parties  have been in
discussions regarding proposals that involve, among other things, a reduction in
the  purchase  price,  the  terms  under  which  additional  financing  would be
available  to the  Company,  an  extension  of the date by which  conditions  to
closing are to be  satisfied,  additional  conditions  to closing and changes to
existing  conditions to closing,  the outside date for  termination of the Share
Exchange  Agreement,  and an early termination of the Share Exchange  Agreement.
There can be no  assurances  as to whether  the Company and Baxter will reach an
agreement  with  respect  to a  mutually  acceptable  modification  to the Share
Exchange Agreement or mutually acceptable termination  arrangements or as to the
timing  of any such  agreement.  If the  parties  are  unable  to reach  such an
agreement and Baxter determines not to waive the conditions to closing which the
Company  is  unable  to  meet,  Baxter  will  not be  obligated  to close on the
acquisition  transaction  and the Company will continue to be bound by the terms
of the Share  Exchange  Agreement  through  at least May 31,  2000.  Baxter  has
advised  the  Company  that it does not wish to  terminate  the  Share  Exchange
Agreement.  If the parties cannot agree upon a mutually acceptable  modification
of the Share Exchange Agreement or mutually acceptable termination arrangements,
the  Company's  credit  facility  with the Bank of America  will  become due and
payable on March 31,  2000.  The line of credit is secured by a pledge of all of
the Company's  otherwise  unencumbered  assets.  In such event,  there can be no
assurances  that the Company  will be able to  refinance  this  indebtedness  or
obtain  financing for its  continued  operations.  If the Company  cannot obtain
financing,  there  can  be no  assurance  that  the  Company  can  continue  its
operations  for any period of time without  seeking  bankruptcy  protection.  In
addition,  there can be no  assurances  that  litigation  will not be  commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient  funds
to defend such  litigation,  whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.

      The Company has incurred  recurring  losses from  operations and has a net
capital  deficiency at December 31, 1999.  Should the arrangement with Baxter be
terminated,  the Company  would be required to repay all  balances due under its
lines of credit  before the end of the second  quarter of 2000,  as well as fund
its ongoing operations.  Given its current cash position, the Company would need
to immediately  address its near-term cash requirements.  The Company would seek
to arrange  financing from one or more of its affiliates,  seek technology based
partnering opportunities,  and/or, if possible, issue debt or equity securities.
There are no  assurances  that any or all of these options would be available or
that  they  could  be  arranged  in time to meet the  cash  requirements  of the
Company.

                                       65
<PAGE>

(2) RISK FACTORS

      RISK  OF  FAILURE  TO  COMPLETE  THE  ARRANGEMENT  WITH  BAXTER.   If  the
arrangement is not completed for any reason,  NAVA may be subject to a number of
material risks, including the following:

      o   the  Company is required to repay  amounts  borrowed  under the credit
          facility with Bank of America,  N.A. and  guaranteed by Baxter.  As of
          March 30,  2000 the  principal  amount  outstanding  under this credit
          facility was $19.5 million;

      o   the Company may be  required  to pay Baxter a  termination  fee of $14
          million and reimburse Baxter for expenses up to $1 million;

      o   the price of the Company's Common Stock may decline to the extent that
          the  current  market  price  of the  Common  Stock  reflects  a market
          assumption that the arrangement will be completed; and

      o   costs  related  to the  arrangement,  such as  legal,  accounting  and
          financial  advisor fees,  must be paid even if the  arrangement is not
          completed.

See also "Risk Factors - Risk Associated with Lack of Availability of Capital."

      In  addition,  current  and  prospective  employees  of the Company may be
uncertain  about their future roles with Baxter until Baxter's  strategies  with
regard to the Company are announced or executed.  This may adversely  affect the
Company's  ability to attract and retain key  management,  sales,  marketing and
technical personnel.  Also, concern about the financial prospects of the Company
and the uncertainty  related to the closing of the  arrangement  with Baxter has
contributed  to employees  leaving the Company and may  contribute to additional
loss of personnel.

      Further,  if the  arrangement  is terminated  and the  Company's  board of
directors determines to seek another arrangement or business combination,  there
can be no  assurance  that it will be able to find a partner  willing  to pay an
equivalent or more attractive price than the price to be paid in the arrangement
or sufficient  financing on acceptable  terms that will be necessary to fund the
Company's continuing operations. In addition, while the Share Exchange Agreement
is in effect,  the Company is prohibited,  subject to certain  exceptions,  from
soliciting,  initiating or  encouraging  or entering into certain  extraordinary
transactions,  such  as  an  arrangement,  sale  of  assets  or  other  business
combination,  with any party other than Baxter without becoming  responsible for
paying a termination fee and reimbursing Baxter for expenses up to $1 million.

      RISK  ASSOCIATED  WITH LACK OF  AVAILABILITY  OF CAPITAL.  To maintain the
Company's production,  research and development at current levels,  present cash
and cash equivalents,  expected product sales of Certiva(R),  NeisVac-C(TM), and
the Company's other products are not expected to provide sufficient cash to fund
the Company's operations, debt service payments and capital expenditures in 2000
and into 2001. To address the cash needs,  the Company obtained in November 1999
a $30 million secured  revolving line of credit from Bank of America,  N.A. This
line of credit is  guaranteed  by Baxter and is secured by all of the  Company's
otherwise  unencumbered  assets,  including  patents,  patent  applications  and
receivables.  The  Company  expects  that  this  line of  credit  will  fund its
operations  through March 31 and through April 2000 if extended by the bank with
Baxter's  consent.  If the  acquisition by Baxter does not close timely in early
April 2000, the Company will have to secure  alternative  interim  financing and
could be required to repay any  outstanding  balances on March 31, 2000. In this
case,  there  can be no  assurances  that  the  Company  will be able to  obtain
additional debt or equity  financing on favorable  terms in amounts  required to
meet cash  requirements  or that  litigation will not result with Baxter arising
out of the  Company's  efforts  to secure  such  financing.  The Share  Exchange
Agreement  prohibits  the Company  from  entering  into  certain debt and equity
financing arrangements.


                                       66
<PAGE>

      In this case,  the Company  will be required to raise up to  approximately
$62 million,  or $77 million  should the Company be required to pay breakup fees
to  Baxter, of new  financing  in the  second  quarter  of 2000 to  finance  its
operations,  service its debt and repay the lines of credit guaranteed by Baxter
and BioChem.  The factors which affect the actual cash  required for  operations
could  include,  among  other  things:  vaccine  production  levels;  regulatory
authorization to commence clinical  investigations;  timing for the commencement
of planned  clinical  trials;  and the level of  expenditures  for the Company's
ongoing research and development program.

      In addition, the Company currently cannot secure any funding through third
party  collaborations,  because under the terms of the Share Exchange Agreement,
the Company may not enter into any new or alternative collaborative arrangements
for third  parties to  distribute,  research  and develop its  products  without
Baxter's  consent until either the  transaction  with Baxter is completed or the
Share Exchange Agreement is terminated.

      If the Company is unable to extend the March 31,  2000,  maturity  date of
its credit  facility  with the Bank of America or to obtain  other  financing to
repay the  facility,  then the  Company  would be in  default  under the Bank of
America  credit  facility,  and the bank  and/or  Baxter  (as  guarantor)  could
foreclose on the Company's assets,  including patents,  patent  applications and
receivables,  securing the credit facility.  The $30 million line of credit with
Bank of America,  N.A.  guaranteed  by Baxter is secured by all of the Company's
otherwise  unencumbered  assets,  including  patents,  patent  applications  and
receivables.  If an event of default occurs under the loan agreement,  Baxter is
obligated to purchase all of Bank of America's rights and obligations  under the
loan agreement  with the Company.  A default that is not timely cured would also
trigger defaults and, therefore, repayment obligations under the Company's other
financing  facilities,  as well as the possible  foreclosure  upon the remaining
Company  assets  by  creditors.  The 4.5%  Notes  are  secured  by a  pledge  of
collateral,  which includes certain of the Company's  equipment and other assets
at the Company's  principal  manufacturing  facility and the Company's ownership
rights  in  U.S.  Patent  No.  5,425,946,  entitled  "Vaccines  Against  Group C
NEISSERIA  MENINGITIDIS." Any foreclosure on the collateral would  substantially
impair the Company's  ability to operate its business,  if it could do so at all
without seeking bankruptcy protection.  See Item 6 - Selected Financial Data and
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operation.

      RISK RELATED TO SIGNIFICANT  LEVEL OF INDEBTEDNESS.  The Company currently
has a significant level of indebtedness.  As of December 31, 1999, the Company's
consolidated    indebtedness   and   capitalized   lease   obligations   totaled
approximately  $119  million,   including  $75.3  million  of  6.5%  Convertible
Subordinated Notes ("6.5% Notes"), $25 million of 4.5% Convertible Secured Notes
("4.5% Notes"),  $6 million under a line of credit guaranteed by BioChem and $10
million under a $30 million line of credit  guaranteed by Baxter.  The Company's
total assets as of December 31, 1999 are approximately $34 million.  As of March
30, 2000,  the Company had drawn down a total of $19.5 million under the line of
credit guaranteed by Baxter,  which matures on March 31, 2000. Until the Company
begins to receive significant revenues from product sales of NeisVac-C(TM) under
the NHS contract, the Company will continue to incur additional indebtedness .

      This  level of  indebtedness  could  have  material  consequences  for the
Company such as:

      o   impairing the  Company's  ability to obtain  additional  financing for
          working capital, capital expenditures,  and general corporate or other
          purposes, and

      o   limiting the  availability  of a substantial  portion of the Company's
          future cash flow from  operations,  if any, as it will be required for
          payment of the principal and interest on its indebtedness.


                                       67
<PAGE>

      The  Company  will not  generate  sufficient  increases  in cash flow from
operations  to service its  indebtedness;  accordingly  the Company  must secure
additional  financing.  There can be no assurance,  however,  that any financing
would be available to the Company.

      In early May 2000,  the Company is  obligated  to pay  approximately  $3.0
million in  interest  payments  to the holders of the 6.5% Notes and 4.5% Notes.
The $6 million  line of credit  guaranteed  by BioChem  also  expires on May 31,
2000; although as part of the Baxter transaction, BioChem has agreed to maintain
in effect and not to terminate in any respect its guaranty  until the  effective
date for  closing  on the  transaction  and to loan the  Company,  if the  Share
Exchange  Agreement  is  still  in  effect,  up to $5  million  on  commercially
reasonable  terms if the line of credit  becomes due prior to the effective date
of closing the  transaction.  In  addition,  Baxter is the  guarantor of the $30
million  line of  credit  from the Bank of  America,  N.A.  This  line of credit
matures on March 31,  2000,  unless  extended by the bank at  Baxter's  request.
Under the terms of the Share Exchange  Agreement,  the transaction was scheduled
to close by mid-April 2000. The transaction is subject to a number of conditions
to closing,  including, among others, receipt of U.K. regulatory approval of the
NeisVac-C(TM) and the manufacture of a two-month supply of NeisVac-C(TM) for the
Company's contract with the UK's National Health Service ("NHS") before April 1,
2000.  The Company  currently  does not expect to have  received  UK  regulatory
approval for  NeisVac-C(TM) or to manufacture the requisite  two-month supply of
vaccines by April 1, 2000.

      Baxter has advised the Company  that it will not close on the  acquisition
transaction  under the current terms of the Share Exchange  Agreement unless all
conditions to closing are satisfied in the time frame specified.  Based upon the
Company's failure to meet required  conditions on April 1 and other developments
of concern to Baxter,  Baxter has  proposed  that the  parties  modify the Share
Exchange  Agreement.  The parties have been in discussions  regarding  proposals
that involve,  among other things,  a reduction in the purchase price, the terms
under which additional financing would be available to the Company, an extension
of the date by which  conditions  to  closing  are to be  satisfied,  additional
conditions to closing and changes to existing conditions to closing, the outside
date for termination of the Share Exchange  Agreement,  and an early termination
of the Share  Exchange  Agreement.  There can be no assurances as to whether the
Company and Baxter will reach an agreement with respect to a mutually acceptable
modification to the Share Exchange Agreement or mutually acceptable  termination
arrangements  or as to the  timing of any such  agreement.  If the  parties  are
unable  to reach  such an  agreement  and  Baxter  determines  not to waive  the
conditions  to closing  which the Company is unable to meet,  Baxter will not be
obligated to close on the acquisition  transaction and the Company will continue
to be bound by the terms of the Share  Exchange  Agreement  through at least May
31, 2000. If the parties cannot agree upon a mutually acceptable modification of
the Share Exchange Agreement or mutually  acceptable  termination  arrangements,
the  Company's  credit  facility  with the Bank of America  will  become due and
payable on March 31,  2000.  The line of credit is secured by a pledge of all of
the Company's  otherwise  unencumbered  assets.  In such event,  there can be no
assurances  that the Company  will be able to  refinance  this  indebtedness  or
obtain  financing for its  continued  operations.  If the Company  cannot obtain
financing,  there  can  be no  assurance  that  the  Company  can  continue  its
operations  for any period of time without  seeking  bankruptcy  protection.  In
addition,  there can be no  assurances  that  litigation  will not be  commenced
between the parties arising out of the Share Exchange Agreement or the Company's
efforts to secure financing. If the Company becomes involved in such litigation,
there can be no assurances as to whether the Company will have sufficient  funds
to defend such  litigation,  whether the Company will prevail in such litigation
or the amount of damages for which the Company may be responsible if it does not
prevail in such litigation.

      LACK OF  PROFITABILITY.  The  Company  has  operated  at a loss  since its
inception  and  its  net  loss  for  the  year  ended   December  31,  1999  was
approximately  $49.6 million.  The Company expects additional losses during 2000
based upon a number of factors.  The factors included in assessing the projected
losses  are,   among   others:   timing  and  magnitude  of  product  sales  for
NeisVac-C(TM)  under the NHS contract,  difficulties  experienced  in scaling up
bulk  manufacturing  of  NeisVac-C(TM),   the  expensing  of  costs  to  produce
NeisVac-C(TM)  prior to  regulatory  approval,  limited  product  sales from the
limited  inventory  of  Certiva(R)  and  aP  vaccines  on  hand;   manufacturing
limitations for the Company's acellular  pertussis vaccines,  limitations on the
Company's ability to negotiate and enter into new collaborative arrangements and


                                       68
<PAGE>

alternative financings pursuant to the terms of the Share Exchange Agreement. In
addition,  there can be no  assurance  that the Company  will become  profitable
after 2000. To become profitable, the Company must:

      o   timely  receive  regulatory  approval  of, and timely and  efficiently
          manufacture,   NeisVac-C(TM)   to  meet  the   Company's   contractual
          commitments  under the NHS  contract  to  supply 3  million  doses for
          approximately  (pound)40  million (or  approximately $64 million as of
          March 23, 2000),
      o   timely and efficiently  expand production  capacity and output for its
          acellular pertussis vaccine products,
      o   obtain regulatory  approvals for new products,  and produce and market
          those products efficiently, successfully and in sufficient quantities,
      o   secure   milestone  and  other   payments   under  new   collaborative
          agreements, and
      o   reduce current levels of indebtedness.

      The  magnitude  of the  Company's  losses in 2000 will  greatly  depend on
whether the Company  receives the  approximately  (British  pound)40 million (or
approximately  $64 million at March 23, 2000) for the sale of 3 million doses of
NeisVac-C(TM)  under the NHS contract,  with  shipments  that were  scheduled to
begin in early  April  2000,  subject  to UK  regulatory  approval.  Under  that
agreement,   if  the  Company  does  not  receive  the  requisite  UK  marketing
authorization  before its first  scheduled  delivery date in April 2000, NHS has
the right to (1) reschedule the deliveries  without reducing the minimum volumes
to be  supplied  by the  Company,  (2) reduce the  volumes to be supplied by the
Company by an amount that NHS  considers  reasonable to reflect the shorter life
of the agreement, or (3) terminate the contract. Moreover, once NeisVac-C(TM) is
licensed,  the terms of the  contract  require,  among  other  things,  that the
Company reimburse the NHS and its affilates for any costs associated with delays
caused by the Company  should the Company be unable to meet agreed upon delivery
schedules.  The Company has had  informal  discussions  with NHS  regarding  the
possible  delays in licensure and product  delivery and believes that,  based on
these  discussions  and the strong  profile  demonstrated  by  NeisVac-C(TM)  in
clinical trials,  the NHS would be willing to reschedule  deliveries through the
end of 2000 for the entire 3 million doses,  without penalty,  if the regulatory
approval for NeisVac-C(TM) is issued within a few months of April 2000, although
there can be no assurances in this regard. If the NHS significantly  reduces the
number  of doses  purchased  or  terminates  the  contract,  the  Company  would
experience  substantially greater losses and its cash resources (and its ability
to invest in research and development) would be severely impacted.

      See "Risk Factors - Risk Related to  Significant  Level of  Indebtedness,"
"Risk Factors - Risk  Associated  with Lack of  Availability  of Capital," "Risk
Factors - No  Assurance  of  Effective  Marketing,"  and  "Risk  Factors - Risks
Associated with Limited Production Capacity."

      NO ASSURANCE OF  EFFECTIVE  MARKETING.  The Company  sells  Certiva(R)  to
government  purchasers in the United States through a small internal salesforce.
Under  a  distribution   agreement,   Abbott  Laboratories  previously  marketed
Certiva(R) to private  physicians and managed care markets in the United States;
however,  Abbott  terminated  the  agreement in September  1999.  The Company is
currently selling  Certiva(R) to non-government  purchasers in the United States
through wholesale distributors.  There can be no assurance that the Company will
successfully  implement its sales and marketing  strategies,  particularly  with
respect to the private physician and managed care markets given the limited size
of its internal salesforce.

      Factors  affecting  commercial  success of the  Company's  vaccines in the
United States include:

      o   establishing  the Company as an  effective  and  reliable  supplier of
          vaccines,
      o   establishing   efficient  and  consistent   production  of  sufficient
          quantities of vaccine,
      o   establishing effective distribution channels,
      o   maintaining  an  identity  and  reputation  for  the  Company  and its
          products, and


                                       69
<PAGE>

      o   increasing awareness among pediatricians of the safety and efficacy of
          the Company's vaccines, and
      o   distinguishing the Company's products from those of its competitors.

      In  addition,   the  Company  has  entered  into  supply,   marketing  and
distribution agreements with Statens Serum Institute ("SSI") under which SSI has
to market  certain of the  Company's  products,  such as  Certiva(R)-EU  and the
DTaP-IPV  vaccine,  in SSI's  Territory.  The Company does not currently  have a
salesforce or partner to market products in the European  countries not included
in SSI's Territory.  Although the national marketing  authorization for the sale
and  distribution  of its  DTaP-IPV  vaccine  in  German  and  Austria  has been
completed,  the Company  and  Chiron-Behring  terminated  at the end of 1999 the
distribution  agreement  for  sales  within  these  countries.  The  Company  is
considering  possible  arrangements  with  distributors  to market the Company's
products in these territories, although no formal agreements have been complete.
Consequently,  the  Company's  revenues  from product  sales in Europe and other
territories  depend upon the timing,  implementation  and  effectiveness  of the
sales,  marketing and distribution  efforts of others. In addition,  the Company
may not be successful in negotiating and executing  additional  marketing and/or
distribution  agreements  with any other  third  parties  and these  other third
parties may be unable to market the Company's products successfully.

      RISKS ASSOCIATED WITH LIMITED  PRODUCTION  CAPACITY.  The Company has only
one manufacturing facility through which it alternates production of its various
products,  such as Certiva(R) and NeisVac-C(TM).  Given that products may not be
manufactured  concurrently in the facility, the Company may experience shortages
of supply for  commercial  products if  inventories  are not sufficient to carry
over until the next scheduled production cycle for each product. This may result
in the loss of sales for that product.  NeisVac-C(TM) is presently in commercial
production  in the  manufacturing  facility,  so the Company  will only have its
current  limited  inventories  of  Certiva(R)  and  aP  vaccines  available  for
commercial sale until such time as lots of those products are  manufactured  and
released for sale.

      The Company's  manufacturing facility also has limited production capacity
based on the present size, configuration,  equipment, processes and methods used
to produce its products.  In addition,  production expenses are mainly fixed and
consist  primarily  of expenses  relating  to the  operation  of its  production
facilities and maintaining a ready work force.  Further,  from time to time, the
Company experiences  disruptions and production failures.  These disruptions and
failures  increase  unit  production  costs as units are lost in the  production
process.  These  factors have  contributed  to higher  production  costs for the
Company's  acellular  pertussis  products,  which costs  currently  exceed their
respective  net selling  prices.  In  addition,  the Company is  commencing  the
production of NeisVac-(TM) in this facility on a commercial scale, and there can
be no assurances that there will not be disruptions or product failures.

      In order to  address  production  limitations  for  Certiva(R)  and its aP
vaccines,  the Company has implemented a two-step capacity  enhancement program.
First,  the Company has modified its existing  facilities  and  operations  in a
manner intended to expand production capacity and efficiency.  The Company filed
the  appropriate  documentation  with the FDA in the  fourth  quarter of 1999 in
seeking the approval for these enhancements; however, there can be no assurances
that  such  approval  will be  granted  by the FDA or that FDA  review  will not
involve  delays  that would  adversely  affect the  Company's  ability to market
Certiva(R)  made  with  these  enhancements.  See  "Risk  Factors  -  Government
Regulation;  Regulatory  Approvals." The second step is to eliminate bottlenecks
and streamline and strengthen the product testing and release  process,  thereby
reducing  production  disruptions  and failures and enhancing the reliability of
the production process.  This work will continue to be performed off-line during
the  first  half  of  2000,  while   NeisVac-C(TM)  is  being  produced  in  the
manufacturing  facility.  Upon completion of both of these programs, the Company


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<PAGE>

expects  that unit  production  costs  (before  filling and  packaging)  will be
reduced.  To date, the production  costs for the Company's  acellular  pertussis
products  have  exceeded  their  net  realizable  value,  and  there  can  be no
assurances  that the enhanced  production  and testing  processes  will increase
capacity  or  lower  the unit  production  costs,  particularly  in light of the
increased   filling  and  packaging  costs   associated  with  the  decision  to
manufacture Certiva(R) without the preservative thimerosal.

      In addition,  the Company's  ability to timely and efficiently  expand its
production capacity depends, in large part, upon the following:

      o   adequacy of engineering designs,
      o   manufacturing experience with these enhancements,
      o   timeliness of regulatory review of modifications, and
      o   acceptability   of  the   modifications   to   applicable   regulatory
          authorities.

      The  Company's  plans to  increase  production  capacity  and  output  for
Certiva(R)  and its aP  vaccines  could  be  ineffective  or may not  result  in
production  efficiencies that cover future production costs. Failure to increase
production  capacity and output could limit the Company's ability to meet market
demand or achieve profitability.

      RISKS  ASSOCIATED  WITH  MANUFACTURING  AND  SCALE-UP.  The  production of
vaccines is a highly complex,  biological process involving many steps from seed
culture through final production.  Thus, the Company's  production process could
fail or become  subject to  substantial  disruptions  that impede its ability to
meet production requirements.

      From time to time,  the Company  experiences  disruptions  and  production
failures.  There is no assurance  that the Company can  adequately  address such
failures or that  production  failures  will not  continue in the future.  These
disruptions and failures:

      o   limit the Company's production capacity,
      o   increase  its  production  costs,  which  would  affect the  Company's
          prospects for profitability,
      o   could  have  a  negative  impact  on the  Company's  ability  to  meet
          commitments to provide product under its supply agreements; and
      o   could have a negative  impact on the Company's  existing  licenses for
          its  products  and delay or inhibit its  ability to obtain  additional
          regulatory approvals for its products.

      In  addition,  the Company may not  consistently  produce its  vaccines in
quantity  and quality  sufficient  to achieve  competitive  commercial  sales or
profitability.

      The Company's manufacturing  operations for NeisVac-C(TM),  Certiva(R) and
its acellular  pertussis  vaccine are located  principally in one facility.  Any
condition or event that  adversely  affects the operation of this facility would
have a material adverse effect on the Company's  financial  condition and future
results of operations.

      DEPENDENCE  ON  SUPPLIERS.   While  the  Company  produces  the  pertussis
component of Certiva(R) and the polysaccharide  component for NeisVac-C(TM),  it
has purchased, and intends to continue to purchase, from SSI required diphtheria
and tetanus toxoids and enhanced IPV for Certiva(R) and the combination vaccines
and  tetanus  toxoids  for  NeisVac-C(TM).  SSI may not  fulfill  the  Company's
requirements,  its  components  may not be supplied on  commercially  reasonable
terms,  or it may  experience  difficulties  in obtaining  necessary  regulatory


                                       71
<PAGE>

approvals or disruptions in their  production of diphtheria and tetanus  toxoids
or  IPV.  Any  of  the  foregoing  could  significantly   affect  the  Company's
operations.

      In late March 2000,  the  Company was  notified by SSI that SSI is seeking
changes in the terms,  primarily  with regards to pricing and  quantity,  of its
supply  agreements  with the Company.  The Company  currently does not know what
specific  changes are being  requested  and has  scheduled a meeting with SSI to
discuss its concerns.

      Certain of the Company's  production  processes require raw materials from
sole  sources or  materials  that are  difficult  for  suppliers  to produce and
certify  to the  Company's  specifications.  The  Company  also  may  experience
temporary  or  permanent  shortages  of critical  raw  materials  necessary  for
continued  production of its  vaccines.  Any shortage of these  materials  could
delay  production  efforts,  adversely impact  production  costs and yields,  or
necessitate  the  use  of  substitute  materials,  any  of  which  could  have a
significant adverse impact on the Company's operations.

      In addition,  the Company has  contracted  with third  parties for certain
product testing and for the sterile fill,  labeling and packaging of its vaccine
products.  Failure of any such  contractor  to meet the  Company's  requirements
could have a material  adverse effect on the Company,  may involve costly delays
and significant expense, and would require additional regulatory approval as the
Company seeks alternative arrangements.

      COMPETITION AND TECHNOLOGICAL CHANGE.  Competition in the vaccine industry
is  intense.   Competitors  of  the  Company  both  in  the  United  States  and
internationally include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of these
competitors are actively developing competing vaccines.

      Certiva(R)  currently  competes in the United States with three other DTaP
vaccines,  and most, if not all,  manufacturers of DTaP vaccines are expected to
compete in the TdaP vaccine market.  In addition,  NeisVac-C(TM)  is expected to
compete in the United Kingdom against two other Group C meningococcal  conjugate
vaccines,  one of which is already  licensed  there.  If these  competitors  are
successful in developing  and marketing  combination  vaccines that include DTaP
vaccines,  these  combination  vaccines  may gain market share at the expense of
stand-alone DTaP vaccines,  including  Certiva(R).  One of these competitors has
licensed in the United  States a vaccine that  combines by  reconstitution  that
company's Hib vaccine with its DTaP vaccine for  administration  at 15-18 months
of age and that it continues to seek FDA  approval  for  administration  of this
combination  vaccine at two, four and six months of age. Another  competitor has
reported that it is in clinical trials for a DTaP-Hib  combination  vaccine.  In
addition,  several  competing  DTaP  vaccines and certain  combination  vaccines
incorporating  DTaP, IPV and/or Hib vaccines have been licensed for sale outside
of the United States.

      Many of these  competitors  have  substantially  greater  resources,  more
extensive  experience in conducting  clinical  testing and obtaining  regulatory
approvals for their products, greater operating experience,  larger research and
development and marketing staffs, and greater  production  capabilities than the
Company.  These  factors may be  particularly  advantageous  because the vaccine
industry is subject to significant technological change.

      The  Company's  competitors  could also gain a  competitive  advantage  by
designing around the Company's patents, and developing technologies and products
that are as or more effective than any that have been or are being  developed by
the Company. They could also develop technologies and products that would render
the Company's technology and products obsolete and noncompetitive.

      CHANGES IN GOVERNMENT  PURCHASING POLICIES.  Children in the United States
receive immunizations from private providers and public providers, such as local
health  departments.  Immunizations  provided by public  providers are generally
funded through federal and state government  public health programs.  Government
purchases  historically have been at prices substantially below those offered to


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<PAGE>

the  private  sector and  presently  account  for a  substantial  portion of the
vaccine doses  distributed in the United States.  In the United States,  federal
and state  governments  historically have purchased DTaP and other vaccines from
multiple suppliers. There can be no assurances that this practice will continue.

      From time to time,  legislative  and regulatory  initiatives  are proposed
that, if adopted, could significantly modify government vaccine programs.  These
initiatives  could  materially  affect  the  federal   government's   purchasing
authority,  the contract award process,  or the funding available for government
vaccine   purchases.   The  Company  is  unable  to  predict  which  legislative
initiative, if any, will ultimately be enacted or the effect any such initiative
may ultimately have on the Company's  business or results of future  operations.
In  addition,  proposals  for  health-care,  insurance  and  tax  reform  may be
considered  in the future by  federal  and state  governments  and some of these
proposals,   if  adopted,   may  limit   government  or   third-party,   private
reimbursement   policies,  or  prices  charged  by  pharmaceutical  and  vaccine
manufacturers for their products.

      GOVERNMENT  REGULATION;   REGULATORY  APPROVALS.   The  Company's  vaccine
products,  product  development  activities  and  manufacturing  facilities  and
processes are subject to extensive and rigorous  regulation by the United States
Food and Drug Administration  ("FDA").  FDA regulation includes  preclinical and
clinical testing  requirements and inspection and approval  processes.  To date,
the Company has received FDA approval for only one product.

      Commercial  introduction  of the  Company's  products in the United States
currently  requires a separate license for each product.  Obtaining licenses can
be costly and time  consuming.  There can be no assurance that the licenses will
be  granted,  or that FDA review will not  involve  delays that would  adversely
affect the Company's ability to market products.  There also can be no assurance
that any products under  development by the Company will  demonstrate the safety
or efficacy profiles  necessary for regulatory  approval,  or that the Company's
products  under  development  or its  production  facilities  will  receive  the
requisite regulatory approvals and licenses in a timely fashion or at all.

      Moreover,  FDA-granted  licenses  may impose  limitations  that affect the
commercialization  of the  product,  including  limitations  on product  use and
requirements for post-licensure  testing.  The FDA can withdraw approvals at any
time by following appropriate regulatory  procedures.  The FDA can also limit or
prevent the manufacture or  distribution  of the Company's  products both in the
United States and abroad and can require  recalls of products.  FDA  regulations
depend  heavily on  administrative  and scientific  interpretation  and advisory
committee  determinations.  Such interpretations,  with possible prospective and
retroactive  effect,  could adversely  affect the Company.  For example,  recent
assessments of the potential  health risks related to mercury  contained in food
and  drugs  conducted  by  the  FDA,  in  cooperation  with  the  United  States
Environmental  Protection  Agency  ("EPA"),  have  raised  questions  about  the
continued use of thimerosal in vaccines.  In July 1999,  the Company  decided to
follow the  recommendations  of these agencies and move toward the  discontinued
use of  thimerosal in  Certiva(R),  which is licensed in multidose  vials.  This
change  has  required  the  Company  to  file  for  regulatory   approval  on  a
thimerosal-free  formulation  of the product in single-dose  syringes;  however,
there can be no assurances that such approval will be granted by the FDA or that
FDA review will not involve  delays that would  adversely  affect the  Company's
ability to market Certiva(R) made with these enhancements.

      In addition,  the FDA and various state  agencies  inspect the Company and
its  facilities  from  time to time  to  determine  whether  the  Company  is in
compliance with regulations,  including manufacturing,  testing,  recordkeeping,
quality control and labeling  practices.  If such entities find that the Company
is in material violation of these regulations,  the Company could be subject to,
among other things,  product  recalls,  suspensions  or withdrawals of licenses,


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<PAGE>

revocation or suspension  of export  authorizations,  and denials of any pending
applications.

      UNCERTAINTIES  RELATED TO CLINICAL  TRIALS.  Before  obtaining  regulatory
approval for the commercial sale of any products under development,  the Company
must  demonstrate  through  pre-clinical  studies and clinical trials that these
products are safe and effective. The results from pre-clinical studies and early
clinical  trials  may not be  predictive  of  results  obtained  in  large-scale
clinical trials.  There can be no assurance that large-scale clinical trials for
any  of  the  Company's  products  will  demonstrate  safety  and  efficacy,  be
sufficient to support application for regulatory approval, or lead to marketable
products.  A number of companies in the  biotechnology  industry  have  suffered
significant  setbacks in advanced clinical trials even after achieving promising
results in earlier trials.

      PATENT PROTECTION AND PROPRIETARY INFORMATION.  Traditionally, the vaccine
industry has placed  importance  on obtaining and  maintaining  patent and trade
secret protection for significant new technologies,  products and processes. The
Company believes that this protection will be an important factor in its success
and may require the expenditure of substantial resources.

      Many companies,  universities and research  institutions  have applied for
and/or  obtained  patents  for vaccine  products  and  technologies  that may be
competitive or  inconsistent  with those held by or licensed to the Company.  No
assurances  can be given that the degree and range of  protection of any patents
will be sufficient,  that additional  patents will be issued to the Company,  or
that the Company will not  infringe  upon  patents  granted to others.  Further,
others have or may  independently  develop or otherwise  properly gain access to
technology  or  information  that is  substantially  similar  to that  which  is
unpatented yet considered proprietary by the Company.

      The Company also may desire or be required to obtain  licenses from others
to effectively develop, produce and market commercially viable products. Failure
to  obtain  those  licenses  could  have a  significant  adverse  effect  on the
Company's  ability  to  commercialize  its  vaccine  products.  There  can be no
assurance that the Company can obtain these licenses on commercially  reasonable
terms, if at all, that the patents  underlying  these licenses will be valid and
enforceable  or  that  the  proprietary  nature  of  the  unpatented  technology
underlying these licenses will remain proprietary.

      There has been, and the Company  believes that there may be in the future,
significant  litigation in the industry  regarding patent and other intellectual
property rights. If the Company becomes involved in this type of litigation,  it
could consume substantial resources.

      RISK OF PRODUCT LIABILITY AND LIMITED INSURANCE. The testing and marketing
of vaccine products involve an inherent risk of product  liability.  The Company
has limited product liability insurance coverage. There can be no assurance that
adequate additional  insurance coverage will be available at acceptable cost, if
at all, or that a product liability claim would not materially  adversely affect
the Company's business or financial condition. If not covered by insurance,  the
Company faces  potential  liability  that could be  substantial  in the event of
claims.

      DEPENDENCE ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL.  The Company's
success in developing  marketable products and achieving a competitive  position
will depend, in part, on its ability to attract and retain qualified  personnel.
Competition  for such  personnel is intense.  No assurance can be given that the
Company  will  continue  to attract or retain  such  personnel.  The loss of key
personnel could adversely affect the Company.


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<PAGE>

      DIVIDENDS AND TAXATION.  The Company has never paid cash  dividends on its
Common Stock.  The Company  intends to retain  earnings,  if any, to finance the
growth and  development  of its  business  and does not  anticipate  paying cash
dividends  in the  foreseeable  future.  Moreover,  any  profits  earned  by the
Company's  U.S.  subsidiary  will be  declared  and  paid as a  dividend  to the
Company,  and the  Company  will  in turn  declare  and  pay a  dividend  to its
shareholders. Each such dividend would be subject to a withholding tax.

      IMPACT OF BECOMING A PASSIVE FOREIGN  INVESTMENT  COMPANY.  If more than a
certain  percentage  of the  Company's  assets or income  becomes  passive,  the
Company would be classified as a passive foreign investment company ("PFIC") for
U.S.  federal  income tax  purposes.  As a result,  U.S.  taxpayers  who receive
certain  dividends  from the Company or who sell shares of the Company's  Common
Stock would be subject to additional federal income tax.

      VOTING CONTROL BY PRINCIPAL  SHAREHOLDERS.  The principal  shareholders of
the  Company,  BioChem  and  Dr.  Phillip  Frost,  either  directly  or  through
affiliates,  are parties to a  shareholders'  agreement  requiring,  among other
things,  that the  Company's  Common  Stock  covered by the  agreement  be voted
together for the election of directors.  As of January 31, 2000, these principal
shareholders  beneficially  owned  approximately  20.7  million  shares  of  the
Company's outstanding Common Stock, which represented approximately 52.7% of the
then  outstanding  shares of the Company's  Common Stock.

      VOLATILITY  OF STOCK  PRICE.  The  market  prices for  securities  of many
biotechnology and  pharmaceutical  companies,  including the Company,  have been
highly  volatile.  Many  factors  have  historically  had,  and are  expected to
continue to have,  a  significant  impact on the  Company's  business and on the
market price of the Company's securities, including:

      o   financial results,
      o   announcements  by the  Company  and others  regarding  the  results of
          regulatory approval filings, clinical trials or other testing,
      o   technological innovations or new commercial products by the Company or
          its competitors, government regulations,
      o   developments concerning proprietary rights,
      o   public  concern as to safety of vaccine and  pharmaceutical  products,
          and
      o   economic or other external factors.

      SHARES  ELIGIBLE  FOR FUTURE  SALE.  Sales of  substantial  amounts of the
Company's Common Stock in the public market following the exercise of options or
the  conversion of  convertible  securities  could have an adverse effect on the
price of the Company's  securities.  If either of the two principal  shareholder
groups  decides to sell a substantial  number of shares of the Company's  Common
Stock,  these sales could  significantly  increase the  volatility of the market
price of the Company's issued and outstanding  securities.  In addition,  one of
the  principal  shareholders  has  registration  rights  for the  shares  of the
Company's Common Stock that it owns.

      YEAR 2000 ISSUES.  The Year 2000 Issue is the result of computer  programs
being written using two digits rather than four to define the  applicable  year.
Management  has  completed a  Company-wide  program that  prepared the Company's
computer  systems and programs for the Year 2000.  To date,  the Company has not
experienced any Year  2000-related  problems that could have a material  adverse
effect on the  future  results  of  operations  or  financial  condition  of the
Company,  and the Company is  continuing  to monitor its  software  and hardware
systems for continued compliance;  however,  there can be no assurances that the
Company will not experience future Year 2000-related problems. Additionally, the
failure of suppliers  and other  companies  doing  business  with the Company to
maintain  Year 2000  qualification  in a manner  compatible  with the  Company's
systems could also have a material  adverse effect on the Company.


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<PAGE>


(3) SIGNIFICANT ACCOUNTING POLICIES

      (a)  BASIS OF  ACCOUNTING  AND  CURRENCY.  The  accompanying  consolidated
financial  statements have been prepared in conformity  with generally  accepted
accounting principles ("GAAP") in the United States ("U.S.") and are denominated
in U.S.  dollars,  because the Company conducts the majority of its transactions
in this currency.  The application of Canadian GAAP would not result in material
adjustments to the accompanying  financial statements,  except for the impact of
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 115, as
discussed in Note 6 and the interest  charge of $12.0 million in 1998 related to
the issuance of the 4.5% Notes as discussed in Note 10. Under Canadian GAAP, the
beneficial  conversion  feature of the 4.5% Notes  would be assigned a value and
reported as additional  equity to be amortized to retained earnings ratably over
the term of the 4.5% Notes rather than being  charged to interest in the current
period. The effect of foreign currency translation has been immaterial.

      (b) PRINCIPLES OF  CONSOLIDATION.  The consolidated  financial  statements
include the accounts of North American Vaccine,  Inc. and its subsidiaries.  All
significant intercompany transactions have been eliminated in consolidation.

      (c) PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with GAAP 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  reporting  period.
Actual results could differ from estimates.

      (d) CASH AND CASH  EQUIVALENTS.  The Company  considers  all highly liquid
investments  with  an  original  maturity  of  three  months  or less to be cash
equivalents. Cash and cash equivalents consist primarily of commercial paper and
U.S. Treasury Bills.

      (e)  INVENTORIES.  Inventories  are stated at the lower of cost (first-in,
first-out) or market. Components of inventory cost include materials, labor, and
manufacturing overhead.  Production costs attributable to a product are expensed
until regulatory  approval is obtained for such product.  Beginning in the third
quarter of 1998, costs to produce Certiva(R)  for sale in the United States were
capitalized.  Production  costs  incurred in 1999 under a new but not regulatory
approved  process were expensed.  Any production costs incurred in excess of net
realizable  value  are  expensed  in the  quarter  in which  they are  incurred.
Inventories consist of the following:


                                          1999        1998
                                          ----------------
                                            (in thousands)
                  Raw Materials         $2,371      $2,509
                  Work-in-process          745       1,024
                  Finished goods           169         534
                                       -------     -------
                                        $3,285      $4,067


      (f)  REVENUE  RECOGNITION.  Nonrefundable  fees or  milestone  payments in
connection  with  research  and  development  or  collaborative  agreements  are
recognized  when they are earned in accordance  with the applicable  performance
requirements  and contract terms.  Revenue from product sales is recognized when
all  significant  risks of ownership  have been  transferred,  the amount of the
selling  price  is fixed  and  determinable,  all  significant  related  acts of


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<PAGE>

performance have been completed,  and no other significant  uncertainties exist.
In most cases, these criteria are met when the goods are shipped.

      In July 1998, the Company  received FDA approval to manufacture and market
Certiva(R)  in  the  United  States.  Under  the  FDA  approval,  Certiva(R)  is
indicated  for active  immunization  against  diphtheria,  tetanus and pertussis
(whooping  cough) in infants and  children  six weeks to seven years of age. The
Company produces the monocomponent acellular pertussis toxoid and formulates the
final product with diphtheria and tetanus toxoids  manufactured  and supplied by
SSI.

      In 1999 and  1998,  the  Company  recognized  revenues  from  sales of its
acellular  pertussis vaccine to SSI in Denmark of $2.4 million and $1.0 million,
respectively,  and has recognized  revenue from sales  of Certiva(R),  primarily
under a contract  with the U.S.  Centers for Disease  Control and  Prevention of
$2.6 million and $1.2 million, respectively.

      (g) RESEARCH AND DEVELOPMENT  COSTS. The Company expenses all research and
development costs as incurred.  Under Canadian GAAP,  certain  development costs
should be deferred to future periods if certain  criteria are met. No costs have
been  capitalized for Canadian GAAP purposes  because the Company  believes that
the applicable deferral criteria have not been met.

      (h)  DEPRECIATION  AND  AMORTIZATION.   Prior  to  1998,  depreciation  of
property, plant and equipment,  with the exception of leasehold improvements and
an owned facility,  was provided using an accelerated  method over the estimated
useful lives of the assets.  The estimated  useful lives are generally from five
to seven years for machinery,  equipment, and furniture.  Leasehold improvements
are amortized over the term of the lease. The Company's owned facility was being
depreciated on a straight-line basis over twenty years. For property,  plant and
equipment purchased after 1997, depreciation is provided using the straight-line
method over the estimated  useful lives. The effect of this change in accounting
principle is insignificant.

      (i) DEFERRED FINANCING COSTS.  Deferred financing costs represent fees and
other costs  incurred in connection  with the issuance of the 4.5% Notes and the
6.5% Notes.  These costs are  amortized  over the term of the related debt using
the  effective  interest rate method.  Total  accumulated  amortization  through
December 31, 1999 and 1998 was $1,877,000 and $1,335,000,  respectively.  During
the year ended  December 31, 1999,  the Company  incurred  $1.6 million of costs
related to warrants issued to BioChem (See Footnote 11).

      (j) INCOME TAXES. The Company computes  deferred tax assets or liabilities
based on the difference between the financial  statement and income tax basis of
assets and liabilities using the enacted tax rate.

      (k) BASIC AND  DILUTED  NET LOSS PER  COMMON  SHARE.  In March  1997,  the
Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 is effective  for financial  statements  issued for periods
ending after  December 15, 1997. The Company  implemented  SFAS No. 128 in 1997,
retroactive for all periods  presented.  SFAS No. 128 requires dual presentation
of basic and  diluted  earnings  per  share.  Basic loss per share  includes  no
dilution and is computed by dividing net loss by the weighted  average number of
common shares  outstanding  for the period.  Diluted loss per share includes the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were  exercised or converted into common stock.  Options,  warrants
and convertible  securities that were outstanding at December 31, 1999, 1998 and
1997,  were not included in the  computation  of diluted loss per share as their
effect would have been  anti-dilutive.  As a result,  the basic and diluted loss
per share amounts are identical for all periods presented.


                                       77
<PAGE>

      (l)  COMPREHENSIVE  INCOME.  In 1997, the Financial  Accounting  Standards
Board  issued SFAS No. 130,  "Reporting  Comprehensive  Income." The Company has
implemented  SFAS  130  beginning  with  the  1998  financial  statements.   The
implementation  of this  standard  did not  result in a  material  impact to the
Company's financial statements. The Company presents its comprehensive income in
the statement of shareholders' equity.

      (m) SEGMENT REPORTING.  In 1997, the Financial  Accounting Standards Board
issued SFAS No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information."  The Company  implemented SFAS No. 131 for the year ended December
31, 1998 and has determined that it currently does not have reportable segments.
Product  sales in the  United  States  were  approximately  $2.6  million,  $1.2
million,  and $0  for  the  years  ended  December  31,  1999,  1998  and  1997,
respectively.  Product sales to Europe were  approximately  $2.4  million,  $1.0
million,  and $1.7 million for the years ended December 31, 1999, 1998 and 1997,
respectively. All products are currently being manufactured at the Company's one
production facility in the United States. The production process, and ultimately
product costing for the acellular pertussis vaccine component,  is primarily the
same for all of the Company's  acellular  pertussis vaccine products sold in the
United  States and Europe.  Because of this,  and the  relative  consistency  in
selling prices,  as well as the  nature of the distribution  methods utilized by
the Company,  the Company does not  differentiate  and manage its business along
geographic lines.


(4)  PRODUCTION, DEVELOPMENT, AND MARKETING CONTRACTS

      (a) In October 1999, the NHS committed to purchase 3 million doses in 2000
of NeisVac-C(TM),  the Company's group C meningococcal  conjugate vaccine.  This
commitment  is  contingent  on  regulatory  approval  of  NeisVac-C(TM)  by  the
appropriate U.K. regulatory authorities.  The NeisVac-C(TM) contract is expected
to generate  gross  revenue of  approximately  $64 million in 2000.  The Company
filed an  application  for approval of  NeisVac-C(TM)  with the U.K.  regulatory
authorities  in the first  quarter  of 2000.  Following  a review,  approval  is
anticipated  in the  second  quarter of 2000,  with  initial  product  shipments
scheduled for the second quarter of 2000.  Should the Company  receive  approval
and be unable to comply with the delivery terms of the NHS agreement,  it may be
required to reimburse the NHS and its affiliates for any costs  associated  with
delays  caused by the Company  should the Company be unable to meet  agreed-upon
delivery schedules.

      In order to produce  NeisVac-C(TM)  under the NHS  contract,  the  Company
suspended  production  of  its  acellular  pertussis  vaccine  in  1999  in  its
production   facility   until  it  has   produced   sufficient   quantities   of
NeisVac-C(TM).

      (b) AGREEMENTS WITH AVENTIS PASTEUR (FORMERLY PASTEUR MERIEUX  CONNAUGHT).
Under a 1995 clinical development  agreement and license agreements with Aventis
Pasteur,  the parties  agreed to jointly  develop the  Company's  new  conjugate
vaccine against Group B meningococcus for both adult and pediatric  indications.
The Company recognized $4 and $6 million of research and development revenue for
non-refundable payments made by Aventis Pasteur in 1996 and 1997,  respectively.
In 1999, the Company  recognized $5.1 million of revenue for reimbursable  costs
in connection with the clinical development agreement. In February 2000, Aventis
Pasteur  notified the Company that it was exercising its option to terminate the
license and clinical development agreements.

      (c)  AGREEMENT  WITH  ABBOTT.  In 1996,  the Company and Abbott  signed an
agreement  under  which Abbott  would  market  Certiva(R),  the  Company's  DTaP
vaccine,  when  approved by the FDA.  With  FDA approval of  Certiva(R)  in July
1998, Abbott began marketing  Certiva(R) to  private physicians and managed care


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<PAGE>

markets in the United  States for  immunization  of  infants  and  children.  In
accordance with the terms of the agreement,  Abbott  terminated the agreement in
the third quarter of 1999.  The Company is marketing to  government  purchasers,
including state  governments and the Centers for Disease Control and Prevention,
and with the termination of the Abbott agreement it began selling  Certiva(R) to
private physicians and managed care organizations.

      On execution of the agreement,  the Company  received $13 million of which
approximately  $6.3  million  represented  payment  for  350,000  shares  of the
Company's common stock, and the balance represented a marketing fee and clinical
development  funding.  Abbott  provided  the Company with  clinical  development
funding.  Amounts received for clinical development to be expended in the future
by the  Company  were  recorded  as deferred  revenue.  The Company  received $3
million in 1997 for  clinical  development  funding.  The Company was to receive
payments upon  achievement  of  prescribed  milestones.  The Company  recognized
$850,000  and $5.2  million of  revenues  under this  contract in 1999 and 1998,
respectively,  including a milestone payment associated with the FDA approval of
Certiva(R) in  1998.  Under the agreement,  the Company paid $750,000 to support
and enhance Abbott's promotional and advertising program in 1998.


(5) PROPERTY, PLANT, AND EQUIPMENT

      Property,  plant and equipment  were recorded at cost and consisted of the
following components:

                                                            As of December 31,
                                                            ------------------
                                                              1999      1998
                                                              --------------
                                                              (in thousands)

            Property, plant and equipment:
              Land                                          $     -     $498
              Building and improvements                           -    2,443
              Machinery, equipment and laboratory fixtures   47,188   43,806
              Leasehold improvements                          8,317    8,293
              Office furniture, equipment and software        4,320    4,915
                                                             ------   ------
                                                             59,825   59,955
                                                             ------   ------

            Accumulated depreciation and amortization:
              Building and improvements                           -      372
              Machinery, equipment and laboratory fixtures   31,371   26,382
              Leasehold improvements                          5,563    4,899
              Office furniture, equipment and software        3,223    2,987
                                                             ------   ------
                                                             40,157   34,640
                                                             ------   ------
            Property, plant and equipment, net              $19,668  $25,315


      In September  1999,  the Company  completed a  sale/leaseback  of its only
owned facility. The approximately 31,000 square foot facility,  which is used as
a warehousing and testing facility, was sold for approximately $2.1 million with
a loss on the sale of $378,000.

      In  1996,  the  Company  entered  into an  agreement  which  included  the
assumption of an operating lease of a 35,000 square foot manufacturing  facility
and the purchase and capital lease of equipment and leasehold improvements.  See
Note 8 for further description of the transaction.


                                       79
<PAGE>

(6)  INVESTMENT IN AFFILIATE

      In 1999,  the Company sold the remaining  125,000 shares of its investment
in IVAX  Corporation  stock.  The gross  proceeds and the realized gain from the
sales were $1.6 million and $952,000, respectively.

      In accordance with SFAS No. 115,  "Accounting  for Certain  Investments in
Debt and Equity Securities," equity securities  classified as available-for-sale
are  reported  at fair value,  with  unrealized  gains and losses  reported as a
separate  component  of  shareholders'   equity.  As  a  result,  the  Company's
investment  in its  affiliate  is  reflected  at its current  market value as of
December 31, 1998, of $1.6 million (original cost of $629,000).

      The  market  values  of these  securities  as of  December  31,  1998,  as
disclosed on the accompanying  consolidated balance sheet, were determined based
on the closing prices for registered securities of IVAX on that date.


(7) OTHER CURRENT LIABILITIES

      Other current liabilities consisted of the following components:

                                                            As of December 31,
                                                            ------------------
                                                              1999      1998
                                                              --------------
                                                              (in thousands)

            Payroll and fringe benefits                   $ 3,458      $ 1,702
            Accrued interest                                1,069        1,103
            Accrued taxes                                     833        1,149
            Reserve for contract loss                         720          720
            Accrued consulting and professional fees          462          353
            Accrued costs of clinical trials                  245          216
            Other accrued liabilities                         421          605
                                                         --------      -------
              Total other current liabilities             $ 7,208      $ 5,848
                                                         ========      =======


(8)  RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE

      In connection with an operating lease for a 35,000 square foot development
and production facility, the Company entered into an agreement that included the
purchase  and lease of  equipment  and  leasehold  improvements.  As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February  2001, but may be extended  through 2011.  Under
the terms of the equipment  lease,  there are certain  financial  covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes),  and certain other financial  ratios.  The equipment lease
agreement  permits the Company,  at its option,  to suspend the  application  of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application  of all  financial  covenants.  The letter of credit  decreases on a
monthly basis as the payments on the lease obligation are made and is secured by


                                       80
<PAGE>

a  restricted  cash  deposit of an equal  amount.  The  balance of the letter of
credit and the  corresponding  restricted  cash is $3.2  million at December 31,
1999.  The letter of credit will  expire by its terms on  November  1, 2000,  at
which time approximately $1.6 million will be released to the Company.


(9) COMMITMENTS AND CONTINGENCIES

      (a) OPERATING LEASES. The Company has extended its lease agreement for its
production  facility  through  February 28, 2009.  The Company has the option of
further extending this lease for an additional ten years. Under the terms of the
lease of this  facility,  the lessor  reimbursed  the  Company  for  $625,000 of
improvements  made to the property.  This  reimbursement has been reflected as a
deferred  rent  credit,  which was  amortized  over the initial base term of the
lease which expired  February 28, 1999.  The lease  provides for minimum  annual
escalations of the base rent. These escalations were recorded as expense ratably
over the term of the lease.

      In September  1999,  the Company  completed a  sale/leaseback  of its only
owned facility. The approximately 31,000 square foot facility,  which is used as
a warehousing and testing facility, was sold for approximately $2.1 million with
a loss on the sale of  $378,000.  The lease for the  facility  is for an initial
term of ten years, with two five-year  renewal options.  The initial base annual
rent under the lease is approximately $237,000 with minimum annual escalations.

      The Company has  terminated its lease for certain office space that it had
leased through December 31, 2000.

      As discussed in Note 8, in 1996 the Company assumed a lease to rent 35,000
square feet of space for a development and production  facility through February
1, 2001,  with two five-year  renewal  options.  The lease  provides for minimum
annual escalations of the base rent.

      In March 1998,  the Company  leased an  approximately  75,500  square foot
facility  to be used  for  research,  development,  general  and  administrative
functions and for future expansion of the Company's operations. The lease is for
an initial term of ten years,  with two five-year  renewal options.  The initial
base annual rent under the lease is  approximately  $981,000 with minimum annual
escalations.  At the end of the fifth year of the initial term,  the Company has
the right to terminate the lease for a specified  fee. In addition,  the Company
has an option to purchase the  facility  during  specified  periods of the lease
term.  The  landlord  provided  the Company a tenant  improvement  allowance  of
approximately $1.4 million.

      Minimum future lease  payments under all leases,  exclusive of real estate
tax escalations, are as follows:

                     YEARS ENDING
                     DECEMBER 31,
                     ------------
                     (in thousands)

                     2000                $ 2,054
                     2001                  1,745
                     2002                  1,719
                     2003                  1,766
                     2004                  1,813
                     Beyond                7,082
                                        --------
                        Total            $16,179
                                        ========


                                       81
<PAGE>

      Total rent expense was  $2,086,000,  $1,620,000,  and  $1,232,000 in 1999,
1998, and 1997, respectively.

      (b) CAPITAL  LEASE.  In  connection  with the  operating  lease  agreement
described in Note 8 that was entered into in 1996, the Company also entered into
an agreement  that  included the purchase and lease of equipment  and  leasehold
improvements.  The total acquisition cost was approximately $24.9 million, which
included a cash  payment of $17.2  million.  The  balance  of $7.7  million  was
financed  through an equipment  lease  obligation  which  expires on November 1,
2000, at which time the Company may purchase the equipment at the greater of its
then fair market value or approximately  $770,000. In 1997, the Company disposed
of  approximately  $457,000 of this  equipment  recognizing  a non-cash  loss of
approximately  $97,000.  The equipment lease has been accounted for as a capital
lease for financial reporting  purposes,  with monthly payments of approximately
$173,000. As of December 31, 1999, the total obligation under this capital lease
was $2.4 million. Total depreciation expense associated with equipment under the
capital lease was approximately $1.9 million,  $2.7 million and $4.1 million for
1999, 1998 and 1997, respectively. Under the equipment lease agreement there are
financial  covenants that obligate the Company to maintain  certain minimum cash
and  investment  balances,  a  minimum  tangible  net worth  and  certain  other
financial ratios. As discussed in Note 8, in 1998, as permitted by the equipment
lease agreement, the Company voluntarily posted a letter of credit in the amount
of $5.9 million,  thereby suspending the application of all financial covenants.
The letter of credit  decreases on a monthly  basis as the payments on the lease
obligation  are made and is secured  by a  restricted  cash  deposit of an equal
amount.  The  balance of the letter of credit and the  corresponding  restricted
cash is $3.2 million at December  31, 1999.  The letter of credit will expire by
its terms on November 1, 2000.  Minimum future lease payments  remaining in 2000
are $2,495,000,  which includes  interest of $139,000.  The Company also entered
into a financing agreement of capital lease of scientific equipment in the first
quarter of 1999.

      Minimum future (capital) lease payments are as follows:

                     YEARS ENDING
                     DECEMBER 31,
                     ------------
                     (in thousands)

                     2000 (includes interest of $150)       $ 2,550
                     2001 (includes interest of $6)              54
                     2002 (includes interest of $1)              32
                                                            -------
                        Total                                 2,636
                     Less interest component                  (157)
                                                            -------
                        Total principal payments            $ 2,479
                                                            =======

      (c) FILLING  CONTRACT.  The Company has entered into an  agreement  with a
contractor  to fill doses of its  Meningitis C vaccine for sale under a contract
with  the  NHS.  The  agreement  obligates  the  Company  to  fill  its  vaccine
requirements  prior to  November  9, 2000.  Should the  Company  terminate  this
agreement  prior to meeting  its  obligation  under this  agreement,  it will be
required to pay  liquidating  damages to the  contractor.  The damages  would be
approximately  $2.9 million  should no vaccine be filled and would decrease on a
sliding scale as the obligations are met.

      (d)  CONTINGENCIES.  In prior  years,  the  Company  was  awarded  various
cost-plus-fixed-fee  contracts  by the  National  Institute  of Child Health and
Human Development ("NICHD").  Performance under these contracts was completed in


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<PAGE>

1993. Provisional payments to the Company under cost-reimbursable  contracts are
subject to adjustment  upon  completion of audits of  reimbursable  costs by the
NICHD.  In the opinion of management,  adjustments,  if any,  resulting from the
audits of the  contracts are not expected to have a material  adverse  impact on
the Company's financial position or future results of operations.

      In March 2000, the Company settled a claim filed by its former  president.
The  Company  has  agreed  not to  disclose  the  terms of the  settlement.  The
settlement will not have a materially adverse impact on the Company's  financial
position or results of operations.

      The Company is, and from time to time becomes,  involved in various claims
and  lawsuits  that  are  incidental  to its  business.  In the  opinion  of the
Company's  management,  there are no other  material legal  proceedings  pending
against the Company.

(10) CONVERTIBLE DEBT

      In November 1998, the Company  completed a $25 million  financing  through
the private  placement of 4.5% Notes.  BioChem and Dr. Frost,  affiliates of the
Company,  purchased 4.5% Notes in the aggregate  principal  amount of $9 million
and $4.25 million,  respectively.  In addition,  Societe financiere d'innovation
inc. ("Sofinov") purchased 4.5% Notes in the aggregate principal amount of $6.25
million. Denis Dionne, a director of the Company, is the President of Sofinov.

      The 4.5% Notes were sold at par,  mature on November  13, 2003 and provide
for  interest  payable  semi-annually  on May 13 and  November  13 of each  year
commencing  on  May  13,  1999.   The  net  proceeds  from  this  offering  were
approximately  $24.6  million.  The 4.5% Notes are  convertible,  in whole or in
part, by the holder(s) at any time prior to maturity (unless previously redeemed
or  repurchased)  into shares of the  Company's  Common Stock at the  conversion
price of  approximately  $8.54 per share.  The conversion price was set based on
the average  closing  price of the  Company's  Common  Stock for the twenty (20)
trading   days    preceding    the   date   of   the    announcement    of   the
agreement-in-principle  between  the  Company and  prospective  purchasers.  The
measurement period for determining the conversion price began on August 26, 1998
and terminated on September 23, 1998. The closing prices of the Company's Common
Stock  during that period  ranged from a low of $6.875 to a high of $11.25.  The
4.5%  Notes  are  secured  by  certain  assets  of the  Company;  are  otherwise
subordinated in right of payment to all existing and future senior  indebtedness
of the  Company,  do not  restrict  the  incurrence  of  future  senior or other
indebtedness  of the Company  and are  redeemable,  in whole or in part,  at the
option of the  Company  on or after one year from the date of  issuance  at par,
plus accrued  interest to the  redemption  date.  Upon a change in control,  the
Company is required to offer to purchase all of the 4.5% Notes then  outstanding
at a  purchase  price  equal  to  100% of the  principal  amount  thereof,  plus
interest.  The repurchase price will be payable in cash or, at the option of the
Company,  in shares of the Company's  Common Stock (valued at 95% of the average
closing  prices  of  the  Common  Stock  for a  specified  period  prior  to the
repurchase date).

      The 4.5% Notes are not  registered  under the  Securities  Act of 1933, as
amended,  ("1933 Act") or any applicable  state or foreign  securities laws, and
were sold in reliance on prescribed exemptions from registrations under the 1933
Act and other applicable state or foreign securities laws.

      On November  12, 1998,  the date on which the 4.5% Notes were issued,  the
closing price for the  Company's  Common Stock was $12.625,  which  exceeded the
initial  conversion price for the 4.5% Notes. The difference between the initial
conversion price and the fair market value per share on the date of issue of the
4.5%  Notes,  for the  number of  equivalent  shares,  has been  recognized  and
recorded as paid in capital,  thus increasing the effective interest rate of the


                                       83
<PAGE>

4.5% Notes. Given that the 4.5% Notes are immediately convertible,  the interest
expense  of  approximately  $12.0  million  was  recognized  immediately  and is
included  in  the  accompanying  Consolidated  Statements  of  Operations.  This
interest expense is not deductible for U.S. or Canadian income tax purposes.

      In May 1996,  the  Company  completed  an  offering  of 6.5%  Notes in the
principal  amount of $86.25  million due May 1, 2003. The net proceeds from this
offering  were  approximately  $82.7  million.  Interest on the notes is payable
semi-annually  on  May 1 and  November  1 of  each  year.  The  6.5%  Notes  are
convertible  into  common  shares  of the  Company  at the  conversion  price of
approximately  $24.86  per common  share.  The 6.5%  Notes are  subordinated  to
present and future senior  indebtedness of the Company and will not restrict the
incurrence of future senior or other indebtedness by the Company. The 6.5% Notes
are  redeemable,  in whole or in part,  at the option of the Company on or after
May 1, 1999, at certain pre-established redemption prices plus accrued interest.
Upon a change in control,  the  Company is required to offer to purchase  all or
part of the notes  then  outstanding  at a purchase  price  equal to 100% of the
principal amount thereof, plus interest. The repurchase price is payable in cash
or, at the option of the  Company,  in common  shares.  In  December  1997,  the
Company issued 101,207 shares of common stock upon  conversion of the $2,516,000
principal amount of notes. In June 1999, the Company retired $8.4 million of the
6.5% notes in exchange for 550,000  shares of its common stock.  The  conversion
generated a non-cash debt conversion expense in 1999 of $940,000.

(11) LINES OF CREDIT

      In July 1999, the Company obtained from a bank a $6 million revolving line
of credit originally maturing December 31, 1999. The interest rate on borrowings
under the line of credit is LIBOR plus 265 basis points.  BioChem,  an affiliate
of the Company,  has provided  the  guarantee of the line of credit,  which will
remain in place for a maximum of two years,  unless there is a change of control
such as the contemplated acquisition by Baxter. Upon drawing down on the line of
credit by the Company,  BioChem was entitled to receive  warrants to purchase up
to a total of 750,000  shares of the Company's  Common Stock.  The warrants were
issued by the  Company  ratably as it drew down  under the line of credit.  Each
warrant  has a term of two  years  from  the  date of  issuance.  The per  share
exercise price under the warrant is approximately $5.14, which is the average of
the closing price of the Company's  Common Stock on the American  Stock Exchange
over five  trading  days that began on June 28 and ended on July 2,  1999.  Each
warrant contains  anti-dilution  provisions and registration  rights among other
provisions.  The Company drew down the $6 million in 1999,  under the  revolving
line of credit and  accordingly  issued  warrants to purchase  750,000 shares of
Common Stock to BioChem.

      The Company  recognized  approximately  $1.6  million of interest  expense
calculated  using the  Black-Scholes  pricing  model based upon the  issuance of
these  warrants to purchase up to 750,000  shares of common  stock.  The Company
recognized interest expense for the period beginning at the issuance date of the
warrants and ending on December 31, 1999,  the original  repayment  date for the
line of credit. The line of credit has been extended through May 31, 2000.

      Upon reaching a definitive  acquisition  agreement with Baxter in November
1999, the Company finalized terms relating to a secured revolving line of credit
from Bank of America,  N.A.,  which is guaranteed by Baxter.  The credit line is
for $30  million at an  interest  rate of LIBOR plus .625% and has a maturity of
March 31, 2000. The line of credit is secured by all of the Company's  otherwise
unencumbered assets, including patents, patent applications and receivables. The
Company may be required to repay any borrowed  funds under the facility on March
31,  2000.  There are no  assurances  that the  Company  would be able to obtain


                                       84
<PAGE>

additional  financing  to repay the loan or that such  financing,  if  obtained,
would be adequate to fund the ongoing operations of the Company.

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts reported in the Company's consolidated balance sheets
at  December  31,  1999  and  1998,  for cash  and  cash  equivalents,  accounts
receivable,   accounts  payable,  accrued  liabilities,   and  lines  of  credit
approximate  fair  values  due to  the  short  maturity  of  those  instruments.
Management  believes the carrying  value of the 4.5% Notes and the capital lease
obligation  approximate fair value. At December 31, 1999,  management  estimates
the fair value of the 6.5% Notes at approximately $59 million as determined by a
review of a December 31, 1999 trade of the 6.5% Notes.

(13) INCOME TAXES

      The operations of the Company are taxed under Canadian income tax laws and
the  operations of its United States branch are taxed under United States income
tax laws subject to  applicable  treaty  provisions  for the avoidance of double
taxation. The Company's wholly owned subsidiaries,  American Vaccine Corporation
and AMVAX, Inc. ("AMVAX"), are both taxed under United States income tax laws.

      In 1999,  1998 and  1997,  the  Company  incurred  a loss for  income  tax
reporting purposes in Canada and the United States.

      The components of the net deferred tax assets consisted of:

                                                            AS OF DECEMBER 31,
                                                            ------------------
                                                          1999            1998
                                                          --------------------
                                                             (in thousands)

            Deferred tax assets:
            Net operating loss carryforwards           $65,057        $48,348
            Accrued intercompany interest                7,597          6,046
            Depreciation and amortization                3,194          2,581
            Inventory cost capitalization                  827              -
            Reserve for contract loss                      278            278
            Deferred rent                                   17              7
            Other                                        2,602          3,240
                                                         -----        -------
              Total deferred tax assets                 79,572         60,500

            Deferred tax liabilities:
            Historical accrual to cash difference            -          (745)
            Investments in affiliates                        -          (312)
                                                      --------       --------
              Total deferred tax liability                   -        (1,057)
                                                      --------       --------

            Net deferred tax assets before allowance    79,572         59,443
            Less:  Valuation allowance                (79,572)       (59,443)
                                                      --------        -------
            Net deferred tax assets                   $      -       $      -
                                                      ========       ========


                                       85
<PAGE>

      The Company has determined that $79.6 million in 1999 and $59.4 million in
1998 of net  deferred  tax assets do not satisfy the  recognition  criteria  set
forth in SFAS No. 109.  Accordingly,  a valuation allowance was recorded against
the applicable net deferred tax assets.

      At December 31, 1999, the Company had net operating loss  carryforwards of
approximately  $167.6 million. Of this consolidated  total,  approximately $52.4
million of the  Company's  net  operating  loss  carryforwards  are available to
offset future Canadian-sourced  taxable income, if any. These loss carryforwards
expire  between 2000 and 2006. Of the remaining  balance,  American  Vaccine and
AMVAX had net operating loss  carryforwards of approximately  $114.3 million and
$911,000, respectively, available to offset future United States taxable income,
if any. These loss carryforwards expire between 2003 and 2019.

      The net  operating  loss  carryforwards  available to be used in any given
year may be limited due to significant  changes in ownership interests resulting
from future stock issuances or other changes in equity interests.


(14) INDEMNIFICATION AGREEMENT

      In connection with the Merger described in Note 1, certain shareholders of
American Vaccine with significant ownership interests were required to file gain
recognition  agreements with the United States Internal Revenue  Service.  Under
the terms of the gain recognition agreements,  these shareholders have agreed to
amend their income tax returns for 1990 if the Company disposes of substantially
all of the stock or assets of American  Vaccine  prior to the end of 2000.  With
those amended returns, the shareholders will be required to pay tax based on the
difference  between  their basis in  American  Vaccine  stock and the value,  at
February 28, 1990,  of the Company stock  received in the Merger,  plus interest
from the time of the Merger to the  disposition  of  American  Vaccine  stock or
assets by the Company.

      In connection with the Merger, the Company entered into an indemnification
agreement with these  shareholders of American  Vaccine whereby the Company will
(i) lend to the affected shareholders,  on an interest-free and after-tax basis,
an amount equal to the taxes to be paid with the amended tax  returns;  and (ii)
pay to the  affected  shareholders,  on an  after-tax  basis,  any  interest and
penalties  with  respect to the taxes to be paid with the amended  tax  returns.
Under  the  terms  of the  indemnification  agreement,  repayment  of the  loans
described  above will only be  required  at the time and to the extent  that the
affected  shareholders  receive  benefit from the resulting  increase in the tax
basis of their Company  stock.  There can be no assurance  that any such benefit
will be received.

      The ultimate amount of this potential liability,  if any, is not presently
determinable  but will be based on the amount of gain,  interest rates in effect
during the period, and the length of time between the consummation of the Merger
and the event triggering the gain recognition.  Based on current interest rates,
the Company  estimates that, in the event that the gain  recognition  would have
occurred at December  31, 1999,  its  obligations  to the affected  shareholders
could approximate $15.7 million.


(15) LICENSE AGREEMENTS

      Certain of the conjugate  vaccine-related  technologies transferred to the
Company  by  BioChem  in  connection  with the  Merger  are  licensed  under two
agreements with the National  Research Council of Canada (the "NRC"), a Canadian
federal governmental agency. Under these license agreements, the Company will be
required to pay royalties to the NRC on all sales of such licensed  products and
related services.  Certain minimum annual royalties are payable  irrespective of


                                       86
<PAGE>

the  volume  of sales of such  products  and  services.  BioChem  has  agreed to
reimburse the Company for 10% of these minimum annual royalties. BioChem's share
of minimum annual  royalties was less than five thousand  dollars in each of the
last three  years.  The NRC has the right to  terminate  the license  agreements
under certain specified conditions including if it concludes that all reasonable
efforts are not being used to develop and commercialize the technologies.

      The  Company  has  a  license   agreement  with  the  National   Technical
Information Service (the "NTIS"), an agency of the United States government,  to
bring the method of preparing  the acellular  pertussis  vaccine to the point of
practical  application.  In return,  the NTIS  granted the Company an  exclusive
license to make,  have made,  use and sell the  vaccine  following  approval  of
commercial sale by the FDA. Under the agreement, the Company pays to the NTIS an
annual   maintenance  fee  and  a  royalty  based  on  sales  or  other  similar
dispositions  of the vaccine.  The exclusive  rights under this  agreement  will
terminate seven years from the date of the first commercial sale of the vaccine,
which was on October  29,  1998.  The  Company  has  acquired a  royalty-bearing
exclusive  license for the use of this patented  technology  in certain  foreign
jurisdictions for the full term of the patents.


(16)  SHAREHOLDERS' EQUITY

      (a)  PREFERRED  STOCK.  Preferred  shares  are  nonvoting  (other  than as
required by law) and may be issued in one or more series. The Company has issued
shares of Series A preferred stock, which are convertible,  at the option of the
holder,  into common  stock on the basis of two shares of common  stock for each
share of preferred stock held. The preferred stock had a liquidation  preference
of Can.  $2.50 per share or U.S.  $3.5 million in the  aggregate at December 31,
1999. The conversion ratio is subject to adjustment for certain dilutive events.

      (b) 1990  SHARE  OPTION  PLAN.  In 1990,  the  Company  adopted  the North
American Vaccine,  Inc. Share Option Plan (the "1990 Plan"),  which, as amended,
provided  for the  issuance  of up to  3,650,000  shares of its common  stock to
officers, directors,  employees and consultants. The 1990 Plan, which expired in
February 1995,  provided that options be granted at no less than market value on
the date of grant. In 1997, the Company extended the expiration date for options
to purchase 150,000 shares of common stock  previously  granted under this plan.
The Company recognized  approximately  $1.3 million of expense  representing the
difference  between the fair market value and the exercise  price of the options
on the date of the extension in 1997. For accounting purposes, the extensions of
these options have been treated as new grants.

      (c) 1995  SHARE  OPTION  PLAN.  In 1995,  the  Company  adopted  the North
American Vaccine,  Inc. 1995 Share Option Plan (the "1995 Plan"), which provides
for the  issuance of up to  1,000,000  shares of its common  stock to  officers,
directors,  employees  and  consultants.  The 1995 Plan,  which expires in March
2000,  provides that options be granted at no less than market value on the date
of the grant and may have a term of up to 10 years.

      (d) 1997  SHARE  OPTION  PLAN.  In 1997,  the  Company  adopted  the North
American Vaccine,  Inc. 1997 Share Option Plan (the "1997 Plan"), which provides
for the  issuance of up to  5,000,000  shares of its common  stock to  officers,
directors,  employees and consultants.  The 1997 Plan, which expires in December
2007,  provides that options be granted at no less than market value on the date
of the grant and may have a term of up to 10 years.  Upon a change of control of
the Company,  all outstanding  stock options granted under the 1997 Share Option
Plan become fully exercisable.



                                       87
<PAGE>

      The following table summarizes option activity outside of any formal stock
option  plan and  under the 1990  Plan,  the 1995 Plan and the 1997 Plan for the
period from December 31, 1996, through December 31, 1999:

<TABLE>
<CAPTION>

                                          Number of Shares
                                          ----------------
                                   1990 Plan  1995 Plan  1997 Plan  Non-Plan    Exercise   Wtg.Avg.
                                    Options    Options    Options    Options      Price   Exer.Price
                                   -----------------------------------------------------------------
<S>                                <C>       <C>        <C>         <C>      <C>           <C>

Balance at December 31, 1996       1,199,682   499,500         --    115,624 $ 2.92-21.50  $ 11.59
Granted                              150,000   500,500         --         --  11.13-24.50    18.69
Exercised                          (230,964)  (19,291)         --   (57,812)   9.00-13.88     9.66
Expired or canceled                (153,069)  (67,738)         --         --   9.13-24.50    14.68
                                   ---------------------------------------------------------------
Balance at December 31, 1997        965,649    912,971         --     57,812   2.92-24.50    13.93

Granted                                  --     60,000    879,700         --   8.75-19.94     9.96
Exercised                         (368,938)    (3,365)         --         --   9.00-13.88    12.44
Expired or canceled               (200,603)  (146,207)         --         --   9.00-24.50    14.52
                                   ---------------------------------------------------------------
Balance at December 31, 1998        396,108    823,399    879,700     57,812   2.92-24.50    12.37

Granted                                  --    100,000    138,300         --   5.25-20.25    11.75
Exercised                                --         --         --     57,812         2.92     2.92
Expired or canceled               (347,387)  (271,531)  (187,934)         --   8.75-24.50    12.74
                                   ---------------------------------------------------------------
Balance at December 31, 1999         48,721    651,868    830,066         --   5.25-24.50    12.29
</TABLE>


      At December 31, 1999, under the 1990 Plan, outstanding options to purchase
an aggregate of 48,721 common shares were exercisable at $9.13 per share, and no
options were  available  for grant.  At December 31, 1999,  under the 1995 Plan,
options to purchase an aggregate of 581,246  common shares were  exercisable  at
prices ranging from $11.25 to $24.50 per share (weighted  average exercise price
per share of $16.14),  and 325,476 options were available for grant. At December
31,  1999,  under the 1997 Plan,  options to  purchase an  aggregate  of 233,928
common shares were  exercisable at prices ranging from $8.75 to $10.63 per share
(weighted  average exercise price per share of $9.42) and 4,169,934 options were
available for grant.

      The  weighted-average  per share grant date fair value of options  granted
during 1997 for the 1990 Plan was $13.16. The  weighted-average  per share grant
date fair value of options  granted during 1999, 1998 and 1997 for the 1995 Plan
was $0.52,  $10.62, and $12.32,  respectively.  The  weighted-average  per share
grant date fair value of options  granted during 1999 and 1998 for the 1997 Plan
was $3.91 and $5.49, respectively.

      (e) 1990  NON-EMPLOYEE  DIRECTOR  AND SENIOR  EXECUTIVE  STOCK OPTION PLAN
("1990 SESOP").  In 1990, the Company adopted the 1990 SESOP, which, as amended,
provided for the  issuance of up to 1,850,000  shares of its common stock to all
the Company's non-employee directors, and senior executives who are residents of
Canada.  Under the 1990  SESOP,  which  expired in October  1995,  options  were
granted  automatically to each non-employee  director annually on January 1. The
1990 SESOP  required  that the  exercise  price must not be less than the market
value  of the  stock  at the  date of  grant.  Options  issued  to  non-employee
directors  under the 1990  SESOP are  exercisable  in  Canadian  currency,  vest
ratably  over a period of three  years and  expire  five  years from the date of
grant.  Upon a change of control of the Company,  all outstanding  stock options


                                       88
<PAGE>

granted under the 1990 SESOP become fully exercisable.

      (f) 1995  NON-EMPLOYEE  DIRECTOR  AND SENIOR  EXECUTIVE  STOCK OPTION PLAN
("1995 SESOP").  In 1995, the Company adopted the 1995 SESOP, which provides for
the issuance of up to 500,000  shares of its common  stock to all the  Company's
non-employee  directors,  and its senior executives who are residents of Canada.
Under  the 1995  SESOP,  which  expires  in March  2000,  options  were  granted
automatically  to each  non-employee  director  annually  on January 1. The 1995
SESOP requires that the exercise price must not be less than the market value of
the stock at the date of grant.  Options issued to  non-employee  directors vest
ratably  over a period of three  years  and  expire  ten years  from the date of
grant.  Upon a change of control of the Company,  all outstanding  stock options
granted under the 1995 SESOP become fully exercisable.

      (g) 1999  NON-EMPLOYEE  DIRECTOR  AND SENIOR  EXECUTIVE  STOCK OPTION PLAN
("1999 SESOP").  In 1999, the Company adopted the 1999 SESOP, which provides for
the issuance of up to 650,000  shares of its common  stock to all the  Company's
non-employee  directors,  and its senior executives who are residents of Canada.
Under the 1999  SESOP,  which  expires  in January  2009,  options  are  granted
automatically  to each  non-employee  director  annually  on January 1. The 1999
SESOP requires that the exercise price must not be less than the market value of
the stock at the date of grant.  Options issued to  non-employee  directors vest
ratably  over a period of three  years  and  expire  ten years  from the date of
grant.  Upon a change of control of the Company,  all outstanding  stock options
granted under the 1999 SESOP become fully  exercisable.  No options were granted
under the plan as of December 31, 1999, and the plan was  suspended indefinitely
in December 1999, and accordingly no options were granted in January 2000.

      The following table  summarizes  option activity under the 1990 SESOP plan
and the 1995 SESOP plan from December 31, 1996, through December 31, 1999:

<TABLE>
<CAPTION>

                                   1990          1995
                                  SESOP          SESOP            Exercise Price         Wtg.Avg.
                               Plan Options   Plan Options      Can.$       U.S. $  Exer.Price(U.S.)
                               ------------------------------------------------------------------
   <S>                             <C>    <C>    <C>    <C>    <C>    <C>

   Balance at December 31, 1996   490,000        120,000 $11.75-15.10  $8.58-14.13   $ 10.82
   Granted                             --        130,000           --        24.38     24.38
   Exercised                    (190,000)             --  12.88-15.10   9.01-10.56     10.31
   Expired or canceled                 --             --           --           --        --
                               -------------------------------------------------------------
   Balance at December 31, 1997   300,000        250,000  11.75-14.56   8.22-24.38     13.83

   Granted                             --        130,000           --        24.94     24.94
   Exercised                     (90,000)             --  12.88-14.56    8.42-9.52      8.54
   Expired or canceled                 --       (20,001)           --  14.13-24.94     22.95
                               -------------------------------------------------------------
   Balance at December 31, 1998   210,000        359,999  11.75-14.56   7.68-24.94     16.57

   Granted                             --        130,000           --         8.88      8.88
   Exercised                           --             --           --           --        --
   Expired or canceled          (100,000)        (9,999)        14.56  10.08-24.38     10.26
                               -------------------------------------------------------------
   Balance at December 31, 1999   110,000        480,000        11.75   8.14-24.94     16.14
</TABLE>


                                                 89
<PAGE>

      At  December  31,  1999,  under  the  1990  SESOP,  110,000  options  were
exercisable at Can. $11.75 (U.S. $8.14 ) per share and no options were available
for grant under the 1990  SESOP.  At December  31,  1999,  under the 1995 SESOP,
229,988  options were  exercisable  at prices  ranging from U.S.  $14.13 to U.S.
$24.94 per share  (weighted  average U.S.  price of $19.57),  and 20,000 options
were available for grant. The  weighted-average  per share grant date fair value
of options  granted during 1999,  1998 and 1997 for the 1995 SESOP plan was U.S.
$6.51, $16.96, and $15.92, respectively.

      (h) STOCK BASED  COMPENSATION  PLANS.  The Company  applies the  intrinsic
value based method of accounting pursuant to APB Opinion No. 25, "Accounting For
Stock Issued To Employees," and related  interpretations for option grants under
its stock based compensation plans.  Accordingly,  no compensation cost has been
recognized in the accompanying  financial statements.  Had compensation cost for
the  Company's  five stock option plans been  determined on the fair value based
method of SFAS 123,  "Accounting  for  Stock-Based  Compensation,"  at the grant
dates for awards under these plans,  the  Company's  net loss and loss per share
for 1999,  1998 and 1997 would  have been  $52.6  million or a loss of $1.61 per
share,  $61.0 million or a loss of $1.90 per share,  and $49.3 million or a loss
of $1.56 per share, respectively.

      The  Black-Scholes  option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
characteristics  significantly  different  from  those of  traded  options,  and
because changes in the subjective  input  assumptions can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily  provide a reliable single measure of the fair value of its employee
stock options.

      Pursuant to SFAS 123,  the fair value of each option grant is estimated on
the date of grant using a Black-Scholes  option pricing model with the following
weighted  average   assumptions  used  for  grants  in  1999,  1998,  and  1997,
respectively:  risk-free interest rates of 6.43 percent for the 1990 Plan option
extensions,  5.50-6.99 percent for the 1995 Plan options,  4.34-6.25 percent for
the 1997 Plan options,  and  4.34-6.79  percent for the 1995 SESOP  options;  no
expected  dividend  yields;  expected  lives of 4 years for the 1990 Plan option
extensions, between 1.5 and 8 years for the 1995 Plan options, between 1.5 and 8
years for the 1997 Plan,  and 8 years for the 1995 SESOP  options;  and expected
volatilities of 78, 65 and 58 percent.  Of the 2,120,655 options  outstanding at
December  31,  1999,   1,203,883  options  have  a  weighted  average  remaining
contractual  life  of  approximately   5.8  years.  All  of  these  options  are
exercisable.  The remaining  916,772 options have a weighted  average  remaining
contractual life of approximately 8.7 years.

(17) RETIREMENT AND SAVINGS 401(K) PLAN AND TRUST

      The Company's  Retirement  and Savings  401(k) Plan and Trust (the "Plan")
became effective April 1, 1991. The Plan is a qualified profit-sharing plan with
a  cash  or  deferred  compensation   arrangement  and  discretionary   matching
contributions. Under the Plan, eligible employees may elect to contribute to the
Plan by  salary  deferrals  up to an  annual  limit,  which is the  lesser of 20
percent of a  participant's  annual  compensation or the maximum allowed by law,
and the Company may contribute  matching amounts as provided by the Plan. Salary
deferrals  and matching  contributions  are vested  immediately.  The  Company's
matching  expense,  contributed in the form of the Company's  common stock,  was
$243,000, $309,000, and $251,000 for 1999, 1998, and 1997, respectively.

      The Company may elect to make additional  contributions  to the Plan, from
its  current  or  accumulated  net  profits,  in the  form of a  profit  sharing
contribution.  This  discretionary  contribution  will be made for all  eligible


                                       90
<PAGE>

participants  regardless of whether such  participants make any salary deferrals
for that plan year. Profit sharing  contributions are vested ratably over a five
year  period.  From  inception  of the Plan,  the  Company has not made a profit
sharing contribution.

      The Plan provides for an overall  limitation with respect to the amount of
contributions  (including  Company match,  if any) which can be allocated to any
participant in any plan year.  This  limitation is the lesser of 25 percent of a
participant's annual compensation or the maximum allowed by law.

(18) RELATED-PARTY TRANSACTIONS

      In the Merger,  as discussed in Note 1, the Company and BioChem granted to
each other a one time demand registration right (with expenses to be paid by the
party exercising the  registration  right) and certain  piggy-back  registration
rights,  through January 17, 1995. In connection with a proposed offering of the
Company's  stock in 1994 by both  BioChem and the  Company,  which  offering was
later withdrawn at BioChem's  request,  BioChem's  one-time demand  registration
right was  extended  through  January  17,  1998,  and at that time was  further
extended to January 17, 2001.

      In April 1998, the Company extended a loan to its then president,  related
to  the  exercise  of  expiring  stock  options.   The  loan  was  comprised  of
approximately  $1.0  million for the  exercise of the options and  $217,000  for
payment of withholding  taxes.  The loan was made on a full recourse basis,  was
for a six month period,  was  collateralized  by approximately  94,000 shares of
common  stock of the  Company,  which at the time of the loan had a fair  market
value of 125% of the principal  amount of the loan. The loan accrued interest at
a fair market  rate,  was repaid in full at maturity  in October  1998,  and the
related collateral has been released.

      In 1998, the Company completed a $25 million financing through the private
placement of an offering of 4.5% Notes. BioChem and Dr. Frost, affiliates of the
Company,  purchased 4.5% Notes in the aggregate  principal  amount of $9 million
and  $4.25,  respectively.  In  addition,  Sofinov  purchased  4.5% Notes in the
aggregate  principal  amount of $6.25 million.  Denis Dionne,  a director of the
Company, is the President of Sofinov. See Note 10 for further details.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      None.




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<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

      Following is a list of the Company's directors:

       NAME                     AGE(1)         POSITION
       ----                     ------         --------
Neil W. Flanzraich                56      Director; Chairman
Francesco Bellini, Ph.D.          52      Director; Vice Chairman
Phillip Frost, M.D.               63      Director; Vice Chairman
Randal D. Chase, Ph.D.            50      Director; Chief Executive Officer and
                                          President
Alain Cousineau                   58      Director
Jonathan Deitcher                 53      Director
Denis Dionne                      50      Director
Gervais Dionne, Ph.D.             53      Director
Lyle Kasprick                     67      Director
Francois Legault                  43      Director
Richard C. Pfenniger, Jr.         44      Director
---------------------------
  (1) As of March 1, 2000.

      The  Company's  directors  are  elected  at  each  annual  meeting  of the
Company's  shareholders  and serve until the next annual meeting of shareholders
or until their  respective  successors are duly elected and qualified,  or their
prior resignation or removal. There are no family relationships among any of the
executive  officers  or  directors  of  the  Company.   Under  the  terms  of  a
Shareholders'  Agreement,  the Company's  principal  shareholders have agreed to
vote together for the election of directors. See Item 13 - Certain Relationships
and Related Transactions. Background information regarding each of the Company's
directors is set forth below.

      NEIL W.  FLANZRAICH:  Director  of the  Company  since  October  1989  and
Chairman  since January 1995;  Vice Chairman and President  since May 1998 and a
director  since  1997 of IVAX  Corporation  ("IVAX")  (pharmaceutical  company);
shareholder with law firm of Heller Ehrman White & McAuliffe and Chairman of the
Life Sciences Group of that firm from  September 1995 through May 1998;  General
Counsel,   Senior  Vice  President  and  Secretary  of  Syntex  (U.S.A.),   Inc.
(pharmaceutical  company), a subsidiary of Roche Holding Ltd., from January 1995
to August 1995;  General Counsel from January 1992 to December 1994,  Co-General
Counsel from August 1987 through  January 1992,  and Senior Vice  President from
June 1981 to  December  1994 of Syntex  Corporation,  a  pharmaceutical  company
acquired  by  Roche  Holding  Ltd.  at the  end of  1994;  Director  of  Whitman
Educational   Group,   Inc.   (operator  of  degree  and   non-degree   granting
post-secondary  schools)  since 1997;  and Director of  Continucare  Corporation
(health-care management) since January 1998.

      FRANCESCO BELLINI,  PH.D.:  Director of the Company since October 1989 and
Vice Chairman since June 1991;  President from September 1986 to May 1998, Chief
Executive  Officer  since  October 1986 and  Director  since  September  1986 of
BioChem Pharma Inc.
("BioChem") (pharmaceutical company).

      PHILLIP FROST,  M.D.:  Director of the Company since October 1989 and Vice
Chairman since December 1990;  Chairman of the Board and Chief Executive Officer
of IVAX since 1987 and  President  from July 1991 to January  1995;  Chairman of
Whitman  Education  Group,  Inc.  since  1992;   Director  of  Northrop  Grumman
Corporation  (aerospace  company)  since 1996;  Vice  Chairman  and  Director of
Continucare  Corporation  since 1996; a trustee of the University of Miami since
1983;  and a member of the Board of  Governors of the  American  Stock  Exchange
since 1992.

      RANDAL D. CHASE,  PH.D.:  Chief  Executive  Officer and  President  of the
Company  since October 1998;  President and Chief  Executive  Officer of Aventis
Pasteur (Canada)  (pharmaceutical company) from January 1996 to October 1998 and
also  served  as a  member  of  the  Executive  Committee  for  Aventis  Pasteur
(Worldwide),  as Chairman of Aventis Pasteur  (Mexico) and a member of the Board
of Directors of Rhone-Poulenc  Canada (a pharmaceutical  company); and from July
1993 to January 1996, Dr. Chase was with QLT  Phototherapeutics (a biotechnology
company)  holding various  positions  including:  Director,  President and Chief
Executive Officer, and Vice President and Chief Operating Officer.


                                       92
<PAGE>

      ALAIN COUSINEAU:  Director of the Company since October 1989;  Chairman of
the Board of Groupe SECOR Inc.  (management  consultants in corporate  strategic
planning)  since  February 1993 and President  from  September  1985 to February
1993;  Partner of Groupe SECOR Inc.  since July 1983;  Director of Bioniche Life
Sciences Inc.  (biopharmaceutical  company) since September 1996 and Heroux Inc.
(manufacture  and repair of aerospace and industrial  products)  since September
1999, both of which are public companies trading on the Toronto Stock Exchange.

      JONATHAN DEITCHER:  Director of the Company since February 1990;  Director
and Vice President of RBC Dominion  Securities  (securities  investment  dealer)
since  May  1984;  and  Director  of  Renaissance   Energy  Ltd.  (oil  and  gas
exploration)  since  1982 and  Vincor  International  Inc.  (wine  producer  and
retailer) since November 1993, both of which are public companies trading on the
Toronto Stock Exchange.

      DENIS DIONNE:  Director of the Company  since  October 1989;  President of
Societe financiere  d'innovation inc. ("Sofinov"),  a high technology investment
fund that is a subsidiary  of La Caisse de dep6t et  placement du Quebec,  since
April 1996;  and Senior  Vice  President,  Economic  Development  and  Strategic
Investments  from 1995 to March 1996,  and Senior Vice  President,  Security and
Investment  from 1988 to March 1996, of Fonds de Solidarite des  Travailleurs du
Quebec, an investment fund.

      GERVAIS DIONNE,  PH.D.:  Director of the Company since May 1998; currently
Chief  Scientific  Officer of BioChem;  Executive Vice  President,  Research and
Development  of BioChem  since  November  1994;  President  and Chief  Executive
Officer of BioChem Therapeutics Inc. (pharmaceutical company) from February 1993
to November  1994;  Vice  President,  Research and  Development  of BioChem from
September  1986 to November  1994;  Director of BioChem since 1991;  Director of
BioChem  Therapeutics Inc. from 1993 to 1998; Director of GeneChem  Technologies
(investment  fund) since May 1997;  and Director of  Scriptogen  Pharmaceuticals
Inc.

      LYLE  KASPRICK:  Director of the Company  since  October 1989 and Chairman
from June 1991 to January 1995;  private  investor since March 1988;  and, since
June 1993, a member of the Board of Directors  and the  Investment  Committee of
the University of North Dakota Foundation.

      FRANCOIS  LEGAULT:  Director  of the  Company  since June 1996;  Executive
Vice-President  Corporate  Development and Investments of BioChem since February
1997; Senior Vice President,  Finance,  Administration and Treasurer of BioChem,
from February 1993 to February 1997; and Vice  President,  Finance and Treasurer
of BioChem from 1987 to February 1993.

      RICHARD C.  PFENNIGER,  JR.:  Director  of the Company  since 1992;  Chief
Executive Officer and Vice Chairman of Whitman Education Group, Inc. since March
1997 and Director since 1992;  Chief Operating  Officer of IVAX from May 1994 to
March 1997;  and Senior Vice  President -- Legal Affairs and General  Counsel of
IVAX from 1989 to May 1994 and Secretary from 1990 to April 1994.

EXECUTIVE OFFICERS

      The following table  identifies the executive  officers of the Company and
the positions  that they hold.  Officers of the Company are elected by the Board
of Directors at the annual meeting  thereof to hold office until  successors are
elected and qualified, or their prior resignation or removal.


                                       93
<PAGE>




      NAME (1)                   AGE (2)          POSITION
      ----                       ---              --------

Randal D. Chase, Ph.D. (3)        50       Chief Executive Officer and
                                             President
Stephen N. Keith, M.D., MSPH      47       Vice President - Marketing & Sales
Wayne Morges, Ph.D.               53       Vice President - Quality/Regulatory
                                            Affairs
Joan D.S. Fusco, Ph.D.            44       Vice President - Business
                                            Development
C. Jo White, M.D.                 45       Vice President - Clinical
                                            Development
Lawrence J. Hineline              43       Vice President - Finance
----------------------

(1) These  persons  are  "executive  officers"  for  purposes of the rules and
    regulations of the Securities and Exchange Commission.
(2) As of January 1, 2000.
(3) See background description under "Directors" above.

    Background  information  regarding each of  the Company's senior  management
is set forth below:

      STEPHEN N. KEITH, M.D., M.S.P.H.:  Vice President - Marketing and Sales of
the Company since August 1995; from 1990 to 1995, Dr. Keith was with Merck & Co.
(pharmaceutical  company) holding various positions including:  Senior Director,
Merck-Medco  Managed Care Division;  Senior Customer Manager,  U.S. Human Health
Division; and Senior Director, Corporate Public Affairs.

      WAYNE MORGES,  PH.D.: Vice President -  Quality/Regulatory  Affairs of the
Company since January 1995;  Vice President --  Manufacturing  Operations of the
Company from June 1994 to January  1995;  and from 1981 to 1994,  Dr. Morges was
with Merck & Co.  holding  various  positions  including:  Senior  Director  and
Responsible  Head,  Biological  Quality Control;  Director,  Biological  Quality
Control;  Manager,  Hepatitis  Vaccines and Recombinant  Products;  and Manager,
Biological Quality Control Technical Services.

      JOAN D.S.  FUSCO,  PH.D.:  Vice  President - Business  Development  of the
Company since January 1997; Director of Business Development of the Company from
1995 to  January  1997;  and from 1991 to 1994,  Dr.  Fusco  served  in  various
scientific and research positions with the Company.

      C. JO WHITE,  M.D.: Vice President -- Clinical  Development of the Company
since  March  1999;  Senior  Vice  President  -  Medical  Affairs  of  Aviron (a
biopharmaceutical/vaccine  company) from  September  1997 to January 1999;  Vice
President -- Clinical Development of the Company from February 1997 to September
1997; Vice President,  Clinical Development of PPD Pharmaco, a clinical research
organization from 1996 to January 1997;  pharmaceutical industry consultant from
1995 to 1996;  from 1987 to 1995, Dr. White was with Merck & Co. holding various
positions including Senior Director, Clinical Research.

      LAWRENCE  J.  HINELINE:  Vice  President  - Finance of the  Company  since
November 1993.

      SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended (the
"1934 Act"),  requires the  Company's  executive  officers  and  directors,  and
persons who own more than ten percent of the  Company's  Common  Stock,  to file
initial  reports of ownership  and reports of changes in ownership  with the SEC
and the  American  Stock  Exchange  (the  "AMEX"),  the  exchange  on which  the
Company's Common Stock is listed for trading. Executive officers,  directors and


                                       94
<PAGE>

greater than ten-percent  shareholders  (collectively,  the "Reporting Persons")
are  required  by SEC  regulations  to furnish  the  Company  with copies of all
Section 16(a) forms they file.

      Based  solely on  review of the  copies  of such  forms  furnished  to the
Company, and written  representations by the Reporting Persons received to date,
the Company  believes that with respect to the year ended December 31, 1999, all
Section 16(a) filing requirements  applicable to the Reporting Persons were met,
except that one monthly report,  covering one transaction,  was not timely filed
by BioChem,  an affiliate of the Company.  The Company is not aware of any other
exceptions.








                                       95
<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

      SUMMARY COMPENSATION TABLE

      The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years  awarded to (1) the Chief  Executive  Officer and
President,  (2) the four other most highly compensated executive officers of the
Company for the year ended December 31, 1999 and (3) the Company's former Senior
Vice  President - Operations & Chief  Operating  Officer and former  Senior Vice
President  -  Legal  Affairs  &  General  Counsel   (collectively,   the  "Named
Officers").

<TABLE>
<CAPTION>

                                        ANNUAL COMPENSATION
                                                                                LONG-TERM
-------------------------       ------------------------------------          COMPENSATION
                                                                                 AWARDS
-------------------------                                                    -------------
   NAME AND PRINCIPAL         YEAR    SALARY      BONUS       OTHER ANNUAL     SECURITIES     ALL OTHER
        POSITION                        ($)         ($)       COMPENSATION     UNDERLYING  COMPENSATION(2)
                                                                 (1)              OPTIONS         ($)
                                                                 ($)               (#)
---------------------------------------------------------------------------------------------------------
<S>                           <C>    <C>         <C>             <C>          <C>              <C>

----------------------------
Randal D. Chase, Ph.D. (3)    1999   $212,954    $155,000 (4)    --              --             $5,427
Chief Executive Officer       1998     32,778       --           --           250,000              104
& President                   1997       --         --           --              --                --
----------------------------
Stephen N. Keith, M.D., MSPH  1999    222,346      20,000 (5)    --              --              5,427
Vice President -              1998    207,800       --           --            25,000            5,623
Marketing & Sales             1997    207,800       --           --            25,000            5,374
----------------------------
Wayne Morges, Ph.D.           1999    232,956      10,000 (5)    --              --              5,427
Vice President -              1998    215,700       --           --            25,000            5,623
Quality/Regulatory Affairs    1997    215,700       --           --            25,000            5,374
----------------------------
C. Jo White, M.D. (6)         1999    158,333      20,000 (5)    --            50,000            3,173
Vice President -              1998      --          --           --              --                --
Clinical Development          1997    109,486       --           --            50,000            1,503
----------------------------
Lawrence J. Hineline          1999    149,800      10,000 (5)    --              --              4,921
Vice President - Finance      1998    140,000       --           --            25,000            4,823
                              1997    140,000       --           --              --              4,778
----------------------------
Arthur Y. Elliott, Ph.D.      1999    173,823 (7)   --           --           137,500 (8)      155,206
Former Senior Vice            1998    283,000       --           --            37,500            5,623
President - Operations &      1997    283,000       --           --            37,500            5,374
Chief Operating Officer
----------------------------
Daniel J. Abdun-Nabi          1999    189,608 (9)   --           --              --              4,123
Former Senior Vice            1998    224,100       --           --            25,000            5,623
President - Legal             1997    224,100       --           --            37,500 (10)       5,374
Affairs & General Counsel
----------------------------
</TABLE>


                                                 96
<PAGE>


      (1)  For 1999,  1998 and 1997 the  aggregate  amount of  perquisites,  and
           other  personal  benefits,  securities  or  property  for each  Named
           Officer is not reportable  under SEC rules because such amount is the
           lesser of either  $50,000 or 10% of the total annual  salary for each
           such Named Officer.

      (2)  Amounts of All Other  Compensation  for 1999  includes  (i)  matching
           contributions  made  by the  Company  in  fiscal  1999  to the  Named
           Officer's  retirement account under the North American Vaccine,  Inc.
           Retirement and Savings 401(k) Plan and Trust ($5,000 for Drs.  Chase,
           Keith, Morges, $2,850 for Dr. White, $4,494 for Mr. Hineline,  $2,500
           for Dr.  Elliott and $3,750 for Mr.  Abdun-Nabi),  (ii) the Company's
           cost  allocation of  supplemental  term life insurance ($427 for Drs.
           Chase,  Keith,  Morges and  Elliott  and Mr.  Hineline,  $323 for Dr.
           White, and $373 for Mr. Abdun-Nabi),  and (iii) $152,279 in severance
           pay for Dr. Elliott.  The matching 401(k)  contributions were made in
           the form of the Company's Common Stock through September 1999 and are
           included  in the table in Item 12 -  Security  Ownership  of  Certain
           Beneficial Owners and Management.

      (3)  Dr. Chase was first employed by the Company in November 1998.

      (4)  Includes $80,000  performance  bonus paid in 1999, as well as $75,000
           paid in 1999 under a retention package for Dr. Chase,  which provides
           for $50,000 upon signing of the Share Exchange Agreement, $25,000 per
           month  for  the  months  of  December  1999  through  April  2000 and
           $175,000 upon completion of the arrangement.

      (5)  Represents payments made in 1999 under retention agreements made with
           14 key employees,  including officers (other than the Chief Executive
           Officer),  for bonus  payments  equal to $690,000  in the  aggregate.
           $140,000  of these  payments  were  made  upon  signing  of the Share
           Exchange  Agreement,  $180,000  will be paid upon  completion  of the
           arrangement and $370,000 is payable upon the first anniversary of the
           signing of the Share Exchange Agreement, in each case contingent upon
           continued employment, satisfactory performance, successful completion
           of key milestones and other customary conditions.

      (6)  Dr. White was first  employed  with the Company from February 1997 to
           September  1997,  and then she rejoined the Company in February 1999.
           See Item 10 -  Directors  and  Executive  Officers  of  Registrant  -
           Executive Officers.

      (7)  Dr.  Elliott  retired  from the  Company  in June  1999 and  received
           retirement payments equal to 6-months' salary, all payable in 1999.

      (8)  In connection with his retirement, Dr. Elliott was granted extensions
           of three  previously  granted  options to purchase a total of 137,500
           shares of the Company's Common Stock.  Also, the vesting schedule for
           one of those options was amended.  No other terms of the options were
           changed.  The  extension  was  effective  as of June  16,  1999.  See
           "Compensation  of Executive  Officers - Option  Grants in Last Fiscal
           Year."

      (9)  Mr. Abdun-Nabi resigned from the Company in September 1999.

      (10) In addition to the grant of a new option to purchase 37,500 shares of
           the  Company's  Common  Stock under the  Company's  1995 Share Option
           Plan,  Mr.  Abdun-Nabi  was  granted  a  five-year   extension  of  a
           previously granted option to purchase 150,000 shares of the Company's
           Common Stock under the  Company's  former  Share  Option Plan,  which
           option was originally scheduled to expire on March 18, 1997. No other
           terms of the option were  changed.  The extension was effective as of
           March 6, 1997.


                                       97
<PAGE>

      The Company has entered into retention  agreements  with 14 key employees,
including officers (other than the Chief Executive Officer),  for bonus payments
equal to $690,000 in the  aggregate.  $140,000 of these  payments were made upon
the  signing  of the  Share  Exchange  Agreement,  $180,000  will be  paid  upon
completion of the arrangement and $370,000 is payable upon the first anniversary
of the signing of the Share Exchange  Agreement,  in each case  contingent  upon
continued  employment,  satisfactory  performance,  successful completion of key
milestones and other  customary  conditions.  Randal Chase,  the Chief Executive
Officer and President of the Company,  has a retention  package with the Company
that  provides  for  payments  of $50,000  upon  signing  of the Share  Exchange
Agreement, $25,000 per month for the months of December 1999 through April 2000,
and $175,000 upon completion of the arrangement.

      OPTION GRANTS IN LAST FISCAL YEAR

      The following table sets forth certain information  concerning  individual
grants and  extensions  of stock options made to the Named  Officers  during the
year ended December 31, 1999. The Company has not granted any stock appreciation
rights ("SARs").


<TABLE>
<CAPTION>

                              INDIVIDUAL GRANTS                            POTENTIAL REALIZABLE VALUE
                 ---------------------------------------------             AT ASSUMED ANNUAL RATES OF
                                                                             STOCK APPRECIATION FOR
                                                                                 OPTION TERM(2)

                 NUMBER OF    % OF TOTAL
                 SECURITIES     OPTIONS
                 UNDERLYING    GRANTED TO
                  OPTIONS     EMPLOYEES IN     EXERCISE OR    EXPIRATION
NAME              GRANTED      FISCAL YEAR    BASE PRICE(1)      DATE           5%          10%
----             ----------   ------------    -------------      ----      ---------------------------
                     #              (%)          ($/SH)
<S>              <C>               <C>           <C>          <C>          <C>         <C>


C. Jo White      50,000(3)(4)      21.0%         $ 7.56        3/1/2009    $ 237,722   $ 602,435

Arthur Elliott   75,000(5)         31.5%         $13.88       6/30/2002      164,088     344,571
                 25,000(5)         10.5%         $20.25       6/30/2002       79,798     167,569
                 37,500(5)(6)      15.7%         $ 8.75       6/30/2002       51,721     108,609
                 ------            -----                                      ------     -------
                137,500            57.7%                                     295,607     620,749
</TABLE>

(1)   All of  these options  are out-of-the-money  based on  the $7.00 aggregate
      purchase price offered by Baxter under the Share Exchange Agreement.

(2)   Gains are  reported  net of the option  exercise  price,  but before taxes
      associated with exercise. These amounts represent certain assumed rates of
      appreciation  only,  based on the per  share  market  price on the date of
      grant and an annual appreciation at the rate stated through the expiration
      date of the option.  Actual gains,  if any, on stock option  exercises are
      dependent on the future performance of the Company's Common Stock, overall
      market conditions and the optionholder's  continued employment through the
      vesting period. The amounts reflected in this table may not necessarily be
      achieved.

(3)   This option was granted under the Company's 1997 Share Option Plan at fair
      market value and vest in three equal annual  installments  commencing  one
      year after the date of grant.

(4)   In the event of a change of control of the Company,  the exercisability of
      each option shall be  automatically  accelerated  so that each such option
      outstanding shall,  immediately prior to the specified effective date of a


                                       98
<PAGE>

      change of control, become  fully exercisable for all shares subject to the
      option.   The  events  that  trigger  an   acceleration  of  the  options'
      exercisability  are:  (i)  a  third  party  acquires  direct  or  indirect
      ownership of fifty percent  (50%) or more of the combined  voting power of
      the  Company's  then  outstanding  securities  of the  Company;  (ii)  any
      election  has occurred of persons to the Board of Directors of the Company
      that causes  two-thirds of the Company's  Board of Directors to consist of
      persons other than (A) persons who were members of the Company's  Board of
      Directors  on January 1, 1997 and (B)  persons who were  nominated  by the
      Company's  Board of  Directors  for  election as members of the  Company's
      Board of Directors at a time when  two-thirds  of the  Company's  Board of
      Directors  consisted of persons who were members of the Company's Board of
      Directors on January 1, 1997; provided, however, that any person nominated
      for election by the Board of Directors of the Company at least  two-thirds
      of whom constituted  persons  described in clauses (A) and/or (B) above or
      by persons who were  themselves  nominated by such Board  shall,  for this
      purpose,  be deemed to have been  nominated by a Board composed of persons
      described in clause (A) above;  or (iii) the  shareholders  of the Company
      approve (A) any statutory  consolidation,  merger or  amalgamation  of the
      Company in which the Company is not the surviving  corporation (other than
      a merger or  amalgamation of the Company in which the holders of shares of
      Common Stock immediately prior to the merger or amalgamation have the same
      proportionate ownership of the surviving corporation immediately after the
      merger  or  amalgamation),  or (B) any  sale,  lease,  exchange  or  other
      transfer (in one transaction or a series of related  transactions) of all,
      or  substantially  all,  of the assets of the Company to an entity that is
      not a wholly-owned subsidiary of the Company.

(5)   In connection  with his  retirement,  Dr.  Elliott was granted a  24-month
      extension of the period for  exercising  two  previously  granted,  vested
      options  under the  Company's  1995 Share Option Plan,  which options were
      originally  scheduled  to expire  on June 30,  2000,  12 months  after Dr.
      Elliott's  retirement.  No other terms of the options  were  changed.  The
      extensions were effective as of June 16, 1999.

(6)   In connection with his retirement, Dr. Elliott was also granted a 33-month
      extension  of the period for  exercising a  previously  granted,  unvested
      option to purchase  37,500 shares of Common Stock under the Company's 1997
      Share Option  Plan,  which  option was  originally  scheduled to expire on
      September  30,  1999,  three months after Dr.  Elliott's  retirement.  The
      vesting  schedule  was also  amended so that  options now vest as follows:
      12,500  shares as of June 16, 1999,  12,500  shares as of December 9, 2000
      and 12,500  shares as of  December  9, 2001.  No other terms of the option
      were changed. The changes were effective as of June 16, 1999.

      AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
      AND FISCAL YEAR-END OPTION VALUES

       The following  table  summarizes  the value  realized by any of the Named
 Officers who exercised  options under the Company's former Share Option Plan in
 fiscal  1999,  as well as the number and value of  unexercised  options held by
 each Named  Officer as of December 31, 1999.  As the Company has not issued any
 SARs, no SARs were exercised.





                                       99
<PAGE>

<TABLE>
<CAPTION>

                                        NUMBER OF SECURITIES       VALUE OF UNEXERCISED
                   SHARES              UNDERLYING UNEXERCISED      IN-THE-MONEY OPTIONS
                  ACQUIRED           OPTIONS AT FISCAL YEAR-END   AT FISCAL YEAR-END (1)
                     ON      VALUE   --------------------------  -------------------------
      NAME        EXERCISE  REALIZED  EXERCISABLE  UNEXERCISABLE EXERCISABLE UNEXERCISABLE
      ----        --------  -------- -----------   ------------- ----------- -------------
                     (#)      ($)         (#)           (#)          ($)          ($)
<S>                  <C>      <C>       <C>           <C>           <C>           <C>

Randal Chase         --        --        83,333       166,667        --           --

Stephen Keith        --        --        94,999        25,001        --           --

Wayne Morges         --        --        49,999        25,001        --           --

C. Jo White          --        --            --        50,000        --           --

Lawrence Hineline    --        --        23,333        16,667        --           --

Arthur Elliott       --        --       112,500        25,000        --           --

Daniel Abdun-Nabi    --        --        75,000            --        --           --
</TABLE>


(1)   Values  based  only on (i) the number of  options  for which the  exercise
      price was equal to or less than $4.50 (the closing  price of the Company's
      Common  Stock on the AMEX on December  31,  1999) and (ii) the  difference
      between such closing price and such options' exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      The current members of the Compensation  Committee for the Company's Board
of Directors are Jonathan Deitcher (Chairman), Alain Cousineau and Denis Dionne.
No member of the  Compensation  Committee  is a current  employee or a former or
current officer of the Company or any of its  subsidiaries.  Denis Dionne is the
president of Sofinov,  which purchased the aggregate  principal  amount of $6.25
million of the 4.5%  Convertible  Secured  Notes in the  Company's  $25  million
financing completed in November 1998.  See Item 13 - Certain  Relationships  and
Related Transactions.

COMPENSATION OF DIRECTORS

      Employee directors do not receive  additional  compensation for serving on
the Board of Directors. Non-employee directors received no cash compensation for
their  service  as  directors,  except as  described  below.  Directors  receive
reimbursement  for the expenses that they incur in performing  their services as
directors.

      Non-employee  directors have automatically received annual grants of stock
options  on  January 1 of each year  under the 1995  Non-Employee  Director  and
Senior Executive Stock Option Plan (the "1995 SESOP").  Accordingly,  on January
1, 1999, each non-employee  director  received an option to acquire:  (i) 20,000
shares of the  Company's  Common Stock where the  non-employee  director was the
Chairman of the Board or Vice  Chairman of the Board;  (ii) 5,000  shares of the
Company's  Common Stock for all other  non-employee  directors;  and (iii) 5,000
shares of Company's Common Stock for each committee of the Board of Directors on
which  non-employee  directors (other than the Chairman and Vice Chairman of the
Board) serve.  These options were all granted to such non-employee  directors at
an exercise  price of $8.875 per share,  the fair market value of the  Company's
Common Stock on January 1, 1999,  the date of grant.  These options will vest in
three equal annual installments commencing on the January 1st following the date
of the grant.  No current  executive  officer  has  received,  or is entitled to
receive,  options under the 1995 SESOP. The 1995 SESOP has been succeeded by the
1999 SESOP, which was approved by the Company's  shareholders at the 1999 Annual
Meeting of  Shareholders.  However,  in connection  with the  acquisition of the
Company by Baxter pursuant to the Share Exchange  Agreement,  the 1999 SESOP was
suspended  indefinitely  pending  the  transaction.  Accordingly,  there were no
automatic grants of options to non-employee directors on January 1, 2000.

Neil Flanzraich, the Chairman of the Board, received a total of $100,000 for the
1999 calendar year for his duties performed in that capacity.


                                       100
<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

      The following table sets forth certain information provided to the Company
or contained in filings with the Securities and Exchange  Commission (the "SEC")
regarding the beneficial ownership of shares of the Company's Common Stock as of
January  31,  2000  by (i)  each  person  who is  known  by the  Company  to own
beneficially,  or  exercise  control  or  direction  over,  more  than 5% of the
outstanding  shares of the Company's Common Stock, (ii) all current directors of
the Company,  (iii) the chief executive officer and four most highly compensated
executive officers of the Company,  and (iv) all current directors and executive
officers of the Company as a group. Unless otherwise indicated,  each person has
sole voting and investment power with respect to the shares  specified  opposite
such person's name.

<TABLE>
<CAPTION>

NAME OF BENEFICIAL OWNER                         NUMBER OF SHARES        PERCENT OF CLASS
<S>                                               <C>                        <C>

BioChem Pharma Inc.........................       14,326,418 (1)             39.1%
   275 Armand-Frappier Blvd.
   Laval, Quebec H7V 4A7
Frost-Nevada, Limited Partnership..........        4,546,732 (2)             12.9%
   c/o Phillip Frost, M.D.
   IVAX Corporation
   4400 Biscayne Blvd.
   Miami, Florida 33137
Phillip Frost, M.D. (3) ...................        6,342,898 (2)(4)          17.9%
   c/o IVAX Corporation
   4400 Biscayne Blvd.
   Miami, Florida 33137
Delphi Asset Management....................        2,277,700 (5)              6.9%
   485 Madison Avenue
   New York, New York 10022
Baxter International Inc...................       13,254,344 (15)            29.2%
Neil W. Flanzraich (3).....................          261,560 (4)                 *
Francesco Bellini, Ph.D. (3)...............          105,198 (4)(6)(7)           *
Randal Chase, Ph.D. (3)(10)................           84,929 (4)                 *
Alain Cousineau (3)........................           39,999 (4)                 *
Jonathan Deitcher (3)......................           74,999 (4)                 *
Denis Dionne (3)...........................          761,797 (4)(8)              *
Gervais Dionne, Ph.D. (3)..................            3,333 (4)(6)              *
Lyle Kasprick (3)..........................          446,269 (4)              1.4%
Francois Legault (3).......................           19,999 (4)(6)              *
Richard C. Pfenniger, Jr. (3)..............           74,685 (4)(9)              *
Stephen N. Keith, M.D., MSPH (10)..........           96,423 (4)(11)             *
Wayne Morges, Ph.D. (10)...................           52,044 (4)(11)             *
C. Jo White, M.D. (10).....................           16,864 (4)(11)             *
Lawrence J. Hineline (10)..................           25,621 (4)(11)             *
Arthur Y. Elliott, Ph.D. (12)..............          114,539 (11)(13)            *
Daniel J. Abdun-Nabi (12)..................           78,374 (11)(14)            *
All directors and executive officers as
   a group (16 persons)....................        8,644,595 (2)(4)(7)
                                                             (8)(9)(11)      23.4%
</TABLE>
--------------------------------------------
* Indicates less than one percent

      (1)   As reported in BioChem's  Amendment No. 11 to its Schedule 13D dated
            November 23, 1999, the amount shown  includes:  1,000,000  shares of
            the Company's Series A Preferred  Stock,  which are convertible into
            2,000,000 shares of the Company's Common Stock, $9,000,000 aggregate
            principal  amount  of 4.5%  Convertible  Secured  Notes,  which  are
            convertible into 1,053,790 shares of the Company's Common Stock, and
            warrants to purchase up to 750,000  shares of the  Company's  Common
            Stock.  See note 15 with respect to certain voting rights granted to
            the  Board  of   Directors   of  Baxter.   See  Item  13  -  Certain
            Relationships and Related Transactions.


                                      101


<PAGE>


      (2)   As reported in Amendment  No. 3 to Schedule  13D dated  December 17,
            1999,  2,049,109 of these shares are held by  Frost-Nevada,  Limited
            Partnership ("Frost-Nevada"),  which has sole voting and dispositive
            power with respect to such shares. Also includes 1,000,000 shares of
            the Company's Series A Preferred  Stock,  which are convertible into
            2,000,000 shares of the Company's Common Stock, held by Frost-Nevada
            and  $4,250,000  aggregate  principal  amount  of  4.5%  Convertible
            Secured  Notes,  which are  convertible  into 497,623  shares of the
            Company's  Common  Stock,  held by  Frost-Nevada.  As of January 31,
            2000, 281,250 additional shares are held by Frost-Nevada,  which has
            sole voting and dispositive  power with respect to such shares.  See
            Item 13 - Certain Relationships and Related Transactions.  Dr. Frost
            is the sole  shareholder of  Frost-Nevada  Corporation,  the general
            partner  of  Frost-Nevada,  and  is  the  sole  limited  partner  of
            Frost-Nevada.  Consequently,  Dr.  Frost  may  be  deemed  to be the
            beneficial owner of all such shares held by  Frost-Nevada.  See note
            15 with  respect to certain  voting  rights  granted to the Board of
            Directors of Baxter.

      (3)   A director of the Company.

      (4)   Includes,  where  applicable,  shares that may be purchased upon the
            exercise  of stock  options  presently  exercisable  or  exercisable
            within 60 days of January 31, 2000 as  follows:  59,999  shares with
            respect to Drs. Frost and Bellini and Mr. Flanzraich;  29,999 shares
            with respect to each of Messrs.  Cousineau,  Deitcher, Denis Dionne,
            Kasprick and Pfenniger;  19,999 shares with respect to Mr.  Legault;
            3,333 shares with respect to Dr. Gervais Dionne;  83,333 shares with
            respect to Dr. Chase;  94,999 with respect to Dr. Keith; 49,999 with
            respect to Dr.  Morges;  16,666  shares with  respect to Dr.  White;
            23,333 shares with respect to Mr.  Hineline;  and 43,333 shares with
            respect to one unnamed executive officer.

      (5)   Reflects  aggregate  beneficial  ownership of the  Company's  Common
            Stock held by Delphi Asset Management  ("Delphi") in its capacity as
            investment advisor, according to its Schedule 13G dated February 11,
            2000.  Delphi  reports that it has sole voting power over  1,622,300
            shares of the Company's Common Stock and sole dispositive power over
            2,277,700 shares of the Company's Common Stock.

      (6)   Although a director and/or officer of BioChem,  the named individual
            disclaims   beneficial  ownership  of  the  Company's  Common  Stock
            beneficially owned by BioChem.

      (7)   Includes  8,000 shares held by Dr.  Bellini's  wife and 1,000 shares
            each held by two sons.

      (8)   10,000 stock  options are subject to a prior  agreement  between Mr.
            Denis  Dionne and his  former  employer,  whereby  Mr.  Dionne  must
            exercise these options at his former  employer's  direction and then
            transfer the underlying  shares of the Company's Common Stock to his
            former  employer at cost  (exercise  price).  Although an officer of
            Sofinov,  Mr. Denis  Dionne  disclaims  beneficial  ownership of the
            shares of the Company's Common Stock  beneficially owned by Sofinov.
            Sofinov  holds  $6,250,000   aggregate   principal  amount  of  4.5%
            Convertible Secured Notes, which are convertible into 731,798 shares
            of the Company's Common Stock.  See Item 13 - Certain  Relationships
            and Related Transactions.

      (9)   Includes 19,686 shares held jointly by Mr. Pfenniger and his wife.


                                      102
<PAGE>

      (10)  Chief executive  officer or one of the four most highly  compensated
            executive officers of the Company.

      (11)  Includes,  where applicable,  approximately 596, 1,424,  2,045, 198,
            2,288 and 1,742 shares  issued under  the  Company's 401(k) Plan and
            Trust as a matching  contribution  by the Company to the  retirement
            accounts of Drs. Chase,  Keith,  Morges and White,  Mr. Hineline and
            one unnamed executive officer, respectively.

      (12)  Dr.  Elliott  retired  from  the  Company  in  June  1999,  and  Mr.
            Abdun-Nabi resigned from the Company in September 1999.

      (13)  Includes  112,500  shares that may be purchased by Dr.  Elliott upon
            the exercise of stock options  presently  exercisable or exercisable
            within 60 days of January 31, 2000 and includes  approximately 2,039
            shares  issued  under  the  Company's  401(k)  Plan  and  Trust as a
            matching  contribution  by the Company to the retirement  account of
            Dr. Elliott.

      (14)  Includes 75,000 shares that may be purchased by Mr.  Abdun-Nabi upon
            the exercise of stock options  presently  exercisable or exercisable
            within 60 days of January 31, 2000 and includes  approximately 3,374
            shares  issued  under  the  Company's  401(k)  Plan  and  Trust as a
            matching  contribution  by the Company to the retirement  account of
            Mr. Abdun-Nabi.

      (15)  Reflects  aggregate  beneficial  ownership of the  Company's  Common
            Stock held by Baxter  according to its  Schedule 13D dated  November
            29, 1999.  Baxter  reports  that it has sole voting and  dispositive
            power over 714,286  shares and shared  voting power over  12,540,058
            shares of the  Company's  Common Stock.  Pursuant to an  irrevocable
            proxy granted by Phillip Frost,  BioChem,  and  Frost-Nevada  to the
            Board of  Directors  of Baxter,  such Board is  entitled to vote all
            such shares of the  Company's  Common Stock in favor of the adoption
            of the Share Exchange Agreement and related matters.

      On November 17, 1999, the Company entered into a Share Exchange  Agreement
with Baxter and a newly formed Canadian  subsidiary of Baxter  providing for the
acquisition by Baxter of all of the Company's  outstanding Common Stock by means
of an arrangement under Section 192 of the Canada Business  Corporation Act (the
"Arrangement").   In  connection  with  the  execution  of  the  Share  Exchange
Agreement,  Dr. Frost,  Frost-Nevada,  Limited  Partnership and IVAX Corporation
(collectively,  the  "Frost  Group")  and  BioChem  entered  into a  Shareholder
Agreement  dated as of November  17, 1999 with Baxter (the  "Baxter  Shareholder
Agreement"),  pursuant to which BioChem and the Frost Group agreed to vote their
respective shares of the Common Stock in favor of the Arrangement. See Item 13 -
Certain Relationships and Related Transactions.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------
ORGANIZATION OF COMPANY

      The  transaction,  whereby  certain  vaccine  technologies  of BioChem and
American  Vaccine  Corporation,   the  predecessor  to  the  Company  ("American
Vaccine"),  were combined into the Company, was consummated on February 28, 1990
(the "Merger").  As a result of the Merger, BioChem currently holds Common Stock
of the  Company,  and Series A Preferred  Stock of the  Company.  In the Merger,
BioChem  issued shares to the Company,  together  with cash and certain  vaccine
technologies.  In the Merger,  the  Company and BioChem  granted to each other a
one-time  demand  registration  right  (with  expenses  to be paid by the  party


                                      103
<PAGE>

exercising the registration right) and certain piggy-back  registration  rights.
The  piggy-back  registration  rights expired on January 17, 1995 and the demand
registration  right,  which was scheduled to expire as of January 17, 1998,  was
amended in January 1998 to extend that right until January 17, 2001.

      A  shareholders'  agreement (the "Original  Shareholders'  Agreement") was
executed  between Dr. Frost,  Frost-Nevada  and IVAX  (collectively,  the "Frost
Group") and BioChem as part of the Merger. The Original Shareholders'  Agreement
terminated  on February 28, 2000.  Under the Original  Shareholders'  Agreement,
both the Frost Group and BioChem agreed to nominate an equal number of directors
for election to the Board of Directors of the Company,  and such  nominees  then
select one additional nominee satisfactory to both groups of nominees. The Frost
Group and BioChem agreed to vote all of their respective shares of the Company's
Common Stock to elect to the Board of Directors all of the nominees so selected.
The  combination  of the voting  power of the Frost Group and BioChem  under the
Original Shareholders'  Agreement gave them effective control of the Company and
enabled them to determine the policies and direct the operations of the Company.
The Original  Shareholders'  Agreement  also granted the Frost Group and BioChem
mutual  rights of first  refusal  with  respect to the sale,  transfer  or other
similar  disposition of any of their shares of the Company's  Common Stock,  the
Company's  Series A Preferred  Stock or other  securities  of the  Company  held
directly or indirectly  by either of them.  Such rights of first refusal did not
apply, however, to transfers of such securities by the Frost Group or BioChem to
their respective affiliates.

      In connection  with the Merger,  Frost-Nevada,  IVAX and a former  officer
(collectively, the "Indemnitees"),  all of whom beneficially owned, at the time,
more than 5% of the outstanding capital stock of American Vaccine,  entered into
an Indemnification Agreement with the Company (the "Indemnification Agreement"),
pursuant to which the Company  agreed to indemnify the  Indemnitees  against any
United States  federal,  state and local income tax  liabilities  that may arise
under  prescribed  "gain  recognition  agreements"  that  the  Indemnitees  were
required to file with the United States Internal  Revenue Service and that would
require the Indemnitees to recognize gain upon the occurrence of certain events.
Such gain  recognition  agreements  generally would require that the Indemnitees
recognize  gain (and file  amended tax  returns) if the Company  sells  American
Vaccine stock that it acquired as a result of the Merger or if American  Vaccine
sells all or substantially  all of its assets (other than in the ordinary course
of business)  during the period  commencing on the date of  consummation  of the
Merger and ending December 31, 2000. Under the  Indemnification  Agreement,  the
Company  agreed to (i) lend the  Indemnitees on an  interest-free  and after-tax
basis, an amount equal to the taxes to be paid with the amended tax returns, and
(ii) pay the Indemnitees, on an after-tax basis, any interest and penalties with
respect to the taxes to be paid with the amended returns. However,  repayment of
these  loans  will  only be  required  at the  time and to the  extent  that the
Indemnitees  receive  benefit  from the  resulting  increase in the tax basis of
their Common Stock or Series A Preferred  Stock.  There can be no assurance that
any such benefit  will be received.  Under the  Indemnification  Agreement,  the
Company's  directors  nominated  by the Frost Group,  with the  exception of Dr.
Frost, will not be precluded from voting upon a transaction that could give rise
to the Company's indemnification obligations to the Indemnitees. The affirmative
vote of 75% of all of the Company's  directors,  excluding  Dr.  Frost,  will be
required  to approve  any  transaction  that could  require  the  payment of any
indemnity  pursuant  to the  Indemnification  Agreement.  No  payments  would be
triggered under the Indemnification Agreement arising out of a tender offer for,
or a business  combination  involving,  all of the Company's  Common Stock.  The
acquisition of the Company by Baxter pursuant to the Share Exchange Agreement is
not  expected  to trigger  any gain under the gain  recognition  agreement  and,
therefore,  would not trigger  the  indemnity  pursuant  to the  Indemnification
Agreement.  Under the  terms of the  Share  Exchange  Agreement,  Dr.  Frost and
Frost-Nevada  will enter into an agreement to file tax returns  consistent  with
the position that the gain recognition agreement has terminated and is no longer
in effect as a result of the taxable sale of the Company to Baxter.  Baxter will


                                      104
<PAGE>

indemnify Dr. Frost and Frost-Nevada for any penalties or addition to tax if the
sale of the  Company to Baxter is  determined  to trigger  the gain  recognition
agreement.

PRIVATE PLACEMENT OF CONVERTIBLE SECURED NOTES

      In November 1998, the Company  completed a $25 million  financing  through
the private placement of 4.5% Convertible Secured Notes ("4.5% Notes").  BioChem
and Dr. Frost, affiliates of the Company,  purchased 4.5% Notes in the aggregate
principal  amount of $9 million and $4.25  million,  respectively.  In addition,
Sofinov purchased 4.5% Notes in the aggregate principal amount of $6.25 million.
Denis Dionne, a director of the Company, is the President of Sofinov.

      The 4.5% Notes were sold at par,  mature on November  13, 2003 and provide
for  interest  payable  semi-annually  on May 13 and  November  13 of each  year
commencing on May 13, 1999. The 4.5% Notes are convertible, in whole or in part,
by the holder(s) at any time prior to maturity  (unless  previously  redeemed or
repurchased)  into shares of the Company's Common Stock at a conversion price of
approximately $8.54 per share. The conversion price was set based on the average
closing  price of the  Company's  Common  Stock for the twenty (20) trading days
preceding the date of the announcement of the agreement-in-principle between the
Company and prospective  purchasers.  The measurement period for determining the
conversion  price began on August 26, 1998 and terminated on September 23, 1998.
The closing prices of the Company's  Common Stock during that period ranged from
a low of $6.875  and a high of  $11.25.  The 4.5%  Notes are  secured by certain
assets of the Company,  are  otherwise  subordinated  in right of payment to all
existing and future  senior  indebtedness  of the  Company,  do not restrict the
incurrence  of  future  senior  or other  indebtedness  of the  Company  and are
redeemable,  in whole or in part,  at the option of the  Company on or after one
year from the date of issuance at par, plus accrued  interest to the  redemption
date. Upon a change in control, the Company is required to offer to purchase all
of the 4.5% Notes then  outstanding  at a  purchase  price  equal to 100% of the
principal amount thereof, plus interest. The repurchase price will be payable in
cash or, at the option of the Company,  in shares of the Company's  Common Stock
(valued at 95% of the average closing prices of the Common Stock for a specified
period prior to the repurchase date). Under the Share Exchange Agreement, Baxter
will purchase,  as promptly as practicable after the closing of the transaction,
the 4.5% Notes  pursuant to the terms of their  indenture.  See "Share  Exchange
Agreement with Baxter" below.

      The 4.5%  Notes are not  registered  under the 1933 Act or any  applicable
state or  foreign  securities  laws,  and were sold in  reliance  on  prescribed
exemptions from  registrations  under the 1933 Act and other applicable state or
foreign securities laws.

GUARANTEE OF LINE OF CREDIT

      In July 1999,  the Company  obtained  from a commercial  bank a $6 million
revolving line of credit,  which  currently  matures May 31, 2000.  BioChem,  an
affiliate  of the Company,  has  provided  the  guarantee of the line of credit,
which will remain in place for a maximum of two years,  unless there is a change
of control such as the contemplated  acquisition by Baxter. The interest rate on
borrowings under the line of credit is LIBOR plus 265 basis points. Upon drawing
down on the line of credit by the  Company,  BioChem  was  entitled  to  receive
warrants  to purchase up to a total of 750,000  shares of the  Company's  Common
Stock (the "BioChem Warrants").  The BioChem Warrants were issued by the Company
ratably as it drew down under the line of credit  such that  BioChem  received a
warrant for 125,000 shares of Common Stock for each $1 million drawn down by the
Company. Each warrant has a term of two years from the date of issuance. The per
share exercise price under the BioChem Warrants is approximately $5.14, which is
the average of the closing price of the  Company's  Common Stock on the American
Stock Exchange over five trading days that began on June 28 and ended on July 2,
1999. Each warrant contains  anti-dilution  provisions and registrations  rights
among other  provisions.  The Company drew down $4 million and $2 million in the
third and fourth  quarters of 1999,  respectively,  under the revolving  line of
credit and accordingly issued the BioChem Warrants to purchase 750,000 shares of
Common Stock.

      As part of the  Baxter  transaction,  BioChem  has agreed to  maintain  in
effect and not to terminate in any respect its guaranty until the effective date
for  closing on the  transaction  and to loan the  Company up to  $5,000,000  on
commercially  reasonable  terms if the line of credit  becomes  due prior to the
effective date on the closing of the transaction.

                                      105
<PAGE>

SHARE EXCHANGE AGREEMENT WITH BAXTER

      The Company has entered into the Share  Exchange  Agreement to be acquired
by Baxter  in a  taxable  stock  for  stock  transaction  pursuant  to a Plan of
Arrangement  under the Canada Business  Corporations Act valued at approximately
$390 million.  Under the Share Exchange  Agreement,  the Company's  shareholders
will receive $7 per common share,  comprised of $6.97 of Baxter common stock and
$0.03 in cash.  BioChem and the Frost  Group,  as the  holders of the  Company's
Series A Preferred Stock, will also receive $7.00,  comprised of $6.97 of Baxter
common  stock and $0.03 in cash,  for each share of Common Stock  issuable  upon
conversion of the preferred  stock.  The number of Baxter shares to be issued to
the Company's  shareholders under the Share Exchange Agreement will be set based
upon the average  closing sale price of Baxter  common stock for the ten trading
days ending on the fifth trading day prior to consummation  of the  transaction.
As part of the  transaction,  Baxter  has agreed to  purchase,  as  promptly  as
practicable after the closing of the transaction, the outstanding 6.5% Notes and
all of the 4.5% Notes pursuant to the terms of their respective indentures.  See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation for a more complete description of the transaction.

      Baxter, the Company and BioChem entered into a warrant  termination letter
concurrent  with the Share Exchange  Agreement  pursuant to which BioChem agreed
that the BioChem  Warrants to purchase  750,000  shares of the Company's  Common
Stock would be terminated at the effective  time of the  Arrangement in exchange
for a cash  payment by Baxter to BioChem  in an amount  equal to the  difference
between $7.00 and $5.14, the exercise price of these warrants, for each share of
the Company's Common Stock issuable upon exercise of the BioChem Warrants, equal
to approximately $1,400,000 in the aggregate.

      In order to induce  Baxter to enter  into the  Share  Exchange  Agreement,
BioChem and the Frost Group entered a  shareholders'  agreement with Baxter (the
"Baxter  Shareholders'   Agreement").   Pursuant  to  the  Baxter  Shareholders'
Agreement,  each of  BioChem  and the  Frost  Group  has  agreed  to vote  their
respective shares of Common Stock in favor of the Arrangement. In addition, each
of  BioChem  and the Frost  Group has  agreed  to  timely  deliver  to Baxter an
irrevocable  proxy (each a "Proxy")  which Proxy will cover all shares of Common
Stock  owned  by such  shareholder  and  entitled  to vote  at each  meeting  of
shareholders of the Company (including, without limitation, each written consent
in lieu of meeting) (the "Proxy Shares") and will entitle Baxter's Board to vote
such  shares  of common  stock in favor of the  adoption  of the Share  Exchange
Agreement and related matters.  Each Proxy will serve to irrevocably appoint the
members of the Board of  Directors of Baxter to vote the Proxy  Shares.  BioChem
and the  Frost  Group  retain  the  right  to vote  the  Proxy  Shares  in their
discretion  on all  other  matters.  Each  Proxy  and the  Baxter  Shareholders'
Agreement will terminate upon the earliest to occur of (i) such date and time as
the Arrangement  shall become  effective in accordance with terms and provisions
of the  Share  Exchange  Agreement,  (ii) the date of  termination  of the Share
Exchange Agreement, (iii) a material breach by Baxter of any agreement with such
party and (iv) May 31, 2000 (such earliest date, the "Expiration  Date").  Until
the  Expiration  Date,  the  shareholder  parties have agreed not to (and to use
reasonable efforts to cause the Company, its affiliates, officers, directors and
employees  and any  investment  banker,  attorney,  accountant  or  other  agent
retained by any of such shareholder parties, the Company or any of the same, not
to,  except  to  the  extent  otherwise   permitted  under  the  Share  Exchange
Agreement):  (i) solicit, initiate or encourage (including by way of furnishing,
or disclosing nonpublic information) any inquiries or the making of any proposal
or  offer  (including,   without  limitation,  any  proposal  or  offer  to  any
shareholders  of the Company) that  constitutes or may reasonably be expected to
lead to, any Company Competing Transaction (as such term is defined in the Share
Exchange  Agreement);  or (ii)  knowingly  encourage or otherwise  enter into or
maintain or continue  discussions  or negotiate  with any person with respect to
such  inquiries or to obtain a  Company  Competing  Transaction,  or agree to or
endorse any agreement,  arrangement or understanding with respect to any Company
Competing  Transaction.  If the shareholder  parties become aware of any Company
Competing Transaction  subsequent to November 17, 1999, each of such shareholder
parties  has  agreed to  promptly  inform  Baxter as to any such  matter and the
details thereof to the extent possible without  breaching any other agreement to
which such shareholder is a party or violating its fiduciary duties.

      BioChem and Baxter also entered into a stock purchase  agreement  pursuant
to which Baxter  purchased  on December 1, 1999, 714,286  shares of Common Stock
from BioChem for $7.00 in cash per share, or an aggregate of $5,000,002.

OTHER MATTERS

      In March 2000, the Company settled a claim filed by its former president.
The Company has agreed not to disclose the terms of the settlement.  The
settlement will not have a materially adverse impact on the Company's financial
position or results of operations.


                                      106
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
          ----------------------------------------------------------------
a)    Documents Filed as Part of Form 10-K.

The following documents are filed as part of this Annual Report on Form 10-K:

1.       Financial Statements:                                            Page:
         --------------------                                             ----
         Report of Independent Public Accountants                         59
         Consolidated Balance Sheets as of
            December 31, 1999 and 1998                                    60
         Consolidated Statements of Operations for the
            Years Ended December 31, 1999, 1998 and 1997                  61
         Consolidated Statements of Shareholders' (Deficit) Equity
            for the Years Ended December 31, 1999, 1998 and 1997          62
         Consolidated Statements of Cash Flows for the
            Years Ended December 31, 1999, 1998 and 1997                  63
         Notes to Consolidated Financial Statements                       65

2.       Financial Statement Schedules:
         -----------------------------

         None Required.

3.       Exhibits: See Exhibit Index on page 109.
         --------

B)    REPORTS ON FORM 8-K.
      -------------------

      The following reports on Form 8-K were filed during the three months ended
      December 31, 1999:

      (1)   On November  29, 1999,  the Company  filed with the  Securities  and
            Exchange  Commission  a  Current  Report  on Form 8-K  under  Item 5
            reporting that the Company had signed the Share Exchange  Agreement,
            whereby the Company  would be acquired by Baxter in a taxable  stock
            for stock  transaction  pursuant to a Plan of Arrangement  under the
            Canada  Business  Corporations  Act  valued  at  approximately  $390
            million.



                                      107
<PAGE>


                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, North American  Vaccine,  Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                         NORTH AMERICAN VACCINE, INC.

Dated: March 30, 2000                    By: /s/ Randal Chase
                                             ----------------------
                                             Randal Chase, Ph.D.
                                             Chief Executive Officer & President

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has been  signed  below by the  following  persons  on  behalf  of North
American Vaccine, Inc. in the capacities and on the dates indicated.

PRINCIPAL EXECUTIVE OFFICER:

/s/ Randal Chase                                            March 30, 2000
----------------
Randal Chase, Ph.D.
Chief Executive Officer & President

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ Lawrence J. Hineline                                    March 30, 2000
------------------------
Lawrence J. Hineline
Vice President-Finance

<TABLE>
<CAPTION>

A MAJORITY OF THE BOARD OF DIRECTORS:
<S>                    <C>                  <C>                            <C>

                                             /s/ Neil W. Flanzraich        March 30, 2000
----------------------  --------------       ----------------------
Francesco Bellini, Ph.D                      Neil W. Flanzraich

/s/ Alain Cousineau     March 30, 2000
----------------------                      ----------------------         --------------
Alain Cousineau                             Phillip Frost, M.D.

/s/ Randal Chase        March 30, 2000      /s/ Lyle Kasprick              March 30, 2000
----------------------                      -----------------------
Randal Chase, Ph.D.                         Lyle Kasprick

/s/ Jonathan Deitcher   March 30, 2000      /s/ Francois Legault           March 29, 2000
----------------------                      -----------------------
Jonathan Deitcher                           Francois Legault

/s/ Denis Dionne        March 23, 2000      /s/ Richard C. Pfenniger, Jr.  March 30, 2000
----------------------                      -----------------------
Denis Dionne                                Richard C. Pfenniger, Jr.

/s/ Gervais Dionne      March 27, 2000
----------------------
Gervais Dionne, Ph.D.
</TABLE>



                                      108
<PAGE>


                                       EXHIBIT INDEX

EXHIBIT
NO.        DESCRIPTION
---        -----------

2.1        Master Agreement, dated October 25, 1989, among North American
           Vaccine, Inc. ("NAV"), American Vaccine Corporation ("American
           Vaccine") and IAF BioChem International, Inc. ("BioChem"). (1)

2.2        Agreement and Plan of Merger, dated as of October 25, 1989, among
           NAV, American Vaccine and NAVA Acquiring Corp. (1)

2.3        Share Purchase Agreement, dated January 17, 1990, between NAV and
           BioChem. (1)

2.4        Technology Transfer Agreement, dated January 17, 1990, between NAV
           and BioChem. (1)

2.5        Amendment to Share Purchase Agreement dated as of January 8, 1998
           between NAV and BioChem. (2)

2.6        Share Exchange Agreement dated as of November 17, 1999 among Baxter
           International Inc. ("Baxter"), NAV and Neptune Acquisition Corp. (23)

3.1        Articles of Incorporation of NAV, as amended. (1)(6)

3.2        Restated Bylaws of NAV. (3)

9.1        Shareholders' Agreement, dated January 17, 1990, among BioChem,
           Phillip Frost, M.D., IVAX Corporation ("IVAX") and Frost-Nevada,
           Limited Partnership ("Frost-Nevada"). (1)

9.2        Shareholders' Agreement dated as of November 17, 1999 among Baxter,
           BioChem, Phillip Frost, Frost-Nevada and IVAX. (24)

10.1       License Agreement,  dated July 27, 1987, between Canadian Patents and
           Development  Limited ("CPDL") and BioChem [with certain  confidential
           information deleted therefrom]. (1)

10.2       License Agreement, dated June 27, 1988, between CPDL and BioChem
           [with certain confidential information deleted therefrom]. (1)

10.3       Agreement, dated April 6, 1989, between AMVAX, Inc. ("AMVAX") and
           the National Institute of Child Health and Human Development
           ("NICHD"). (1)

10.4       License  Agreement,  dated March 25, 1988, between National Technical
           Information   Service  ("NTIS")  and  Selcore   Laboratories,   Inc.,
           predecessor   to  AMVAX   ("Selcore")   [with  certain   confidential
           information deleted therefrom]. (1)

10.5       Second Amended and Restated Patent License Agreement, dated March
           12, 1992, between Ronald D. Sekura, Ph.D., and AMVAX [with certain
           confidential information deleted therefrom]. (6)


                                      109
<PAGE>

EXHIBIT
NO.        DESCRIPTION
---        -----------

10.6*      North American Vaccine, Inc. Share Option Plan, as amended. (7)

10.9       Form of Indemnification Agreement among NAV, American Vaccine, IVAX,
           Frost-Nevada and Ronald D. Sekura, Ph.D. (1)

10.12      Lease Agreement dated December 31, 1987, as amended, between Selcore
           and Indian Creek Holding Associates Limited Partnership. (1)

10.14      Supply Agreement between AMVAX and Statens  Seruminstitut dated March
           26, 1991 [with certain confidential information deleted therefrom].
           (4)

10.16      Supply Agreement between AMVAX and Statens  Seruminstitut dated March
           26, 1991 [with certain confidential information deleted therefrom].
           (4)

10.17      Research, Development and License Agreement between AMVAX and Statens
           Seruminstitut  dated  March  26,  1991  [with  certain   confidential
           information deleted therefrom]. (4)

10.18*     Non-Employee Director and Senior Executive Stock Option Plan, as
           amended. (7)

10.22      Amended and restated master  agreement dated June 20, 1994 among NAV,
           BioChem, IVAX, D&N Holding Company, Frost-Nevada and Phillip Frost.
           (9)

10.23      Share exchange agreement dated April 20, 1994 between NAV and
           BioChem. (8)

10.25*     North American Vaccine, Inc. 1995 Share Option Plan. (10)

10.26*     North American Vaccine, Inc. 1995 Non-Employee Director and Senior
           Executive Stock Option Plan. (11)

10.27      Clinical  Development  Agreement  dated December 22, 1995 between NAV
           and  Pasteur  Merieux  Serums  et  Vaccins   ("PMSV")  [with  certain
           confidential information deleted therefrom]. (12)

10.28      License Agreement dated December 22, 1995 between NAV and PMSV [with
           certain confidential information deleted therefrom]. (12)

10.29      Indenture dated May 7, 1996 between NAV and Marine Midland Bank. (13)

10.30      Registration Rights Agreement dated May 1, 1996 between NAV,
           Goldman, Sachs & Co. and UBS Securities LLC. (13)

10.32      Stock Purchase Agreement dated October 11, 1996 between Abbott
           Laboratories and NAV. (14)

10.33      Assets Purchase Agreement dated October 17, 1996 among NAV, Cephalon
           Property Management, Inc. ("CPMI") and Cephalon, Inc. [with certain
           confidential information deleted therefrom]. (14)


                                      110
<PAGE>

EXHIBIT
NO.        DESCRIPTION
---        -----------

10.34      Assignment and Assumption of Leases dated November 12, 1996 between
           CPMI and NAV. (15)

10.35      Master  Agreement  dated  November  1, 1996  between  NAV and General
           Electric Capital Corporation [with certain  confidential  information
           deleted therefrom]. (15)

10.36*     North American Vaccine, Inc. 1997 Share Option Plan. (16)

10.37      Lease Agreement dated as of March 25, 1998 between ARE-10150 Old
           Columbia, LLC and NAV [with certain confidential information deleted
           therefrom]. (17)

10.38      Indenture dated November 12, 1998 by and between NAV and Bankers
           Trust Company, as Trustee. (18)

10.39      Security and Pledge Agreement dated November 12, 1998 by and between
           NAV and Bankers Trust Company, as Trustee. (18)

10.40*     North American Vaccine, Inc. 1999 Non-Employee Director and Senior
           Executive Stock Option Plan. (19)

10.41      First Amendment to the Lease Agreement dated as of January 21, 1999,
           between Liberty Property Limited Partnership and AMVAX, Inc. f/k/a
           Selcore Laboratories, Inc. (19)

10.42      Common Stock Purchase Warrant dated July 21, 1999 issued to BioChem.
           (20)

10.43      Letter Agreement dated July 1, 1999 between NAV and BioChem. (20)

10.44      Line of Credit Agreement dated July 12, 1999. (20)

10.45      Common Stock Purchase Warrant No. W-2 dated August 26, 1999. (21)

10.46      Common Stock Purchase Warrant No. W-3 dated October 28, 1999. (21)

10.47      Revolving Credit Facility Letter Agreement dated November 1, 1999 by
           and between Bank of America, N.A. and NAV. (22)

10.48      Fee Letter Agreement dated November 1, 1999. (22)

10.49      Security Agreement dated as of November 1, 1999 by and between NAV
           and Bank of America, N.A. (22)

10.50      Security Agreement dated as of November 1, 1999. (22)

10.51      Patent and Trademark Assignment and Security Agreement dated as of
           November 1, 1999 by and between NAV and Bank of America, N.A. (22)

10.52      Patent and Trademark Assignment and Security Agreement dated as of
           November 1, 1999. (22)


                                      111
<PAGE>

EXHIBIT
NO.        DESCRIPTION
---        -----------

10.53      Guaranty Agreement dated November 1, 1999. (22)

10.54      Reimbursement Agreement dated as of November 1, 1999 (with certain
           confidential information deleted therefrom). (22)

10.55      Warrant Termination Letter dated November 17, 1999. (25)

10.56      Affiliate Letters dated November 17, 1999. (26)

10.57      Stock Purchase Agreement dated November 17, 1999 between Baxter and
           BioChem. (27)

10.58      Amendment to Loan Agreement dated November 17, 1999 among Bank of
           America, N.A., NAV and Baxter. (28)

10.59      Amendment dated December 14, 1999 to credit facility between NAV and
           Royal Bank of Canada.

21         Subsidiaries.

27         Financial Data Schedule.
--------------------------

*     Management contract or compensatory plan or arrangement.


(1)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form  S-4  Registration  Statement  (File  No.
      33-31512) filed with the SEC and declared effective on January 24, 1990.

(2)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's  Current Report on Form 8-K filed with the SEC on
      January 29, 1998 (File No. 1-10451).

(3)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      June 30, 1990 (File No. 1-10451).

(4)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1990 (File No. 1-10451).

(5)   This exhibit is incorporated herein by this reference to Exhibit 22 in the
      Company's  Form 10-K Annual  Report for the Year Ended  December  31, 1990
      (File No. 1-10451).

(6)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1991 (File No. 1-10451).


                                      112
<PAGE>

(7)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1992 (File No. 1-10451).

(8)   This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      March 31, 1994 (File No. 1-10451).

(9)   This exhibit is  incorporated  herein by this reference to Exhibit 99.1 in
      the  Company's  Registration  Statement  on  Form  S-3  (Registration  No.
      33-78002)  filed with the SEC and withdrawn from  registration on November
      23, 1994.

(10)  This exhibit is  incorporated  herein by this  reference to Exhibit 4.1 in
      the  Company's  Registration  Statement  on  Form  S-8  (Registration  No.
      33-80479) filed with the SEC and effective as of December 15, 1995.

(11)  This exhibit is  incorporated  herein by this  reference to Exhibit 4.2 in
      the  Company's  Registration  Statement  on  Form  S-8  (Registration  No.
      33-80479) filed with the SEC and effective as of December 15, 1995.

(12)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1995 (File No. 1-10451).

(13)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      March 31, 1996 (File No. 1-10451).

(14)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      September 30, 1996 (File No. 1-10451).

(15)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1996 (File No. 1-10451).

(16)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1997 (File No. 1-10451).

(17)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      March 31, 1998 (File No. 1-10451).

(18)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's  Current Report on Form 8-K filed with the SEC on
      November 20, 1998 (File No. 1-10451).

(19)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit  in the  Company's  Form 10-K  Annual  Report  for the Year  Ended
      December 31, 1998 (File No. 1-10451).

(20)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      June 30, 1999 (File No. 1-10451).

(21)  This exhibit is incorporated herein by this reference to the corresponding
      exhibit in the Company's Form 10-Q Quarterly  Report for the Quarter Ended
      September 30, 1999 (File No. 1-10451).

(22)  This exhibit is  incorporated  herein by  reference  to the  corresponding
      exhibit in amendment No. 1 to the Company's Form 10-Q Quarterly Report for
      the Quarter Ended September 30, 1999 (File No. 1-10451).

(23)  This exhibit is  incorporated  herein by this reference to Exhibit 99.1 in
      the  Company's  Current  Report on Form 8-K filed with the SEC on November
      29, 1999 (File No. 1-10451).


                                      113
<PAGE>

(24)  This exhibit is  incorporated  herein by this reference to Exhibit 99.2 in
      the  Company's  Current  Report on Form 8-K filed with the SEC on November
      29, 1999 (File No. 1-10451).

(25)  This exhibit is  incorporated  herein by this reference to Exhibit 99.3 in
      the  Company's  Current  Report on Form 8-K filed with the SEC on November
      29, 1999 (File No. 1-10451).

(26)  This exhibit is  incorporated  herein by this reference to Exhibit 99.4 in
      the  Company's  Current  Report on Form 8-K filed with the SEC on November
      29, 1999 (File No. 1-10451).

(27)  This exhibit is  incorporated  herein by this reference to Exhibit 99.5 in
      the  Company's  Current  Report on Form 8-K filed with the SEC on November
      29, 1999 (File No. 1-10451).

(28)  This exhibit is  incorporated  herein by this reference to Exhibit 99.6 in
      the  Company's  Current  Report on Form 8-K filed with the SEC on November
      29, 1999 (File No. 1-10451).




                                      114