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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 1999
[ ] Transaction Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-12648
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3078632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10030 Barnes Canyon Road, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 812-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
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. [X]
The aggregate market value of voting stock held by non-affiliates of
the registrant was $42,706,156 as of June 15, 1999 (computed by reference to
the last sale price of a share of the registrant's Common Stock on that date
as reported on the New York Stock Exchange).
There were 18,733,745 shares outstanding of the registrant's Common
Stock as of June 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12 and 13 of this Report is
incorporated by reference to the registrant's definitive proxy statement for
the 1999 Annual Meeting of Stockholders to be held August 27, 1999. Certain
exhibits filed with the registrant's prior registration statements and period
reports under the Securities Exchange Act of 1939 are incorporated herein by
reference into Part IV of this report.
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PART I
ITEM 1. BUSINESS
THE TEXT OF THIS FORM 10-K, INCLUDING THIS BUSINESS SECTION, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE
RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REPORT EVENTS
ON CIRCUMSTANCES ARISING AFTER THE DATE OF THIS ANNUAL REPORT. IN ADDITION TO
RISKS AND UNCERTAINTIES SPECIFICALLY IDENTIFIED IN THESE SECTIONS, FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THE FAILURE OF OPTISON TO GAIN WIDE MARKET ACCEPTANCE, THE
FAILURE OF OPTISON TO GAIN FDA APPROVAL FOR NEW INDICATIONS, ADVERSE RESULTS
IN THE COMPANY'S ONGOING PATENT LAWSUITS, THE FAILURE OF THE COMPANY AND
MALLINCKRODT TO CONCLUDE THEIR AGREEMENT RELATING TO THE TRANSFER OF OPTISON
MANUFACTURING RESPONSIBILITY TO MALLINCKRODT, AND OTHER FACTORS IDENTIFIED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND PRESS
RELEASES.
GENERAL
Molecular Biosystems, Inc. ("MBI" or the "Company") is a leader in the
development, manufacture and sale of ultrasound contrast imaging agents.
These contrast agents are used primarily to improve the real-time images
("moving pictures") of organs and body structures, especially the heart,
obtained through ultrasound examinations. MBI's products are designed to
increase the diagnostic usefulness of ultrasound examinations through
enhanced visualization of structures and vasculature, and to reduce the need
for other diagnostic procedures that may be more expensive, time-consuming or
invasive. MBI is the first and only company to obtain marketing approval from
the United States Food and Drug Administration ("FDA") for ultrasound
contrast agents, having gained approvals for ALBUNEX-Registered Trademark- in
1994 and for OPTISON-Registered Trademark- (the Company's second-generation
agent) in 1997. OPTISON, a significant improvement over ALBUNEX in terms of
efficacy, is used to detect heart disease by assessing blood flow within the
heart chambers and by identifying the location of the chamber borders and the
movement of the chamber walls ("cardiac function"). OPTISON is the only
advanced generation cardiac ultrasound imaging agent commercially available
in the United States and Europe.
To increase the potential applications of OPTISON, MBI has conducted
Phase 2 clinical trials to evaluate the product's efficacy in determining
whether the heart muscle is receiving an adequate blood supply ("myocardial
perfusion"). The multiple Phase 2 trials include use of OPTISON in the
emergency room for patients with chest pain, and in various forms of stress
echocardiography. Results using OPTISON in each of these applications suggest
a close agreement with nuclear imaging for the detection of ischemia
("reduced blood supply") by wall motion and perfusion. Furthermore, the
results indicate that use of OPTISON could help to "rescue" a large
proportion of uninterpretable non-contrast studies, thereby reducing the need
for additional, more expensive and time-consuming testing. The Company
believes the information regarding perfusion will enable cardiologists to
diagnose heart attacks and coronary artery disease more accurately and safely
than is currently feasible. MBI is also conducting Phase 2 clinical studies
using OPTISON to detect abnormalities in other organs, such as the liver.
Ultrasound imaging is a widely-used and cost-effective technique to
examine soft tissues, internal body organs and blood flow. Ultrasound systems
use low-power, high-frequency sound waves that are reflected by tissues and
fluids to produce real-time images. It is estimated that over 63 million
ultrasound imaging procedures are performed in the United States each year,
of which approximately 15 million procedures are used to examine the heart
("echocardiograms"). Unlike other imaging modalities, such as magnetic
resonance imaging, computed tomography and nuclear imaging, ultrasound
imaging procedures could not be performed with contrast agents to enhance
images until the approval of ALBUNEX and the subsequent approval of OPTISON.
Non-contrast ultrasound, while very good in delineating anatomy, often
results in poor image quality and is unable to demonstrate actual blood flow
within organ tissue.
MBI's ultrasound contrast agents are designed to enhance existing
ultrasound procedures by improving their ability to image blood flow and by
providing clearer images of body structures and organs. OPTISON and ALBUNEX
consist of human albumin microspheres made using MBI's patented process. The
microspheres are injected intravenously into the bloodstream and transported
to the heart and other organs. Because the microspheres are highly reflective
to the ultrasound beam, organs and structures containing blood will appear
more brightly and clearly than they would in the absence of the contrast
agent. Albumin is a protein naturally found in human blood and has been used
for many years as a blood expander. Both ALBUNEX, which was first marketed in
Japan in October 1993, and OPTISON, which has been marketed in the
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United States since January 1998, have a strong safety profile as
demonstrated in over 80,000 patients with no unexpected adverse events.
OPTISON permits cardiologists to see blood flow in the chambers of the
heart and the motion of the heart muscle using ultrasound. Cardiologists are
particularly interested in viewing the left ventricle, the chamber of the
heart which pumps oxygenated blood arriving from the lungs to all other parts
of the body. In approximately 15-20% of patients undergoing an
echocardiogram, the wall of the left ventricle (the "endocardial border")
cannot be detected or its location appears ambiguous on the ultrasound image
depending on the physical and disease condition of the patient. When OPTISON
enters the left ventricle, however, the endocardial border can be visualized
because of the reflectivity of the OPTISON microspheres in the blood. When
the endocardial border is visible, cardiologists can observe its motion and
thus are able to interpret cardiac function, which is critical in diagnosing
cardiac disease, including damage from a heart attack.
In addition to other indications, OPTISON is designed to permit
cardiologists to evaluate myocardial perfusion. Unlike ALBUNEX, which is
air-filled, OPTISON microspheres contain an insoluble gas, octafluoropropane.
Because of their composition, the contrast effect from OPTISON microspheres
lasts up to 5 minutes, as opposed to 35-40 seconds with ALBUNEX microspheres.
The Company believes that if its clinical trials for myocardial perfusion are
successful, OPTISON will provide important diagnostic benefits, including
detecting areas of the heart muscle compromised due to coronary artery
stenosis as well as detecting the lack of blood flow in the heart muscle
resulting from a complete occlusion of a coronary artery (heart attack). The
Company believes that OPTISON may have much greater market potential than
ALBUNEX because of the greater diagnostic importance of the indications for
which it may be suitable (such as myocardial perfusion) when used in
conjunction with new ultrasound imaging modalities.
In June 1998, the Company announced that results from Phase 2 myocardial
perfusion clinical trials for OPTISON indicate that it may be a useful
contrast agent for the evaluation of myocardial perfusion. The Company
believes that the use of OPTISON in routine diagnostic as well as emergency
room procedures may significantly reduce the overall cost of patient care by
substituting ultrasound for more expensive diagnostic methods, such as
nuclear imaging, and by enabling more accurate screening of patients to
determine whether follow-up diagnostic or surgical procedures are required.
In March 1996, the Company announced that preliminary analysis of Phase 2
myocardial perfusion results indicated a 92% agreement between diagnoses of
patients with known or suspected heart disease made using dipyridamole-stress
nuclear imaging, the current perfusion "gold standard," and
dipyridamole-stress harmonic ultrasound imaging using OPTISON.
In the area of computed tomography imaging ("CT"), MBI is developing a
novel contrast agent, MB-840, which employs iodinated triglycerides ("ITG")
to target hepatocytes (liver cells), thereby providing a site-specific
contrast agent for CT. Current CT imaging is not effective in identifying the
very early stages of liver cancer even with the use of traditional iodinated
x-ray contrast agents. The Company believes that MB-840 may make possible
consistent early identification of liver cancer by CT. At present, the
Company is currently conducting pre-clinical trials for MB-840.
MBI is collaborating with Mallinckrodt, Inc. ("Mallinckrodt") to develop
and commercialize OPTISON in all territories of the world with the exception
of Japan, Taiwan and South Korea. Mallinckrodt is one of the world leaders in
the marketing of contrast imaging agents, with 1998 imaging agent sales of
approximately $760 million. MBI's relationship with Mallinckrodt began in
1988 with the execution of a distribution agreement for ALBUNEX in North and
South America and a related investment agreement pursuant to which
Mallinckrodt paid the Company approximately $30 million.
The Company and Mallinckrodt expanded their original agreement in
September 1995 when the parties entered into an Amended and Restated
Distribution Agreement ("ARDA"). ARDA expanded the geographic scope and
extended the duration of Mallinckrodt's exclusive marketing rights.
Mallinckrodt at that time also made a $13.0 million equity investment in MBI
and committed $20.0 million to the clinical development of OPTISON and
related projects. MBI has received $3.0 million and may receive up to an
additional $9.5 million upon meeting certain territorial and product
development milestones. There can be no assurances, however, that future
milestones will be met.
In December 1996, the Company and Mallinckrodt amended ARDA to further
expand the geographical scope of Mallinckrodt's exclusive marketing and
distribution rights for OPTISON, ALBUNEX and related products. The amendment
extended Mallinckrodt's exclusive territory to include the territory that the
Company had formerly licensed to Nycomed Imaging AS, consisting of Europe,
Africa, India and parts of Asia.
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Under ARDA, the Company is responsible for manufacturing all licensed
products for sale to Mallinckrodt at a price generally equal to 40% of
Mallinckrodt's quarterly average selling price to end users. The Company is
also responsible for conducting clinical trials and securing regulatory
approvals of the licensed products in the United States for cardiac
indications. Mallinckrodt is responsible for conducting clinical trials and
securing approvals of the licensed products in the United States for
non-cardiac indications ("Radiology") and is responsible for conducting all
clinical trials and securing approvals in the other countries in
Mallinckrodt's territory.
In April 1999, the Company and Mallinckrodt Inc. agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties agreement will
be incorporated into an amendment to ARDA. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology, as well
as radiology, clinical trials for OPTISON in the United States. MBI will
continue to conduct all cardiology trials for OPTISON and will assume
responsibility for conducting radiology trials in the United States. Under
the amended agreement, Mallinckrodt will reimburse MBI for all manufacturing
expenses, including incremental costs related to the technology transfer and,
in exchange for the transfer of manufacturing and increased financial support
of clinical trials for OPTISON, MBI will receive a reduced royalty rate on
product sales of OPTISON.
In April 1998, the Company and Chugai entered into a strategic alliance
to develop and commercialize OPTISON and ORALEX in Japan, Taiwan and South
Korea. (Chugai may market OPTISON under a name other than "OPTISON." In the
Chugai agreement, OPTISON is referred to as "FS069," MBI's developmental name
for OPTISON.) In exchange for granting to Chugai a royalty-based license to
market these products in the named countries, MBI received an upfront license
fee from Chugai of $14.0 million. In addition, Chugai made an equity
investment in MBI common stock of $8.3 million at a premium of 40% over the
then-prevailing market price. MBI is eligible to receive milestone payments
of up to $20.0 million based on the achievement of certain product
development goals in the territory and will receive royalties from Chugai
from the sale of commercialized products in the territory.
BUSINESS STRATEGY
The Company's objective is to remain a leader in the development and
commercialization of innovative contrast imaging agents. MBI intends to
achieve this objective by implementing the following key strategies.
DEVELOP OPTISON FOR MULTIPLE INDICATIONS. MBI's primary clinical
developmental objective is to gain additional regulatory approvals in the
United States and abroad for OPTISON for the diagnosis of multiple cardiac
indications, such as cardiac function and myocardial perfusion. Thereafter,
the Company intends to expand the application of OPTISON by seeking approval
for non-cardiac (radiology) indications. The Company believes that the
extensive knowledge that it and Mallinckrodt have gained through the
marketing of ALBUNEX regarding the requirements of the medical and
third-party payor communities will assist in the commercialization of OPTISON.
DEMONSTRATE COST-EFFECTIVENESS. The Company and Mallinckrodt will
continue to design studies to demonstrate the overall cost-effectiveness of
using the Company's ultrasound contrast agents. The Company believes that
such studies may establish that use of OPTISON can significantly reduce the
overall cost of patient care by substituting ultrasound for more expensive
diagnostic modalities, and by enabling more accurate screening of patients to
determine whether follow-up diagnostic or therapeutic procedures are required.
NEW PRODUCT DEVELOPMENT. The Company has established significant
clinical, regulatory and manufacturing expertise in the development of
OPTISON and ALBUNEX. The Company intends to leverage this expertise for the
development of new, proprietary imaging products such as ORALEX, MB-840, and
other products.
INDUSTRY BACKGROUND
NON-ULTRASOUND IMAGING TECHNIQUES
Since the discovery of x-rays, medical imaging has been used extensively
to diagnose and guide the treatment of diseases and injuries to internal
organs. Medical imaging can be used to identify high-risk patients, make
initial diagnoses, confirm diagnoses based on other information, formulate
treatment plans, and evaluate the effectiveness of treatment and detect the
recurrence of a medical problem. Generally, imaging improves patient care and
lowers health care costs by enabling the detection of disease or abnormal
structures not apparent by routine physical examination.
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There are a variety of medical imaging methods, or "modalities,"
available to the physician. The choice of modality by the physician depends
on a number of factors, including the part of the body to be imaged, the
suspected condition to be investigated, the cost of the procedure, the
diagnostic usefulness of the image and the condition of the patient. Other
important factors in determining the selection of a modality are the
availability of equipment and trained operators and the ability to schedule
time on the equipment. The major non-ultrasound modalities are:
COMPUTED TOMOGRAPHY ("CT"). CT employs x-rays aimed into the body from
several different angles to create a computerized static "snapshot" image of
soft tissue and bones. CT is used extensively to image the head and neck for
injury and disease, and is also used to detect liver cancer and other
hepatobiliary diseases. CT may employ injectable contrast agents which absorb
x-rays and thereby enhance structural imaging. According to published
reports, approximately 23 million CT examinations are performed annually in
the United States, approximately 44% of which employed a contrast agent.
While CT is effective in revealing anatomic detail, it is expensive, does not
generally provide real-time images or permit the assessment of blood flow,
and exposes patients to radiation. CT is rarely used to image the heart.
CONVENTIONAL X-RAY. Familiar procedures such as chest x-rays and
mammograms use x-rays aimed from only a single angle and do not require
computer reconstruction to create an image. According to published reports,
more than 5 million abdominal x-rays performed annually in the United States
employed barium as a contrast agent to examine the gastrointestinal system.
Conventional x-ray is not used to assess heart function.
MAGNETIC RESONANCE IMAGING ("MRI"). MRI creates an image by exposing the
body to a radio frequency pulse to which the body's hydrogen atoms respond in
a way detectable by the MRI equipment. This information is analyzed by
computer and a cross-sectional image is produced. MRI is used primarily to
image soft tissues in order to detect tumors, lesions, and injuries. An
accurate image is produced, but as with CT, the images are not real-time. In
addition, MRI does not generally provide information on blood flow or
perfusion of blood into organs and tissues, and has not yet been accepted as
a primary diagnostic for imaging of the heart. According to published
reports, more than 9 million MRI procedures are performed annually in the
United States, approximately 29% of which use a contrast imaging agent.
NUCLEAR IMAGING. Nuclear imaging requires the injection of radioactive
substances into the body. The radiation is detected by a special camera and
analyzed by computer, resulting in a static image that does not depict blood
flow in real time. Great care is required in the handling and disposal of
radioactive contrast agents. Nuclear imaging is used primarily to detect
cardiovascular disease, malignancies and soft-tissue tumors and is typically
preceded by a stress echocardiogram exam. Nuclear imaging is also the current
"gold standard" used to detect myocardial perfusion. According to published
reports, nearly 13 million nuclear imaging procedures are performed annually
in the United States, approximately 5 million of which are cardiac perfusion
studies.
X-RAY ANGIOGRAPHY. Angiography is used to visualize real-time blood flow
in the body's vasculature in order to determine the presence of blockages or
occlusions in the vessels leading to the heart prior to performing bypass
surgery or balloon angioplasty. A catheter is inserted into a vessel or
directly into the heart chamber and a contrast agent that is visible using
special x-ray detection equipment is injected. This procedure requires a
specially-equipped laboratory. It is effective in locating blockages and
occlusions, but it is expensive, invasive, and exposes the patient to x-ray
radiation. According to published reports, approximately 1.3 million
interventional angiographic examinations and approximately 3 million cardiac
catheterization procedures are performed annually in the United States.
ULTRASOUND IMAGING
Ultrasound employs low-power, high-frequency sound waves which are directed
at the organ to be imaged by placing a generating instrument called a
"transducer" on the body near the organ. The sound waves are reflected off of
the organ or tissue back to the ultrasound machine. The ultrasound machine
reads the reflected sound waves and produces a cross-sectional real-time
"moving picture" image of the targeted organ or tissue. Ultrasound is used to
image the heart, liver, kidneys, gall bladder, pancreas, other abdominal
structures, blood vessels, and the reproductive system, and is also being
investigated for use with brain and breast examinations. Cardiac ultrasound
examinations are called "echocardiograms." Non-cardiac diagnostic ultrasound
examinations are referred to as "radiology" indications or applications. The
advantages of ultrasound include:
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- SAFETY. The sound waves employed by ultrasound have no noticeable
medical effect on the body. The same organs or sections of the
body may be imaged repeatedly for long periods of time with no
adverse effects. Ultrasound is routinely used in fetal
examinations.
- EASE OF USE. Ultrasound exams are relatively simple to perform and
require little patient preparation. Unlike machines used for MRI,
CT, nuclear imaging and x-ray angiography, ultrasound machines are
compact and portable and do not require specially-equipped
facilities or housing.
- REAL-TIME IMAGES. Unlike the other imaging modalities (with the
exception of x-ray angiography and, to a less frequent extent,
CT), ultrasound creates a "moving picture" of the targeted organ.
The organ under study may be safely examined over any period of
time selected by the physician. This feature is especially
important in heart examinations, where the dynamics of the beating
heart are of diagnostic importance to the cardiologist.
- LARGE INSTALLED BASE. There is a large installed base of
ultrasound machines throughout the world. According to published
reports, there are more than 70,000 machines installed in the
United States. Several large manufacturers such as
Hewlett-Packard, ATL, Acuson, General Electric and Toshiba compete
in the ultrasound hardware market.
- PRICE. Ultrasound is a relatively inexpensive procedure. According
to a recent published article on diagnostic costs, an average cost
of a cardiac perfusion nuclear exam is $670, a cardiac
catherization is $2,048 and an echocardiogram is $319.
Although ultrasound is a widely-used imaging modality, the visual
clarity of non-contrast-enhanced ultrasound images is generally inferior to
that obtainable using certain of the other modalities. With each of the other
modalities, contrast agents are frequently used, and in nuclear imaging and
x-ray angiography, an imaging agent is required to create the images. Until
the introduction of ALBUNEX, no imaging agents were available in the United
States for use with ultrasound.
"Conventional" ultrasound imaging sends and receives sound waves at a
single frequency; this is called the "fundamental" frequency. The Company's
products are being tested with new ultrasound techniques which, although
currently not widely available, may find acceptance in diagnostic imaging
over the next several years. The most significant of these new techniques is
"harmonic imaging." Researchers have discovered that if the ultrasound
machine's transducer is modified to read the sound waves returning from the
imaged area at a multiple ("harmonic") of the outgoing fundamental frequency,
and if a contrast agent is used, the resulting image can provide more
complete information on blood flow and structures in the scanned area than is
available with a conventional ultrasound exam. This is because the
microspheres generate a harmonic signal significantly stronger than that
generated by the tissue, resulting in a significantly enhanced
signal-to-noise ratio.
PRODUCTS AND MARKETS
OPTISON AND ALBUNEX MICROSPHERE TECHNOLOGY
Both OPTISON and ALBUNEX are ultrasound contrast imaging agents
consisting of gas-filled human albumin microspheres manufactured using MBI's
proprietary process and albumin microsphere technology. They are injected
into an arm vein and pass through the bloodstream to the right atrium and
ventricle of the heart, where they are pumped through the lungs and into the
left atrium and ventricle of the heart. The left ventricle is the chamber of
the heart that pumps oxygenated blood arriving from the lungs out to the rest
of the body and is the portion of the heart that is of the greatest clinical
interest in the diagnosis of heart disease.
ALBUNEX microspheres are air-filled, while OPTISON microspheres are
filled with an insoluble gas, octafluoropropane. The use of OPTISON and
ALBUNEX as ultrasound imaging contrast agents relies on the greater acoustic
reflectivity of the microspheres relative to blood, which does not reflect
sound waves well and is effectively invisible to ultrasound imaging, and
relative to the tissues to which the blood carries the microspheres. Areas
where OPTISON and ALBUNEX are present will appear brighter and clearer than
areas where no agent is present. The contrast effect between the blood
containing the microspheres and the surrounding tissues enhances the ability
to detect blood flow using ultrasound imaging and permits the resolution of
subtle differences in the density of the target tissue structures.
OPTISON, which uses a 1% albumin solution (in saline), has exhibited a
safety profile in clinical studies equivalent to that of ALBUNEX. ALBUNEX
consists of a 5% albumin solution in which the air-filled microspheres are
suspended.
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Human albumin is a protein extracted from blood and has been used as a blood
expander for many years. Both ALBUNEX, which was first marketed in Japan in
October 1993, and OPTISON, which has been marketed in the United States since
January 1998, have a strong safety profile as demonstrated in over 80,000
patients with no unexpected adverse events.
ALBUNEX
ALBUNEX the first ultrasound contrast imaging agent to be approved by the
FDA. The FDA approved ALBUNEX for marketing in the United States in August
1994 to assess cardiac function. It has also been approved in Japan and
Europe. The Company believes that OPTISON has replaced ALBUNEX in the market
because of OPTISON's superior performance characteristics.
OPTISON
OPTISON was the first perfluorocarbon based agent to have been approved
for sale in the United States by the FDA. The Company received FDA approval
for OPTISON in December 1997. In May 1998, OPTISON became the first
perfluorocarbon based agent to receive final marketing authorization by the
European Agency for the Evaluation of Medicinal Products for use in patients
with suspected or known cardiovascular disease. OPTISON consists of
octafluoropropane-filled albumin microspheres of approximately the same size
and concentration as ALBUNEX. Because octafluoropropane is insoluble in
blood, the microspheres in OPTISON have greater durability and remain intact
in the bloodstream for over 5 minutes, versus 35 to 40 seconds for ALBUNEX.
This greater durability permits more of the microspheres to pass from the
right side of the heart, through the microvasculature of the lungs, and into
the left side of the heart. As a result, OPTISON is superior to ALBUNEX in
its ability to enhance endocardial border delineation and regional wall
motion using ultrasound. More importantly, the durability of the OPTISON
microspheres enable them to circulate into the heart muscle and may permit
the assessment of myocardial perfusion using ultrasound.
CARDIAC FUNCTION. Clinical studies have demonstrated that OPTISON is
effective in visualizing blood flow in the chambers of the heart, including
the delineation of endocardial borders and the assessment of regional wall
motion. In 15-20% of the echocardiograms performed annually in the United
States, the location of the wall of the left ventricle, or "endocardial
border," cannot be satisfactorily visualized or its location appears
ambiguous. Clinical studies demonstrated a high success rate for this
indication in cases of suboptimal chamber wall imaging in both stressed and
non-stressed patients. When sufficient numbers of OPTISON microspheres reach
the left ventricle, the acoustical reflectivity of OPTISON in the chamber
permits the endocardial border to be seen by defining the walls of the
chamber, or "endocardial border delineation." This delineation in turn
permits visualization of the movement of the walls of the chamber as the
heart beats, or "regional wall motion." Information regarding endocardial
border delineation and regional wall motion are important for diagnostic
purposes. If the chamber walls appear thicker than normal or are not moving
normally, it is a potential indicator that the surrounding heart muscle is
not receiving sufficient blood or is abnormal in some other way, which, in
turn, may indicate an infarction (heart attack), stenosis (partial blockage
of an artery) or other abnormal condition. OPTISON has demonstrated efficacy
at a much lower dose than ALBUNEX requires, with an equivalent safety profile.
MYOCARDIAL PERFUSION. Clinical studies indicate that the longer
circulation time of the octafluoropropane-filled microspheres in OPTISON may
allow a physician to assess myocardial perfusion using ultrasound. The
Company conducted a Phase 1 safety study which demonstrated a safe dosing
range of many times the expected efficacious dose and also showed myocardial
perfusion in healthy patients using a dose as low as 0.5 cc. Analysis of
Phase 2 results indicated a 92% agreemeny between diagnoses of patients with
known or suspected heart disease made using dipyridamole-stress nuclear
imaging, the current perfusion "gold standard," and dipyridamole-stress
harmonic ultrasound imaging using OPTISON. In June 1998, the Company
announced that results from Phase 2 myocardial perfusion clinical trials for
OPTISON indicate that it may be a useful contrast agent for the evaluation of
myocardial perfusion. The Company will design future Phase 3 studies to
evaluate, among other things, myocardial perfusion in cardiac patients using
ultrasound at both fundamental and harmonic frequencies.
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Myocardial perfusion is important because it provides oxygenated blood to
the heart muscle. If OPTISON is not detected in a portion of the heart
muscle, or not detected with the expected level of intensity, it means that a
portion of the muscle is not receiving enough blood ("ischemia"). This
finding may be diagnostic of several conditions, including coronary arterial
stenosis and myocardial infarction.
The ability to rapidly assess the condition of the heart using OPTISON
may also prove efficacious and cost-effective in the emergency room and in
the subsequent treatment of heart attacks. For example, a patient arriving at
the emergency room complaining of chest pain may be quickly assessed using
ultrasound with OPTISON. If no perfusion defect is seen in the heart, a
myocardial infarction may be ruled out. Where a perfusion defect is detected
using OPTISON, the Company believes that information regarding its severity,
size and location may assist the physician in determining the patient's
condition. A patient with an extensive infarction may be sent immediately for
an angiogram and even emergency angioplasty. A patient with a less severe
infarction may be given a thrombolytic (clot-dissolving) agent. This patient
may then undergo an additional OPTISON echocardiogram to see whether the
affected area of the heart muscle has reperfused; that is, whether the
thrombolytic agent was successful in treating the condition. If the OPTISON
echocardiogram shows that the muscle has reperfused, the physician would not
have to order any additional emergency procedures and conventional treatment
might begin. Subsequent OPTISON echocardiograms may be used to assess the
effectiveness of the post-emergency-room treatment; for example, how the
heart muscle has responded to different medications, changes in diet,
exercise program, weight loss and other therapies.
The Company believes that the assessment of myocardial perfusion may also
be important in screening high-risk patients prior to general surgery or
other potentially stressful treatment regimens. For example, a surgeon may
wish to assess whether an elderly or weakened patient is capable of
undergoing a particular surgery or treatment without a cardiac incident. An
OPTISON echocardiogram may be safely administered to assist the physician in
making this determination.
Commercialization of OPTISON for myocardial perfusion may require the
conversion of present ultrasound equipment to harmonic imaging frequencies.
Although the Company is aware of the development of commercial harmonic
modules for attachment to existing ultrasound machines as well as efforts to
develop new harmonic imaging machinery by several hardware manufacturers,
there can be no assurance that any of these current efforts will be
successfully commercialized. See "Industry Background - Ultrasound Imaging."
RADIOLOGY INDICATIONS. The stability of the OPTISON microspheres renders
the product potentially suitable for a much greater range of indications than
ALBUNEX. In preclinical studies, OPTISON has been shown to perfuse the liver,
which may permit the detection of tumors and lesions using ultrasound.
Preliminary animal studies have shown OPTISON is able to perfuse the kidneys,
ovaries, prostate, testes and peripheral intracranial vessels. The Company
plans clinical studies to evaluate the use of OPTISON in the detection of
liver pathology relative to the current imaging "gold standard" for analyzing
liver pathology.
OPTISON enjoys several other potential advantages. In clinical studies,
OPTISON has achieved greater efficacy at a fraction of the dose of ALBUNEX
required for the assessment of cardiac function. The Company expects that
this low dosage will make OPTISON attractive to the patient as well as the
doctor. In addition, OPTISON uses a 1% albumin solution, compared to a 5%
albumin solution required for ALBUNEX. The lower dose required and the lesser
amount of albumin used may lower the per-unit manufacturing cost and may
allow for the production of more doses of OPTISON than ALBUNEX using
equivalent manufacturing capacity.
MB-840
MBI is developing a novel contrast agent, MB-840, which employs iodinated
triglycerides ("ITG") to target hepatocytes (liver cells), thereby providing
a site-specific contrast agent for CT. Current CT imaging is not effective in
identifying the very early stages of liver cancer even with the use of
traditional iodinated x-ray contrast agents. The Company believes that MB-840
may make possible consistent early identification of liver cancer by CT.
In 1996, approximately 40% of the 7.25 million CT procedures performed
in the US were specific for the abdomen and liver. The evaluation of
abdominal pain, primary or metastatic cancer and undefined mass or cyst
detection were the most commonly ordered procedures in the multi-billion
dollar iodinated contrast market. The Company anticipates that CT
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imaging with contrast will not only become routine for existing applications
but will also create entirely new markets for CT procedures.
Potential applications of MB-840 include the assessment of gallbladder
disorders, liver transplant efficacy, hepatobiliary duct patency,
disease-induced hepatic dysfunction associated with diabetes, alcoholism,
cirrhosis, fibrosis, and hepatitis hepatobiliary disorders such as
cholecystitis, biliary obstruction, hepatobiliary tumors and
choledocolithiasis. Even if the enhancement profiles of the ITG contrasts
prove to be only as good as those of water-soluble contrast media, the ITG
formulations will still bring advantages to the marketplace because of ease
of use (administered manually at slow injection rates), reduced dose, lower
osmolarity, minimal renal elimination, and positive impact on patient
throughput.
Competition to MB-840 comes from three primary sources: 1) commercially
available iodinated contrast media; 2) iodinated lipids, emulsions, and
lipophilic derivatives of water-soluble compounds currently under
development; and 3) liver-specific agents designed for use in magnetic
resonance imaging (MRI) or other imaging modalities. A benefit of using CT
imaging with ITG contrast is the localization of the contrast agent to a
target tissue which reduces systemic toxicity, lowers the doses required for
effective enhancement and maximizes diagnostic efficiency in the target
organ. In addition, ITG contrast agents have the potential for evaluation of
physiological function in the liver. Preliminary safety studies with animals
administered ITG have shown no adverse effects.
MBI holds an exclusive license from the University of Michigan for
patents relating to the ITG technology which requires the Company to exercise
diligence in the development and commercialization of MB-840. If the Company
does not enter into a collaborative development relationship with a partner
or determines that it will no longer invest its own resources in the
development of MB-840, the Company's license from the University of Michigan
will terminate at the University's option. At present, the Company continues
to develop the product and is currently conducting pre-clinical trials for
MB-840.
ORALEX
The Company is developing ORALEX, an oral ultrasound contrast agent
intended to enhance images of the abdomen, including the small bowel, stomach
lining and structures adjoining the stomach, in particular the pancreas.
MBI has entered into a strategic alliance with Chugai to develop and
commercialize ORALEX in Japan, Taiwan and South Korea. See "General." In the
United States, the Company is seeking a partner for continued development of
ORALEX. Because of the Company's primary commitment to OPTISON and MB-840, it
has determined that it will begin Phase 3 clinical trials for ORALEX only
when it has found a collaborative partner to fund a significant portion of
the necessary clinical and regulatory activities in the United States.
MARKETING AND LICENSE AGREEMENTS
MALLINCKRODT, INC. MBI's distribution agreement with Mallinckrodt forms
the basis of its product development and marketing program for products
containing albumin microspheres such as OPTISON and ALBUNEX.
In December 1988, the Company entered into a distribution agreement with
Mallinckrodt granting it the exclusive marketing and distribution rights for
ALBUNEX as defined and gas-filled albumin microspheres in North and South
America. Mallinckrodt paid the Company $6.0 million and agreed to pay the
Company a further $21.0 million based on the successful completion of certain
product development and regulatory milestones. Mallinckrodt also paid the
Company $3.0 million for 181,818 unregistered shares of the Company's Common
Stock. Under the distribution agreement, the Company was responsible for
conducting clinical trials and securing regulatory approvals of the licensed
products in the United States for cardiac indications, and Mallinckrodt was
responsible for conducting clinical trials and securing regulatory approvals
in the United States for non-cardiac indications and was responsible for
conducting all clinical trials and securing approvals in the other countries
in Mallinckrodt's territory. The Company manufactures all licensed products
for sale to Mallinckrodt at a price generally equal to 40% of Mallinckrodt's
quarterly average selling price to end users. The Company expects to transfer
the manufacturing responsibility to Mallinckrodt pursuant to an agreement
announced in April 1999 (see below).
The distribution agreement lasts for the life of the licensed patents
and, prior to amendment in September 1995, granted Mallinckrodt exclusive
rights for five years following the first commercial sale of ALBUNEX in the
United States, after which MBI was granted the assignable right to co-market
the licensed products. In accordance with the distribution agreement, the
Company undertook to acquire license rights from a third party to a United
States patent for certain related
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technology. The Company acquired these rights in February 1991, and in
connection with this acquisition the Company and Mallinckrodt agreed to pay
royalties to the licensor of 0.8% and 1.2%, respectively, on the net sales of
ALBUNEX in the United States.
In September 1991, the Company and Mallinckrodt entered into an Amended
and Restated Distribution Agreement ("ARDA"), which strengthened and expanded
the parties' relationship. ARDA expands the geographic scope of
Mallinckrodt's exclusive right to market the licensed products to include all
of the countries of the world other than those covered by the Company's then
existing license agreements with Shionogi and Nycomed and extends the
duration of Mallinckrodt's exclusive rights to the later of July 1, 2003 or
three years after the date that the Company obtains approval from the FDA to
market OPTISON for an intravenous myocardial perfusion indication.
Mallinckrodt agreed to pay the Company $20.0 million over four years
beginning in October 1995 to support clinical trials of OPTISON, related
regulatory submissions and associated product development and to pay up to an
additional $9.5 million upon the satisfaction of certain territorial and
product development milestones. ARDA required the Company to spend at least
$10.0 million for clinical trials to support regulatory filings with the FDA
for cardiac indications of OPTISON. Under a related investment agreement,
Mallinckrodt purchased 1,118,761 shares of the Company's Common Stock for
$13.0 million at a premium of 40% above the then-prevailing market price. In
addition, ARDA grants the Company the option to repurchase all of the shares
of the Company's Common Stock that Mallinckrodt purchased under the related
investment agreement for $45.0 million, subject to various price adjustments.
This option is exercisable from the later of July 1, 2000, or the date that
the FDA approves OPTISON for a myocardial perfusion indication, through the
later of the third anniversary of such approval or June 30, 2003. If the
Company exercises this option, the Company or its assignee may co-market
licensed products in all of the countries covered by ARDA.
In December 1996, the Company and Mallinckrodt amended ARDA to expand the
geographical scope of Mallinckrodt's exclusive marketing and distribution
rights for OPTISON, ALBUNEX and related products. The amendment extended
Mallinckrodt's exclusive territory to include the territory that the Company
had formerly licensed to Nycomed consisting of Europe, Africa, India and
parts of Asia. Under the amendment to ARDA, Mallinckrodt agreed to pay fees
of up to $12.9 million plus 40 percent of product sales to cover royalties
and manufacturing. Mallinckrodt made an initial payment of $7.1 million,
consisting of reimbursement to the Company of $2.7 million that the Company
paid to Nycomed to reacquire the exclusive product rights in Nycomed's
territory, payment of $3.0 million to the Company under the terms of ARDA
upon the extension of Mallinckrodt's exclusive rights to Nycomed's former
territory, and payment of $1.4 million to Nycomed in satisfaction of the
Company's obligation to pay 45% of any amounts that the Company receives in
excess of $2.7 million upon the licensing of the former Nycomed territory to
a third party. Of the remaining $5.8 million that may be paid, Mallinckrodt
will pay $4.0 million to the Company (upon the achievement of the specified
product development milestone) and $1.8 million to Nycomed (representing 45%
of the $4.0 million payment to the Company). There can be no assurance,
however, that the Company will satisfy this milestone.
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties agreement will
be incorporated into an amendment to ARDA. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology, as well
as radiology, clinical trials for OPTISON in the United States. MBI will
continue to conduct all cardiology trials for OPTISON and will assume
responsibility for conducting radiology trials in the United States. Under
the amended agreement, Mallinckrodt will reimburse MBI for all manufacturing
expenses, including incremental costs related to the technology transfer and,
in exchange for the transfer of manufacturing and increased financial support
of clinical trials for OPTISON, MBI will receive a reduced royalty rate on
product sales of OPTISON.
CHUGAI PHARMACEUTICAL CO., LTD. In an agreement dated March 31, 1998, the
Company entered into a cooperative development and marketing agreement with
Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan. The parties entered into
this strategic alliance which covers Japan, Taiwan and South Korea, to
develop OPTISON (which Chugai may market under a different name) and ORALEX,
as well as related products. The Company granted Chugai an exclusive license
to develop, manufacture, and market these products in the subject territory,
for which the Company received an upfront license fee of $14.0 million.
Chugai will pay the Company a royalty on net sales of licensed products which
Chugai manufactures. For licensed products which the Company manufactures,
Chugai will pay the Company royalties on net sales, depending upon the sales
volume, in addition to a transfer price based on average net sales per unit
from the previous quarter. Additionally, Chugai purchased 691,883 shares of
the Company's common stock at a premium of 40% over the then-prevailing
market price. The equity investment was valued at $8.3 million. The Company
is also eligible to receive milestone payments of up to $20.0 million based
on Chugai's achievement of certain Japanese product development and
regulatory goals.
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FEINSTEIN LICENSE. In November 1986, the Company entered into a license
agreement under which it acquired the exclusive right to develop, use and sell
any products derived from patents and applications which Stephen B. Feinstein,
M.D. owned covering sonicated gas-filled albumin microspheres used for imaging
and any future related patents and applications. In June 1989, the parties
restructured this agreement. The Company paid the licensor $4.5 million as an
additional license fee and $2.0 million as a prepayment of royalties on the
first $66.7 million of sales of the licensed products in the United States, and
the parties agreed to reduce the royalty rate on sales of licensed products from
6% to 3% on worldwide net sales by the Company (and United States sales by a
sublicensee) and from 2 1/2% to 1 1/4% on net sales by sublicensees outside of
the United States. The restructured agreement, requires the Company to pay
minimum royalties each year, increasing from $100,000 in 1994 to $600,000 in
1999 and subsequent years.
ITG AGENT. In November 1991, the Company entered into an exclusive license
agreement with the University of Michigan for certain patents relating to the
Company's ITG CT agent, MB-840, currently under development. The Company paid a
license fee of $20,000 and an annual license maintenance fee of $15,000. The
Company agreed to pay a royalty of from 2 1/2% to 6% on net sales of licensed
products, depending upon the jurisdiction and status of the particular product,
and also agreed to make annual minimum royalty payments increasing from $25,000
to $150,000. Effective June 1998, the Company and the University of Michigan
amended their exclusive license agreement. The Company agreed to increase the
annual license maintenance fee to $100,000 and to provide support for research
projects related to MB-840.
PATENTS AND TRADEMARKS
The Company considers the protection of its proprietary technologies to be
material to its business prospects. The Company pursues a comprehensive program
of patent and trademark prosecution for its products both in the United States
and in other countries where the Company believes that significant market
opportunities exist.
The Company has an exclusive license to certain United States and foreign
patents relating to gas-filled sonicated albumin microspheres from Steven B.
Feinstein, M.D. See "Marketing and License Agreements - Feinstein License." The
Company itself owns additional United States and foreign patents covering
ALBUNEX and OPTISON that broaden the product coverage of its license. Certain of
these additional patents cover the Company's continuous flow sonication
manufacturing process. Andaris Ltd. challenged the European equivalents of these
manufacturing patents in an opposition proceeding which was decided in the
Company's favor in January 1996. Andaris has appealed the decision. Andaris has
also filed an opposition against the Company's ALBUNEX composition patent in
Europe, and Andaris and two other parties have filed a similar opposition in
Japan. No hearing date has been set in these latter two oppositions.
The Company has received patents covering its method of manufacturing
gas-filled albumin microspheres using a milling process. The Company believes
that this process may be more efficient than the sonication process that the
Company currently uses. The Company has also received patents on other
perfluorocarbon-based technology relating to ultrasound contrast agents.
The Company owns a United States patent covering ORALEX and has several
foreign applications pending. The Company has also filed patent applications
relating to several early-stage development products. The Company is uncertain
whether these applications will result in issued patents or whether the covered
products can or will be commercialized.
The last-to-expire of the Company's key United States patents covering
OPTISON and ALBUNEX expires in 2008, and subject to the outcome of the
oppositions previously described, the last-to-expire of the Company's key
European patents covering OPTISON and ALBUNEX expires in 2009.
The patent position of medical and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the Company will receive patents for all or any of the claims
included in its pending or future patent applications, that any issued patents
will provide the Company with competitive advantages or that third parties will
not challenge any issued patents, or that existing or future patents of third
parties will not have an adverse effect on the Company's ability to
commercialize its products. Moreover, there can be no assurance that third
parties will not independently develop similar products, duplicate one or more
of the Company's products or design around the Company's patents.
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The Company's commercial success also will depend in part upon the Company
not infringing patents issued to third parties. There can be no assurance that
patents issued to third parties will not require the Company to alter its
products or manufacturing processes, pay licensing fees, or cease development of
its current or future products.
Litigation or administrative proceedings may be necessary to enforce the
Company's patents, to defend the Company against infringement claims or to
determine the priority, scope and validity of the proprietary rights of third
parties. See "Legal Proceedings." Any such litigation or administrative
proceedings could result in substantial costs to the Company, and an unfavorable
outcome could have a material adverse effect on the Company's business,
financial condition and results of operation. Moreover, there can be no
assurance that, in the event of an unfavorable outcome in any litigation or
administrative proceedings involving infringement claims against the Company,
the Company would be able to license any proprietary rights that it requires on
acceptable terms or at all. The Company's failure to obtain a license that it
requires to commercialize one of its products could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has become aware of several United States patents issued to
other companies purportedly covering various attributes of
perfluorocarbon-containing imaging agents such as OPTISON. Certain of these
companies also are pursuing foreign patent protection. Some of these companies
are developing or may be developing ultrasound contrast imaging agents that
would compete with OPTISON. The patents and patent applications of these other
companies involve a number of complex legal and factual issues that are
currently unresolved. The Company believes that there may be a substantial
overlap among many of the claims in their patents and is currently involved in
various administrative proceedings and litigation in the United States and
Europe to adjudicate their conflicting rights. See "Item 3-Legal Proceedings."
The Company believes that, for a variety of reasons, its commercialization
of OPTISON will not infringe any valid patent held by any of these other
companies. Depending upon the particular patent claim, these reasons include,
but are not limited to (i) differences between OPTISON and the subject of the
claim, (ii) the invalidity of the claim due to the existence of prior art, (iii)
the inadequacy of the claim's specifications, (iv) lack of enablement, (v)
inequitable conduct by patentee, and (vi) various other defenses as allowed by
law. The Company intends to challenge the validity of any such patent granted to
one of the other companies if the patent is asserted against the Company, and
the Company will enforce its own patents if any product of one of the other
companies infringes the Company's patent claims. See "Legal Proceedings."
The Company has obtained registered trademarks for "ORALEX" and "ALBUNEX" in
the United States and in selected foreign countries. Additionally Mallinckrodt
has filed for the trademark for "OPTISON" in various countries throughout the
world. There can be no assurance that the Company's registered or unregistered
trademarks and trade names will not infringe on the proprietary rights of third
parties.
The Company also relies on unpatented trade secrets, proprietary know-how
and continuing technological innovation which it seeks to protect by, in part,
confidentiality agreements with its employees, consultants, investigators and
others. There can be no assurance that these agreements will not be breached,
that the Company would have an adequate remedy for any breach or that the
Company's trade secrets or know-how will not otherwise become known or
independently discovered by third parties.
MANUFACTURING
During the fiscal year ended March 31, 1999, the Company manufactured
OPTISON and ALBUNEX for commercial sale in the United States in its aseptic
plant at its principal San Diego facility. The plant employed the Company's
patented continuous-flow sonication process in which a mixture of sterile
albumin solution and gas was subjected to ultrasonic energy. This treatment
denatures the albumin protein and facilitates a process known as "cavitation" in
which the stable gas-filled microspheres are created. During fiscal year ended
March 31, 1999, the Company replaced its first generation product, ALBUNEX, with
OPTISON.
The Company was able to meet all orders for OPTISON and ALBUNEX from
Mallinckrodt. However, in April 1999, the Company and Mallinckrodt agreed to
transfer the manufacture of OPTISON from MBI to Mallinckrodt as part of a
multi-phase program by the Company to reduce expenses and preserve capital. The
parties agreement will be incorporated into an amendment to ARDA. Under the
terms of the amended agreement, which will be retroactive to March 1, 1999,
Mallinckrodt will reimburse MBI for all manufacturing expenses, including
incremental costs related to the technology transfer. In exchange for the
transfer of manufacturing and increased financial support of clinical trials for
OPTISON, MBI
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will receive a reduced royalty rate on product sales of OPTISON. The Company
expects that it may take up to two years to fully complete the transfer of
manufacturing from MBI to Mallinckrodt.
COMPETITION
In general, competition in the field of contrast agents is based on such
factors as product performance and safety, product acceptance by physicians,
patent protection, manner of delivery, ease of use, price, distribution and
marketing. The Company's products compete or may compete with new or improved
contrast agents.
The Company anticipates that it will face increased competition in the
future as new products enter the market and advanced technologies become
available. The Company expects to compete against a number of companies, many of
which have substantially greater financial, technical and human resources than
the Company and may be better able to develop, manufacture and market products.
In addition, many of the Company's existing or potential competitors have
extensive experience in research, preclinical testing and human clinical trials,
obtaining FDA and other regulatory approvals, and manufacturing and marketing
their products, or are allied with major pharmaceutical companies that can
afford them these advantages. As a result, competitors may develop and introduce
competitive or superior products more rapidly than the Company. While the
Company was the first to obtain FDA approval of ultrasound contrast agents,
OPTISON and ALBUNEX, the Company expects that one or more of these competitors
will develop products that will be approved for an indication or indications
covered by OPTISON or ALBUNEX, including the assessment of cardiac function and
myocardial perfusion. There can be no assurance that existing products or new
products developed by the Company's competitors will not be more effective than
any products that may be developed by the Company. Competitive products may
render the Company's technology and products obsolete or noncompetitive.
Any product that the Company develops that gains regulatory approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, important competitive factors include the relative speed
with which the Company can develop products, complete clinical testing and the
regulatory approval process, gain reimbursement acceptance and supply commercial
quantities of the product for distribution to the market. In addition, the
Company believes that the primary competitive factors in the market for
ultrasound imaging agents are safety, efficacy, ease of delivery, reliability,
innovation and price. The Company also believes that physician relationships and
customer support are important competitive factors.
GOVERNMENT REGULATION
The Company's diagnostic products are subject to substantial regulation by
the FDA and comparable agencies in foreign countries. Pursuant to the federal
Food, Drug and Cosmetic Act, as amended, and the regulations promulgated
thereunder, the FDA regulates the research, development, clinical testing,
manufacture, labeling, distribution and promotion of medical products.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal by the FDA to review New Drug
Applications ("NDA"), withdrawal of marketing approvals, a recommendation by the
FDA that the Company not be permitted to enter into government contracts, and
criminal prosecution.
The process of obtaining FDA approval of new products like OPTISON, ORALEX
and MB-840 involves many steps. The Company must submit the results of
laboratory and animal tests to determine efficacy and safety, including
potential toxicity, to the FDA as part of an application for an Investigational
New Drug ("IND") before the Company may begin clinical trials on humans. After
completion of clinical trials, the Company must submit an NDA, in the case of
drugs, to the FDA for review and approval before the Company may begin
commercial marketing and sale for a new indication.
The FDA classifies OPTISON and ALBUNEX as drugs. As such, the FDA requires
these products to undergo the NDA process. An NDA must be supported by valid
scientific evidence that typically includes extensive data, including
preclinical and human clinical trial data to demonstrate the safety and efficacy
of the drug. If human clinical trials of a drug are required, the sponsor of the
trial is required to file an IND application with the FDA prior to beginning
human clinical trials. The IND application must be supported by data, typically
including the results of animal and laboratory testing. If the IND application
is approved by the FDA and the appropriate institutional review boards, human
clinical trials may begin at a specific site with a specific number of patients,
as specified in the approved protocol. An IND supplement must be submitted to
and approved by the FDA before a sponsor or an investigator may make any change
to the investigational plan that may affect its scientific soundness or the
rights, safety or welfare of human subjects.
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In addition to the results of clinical trials, the NDA must also contain the
results of all relevant bench tests, laboratory and animal studies, a complete
description of the drug and its components, and a detailed description of the
methods, facilities and controls used to manufacture the drug. In addition, the
submission must include the proposed labeling, advertising literature and any
relevant training methods. Upon receipt of an NDA application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the NDA is sufficiently
complete to permit a substantive review, the FDA will accept the application for
filing. Once the submission is accepted for filing, the FDA begins an in-depth
review of the NDA. An FDA review of an NDA application generally takes one to
two years from the date that the NDA application is accepted for filing, but may
take significantly longer. The review time is often significantly extended as a
result of the FDA asking for more information or for clarification of
information already provided in the submission. During the review period, an
advisory committee, typically a panel of clinicians, will likely be convened to
review and evaluate the application and provide recommendations to the FDA as to
whether the drug should be approved. The FDA is not bound by the recommendations
of the advisory panel. Toward the end of the review process, the FDA generally
will conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with the applicable Good Manufacturing Practices
("GMP") requirements.
If the FDA's evaluations of both the NDA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or, in
some cases, an "approvable letter" containing a number of conditions which must
be met in order to obtain final approval of the NDA. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue an NDA approval letter authorizing commercial marketing of the drug for
the specified indications. If the FDA's evaluation of the NDA applications or
manufacturing facilities is not favorable, the FDA will deny approval of the NDA
application or issue a "not approvable" letter. The FDA may also determine that
additional clinical trials are necessary, in which case NDA approval could be
delayed for several years while additional clinical trials are conducted and
submitted in an amendment to the NDA. The NDA process can be expensive,
uncertain and lengthy, and a number of drugs for which approval has been sought
by other companies have never been approved for marketing.
Any drugs manufactured or distributed by the Company pursuant to FDA
approvals are subject to pervasive and continuing regulations by the FDA and
certain state agencies. The FDA often requires drug manufacturers to conduct
post marketing surveillance studies following approval to further evaluate the
safety and effectiveness of the drug. Foreign and domestic regulatory approvals,
if granted, may include significant limitations on the indicated use for which
the product may be marketed. In addition, the FDA and certain foreign regulatory
authorities impose numerous other requirements with which medical drug
manufacturers must comply. Product approvals could be withdrawn for failure to
comply with regulatory standards or as a result of the occurrence of unforeseen
safety or effectiveness problems following initial marketing. The Company will
also be required to adhere to applicable FDA regulations setting forth current
GMP requirements, which include testing, control and documentation requirements.
The Company is also required to register with the FDA and with state agencies
such as the California Department of Health Services as a drug manufacturer and
to list its products with the FDA. Ongoing compliance with GMP and other
applicable regulatory requirements is monitored through periodic inspections by
state and federal agencies, including the FDA, and by comparable agencies in
other countries. Changes in existing regulations or adoption of new regulations
could prevent the Company from obtaining, or affect the timing of, future
approvals or clearances.
The FDA and equivalent foreign agencies have significant discretion in their
conduct of each stage of the regulatory process. Adverse decisions are
effectively unappealable, and agency delays are an unfortunate fact of life for
the companies they regulate.
The Company also intends to sell OPTISON and ALBUNEX in foreign countries.
The time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for additional FDA approval, and the requirements
may differ.
Labeling, advertising and other promotional activities are subject to
scrutiny by the FDA and in certain instances by the Federal Trade Commission.
The FDA actively enforces regulations prohibiting marketing of products for
unapproved uses, sometimes called "off-label" uses. The Company and its products
are also subject to a variety of state laws and regulations in those states or
localities where its products are or will be marketed. Any applicable state or
local regulations may hinder the Company's ability to market its products in
those states or localities.
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The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company's ability to do business.
Changes in existing requirements or the adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse effect
on the Company's business, financial condition, or results of operations.
THIRD PARTY REIMBURSEMENT
In the United States, the Company's products will be purchased primarily by
medical institutions that will then bill various third-party payors such as
Medicare, Medicaid and other government programs and private insurance plans. In
considering reimbursement for a new medical product, these payors must decide
whether to cover the product and how much to pay for it.
In general, to be covered by Medicare, a health care product or service must
be "reasonable and necessary" for the diagnosis or treatment of an illness or
injury. This requirement has been interpreted to mean that the product or
service must be safe and effective, not experimental or investigational (except
under certain limited circumstances involving drugs furnished pursuant to an
FDA-approved clinical trial), and appropriate. Medicaid, Blue Cross and Blue
Shield plans, commercial insurers and other third-party payors generally have
limitations on coverage which are similar to those of Medicare.
Even if a drug has received approval or clearance for marketing by the FDA,
there is no assurance that Medicare or other third-party payors will cover the
drug or related services. The Company is aware that certain third party payors
are providing reimbursement for OPTISON contrast echocardiography procedures.
Plans and programs are in place to develop expanded coverage among third party
payors. However, the Company also acknowledges that these payors may place
certain restrictions on the circumstances in which coverage will be available.
In making such coverage determinations, the Health Care Finance Administration
("HCFA"), which administers the Medicare program, and HCFA's contractors
consider, among other things, peer-reviewed articles concerning the safety and
effectiveness of the drug, the opinions of medical specialty societies, and
input from the FDA, the National Institutes of Health, and other government
agencies. There is no assurance that the Company's products will be covered by
Medicare and other third-party payors.
Failure by hospitals and physicians to receive what they consider to be
adequate reimbursement for procedures in which the Company's products are used
would have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of March 31, 1999, the Company had 92 full-time employees, including 4
officers. Approximately 23 of the Company's employees were involved directly in
scientific research and development activities. Of these employees, 6 held Ph.D.
or M.D. degrees. The Company considers its relations with its employees to be
good, and none of its employees is a party to a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's corporate offices and laboratory, manufacturing and warehouse
facilities are housed in a Company owned 44,000 square foot building located in
San Diego, California. The Company also leases a 30,097 square-foot facility in
San Diego. As part of cost reduction measures implemented in fiscal year 1999,
the Company moved out of the 30,097 square-foot facility and has no plans to
renew this lease when it expires in February 2000. The Company anticipates that
its current facilities will be sufficient to meet its needs into the foreseeable
future.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In July, 1997 the Company and its marketing partner, Mallinckrodt Inc.
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- - seeking declarations that certain of their ultrasound contrast agent patents
are invalid.
The complaint alleges that each of the defendants' patents is invalid on a
variety of independent grounds under U.S. patent law. In addition to requesting
that all of the patents in question be declared invalid, the complaint requests
a declaration that, contrary to defendants' contentions, the Company and
Mallinckrodt do not infringe the defendants' patents, and asks that defendants
be enjoined from proceeding against the Company and Mallinckrodt for
infringement until the status of defendants' patents has been determined by the
court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON, the Company's advanced generation ultrasound contrast agent, and
will attempt to prevent its commercialization.
All of the defendants except Nycomed filed motions to dismiss the complaint
on jurisdictional grounds. In January 1998, the court dismissed each of the
defendants except Nycomed, ruling that the court lacked jurisdiction over those
defendants with respect to the Company's claims of patent invalidity and non
infringement. The court's ruling does not purport to rule on the merits of the
Company's claims; the dismissal was based solely on jurisdictional grounds.
Following Sonus's dismissal as a defendant in the MBI Case, Sonus activated
a patent infringement lawsuit (the "Sonus Case") which it had filed in August
1997 against the Company and Mallinckrodt in the United States District Court
for the Western District of Washington. Although the complaint was filed in
August 1997, Sonus had agreed not to proceed with the Sonus Case until the
jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges
that the manufacture and sale of OPTISON by the Company and Mallinckrodt
infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for
a declaration of invalidity and non-infringement with respect to the Sonus
patents. Additionally, MBI filed a counterclaim which alleges that Sonus
knowingly made false and misleading public statements regarding its patents and
its product, Echogen-Registered Trademark- with the intent to cause damage to
MBI and its product OPTISON. Damages, including punitive damages and attorneys
fees, are requested. These two patents are the same patents for which the
Company was seeking a declaration of invalidity in the MBI Case.
Beginning in July 1997, the Company received the first of five notices from
the PTO granting the Company's petitions for reexamination which it had filed
with respect to five patents held by three potential competitors, Sonus, Nycomed
and ImaRx. Each of the five notices stated there was a substantial new question
of patentability raised by the Company's petitions with respect to all claims of
the patents. Each of the patents in the reexamination process is related to the
use of perfluorocarbon gases in ultrasound contrast agents and is included among
the patents for which the Company was seeking a declaration of invalidity in the
MBI Case (and for which the Company is continuing to seek a declaration of
invalidity in the case of Nycomed's patents).
In late 1997 and early 1998, the PTO issued office actions in connection
with the Company's patent reexamination petitions filed against Sonus, Nycomed
and ImaRx. The PTO office actions rejected all relevant claims of these patents
based on prior art not previously disclosed to the PTO by Sonus, Nycomed or
ImaRx during prosecution of their patent applications.
In June 1998, the PTO issued a final rejection of all claims of the two
Sonus patents involved in the Sonus Case. In December 1998, the Company received
correspondence from the PTO with respect to the two Sonus patents involved in
the reexamination proceedings. On the basis of amendments after final rejection,
the PTO has indicated that certain claims in Sonus' U.S. Patent No. 5,558,094
(`094) are allowable by the agency. According to the PTO correspondence, none of
the original `094 patent claims which Sonus had asserted against MBI will be
allowed by the PTO without amendment. The PTO has also indicated that certain
claims of Sonus' U.S. Patent 5,573,751 (`751) are allowable by the agency.
According to the PTO correspondence, certain of the `751 patent claims which
Sonus has asserted against the Company will be allowed in their original form.
In January 1999, the PTO issued reexamination certificates for the `094 and `751
patents.
In August 1998, the PTO issued a final rejection of all relevant claims of
the Nycomed patent involved in the MBI Case. If the PTO rejection is maintained
on any appeal subsequently filed by Nycomed, the patent Nycomed is attempting to
assert against the Company and Mallinckrodt to block the manufacture and sale of
OPTISON will be invalidated.
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<PAGE>
In May and June 1999, the Company received correspondence from the PTO with
respect to the ImaRx patents involved in the reexamination proceedings. The PTO
indicated that all claims of U.S. Patent No. 5,547,656 (`656) and U.S. Patent
No. 5,527,521(`521) will be allowed in their original form.
On May 5, 1999, the Company and Mallinckrodt announced that the two
companies received notice of a lawsuit filed against them by DuPont
Pharmaceuticals Company ("DuPont) and ImaRx in the United States District Court
for the District of Delaware (the "DuPont Case"). The lawsuit alleges that the
manufacture and sale of OPTISON infringes the `656 patent owned by ImaRx and
exclusively licensed to DuPont. MBI counterclaimed for a declaration of
invalidity and non-infringement with respect to the `656 patent. In June 1999,
DuPont and ImaRx amended their complaint in the DuPont Case to add allegations
that the manufacture and sale of OPTISON also infringes the `521 patent owned by
ImaRx and exclusively licensed to DuPont.
Litigation or administrative proceedings relating to these matters could
result in a substantial cost to the Company; and given the complexity of the
legal and factual issues, the inherent vicissitudes and uncertainty of
litigation, and other factors, there can be no assurance of a favorable outcome.
An unfavorable outcome could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there can be
no assurance that, in the event of an unfavorable outcome, the Company would be
able to obtain a license to any proprietary rights that may be necessary to
commercialize OPTISON, either on acceptable terms or at all. If the Company were
required to obtain a license necessary to commercialize OPTISON, the Company's
failure or inability to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information concerning the names, ages and titles of the
Company's executive officers as of the date of this report, is included in
accordance with General Instruction G(3) of Form 10-K:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Bobba Venkatadri.................................. 55 President and Chief Executive Officer
Howard Dittrich, M.D.............................. 46 Executive Vice President
Joni Harvey ...................................... 44 Vice President, Operations
Elizabeth L. Hougen............................... 37 Executive Director, Finance and Chief Financial
Officer
</TABLE>
BOBBA VENKATADRI has served as the Company's President and Chief
Executive Officer since May 1997. He served as the Company's President and Chief
Operating Officer from October 1995 until May 1997. Mr. Venkatadri served as
Executive Vice President of the Pharmaceutical Division of Centocor, Inc., from
September 1992 until he joined the Company, and as Vice President - Operations
of Centocor's Pharmaceutical Division from March 1992 to September 1992. He was
employed by Warner-Lambert Company from 1967 until February 1992, most recently
serving as Senior Director, Pharmaceutical Operations, at its manufacturing
facility in Vegabaja, Puerto Rico.
HOWARD DITTRICH, M.D., has served as the Company's Executive Vice
President since December 1998. He served as the Company's Vice President -
Research/Medical & Regulatory Affairs from November 1996 to December 1998 and as
Executive Director of Medical Affairs from May 1996 to November 1996. He served
as a consultant to the Company from
17
<PAGE>
1989 to 1996. Dr. Dittrich was a full-time faculty member of the University
of California, San Diego, Department of Medicine from 1984 to May 1996.
Currently, Dr. Dittrich practices part-time with the University of
California, San Diego where he holds an appointment as Clinical Professor of
Medicine.
JONI HARVEY has served as Vice President - Operations since April 1998.
She served as the Company's Executive Director of Operations from November 1996
to April 1998. From September 1995 to November 1996, she served as Director of
Manufacturing. Ms. Harvey served with Genzyme from February 1995 until rejoining
the Company in September 1995. From March 1994 to January 1995, Ms. Harvey was
Associate Director of Manufacturing for the Company. She originally joined the
Company in October 1988 as Manager of Manufacturing. From 1980 until October
1988, Ms. Harvey held various supervisory positions in Quality and Manufacturing
with Baxter Healthcare.
ELIZABETH L. HOUGEN has served as the Company's Executive
Director, Finance and Chief Financial Officer since January 1999. She served as
the Company's Controller from October 1997 until January 1999. She has been
employed at MBI since 1992. Ms. Hougen has more than 15 years of experience in
finance and accounting in the biomedical, high technology and professional
services industries. Ms. Hougen is a certified management accountant and holds
an MBA from the University of San Diego.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "MB." As of June 15, 1999, there were approximately 1,654 holders of
record of the Company's Common Stock, representing approximately 8,928
beneficial owners. The Company has not paid dividends on its Common Stock. The
following table sets forth the quarterly high and low last sale price for a
share of the Company's Common Stock for the three fiscal years ended March 31,
1999, 1998, and 1997, respectively, as reported by the New York Stock Exchange.
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
----------- -----------
<S> <C> <C>
First Quarter (4/1 to 6/30) 10-5/8 7
Second Quarter (7/1 to 9/30) 7-3/8 3-5/8
Third Quarter (10/1 to 12/31) 4-3/8 2-1/2
Fourth Quarter (1/1 to 3/31) 3-7/16 2-5/16
FISCAL 1998 HIGH LOW
----------- -----------
First Quarter (4/1 to 6/30) 10 6-5/8
Second Quarter (7/1 to 9/30) 11-15/16 8-5/16
Third Quarter (10/1 to 12/31) 12-3/8 7-7/8
Fourth Quarter (1/1 to 3/31) 10-3/4 7-1/8
FISCAL 1997 HIGH LOW
----------- -----------
First Quarter (4/1 to 6/30) 11-7/8 8-1/2
Second Quarter (7/1 to 9/30) 9-1/8 7-1/2
Third Quarter (10/1 to 12/31) 8-3/4 6-1/2
Fourth Quarter (1/1 to 3/31) 14-1/2 7
</TABLE>
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31, 1995 1996 1997 1998 1999
- ---------------------------- -------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Revenues under collaborative
agreements $ 15,132 $ 2,412 $ 4,500 $ 5,095 $ 5,498
Product and royalty revenues 1,769 647 626 1,151 4,083
License Fees 40 25 5,725 - 16,371
-------------------------------------------------------------------------
Total Revenues 16,941 3,084 10,851 6,246 25,952
Operating expenses:
Research and development costs 18,743 13,588 9,902 11,078 9,083
Costs of products sold 1,608 1,553 4,748 5,791 7,840
Selling, general and
administrative expenses 5,864 5,862 8,052 11,912 14,191
Other nonrecurring charges 3,403 3,110 3,000 - 15,498
-------------------------------------------------------------------------
Total Expenses 29,618 24,113 25,702 28,781 46,612
Loss from operations (12,677) (21,029) (14,851) (22,535) (20,660)
Interest expense (694) (786) (810) (721) (574)
Interest income 1,189 1,102 2,377 1,996 1,394
-------------------------------------------------------------------------
Loss before income taxes (12,182) (20,713) (13,284) (21,260) (19,840)
Foreign income tax provision - - - - (1,400)
-------------------------------------------------------------------------
Net loss $(12,182) $(20,713) $(13,284) $(21,260) $(21,240)
=========================================================================
Loss per common share - basic and diluted $ (1.02) $ (1.62) $ (0.78) $ (1.19) $ (1.14)
=========================================================================
Weighted average common
shares outstanding 11,999 12,758 16,926 17,793 18,564
=========================================================================
<CAPTION>
AS OF MARCH 31, 1995 1996 1997 1998 1999
- --------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
marketable securities $ 19,718 $ 20,570 $ 41,414 $ 21,338 $ 18,038
Working capital 20,927 18,601 43,843 21,066 10,693
Total assets 50,639 43,829 70,159 51,318 31,849
Long-term debt 8,408 8,610 7,349 6,082 4,804
Total stockholders' equity 36,424 28,962 51,746 31,164 16,207
</TABLE>
The selected financial data set forth above with respect to the Company's
consolidated financial statements has been derived from the audited financial
statements. The data set forth above should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes included elsewhere in this filing.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(REFERENCES TO YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED MARCH 31.)
THIS ANNUAL REPORT ON FORM 10-K MAY CONTAIN PREDICTIONS, ESTIMATES AND
OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. THIS OUTLOOK REPRESENTS THE COMPANY'S CURRENT JUDGMENT ON THE
FUTURE DIRECTION OF ITS BUSINESS. ANY RISKS AND UNCERTAINTIES COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED
BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES ARISING AFTER THE DATE OF THIS ANNUAL REPORT.
OVERVIEW
Molecular Biosystems, Inc. ("MBI" or the "Company") is a leader in the
development, manufacture and sale of ultrasound contrast imaging agents.
These contrast agents are used primarily to improve the real-time images
("moving pictures") of organs and body structures, especially the heart,
obtained through ultrasound examinations. The Company has designed its
products to increase the diagnostic usefulness of ultrasound examinations
through enhanced visualization of structures and vasculature, and to reduce
the need for diagnostic procedures that may be more expensive,
time-consuming, or invasive.
The Company made key operational changes during fiscal year 1999. First,
as fiscal year 1999 was the first full year of OPTISON-Registered Trademark-
sales, the Company made a transition from being a product development company
to a commercial enterprise. In making this transition and in carefully
evaluating cost reduction measures, the Company announced on November 10,
1998 the initiation of a multi-phase program to reduce expenses and preserve
capital. This program included plans to out-source the Company's
manufacturing process.
In April 1999, the Company and Mallinckrodt, Inc. ("Mallinckrodt") agreed
to transfer the manufacture of OPTISON, the only advanced generation cardiac
ultrasound imaging agent commercially available in the United States and
Europe, from MBI to Mallinckrodt under an amendment to their existing
research support and distribution agreement. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology, as well
as radiology, clinical trials for OPTISON in the United States. Under the
terms of the agreement, MBI will continue to conduct all cardiology trials
for OPTISON and will assume responsibility for conducting radiology trials in
the United States. The parties agreement will be incorporated into an
amendment to ARDA.
Under the terms of the amended agreement, which will be retroactive to
March 1, 1999, Mallinckrodt would reimburse MBI for all manufacturing
expenses, including incremental costs related to the technology transfer. In
exchange for the transfer of manufacturing and increased financial support of
clinical trials for OPTISON, MBI would receive a reduced royalty rate on
product sales of OPTISON.
The out-sourcing of the Company's manufacturing process is not only
expected to reduce the Company's expenditures, but also to better enable the
Company to focus on key research and development opportunities, including
other indications of OPTISON and its liver CT, imaging agent, MB-840.
The Company is the first and only company to obtain marketing approval
from the United States Food and Drug Administration ("FDA") for ultrasound
contrast agents, having gained approvals for ALBUNEX-Registered Trademark- in
1994 and OPTISON (the Company's second-generation agent) in 1997. In May
1998, OPTISON received final marketing authorization by the European Agency
for the Evaluation of Medicinal Products ("EMEA") for use in patients with
suspected or known cardiovascular disease. The authorization covers all 15
member states of the European Union.
OPTISON is used to detect heart disease by assessing blood flow within
the heart chambers and by identifying the location of the chamber borders and
the movement of the chamber walls ("cardiac function"). To increase the
potential applications of OPTISON, MBI is conducting Phase 2 clinical trials
to evaluate the product's efficacy in determining whether the heart muscle is
receiving an adequate blood supply ("myocardial perfusion"). The multiple
Phase 2 trials include use of OPTISON in the emergency room for patients
presenting with chest pain, and in various forms of stress echocardiography.
Results using OPTISON in each of these applications suggest a close agreement
with nuclear imaging for the detection of ischemia by wall motion and
perfusion. Furthermore, the results indicate that use of OPTISON could help
to "rescue" a large proportion of uninterpretable non-contrast studies,
thereby reducing the need for additional, more expensive and time consuming
testing. The Company believes the information regarding perfusion will enable
cardiologists to diagnose heart
21
<PAGE>
attacks and coronary artery disease more accurately and safely than is
currently feasible. MBI is also conducting Phase 2 clinical studies using
OPTISON to detect abnormalities in other organs, such as the liver.
OPTISON is the Company's second generation contrast agent and is a
significant improvement over the Company's first generation contrast agent,
ALBUNEX, in terms of efficacy. The Company has replaced ALBUNEX with OPTISON.
Accordingly, the Company does not foresee any ALBUNEX product sales in the
future.
Operating losses may occur for at least the next few years due to
continued requirements for research and development including preclinical
testing and clinical trials, regulatory activities and the costs of
commercializing new products. The magnitude of the losses and the time
required by the Company to achieve profitability are highly dependent on the
market acceptance of OPTISON and are therefore uncertain. There can be no
assurance that the Company will be able to achieve profitability on a
sustained basis or at all. Results of operations may vary significantly from
quarter to quarter depending on, among other things, the progress, if any, of
the Company's research and development efforts, the timing of milestone
payments, the timing of certain expenses and the establishment of
collaborative research agreements.
REVENUE RECOGNITION
Historically the Company has earned revenues from three primary sources:
revenues under collaborative agreements, product revenues and license fee
revenues.
REVENUES UNDER COLLABORATIVE AGREEMENTS. Revenues under collaborative
agreements have been the primary source of revenues for the Company in the
past. They consist of two types of revenues: (i) milestone payments which are
earned on the achievement of certain product development and territorial
milestones, and (ii) payments received from Mallinckrodt under the Company's
Amended and Restated Distribution Agreement ("ARDA") to support clinical
trials, regulatory submissions and product development.
PRODUCT AND ROYALTY REVENUES. Product revenues are based upon the
Company's sales to Mallinckrodt and are recognized upon shipment of the
product. Product revenues in 1997 also included sales to Shionogi & Co., Ltd.
("Shionogi"). The transfer prices for the Company's sales of ALBUNEX to
Mallinckrodt and Shionogi were determined under the respective agreements and
were approximately equal to 40% of Mallinckrodt's average net sales price to
its end users of the product and 30% of Shionogi's net sales to its end users.
For fiscal year 1998 and fiscal year 1999, the transfer price for the
Company's sales of OPTISON to Mallinckrodt was approximately equal to 40% of
Mallinckrodt's average net sales price to its end users of the product for
the immediately preceding quarter. Pursuant to ARDA, the average net sales
price to end users is calculated by dividing the net sales for the preceding
quarter by the total number of units shipped to end users whether paid for or
shipped as samples. Consistent with industry practice, the Company considers
samples a marketing expense and as such the cost of samples is recorded as
selling, general and administrative expense.
Under the anticipated final terms of the April 1999 agreement with
Mallinckrodt, the Company will receive a reduced royalty rate rather than a
transfer price on product sales of OPTISON in exchange for the transfer of
manufacturing of and increased financial support for clinical trials of
OPTISON.
Royalty revenues during fiscal years 1997, 1998 and 1999 were pursuant to
a licensing agreement between the Company and Abbott Laboratories.
LICENSE FEES. The Company recognizes license fees at the time of receipt.
The Company generally receives license fees in conjunction with the grant of
product development, manufacturing, marketing and/or distribution rights to
one of the Company's technologies.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 problem is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a major system failure or miscalculations, which could disrupt operations,
including product development, manufacturing, the processing of transactions
and other normal business
22
<PAGE>
activities. The Year 2000 problem may also create unforeseen risks to the
Company from its internal computing systems as well as from computer systems
of third parties with which it deals.
The Company has conducted a comprehensive review of its information
technology ("IT") and non information technology ("Non-IT") systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to assess and resolve Year 2000 problems with its IT and
Non-IT systems. The plan includes five phases: inventory, assessment,
evaluation, implementation and testing. The Company has completed the
inventory phase on its IT systems and has identified all IT systems that the
Company believes are at risk. The Company is in the process of inventorying
its Non-IT systems and expects to have identified all Non-IT systems that are
at risk within the next few months.
The Company completed the assessment phase (in which systems that were
inventoried are prioritized) for all systems in March 1999. The Company has
begun the evaluation phase which involves testing systems and determining
which IT and Non IT systems need to be replaced, repaired or retired. The
evaluation phase is expected to take approximately 3 months.
Once the evaluation phase is complete, the Company will begin the
implementation phase and repair/replace all noncompliant systems (both IT and
Non-IT), convert data as necessary, and obtain compliance statements. The
implementation phase is expected to take three months to complete. Finally,
the Company will test and validate the repaired noncompliant IT and Non-IT
systems for compliance. This final phase of the process should take 1-2
months and should be complete by November 1999.
In addition, the Company is in the process of conducting a comprehensive
review of its vendors, service providers (including financial institutions
and insurance companies), and collaborative partners. Although this
assessment is not yet complete, the Company is not currently aware of any
material Year 2000 issues with respect to its dealings with such third
parties. However, if the Company discovers Year 2000 problems with such third
parties' systems, the Company will be unable to control whether its current
and future suppliers', service providers' or collaborative partners' systems
are Year 2000 compliant. To the extent that such third parties would be
hindered by Year 2000 problems, the Company's operations could be materially
adversely affected.
The Company anticipates that its assessment of both internal and third
party IT and Non-IT systems will be complete by November 1999. At this time,
the Company believes that the Year 2000 problem will not pose significant
operational problems for the Company's computer systems. The Company also
expects that the total costs required to fix the Year 2000 problem will not
be material. To date, the Company has not used, and does not plan to use, any
independent verification and validation process to assess the reliability of
the Company's risk and cost estimates. Since no significant issues have
arisen, the Company does not have a contingency plan to address any material
Year 2000 issues. If significant Year 2000 issues arise, the Company may not
be able to timely develop and implement a contingency plan and the Company's
operations could be adversely affected.
RESULTS OF OPERATIONS
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998. Revenues under
collaborative agreements were $5.5 million for the fiscal year ended March
31, 1999, compared to $5.1 million for the fiscal year ended March 31, 1998.
This increase is primarily due to an increase in the quarterly payments from
Mallinckrodt to $1.5 million for the last two quarters in fiscal year 1999
over $1.25 million in the prior year. These revenues in both years consist of
quarterly payments to support clinical trials, regulatory submissions and
product development received from Mallinckrodt under ARDA.
Product and royalty revenues were $4.1 million for fiscal year 1999,
compared to $1.2 million for the prior year. Product revenues in the current
year are based on the Company's sales to Mallinckrodt and are recognized upon
shipment of the product. The increase in product revenues for fiscal year
1999 as compared to 1998 results primarily from sales of OPTISON to
Mallinckrodt which were launched in the fourth quarter of fiscal year 1998.
Royalty revenues are pursuant to a license agreement between the Company and
Abbott Laboratories.
License fees were $16.4 million in fiscal year 1999 compared to none in
fiscal year 1998. These revenues consist of payments from Chugai
Pharmaceutical Co. of Japan pursuant to a strategic alliance which covers
Japan, Taiwan and South Korea to develop OPTISON and ORALEX. The Company
granted Chugai an exclusive license to develop, manufacture and market these
products in exchange for an up-front license fee of $14.0 million plus
additional future royalties on net sales. In addition, Chugai purchased
691,883 shares of the Company's common stock at a premium of 40% to the
then-prevailing market price. This premium was equal to $2.4 million and was
recognized as license revenue.
23
<PAGE>
Costs of products sold totaled $7.8 million for fiscal year 1999,
resulting in a negative gross profit margin. This negative gross profit
margin was due to the fact that the low levels of production were
insufficient to cover the Company's fixed manufacturing overhead expenses.
For fiscal year 1998, costs of products sold totaled $5.8 million. The
increase over the prior year is primarily due to two factors. First, the
Company sold OPTISON throughout the entire fiscal year 1999 as compared to
only during the fourth quarter of fiscal year 1998. Second, $1.1 million in
inventories were expensed through cost of sales as a result of the planned
out-sourcing of manufacturing. The Company anticipates an increase in gross
profit margins if and when OPTISON sales volumes increase as OPTISON obtains
market acceptance and when the manufacturing process is out-sourced pursuant
to the anticipated terms of the April 1999 agreement with Mallinckrodt.
During fiscal 1999, manufacturing fixed costs were running at an annual rate
of approximately $4.5 million.
The Company's research and development costs totaled $9.1 million for
fiscal year 1999 as compared to $11.1 million for fiscal year 1998. The
decrease of 18% is due to previously announced cost reduction measures.
Selling, general and administrative expenses totaled $14.2 million in
fiscal year 1999 as compared to $11.9 million in fiscal year 1998. This
increase of 19% is primarily due to continuing legal expenses, marketing
costs associated with the launch of OPTISON, and severance costs.
Additionally, a portion of the increase is due to a licensing agreement
between the Company and Schering AG ("Schering") in which the Company
licensed rights to certain Schering patents.
During fiscal year 1999, the Company incurred nonrecurring charges of
$15.5 million. These nonrecurring charges include $8.5 million related to the
sale to Chugai of territory rights previously reacquired from Shionogi and
$6.1 million of cost reduction measures. The $6.1 million of cost reduction
measures included $3.1 million for the write off of fixed assets, capitalized
license fees and capitalized patent costs that will no longer be used by the
Company as a result of the planned out-sourcing of manufacturing operations
and the discontinuation of certain projects, $2.3 million of severance costs,
and approximately $700,000 of technology transfer costs and other costs
related to the Company's plan to out-source manufacturing. As part of the
cost reduction measures, the Company consolidated facilities and no longer
occupies the 30,097 square-foot leased facility that had become its corporate
headquarters in fiscal year 1998.
Interest expense for fiscal years 1999 and 1998 amounted to $574,000 and
$721,000, respectively. Interest expense consists of mortgage interest on the
Company's manufacturing building and interest related to a note payable,
secured by the tangible assets of the Company, which bears interest at the
prime rate and is payable in monthly installments of principal plus interest
over five years. The interest rate on the note was 7.75% in March 1999. In
September 1998, the Company renegotiated its note payable to reduce the
interest rate from prime plus one to the prime rate and to release
compensating balance requirements.
Interest income for fiscal year 1999 was $1.4 million compared to $2.0
million in fiscal year 1998. This decrease is due to lower average cash
balances and marketable securities balances.
No tax benefit has been recognized for fiscal years 1999 or 1998 as the
Company had fully utilized its operating loss carryback ability in 1993. As
of March 31, 1999, the Company had federal and state operating loss
carryforwards of approximately $121 million and $38.9 million, respectively.
Realization of future tax benefits from utilization of net operating loss
carryforwards is uncertain.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997. Revenues under
collaborative agreements were $5.1 million for the fiscal year ended March
31, 1998, compared to $4.5 million for the fiscal year ended March 31, 1997.
This increase was primarily due to an increase in the quarterly payments from
Mallinckrodt to $1.25 million over $1.0 million in the prior year's first two
quarters. These revenues in both years consisted of quarterly payments to
support clinical trials, regulatory submissions and product development
received from Mallinckrodt under ARDA.
Product and royalty revenues were $1.2 million for fiscal year 1998,
compared to $626,000 for fiscal year 1997. Product revenues in fiscal year
1998 were based on the Company's sales to Mallinckrodt and were recognized
upon shipment of the product. Product revenues in fiscal year 1997 also
included sales to Shionogi, also recognized upon shipment of the product. The
increase in product revenues for fiscal year 1998 as compared to fiscal year
1997 resulted primarily from the market introduction of OPTISON in the fourth
quarter which added revenues of approximately $700,000. Royalty revenues were
pursuant to a license agreement between the Company and Abbott Laboratories.
There were no license fees in fiscal year 1998 compared to $5.7 million
in fiscal year 1997. The revenues in fiscal year 1997 consist of payments
from Mallinckrodt pursuant to an amendment to ARDA that the Company entered
into with Mallinckrodt in December 1996. The amendment extended
Mallinckrodt's exclusive territory to include the territory that the
24
<PAGE>
Company had formerly licensed to Nycomed Imaging AS ("Nycomed") consisting of
Europe, Africa, India and parts of Asia.
Costs of products sold totaled $5.8 million for fiscal year 1998,
resulting in a negative gross profit margin. This negative gross profit
margin was due to the fact that low levels of production were insufficient to
cover the Company's fixed manufacturing overhead expenses. For fiscal year
1997, costs of products sold totaled $4.7 million.
The Company's research and development costs totaled $11.1 million for
fiscal year 1998 as compared to $9.9 million for fiscal year 1997. The
increase of 12% was due to additional research and development costs
associated with the Company's product development efforts.
Selling, general and administrative expenses totaled $11.9 million in
fiscal year 1998 as compared to $8.1 million in fiscal year 1997. This
increase of 47% was primarily due to increased legal expenses.
During fiscal year 1998, the Company did not incur any nonrecurring
charges compared to $3 million in nonrecurring charges for fiscal year 1997
related to the reacquisition of license rights from Nycomed.
Interest expense for fiscal years 1998 and 1997 amounted to $721,000 and
$810,000, respectively. Interest expense consisted of mortgage interest on
the Company's manufacturing building and interest related to a note payable,
secured by the tangible assets of the Company, which bore interest at the
prime rate plus 1% and was payable in monthly installments of principal plus
interest over five years. The interest rate on the note was 9.5% in March
1998.
Interest income for fiscal year 1998 was $2.0 million compared to $2.4
million in fiscal year 1997. This decrease was due to lower average cash
balances and marketable securities balances.
No tax benefit was recognized for fiscal years 1998 or 1997 as the
Company had fully utilized its operating loss carryback ability in 1993. As
of March 31, 1998, the Company had federal and state operating loss
carryforwards of approximately $90.5 million and $27.2 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had net working capital of $10.7 million
compared to $21.1 million at March 31, 1998. Cash, cash equivalents and
marketable securities were $18.0 million at March 31, 1999 compared to $21.3
million at March 31, 1998.
For the next several years, the Company expects to incur substantial
additional expenditures associated with product development. The Company
anticipates that its existing resources, including up-front license fees
received from Chugai, and interest thereon, plus payments under its
collaborative agreements with Mallinckrodt, will enable the Company to fund
its operations for at least the next fifteen months. The Company continually
reviews its product development activities in an effort to allocate its
resources to those products that the Company believes have the greatest
commercial potential. Factors considered by the Company in determining the
products to pursue may include, but are not limited to, the projected
markets, potential for regulatory approval, technical feasibility and
estimated costs to bring the product to the market. Based upon these factors,
the Company may from time to time reallocate its resources among its product
development activities.
The Company may pursue a number of options to raise additional funds,
including borrowings; lease arrangements; collaborative research and
development arrangements with pharmaceutical companies; the licensing of
product rights to third parties; or additional public and private financing,
as capital requirements change as a result of strategic, competitive,
technological and regulatory factors. There can be no assurance that funds
from these sources will be available on favorable terms, or at all.
During fiscal year 1999, the Company used $11.0 million cash for
operating requirements, which was funded primarily by $6.4 million of
marketable securities that matured during fiscal 1999 and $8.3 million in net
proceeds from the sale of common stock to Chugai. Other significant cash uses
included purchases of property and equipment of $791,000, $2.0 million for
the reacquisition of license rights from Shionogi and $1.3 million in
principal payments on long term debt.
In an agreement dated March 31, 1998, the Company entered into a
cooperative development and marketing agreement with Chugai. The parties
entered into this strategic alliance which covers Japan, Taiwan and South
Korea, to develop
25
<PAGE>
OPTISON (which Chugai may be market under a different name) and ORALEX, as
well as related products. The Company granted Chugai an exclusive license to
develop, manufacture, and market these products in the subject territory, for
which the Company received an upfront license fee of $14.0 million during
fiscal year 1999. With respect to licensed products manufactured by Chugai,
Chugai will pay the Company a royalty on net sales. For licensed products
manufactured by the Company, the Company will receive royalties on net sales,
the amount of which will depend upon the sales volume, in addition to a
transfer price based on average net sales per unit from the previous quarter.
Additionally, Chugai purchased 691,883 shares of the Company's common stock
at a premium of 40% over the then-prevailing market price. The equity
investment was valued at $8.3 million. The Company is also eligible to
receive milestone payments of up to $20.0 million based on Chugai's
achievement of certain Japanese product development and regulatory goals.
On September 7, 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA") and a related investment agreement with
Mallinckrodt which will provide the Company with between $33.0 million and
$42.5 million. Under the terms of the agreement, Mallinckrodt is obligated to
make payments to the Company totaling $20.0 million over four years to
support clinical trials, related regulatory submissions and associated
product development of the licensed products, which include, but are not
limited to, ALBUNEX and OPTISON. These payments will be made in 16 quarterly
installments of $1.0 million for the first four quarters, $1.25 million for
the following eight quarters and $1.5 million for the final four quarters.
The payments may be accelerated in the event that the Company's cumulative
outlays for clinical trials are in excess of the amounts received at any
point in time. However, the quarterly payments may not be postponed. The
first 14 quarterly payments have been received by the Company as of March 31,
1999.
In April 1999, the Company and Mallinckrodt Inc. entered into an
agreement to transfer the manufacture of OPTISON from MBI to Mallinckrodt
under an amendment to ARDA. The terms of the agreement also extends
Mallinckrodt's responsibility for funding clinical trials to include all
cardiology, as well as radiology, clinical trials for OPTISON in the United
States. MBI will continue to conduct all cardiology trials for OPTISON and
will assume responsibility for conducting radiology trials in the United
States. Under the terms of the agreement, which is retroactive to March 1,
1999, Mallinckrodt will reimburse MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In exchange
for the transfer of manufacturing and increased financial support of clinical
trials for OPTISON, MBI will receive a reduced royalty rate on product sales
of OPTISON.
In September 1996, the Company entered into an agreement with Shionogi
pursuant to which the Company reacquired all rights to manufacture, market
and sell its ALBUNEX family of products in the territory, consisting of
Japan, Taiwan and South Korea, formerly exclusively licensed to Shionogi.
Under the agreement, the Company paid $3.0 million to Shionogi and agreed to
pay an additional $5.5 million over the next three years, of which $4.0
million had been paid at March 31, 1999.
Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $791,000, $1.4 million, and $726,000 for fiscal years 1999,
1998 and 1997, respectively. Expenditures in all three fiscal years consisted
primarily of building improvements and equipment for aseptic manufacturing
facilities being constructed for the manufacture of OPTISON and other
products. In June 1997, the Company entered into an equipment leasing
agreement with Mellon US Leasing for a lease line of $1.6 million with a term
of 48 months. The outstanding balance on this line of credit at March 31,
1999 was $1.0 million.
The Company currently leases one of its facilities in San Diego. The
lease requires aggregate payments of approximately $324,000 through February
2000.
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates.
The Company believes that inflation and changing prices have not had a
material effect on operations for fiscal years 1999, 1998 and 1997 and that
the impact of government regulation on the Company is not materially
different from the impact on other similar enterprises.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1998 and 1999
Consolidated Statements of Operations for the Fiscal Years Ended
March 31, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended March 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the Fiscal Years Ended
March 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Molecular Biosystems, Inc.:
We have audited the accompanying consolidated balance sheets of
Molecular Biosystems, Inc. (a Delaware corporation) and subsidiaries as of
March 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended March 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 the
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 Molecular
Biosystems, Inc. and subsidiaries as of March 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
April 30, 1999
28
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,064 $ 1,056
Marketable securities, available-for-sale (Note 4) 20,274 16,982
Accounts and notes receivable 1,498 2,320
License rights (Notes 1 and 9) 8,500 -
Inventories 1,902 748
Prepaid expenses and other assets 400 425
----------- ----------
Total current assets 33,638 21,531
----------- ----------
Property and equipment, at cost:
Building and improvements 14,412 11,113
Equipment, furniture and fixtures 4,364 2,893
Construction in progress 471 930
----------- ----------
19,247 14,936
Less: Accumulated depreciation and amortization 7,073 6,672
----------- ----------
Total property and equipment 12,174 8,264
----------- ----------
Other assets:
Patents and license rights, net of amortization of
$87 in 1998 (Notes 7 and 10) 320 -
Certificate of deposit, pledged (Notes 4 and 6) 3,000 -
Other assets, net 2,186 2,054
----------- ----------
Total other assets 5,506 2,054\
----------- ----------
$ 51,318 $ 31,849
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,272 $ 1,278
Accounts payable and accrued liabilities (Notes 1 and 7) 7,498 7,395
Compensation accruals 2,227 2,165
Deferred Contract Revenue 1,575 -
----------- ----------
Total current liabilities 12,572 10,838
----------- ----------
Long-term debt, net of current portion (Note 6): 6,082 4,804
----------- ----------
Other noncurrent liabilities 1,500 -
----------- ----------
Commitments and contingencies (Note 7):
Stockholders' equity (Note 8):
Common Stock, $.01 par value, 40,000,000 shares
authorized, 17,846,237 and 18,580,745 shares
issued and outstanding, respectively 178 186
Additional paid-in capital 128,145 134,347
Accumulated deficit (96,729) (117,969)
Unrealized loss on available-for-sale securities (67) 6
Less 40,470 shares of treasury stock, at cost (363) (363)
----------- ----------
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
Total stockholders' equity 31,164 16,207
----------- ----------
$ 51,318 $ 31,849
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenues (Note 9):
Revenues under collaborative agreements $ 4,500 $ 5,095 $ 5,498
Product and royalty revenues 626 1,151 4,083
License fees 5,725 - 16,371
----------- ------------ ------------
10,851 6,246 25,952
----------- ------------ ------------
Operating expenses:
Research and development costs (Note 9) 9,902 11,078 9,083
Costs of products sold 4,748 5,791 7,840
Selling, general and administrative expenses 8,052 11,912 14,191
Other nonrecurring charges (Note 10) 3,000 - 15,498
----------- ------------ ------------
25,702 28,781 46,612
----------- ------------ ------------
Loss from operations (14,851) (22,535) (20,660)
Interest expense (810) (721) (574)
Interest income 2,377 1,996 1,394
----------- ------------ ------------
Loss before income taxes (13,284) (21,260) (19,840)
Foreign income tax provision - - (1,400)
----------- ------------ ------------
Net Loss $(13,284) $(21,260) $(21,240)
=========== ============ ============
Loss per common share - Basic and diluted $ (0.78) $ (1.19) $ (1.14)
=========== ============ ============
Weighted average common shares
outstanding 16,926 17,793 18,564
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK
------------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 13,296,186 $ 133 $ 91,468 $ (62,185) $ (167)
Comprehensive Loss
Net loss - - - (13,284) -
Unrealized loss on available-
for-sale securities - - - - -
Proceeds from Public
Offering 4,140,000 41 34,045 - -
Purchase of treasury stock (Note 6) - - (85) - (196)
Exercise of stock options 295,500 3 1,928 - -
Issuance of stock grants 14,211 - 127 - -
---------- ----- -------- --------- ---------
Balance at March 31, 1997 17,745,897 $ 177 $127,483 $ (75,469) $ (363)
Comprehensive Loss
Net loss - - - (21,260) -
Unrealized gain on available-
for-sale securities - - - - -
Exercise of stock options 100,340 1 662 - -
---------- ----- -------- ---------- ---------
Balance at March 31, 1998 17,846,237 $ 178 $128,145 $ (96,729) $ (363)
Comprehensive Loss
Net loss -0- -0- -0- (21,240) -0-
Unrealized gain on available-
for-sale securities -0- -0- -0- -0- -0-
Sale of common stock to Chugai 691,883 7 5,922 - -
Exercise of stock options 42,625 1 280 -0- -0-
---------- ----- -------- ---------- ---------
Balance at March 31, 1999 18,580,745 $ 186 $134,347 $ (117,969) $ (363)
========== ===== ======== ========== =========
<CAPTION>
NOTES
ACCUMULATED RECEIVABLE
OTHER FROM SALE
COMPREHENSIVE OF COMMON COMPREHENSIVE
INCOME STOCK TOTAL LOSS
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 $ (6) $ (281) $ 28,962
Comprehensive Loss
Net loss - - (13,284) (13,284)
Unrealized loss on available-
for-sale securities (76) - (76) (76)
Proceeds from Public
Offering - - 34,086 -0-
Purchase of treasury stock (Note 6) - 281 - -0-
Exercise of stock options - - 1,931 -0-
Issuance of stock grants - - 127 -0-
---------- ---------- ---------- ----------
Balance at March 31, 1997 $ (82) $ - $ 51,746 $ (13,360)
==========
Comprehensive Loss
Net loss - - (21,260) (21,260)
Unrealized gain on available-
for-sale securities 15 - 15 15
Exercise of stock options - - 663 -0-
---------- --------- ---------- ----------
Balance at March 31, 1998 $ (67) $ - $ 31,164 $ (21,245)
==========
Comprehensive Loss
Net loss -0- -0- (21,240) (21,240)
Unrealized gain on available-
for-sale securities 73 -0- 73 73
Sale of common stock to Chugai - - 5,929 -0-
Exercise of stock options -0- -0- 281 -0-
---------- --------- ---------- ----------
Balance at March 31, 1999 $ 6 $ - $ 16,207 $ (21,167)
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
32
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($13,284) ($21,260) ($21,240)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,435 1,085 1,915
Loss on disposals/write-downs of tangible and intangible property 1 20 3,092
Write-off of former Nycomed/Shionogi territory license rights 3,000 - 8,500
Forgiveness of note receivable from sale of Common Stock 109 - -
Premium received on Chugai Investment - - (2,371)
Changes in operating assets and liabilities:
Receivables 29 (702) (1,171)
Inventories 280 (1,560) 1,154
Prepaid expenses and other assets (623) (45) 326
Accounts payable and accrued liabilities 721 2,814 397
Deferred contract revenue - 1,575 (1,575)
Compensation accruals 582 614 (62)
-------- -------- --------
Cash used in operating activities (7,750) (17,459) (11,035)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (726) (1,387) (791)
Proceeds from sale of property and equipment 4 - 42
Write off of patents and license rights - 17 -
Additions to patents and license rights (226) (32) (30)
Acquisition of license rights from Shionogi (3,000) (2,000) (2,000)
Acquisition of license rights from Nycomed (2,000) - -
(Increase) decrease in other assets (269) 37 132
(Increase) decrease in marketable securities (32,876) 20,569 6,365
-------- -------- --------
Cash provided by (used for) investing activities (39,093) 17,204 3,718
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale/leaseback transaction - 1,331 -
Net proceeds from public offering of Common Stock 34,086 - -
Net proceeds from sale of common stock to Chugai - - 8,300
Net proceeds from issuance of Common Stock 2,058 663 281
Principal payments on long-term debt (1,256) (1,262) (1,272)
-------- -------- --------
Cash provided by financing activities 34,888 732 7,309
-------- -------- --------
Increase (decrease) in cash and cash equivalents (11,955) 477 (8)
Cash and cash equivalents, beginning of year 12,542 587 1,064
-------- -------- --------
Cash and cash equivalents, end of year $ 587 $ 1,064 $ 1,056
======== ======== ========
Supplemental cash flow disclosures:
Interest income received $ 1,609 $ 2,101 $ 1,744
======== ======== ========
Interest paid $ 804 $ 715 $ 568
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS-
Molecular Biosystems, Inc. ("MBI" or the "Company") discovers, develops
and manufactures proprietary diagnostic ultrasound imaging agents. The
Company's annual continuing operations have been unprofitable since
1992. The Company believes that operating losses may occur for at least
the next several years due to continued requirements for research and
development, including preclinical testing and clinical trials,
regulatory activities and the high costs of commercialization
activities. The magnitude of the losses and the time required by the
Company to achieve profitability are highly dependent on the market
acceptance of OPTISON-Registered Trademark- and other future products
and are therefore uncertain. The Company has replaced its first
generation product, ALBUNEX-Registered Trademark-, with OPTISON. There
is no assurance that the Company will be able to achieve profitability
with sales of OPTISON or other future products on a sustained basis or
at all.
PRINCIPLES OF CONSOLIDATION-
The Consolidated Financial Statements include the accounts of Molecular
Biosystems, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Certain amounts in the prior years' financial statements and notes have
been reclassified to conform with the current year presentation.
USE OF ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
RESEARCH AND DEVELOPMENT COSTS-
All research and development costs and related special purpose
equipment costs are charged to expense as incurred.
REVENUES UNDER COLLABORATIVE AGREEMENTS-
Revenues under collaborative agreements, which have been the primary
source of revenues for the Company, consist of two types of revenues.
The first type, milestone payments, is earned in connection with
research activities performed under the terms of research and
development license agreements. Revenue is recognized on the
achievement of certain milestones, some of which relate to obtaining
regulatory approvals. Accordingly, the estimated dates of the milestone
achievements are subject to revision based on periodic evaluations by
the Company and its partners of the attainment of specified milestones,
including the status of the regulatory approval process. Advance
payments received in excess of amounts earned are classified as
deferred contract revenues and the resulting revenues are recognized
based on work performed at a predetermined rate or level of expense
reimbursement.
Additionally, under the terms of the Amended and Restated Distribution
Agreement ("ARDA") entered into in September 1995, as restated in May
1999, Mallinckrodt, Inc. ("Mallinckrodt") will pay the Company $20.0
million over four years to further the development of OPTISON (the
Company's second-generation product) and related products. These
payments will be made in 16 quarterly installments starting at $1.0
million for the first four quarters, $1.25 million for the following
eight quarters and $1.5 million for the final four quarters. Pursuant
to the agreement, half of each payment is designated for clinical
development expenses and will be recorded as deferred revenue until
such expenses are incurred, and the remaining half of each payment
will be recognized as research revenue when received.
34
<PAGE>
REVENUE RECOGNITION FOR PRODUCT SOLD-
The Company recognizes revenue when goods are shipped to its customer,
Mallinckrodt. For fiscal years 1998 and 1999, the transfer price for
the Company's sales of OPTISON to Mallinckrodt was equal to 40% of
Mallinckrodt's average net sales price to its end users of the product
for the immediately preceding quarter. Pursuant to ARDA, the average
net sales price to end users is calculated by dividing the net sales
for the preceding quarter by the total number of units shipped to end
users whether paid for or shipped as samples. Consistent with industry
practice, the Company considers samples a marketing expense and as such
the cost of samples is recorded as selling, general and administrative
expense.
Under the terms of the May 1999 amended agreement with Mallinckrodt,
the Company will receive a receive a reduced royalty rate on product
sales of OPTISON in exchange for the transfer of manufacturing of and
increased financial support for clinical trials of OPTISON.
REVENUE RECOGNITION FOR LICENSE FEES-
The Company recognizes revenue when license fees are received, provided
the Company has no future obligations.
INCOME TAXES-
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes." SFAS No. 109 is an asset and liability approach that
requires the recognition of deferred assets and liabilities for the
expected future tax consequences of events that have been recognized
differently in the Company's financial statements or tax returns.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
CASH EQUIVALENTS-
Cash equivalents include marketable securities with original maturities
of three months or less when acquired. The Company has not realized any
losses on its cash equivalents.
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company's management has classified its investment
securities as available-for-sale and records holding gains or losses as
a separate component of stockholders' equity.
CONCENTRATION OF CREDIT RISK-
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities
that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and
interest rates.
INVENTORIES-
Inventories are stated at lower of cost (first-in, first-out) or
market, and consist of the following major classes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
<S> <C> <C>
Raw materials and supplies $ 1,639 $551
Work in process 74 92
Finished goods 189 105
------- ----
$ 1,902 $748
======= ====
</TABLE>
35
<PAGE>
Work in process and finished goods include the cost of materials,
direct labor and manufacturing overhead.
PROPERTY AND EQUIPMENT-
Property and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated
useful lives of five years for equipment, 31 years for buildings and
improvements and the term of the lease for leasehold improvements.
PATENTS AND LICENSE RIGHTS AND OTHER ASSETS-
The Company periodically reevaluates the original assumptions and
rationale utilized in the assessment of the carrying value and
estimated lives of long-lived assets. The determinants used for this
evaluation include management's estimate of the asset's ability to
generate positive income and cash flow as well as the strategic
significance of the respective assets.
Patents and license rights are amortized on the straight-line method
over their estimated useful lives of five to ten years. During fiscal
year 1999, the Company reevaluated its patent estate and wrote off
approximately $300,000 in capitalized patent and license rights that
will no longer be used by the Company as a result of the planned
out-sourcing of manufacturing operations and discontinuation of certain
products.
In June 1989, the Company prepaid $2.0 million in royalties on the
first $66.6 million of sales of ALBUNEX and OPTISON in the United
States. Included in other assets at March 31, 1999 is approximately
$1.7 million which is the portion of this prepayment which has not yet
been expensed. Additionally, other assets at March 31, 1998 and 1999
include $300,000 of real estate investment related to an employment
agreement with one of the Company's officers.
IMPAIRMENT OF LONG-LIVED ASSETS-
The Company accounts for long lived assets in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (SFAS 121). The statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity
be reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
fully recoverable.
During fiscal year 1999, the Company wrote off approximately $2.8
million of fixed assets that will no longer be used by the company as a
result of the planned out-sourcing of manufacturing operations and
discontinuation of certain projects.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-
Accounts payable and accrued liabilities consist of the following major
classes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
<S> <C> <C>
Accrued legal and professional fees $ 1,540 $ 3,031
License rights payable and related fees (Note 7) 2,000 1,500
Restructuring accruals - 1,041
Accounts payable - trade 3,394 1,226
Other miscellaneous accruals 564 597
------- -------
$ 7,498 $ 7,395
======= =======
</TABLE>
36
<PAGE>
STOCK BASED COMPENSATION-
The Company has elected to adopt the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). Accordingly the Company accounts
for its stock based compensation plans under the provisions of APB No.
25.
LOSS PER SHARE-
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). The statement
specifies the computation, presentation, and disclosure requirements
for earnings per share (EPS). SFAS 128 requires companies to compute
net income (loss) per share under two different methods, basic and
diluted per share data for all periods for which an income statement is
presented. Basic earnings per share was computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution that could occur if net income were divided by the
weighted-average number of common shares and potential common shares
from outstanding stock options for the period. Potential common shares
are calculated using the treasury stock method and represent
incremental shares issuable upon exercise of the Company's outstanding
options. For the years ended March 31, 1997, 1998, and 1999, the
diluted loss per share calculation excludes effects of outstanding
stock options as such inclusion would be anti-dilutive.
COMPREHENSIVE LOSS-
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," was issued. The Company has adopted
this standard which requires the display of comprehensive income or
loss and its components in the financial statements. The Company has
chosen to disclose Comprehensive Loss, which encompasses net loss and
unrealized gains and losses on available-for-sale securities, in the
Consolidated Statements of Stockholders' Equity. Prior years have been
restated to conform to the SFAS No. 130 requirements.
2. COST REDUCTION MEASURES
On November 10, 1998, as a result of the slower than planned ramp up of
OPTISON sales, the Company announced the initiation of a multi-phase
program to reduce expenses and preserve capital. The initial phase of
cost reduction affected approximately 40 employees of the Company's
140-person workforce. The next reduction in force, in April 1999,
affected an additional 26 employees. The Company will implement a
further reduction in force in the future when the out-sourcing of the
Company's manufacturing operations is complete.
The impact of the cost reduction measures on the Company's financial
results included a one-time charge of $7.2 million for the year ended
March 31, 1999. This charge included $6.1 million in nonrecurring
charges and $1.1 million in cost of sales. The $6.1 million
nonrecurring charge included $3.1 million for the write off of fixed
assets, capitalized license fees and capitalized patent costs that will
no longer be used by the Company as a result of the planned
out-sourcing of manufacturing operations and the discontinuation of
certain projects, $2.3 million of severance costs, and approximately
$700,000 of technology transfer costs and other costs related to the
Company's plan to out-source manufacturing.
Additionally, the Company wrote off $1.2 million in fixed assets
through accelerated depreciation during fiscal year 1999 and expects to
write off another $1.6 million in fixed assets through accelerated
depreciation over the next 12 months as the manufacturing process is
out-sourced. As of March 31, 1999, the Company had approximately $1.0
million in accrued liabilities related to the future costs of
out-sourcing.
3. THE CHUGAI AGREEMENT
In April, 1998, the Company entered into a cooperative development and
marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of
Japan. The parties entered into this strategic alliance
37
<PAGE>
which covers Japan, Taiwan and South Korea, to develop OPTISON (which
may be marketed under a different name) and ORALEX-Registered
Trademark-, as well as related products. The Company granted Chugai an
exclusive license to develop, manufacture, and market these products in
the subject territory, for which the Company received an up-front
license fee of $14.0 million in fiscal year 1999. With respect to
licensed products manufactured by Chugai, Chugai will pay the Company a
royalty on net sales. For licensed products manufactured by the
Company, the Company will receive royalties on net sales, the amount of
which will depend upon the sales volume, in addition to a transfer
price based on average net sales per unit from the previous quarter.
Additionally, Chugai purchased 691,883 shares of the Company's common
stock at a premium of 40% over the then-prevailing market price. This
premium was equal to $2.4 million and was recognized as revenue in the
first quarter of fiscal year 1999. The equity investment was valued at
$8.3 million. The Company is also eligible to receive milestone
payments of up to $20.0 million based on Chugai's achievement of
certain Japanese product development and regulatory goals.
The accompanying consolidated statements of operations incorporate the
impact of the Chugai transaction. Proforma unaudited consolidated
operating results of the Company for the year ended March 31, 1999,
excluding the impact of the Chugai transaction, are summarized below
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended March 31, 1999
Results
Including Impact of Results
Chugai Chugai Excluding
Transaction Transaction Chugai
----------- ----------- ---------
<S> <C> <C> <C>
Revenues $ 25,952 $ 16,371 $ 9,581
Operating Expenses (46,612) (9,378) (37,234)
Interest Income, net 820 - 820
------------------------------------------
Income (Loss) before income taxes (19,840) 6,993 (26,833)
Foreign income taxes (1,400) (1,400) -
------------------------------------------
Net Income (Loss) $(21,240) $ 5,593 $(26,833)
==========================================
Net Income (Loss) per share - Basic and Diluted $ (1.14) $ 0.30 $ (1.44)
Weighted Avg. Common shares Outstanding 18,564 18,564 18,564
</TABLE>
4. MARKETABLE SECURITIES
Investments are recorded at estimated fair market value, and consist
primarily of treasury securities, government agency securities and
corporate obligations. The Company has classified all of its
investments as available-for-sale securities. The following table
summarizes available-for-sale securities at March 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
COST NET OF
PREMIUMS/ GROSS GROSS ESTIMATED
DISCOUNTS UNREALIZED UNREALIZED FAIR
AMORTIZED GAINS LOSSES VALUE
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations
of U.S. government agencies $ 4,501 $ - $ (6) $ 4,495
Corporate obligations 15,840 - (61) 15,779
38
<PAGE>
------- ----- ------ -------
Marketable securities available-for-sale $20,341 $ - $ (67) $20,274
======= ===== ====== =======
</TABLE>
The following table summarizes available-for-sale securities at March
31, 1999 (in thousands):
<TABLE>
<CAPTION>
COST NET OF
PREMIUMS/ GROSS GROSS ESTIMATED
DISCOUNTS UNREALIZED UNREALIZED FAIR
AMORTIZED GAINS LOSSES VALUE
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Money market $ 2,682 $ - $ - $ 2,682
Certificate of Deposit 3,000 - - 3,000
U.S. treasury securities and obligations
of U.S. government agencies 1,500 - - 1,500
Corporate obligations 9,794 6 - 9,800
------- --- --- -------
Marketable securities available-for-sale $16,976 $ 6 $ - $16,982
======= === === =======
</TABLE>
There were no gross realized gains or losses on sales of
available-for-sale securities for the year ended March 31, 1999.
The amortized cost and estimated fair value of debt and marketable
securities at March 31, 1999, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations
without prepayment penalties.
<TABLE>
<CAPTION>
COST LESS
PREMIUMS/ ESTIMATED
DISCOUNTS FAIR
AMORTIZED VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $16,599 $16,605
Due after one year through three years 377 377
------- -------
$16,976 $16,982
======= =======
</TABLE>
At March 31, 1998 a $3.0 million certificate of deposit was held as a
compensating balance under the Company's debt agreement. In September
1998, this loan was renegotiated and the compensating balance
requirement was removed (see note 6). Accordingly, the certificate of
deposit was included in the marketable securities balances for the
fiscal year March 31, 1999, but not for the fiscal year ended March 31,
1998.
5. INCOME TAXES
39
<PAGE>
As described in Note 1, the Company uses the asset and liability method
of computing deferred income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The effective income tax rate on the loss before income taxes differs
from the statutory U.S. federal income tax rate as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------
1997 1998 1999
<S> <C> <C> <C>
Computed statutory tax $ (4,517) $ (7,342) $ (7,221)
State income taxes (843) (1,275) (1,274)
Tax exempt interest (29) (64) (23)
Losses without income tax benefit 5,362 8,634 8,508
Other 27 47 10
-------- -------- --------
Provision for income taxes $ - $ - $ -
======== ======== ========
</TABLE>
At March 31, 1999, the Company has deferred tax assets of approximately
$48.9 million relating to the following tax loss carryforwards for
income tax purposes (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
-------- ----------
<S> <C> <C>
Federal ($120,975) and state ($38,855) net operating losses $159,830 1999-2019
Research and development credit - federal 2,572 1999-2014
Research and development credit - state 1,328 1999-2014
Alternative minimum tax credit 300 Indefinite
</TABLE>
For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to the
carryforwards. If realized, approximately $1.1 million of the tax
benefit for those items will be applied directly to paid-in capital,
related to deductible expenses reported as a reduction of the proceeds
from issuing common stock in connection with the exercise of stock
options.
The foreign income tax provision of $1.4 million included in the
Company's fiscal 1999 net loss represents foreign taxes paid during the
year related to the Chugai transaction.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1999
<S> <C> <C>
Note payable - due 2004 $3,754 $3,682
Note payable - due 2001 3,600 2,400
------ ------
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
7,354 6,082
Less - current portion 1,272 1,278
------- ------
$ 6,082 $4,804
======= ======
</TABLE>
The note payable due in 2004 bears interest at a variable rate based
upon the weighted average Eleventh District cost of funds plus 2.35
percent. The interest rate on this note is adjusted semi-annually and
was 8 percent at March 31, 1998 and 1999. The note is secured by the
Company's manufacturing facility and certain of the equipment contained
therein and is payable in monthly installments of principal and
interest. As of March 31, 1999, maturities of this note in each of the
next five fiscal years are: $79,000, $85,000, $92,000, $100,000 and
$3,326,000.
The note payable due in April, 2001 bears interest at the prime rate
(7.75 percent at March 31, 1999) and is payable in monthly installments
of $100,000 plus accrued interest. The loan contains covenants relating
to cashflow coverage and minimum cash balances. In September 1998, the
terms of the loan were renegotiated which lowered the interest rate
from prime plus one percent to the prime rate and released a
compensating balance requirement. The loan is secured by the tangible
assets of the Company.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts certain of its operations in leased premises and
also leases equipment through lease financing. Terms of the leases,
including renewal options, vary by lease. Future minimum rental
commitments for all noncancelable operating leases that have initial or
remaining lease terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, AMOUNT
<S> <C>
2000 $ 703
2001 379
2002 234
2003 9
2004 -
------
Total minimum lease payments $1,325
======
</TABLE>
In fiscal 1998, the Company entered into a lease for its corporate
headquarters. The lease expires in February 2000. The Company is
obligated to pay real estate taxes, insurance and utilities on its
portion of the leased property. Rental expense for the years ended
March 31, 1997, 1998 and 1999 was $194,000, $245,000, and $297,000,
respectively. As part of the cost reduction measures implemented in
fiscal year 1999, the Company consolidated facilities and no longer
occupies the building that had become its corporate headquarters in
fiscal year 1998. As a result of this move, the Company recognized
approximately $370,000 of the remaining rent expense through the end of
the lease term as other nonrecurring charges in fiscal year 1999.
However, because the Company has not yet paid rent for the period April
1999 through February 2000, the remaining lease payments are included
in the schedule above.
In June 1997, the Company entered into an equipment leasing agreement
with Mellon US Leasing ("Mellon") for a lease line of $1.6 million with
a term of 48 months. The outstanding balance on this line of credit at
March 31, 1999 was $1.0 million.
LICENSE AGREEMENTS
The Company has entered into license agreements requiring future
royalty payments ranging from 1 1/4% to 3% of specified product sales
relating to the licensed technologies. Additionally, there is a minimum
royalty payment of $600,000 due to one licensor in each calendar year.
41
<PAGE>
In April 1998, the Company and Chugai Pharmaceutical Co., Ltd.
("Chugai") entered into a strategic alliance to develop and
commercialize OPTISON (which may be marketed under a different name)
and ORALEX-Registered Trademark- in Japan, Taiwan and South Korea. In
exchange for granting to Chugai a royalty-based license to market these
products in the named countries, MBI received an upfront license fee
from Chugai of $14.0 million. In addition, Chugai made an equity
investment in MBI common stock. MBI is eligible to receive milestone
payments of up to $20.0 million based on the achievement of certain
product development goals and will receive royalties from Chugai from
the sale of commercialized products in the territory.
PATENT MATTERS
The Company considers the protection of its proprietary technologies to
be material to its business prospects. The Company pursues a
comprehensive program of patent and trademark prosecution for its
products both in the United States and in other countries where the
Company believes that significant market opportunities exist.
The Company has an exclusive license to certain United States and
foreign patents relating to gas-filled sonicated albumin microspheres
from Steven B. Feinstein, M.D. (see - Business - Marketing and
Licensing Agreements - Feinstein License) The Company itself owns
additional United States and foreign patents covering ALBUNEX and
OPTISON that broaden the product coverage of its license. Certain of
these additional patents cover the Company's continuous flow sonication
manufacturing process. The European equivalents of these manufacturing
patents were challenged in an opposition proceeding brought by Andaris
Ltd. which was decided in the Company's favor in January 1996. Andaris
has appealed the decision. Andaris has also filed an opposition against
the Company's ALBUNEX composition patent in Europe, and Andaris and two
other parties have filed a similar opposition in Japan. No hearing date
has been set in these latter two oppositions.
The Company has received patents covering its method of manufacturing
gas-filled albumin microspheres using a milling process. The Company
believes that this process may be more reliable and efficient than the
sonication process that the Company currently uses. The Company has
also received patents on other perfluorocarbon-based technology
relating to ultrasound contrast agents.
The Company owns a United States patent covering ORALEX and has several
foreign applications pending. The Company has also filed patent
applications relating to several early-stage development products. The
Company is uncertain whether these applications will result in issued
patents or whether the covered products can or will be commercialized.
The last-to-expire of the Company's key United States patents covering
ALBUNEX and OPTISON expires in 2008, and subject to the outcome of the
oppositions previously described, the last-to-expire of the Company's
key European patents covering ALBUNEX and OPTISON expires in 2009.
The patent position of medical and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There can
be no assurance that the Company will receive patents for all or any of
the claims included in its pending or future patent applications, that
any issued patents will provide the Company with competitive advantages
or will not be challenged by third parties, or that existing or future
patents of third parties will not have an adverse effect on the
Company's ability to commercialize its products. Moreover, there can be
no assurance that third parties will not independently develop similar
products, duplicate one or more of the Company's products or design
around the Company's patents.
The Company's commercial success also will depend in part upon the
Company not infringing patents issued to third parties. There can be no
assurance that patents issued to third parties will not require the
Company to alter its products or manufacturing processes, pay licensing
fees, or cease development of its current or future products.
Litigation or administrative proceedings may be necessary to enforce
the Company's patents, to defend the Company against infringement
claims or to determine the priority, scope and validity of the
42
<PAGE>
proprietary rights of third parties. Any such litigation or
administrative proceedings could result in substantial costs to the
Company, and an unfavorable outcome could have a material adverse
effect on the Company's business, financial condition and results of
operations. Moreover, there can be no assurance that, in the event of
an unfavorable outcome in any litigation or administrative proceedings
involving infringement claims against the Company, the Company would be
able to license any proprietary rights that it requires on acceptable
terms or at all. The Company's failure to obtain a license that it
requires to commercialize one of its products could have a material
adverse effect on the Company's business, financial condition and
results of operations.
The Company has become aware of several United States patents issued to
other companies purportedly covering various attributes of
perfluorocarbon-containing imaging agents such as OPTISON. Certain of
these companies also are pursuing foreign patent protection. Some of
these companies are developing or may be developing ultrasound contrast
imaging agents that would compete with OPTISON. The patents and patent
applications of these other companies involve a number of complex legal
and factual issues that are currently unresolved. The Company believes
that there may be a substantial overlap among many of the claims in
their patents and is currently involved in various administrative
proceedings and litigation in the United States and Europe to
adjudicate their conflicting rights.
The Company believes that, for a variety of reasons, its
commercialization of OPTISON will not infringe any valid patent held by
any of these other companies. Depending upon the particular patent
claim, these reasons include, but are not limited to, (i) differences
between OPTISON and the subject of the claim, (ii) the invalidity of
the claim due to the existence of prior art, (iii) the inadequacy of
the claim's specifications, (iv) lack of enablement, (v) inequitable
conduct by patentee, and (vi) various other defenses as allowed by law.
The Company intends to challenge the validity of any such patent
granted to one of the other companies if the patent is asserted against
the Company, and the Company will enforce its own patents if any
product of one of the other companies infringes the Company's patent
claims.
The Company has obtained registered trademarks for "ALBUNEX" and
"ORALEX" in the United States and in selected foreign countries.
Additionally Mallinckrodt has filed for the trademark for "OPTISON" in
various countries throughout the world. There can be no assurance that
the Company's registered or unregistered trademarks and trade names
will not infringe on the proprietary rights of third parties.
The Company also relies on unpatented trade secrets, proprietary
know-how and continuing technological innovation which it seeks to
protect by, in part, confidentiality agreements with its employees,
consultants, investigators and others. There can be no assurance that
these agreements will not be breached, that the Company would have an
adequate remedy for any breach or that the Company's trade secrets or
know-how will not otherwise become known or independently discovered by
third parties.
OTHER
The Company is periodically a defendant in other legal actions
incidental to its business activities. While any litigation has an
element of uncertainty, the Company believes that the outcome of any of
these actions or all of them combined will not have a materially
adverse effect on its financial condition or results of operations.
8. STOCKHOLDERS' EQUITY
Mallinckrodt has certain registration rights with respect to the Common
Stock issued and issuable to them.
In April 1998, the Company entered into a Common Stock Purchase
Agreement with Chugai. Under this agreement, the Company sold to Chugai
691,883 shares of common stock for $12.00 per share which represented a
40% premium over the then-prevailing market price for a total equity
investment
43
<PAGE>
of $8.3 million. These shares are subject to certain covenants and
restrictions, including "standstill" rights of the Company, a market
stand-off provision and restrictions on transferability.
COMMON SHARES RESERVED
Common shares were reserved for the following purposes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1998 1999
<S> <C> <C>
Options granted 3,139 3,855
Future grants of options 488 1,699
----- -----
3,627 5,554
===== =====
</TABLE>
STOCK OPTIONS-
1998 PLAN
In fiscal 1999, the Board of Directors and the shareholders of the
Company approved the 1998 Stock Option Plan as the sucessor to the
Company's 1993 and 1997 Plans. All outstanding options under the 1993
and 1997 Plans were incorporated into the 1998 Plan plus an additional
2.0 million shares. The 1998 Plan provides for the grant of both
qualified incentive stock options and nonstatutory stock options to
purchase Common Stock to employees, non-employee directors, independent
consultants and advisors of the Company under four separate equity
incentive programs. The exercise price per share may be either 85% of
the fair value on the date of grant or fair market value of the stock
on date of grant depending on the program. Options granted under this
plan are exercisable per the terms specified in each individual option,
but not before one year (unless the option exercisability is
accelerated by the Company's Board of Directors), or later than ten
years from the date of grant.
1997 OUTSIDE DIRECTORS' PLAN
In fiscal 1998, the Board of Directors and the shareholders of the
Company approved the 1997 Directors' Option Plan and authorized the
issuance of options for 300,000 shares pursuant to the plan. The Plan
provides for the grant of both qualified incentive stock options and
nonstatutory stock options to purchase common stock to non-employee
directors of the Company at no less than the fair value of the stock on
the date of grant. Options granted under this plan are exercisable per
the terms specified in each individual option, but not before one year
(unless the option exercisability is accelerated by the Company's Board
of Directors), or later than ten years from the date of grant.
1993 PLANS
In 1993 both the Board of Directors and the shareholders of the Company
approved the 1993 Stock Option Plan and the 1993 Outside Directors
Stock Option Plan (together, the 1993 Plans). The 1993 Plans were
intended to replace the Company's 1984 Incentive Stock Option Plan and
the 1984 Nonstatutory Stock Option Plan (together, the 1984 Plan),
under which all of the options authorized to be granted have been
granted. The 1993 Plans provide for the grant of both qualified
incentive stock options and nonstatutory stock options to purchase
Common Stock to employees (1993 Stock Option Plan) or non-employee
directors of the Company (1993 Outside Directors Stock Option Plan) at
no less than the fair value of the stock on the date of grant. Options
granted under these plans are exercisable per the terms specified in
each individual option, but not before one year (unless the option
exercisability is accelerated by the Company's Board of Directors), or
later than ten years from the date of grant.
During fiscal 1997, the shareholders approved the Company's Board of
Directors recommendation to amend the Company's 1993 Stock Option Plan
to increase the maximum number of shares from 2,500,000 shares to
3,250,000 shares.
1984 PLAN
44
<PAGE>
The Company had an Incentive Stock Option Plan and Nonstatutory Stock
Option Plan (together, the 1984 Plan) which provided for the grant of
options to purchase Common Stock to employees or non-employee directors
of the Company at no less than the fair value of the stock on the date
of grant. Options granted under the 1984 Plan were exercisable per the
terms specified in each individual option, but not before one year
(unless the option exercisability was accelerated by the Company's
Board of Directors) or later than five years from the date of grant.
The 1984 Plan expired in July 1994 and there are no shares reserved for
future grants.
On May 11, 1995, the Board of Directors voted to offer the Company's
non-executive employees the opportunity to reprice certain stock
options which were originally granted under the 1984 Plan to the
closing price on May 31, 1995. The Board approved this repricing
because it believed retaining key employees was in the best interests
of the stockholders and the Company. During the fourth quarter of
fiscal 1995, following a decline in the stock price and a restructuring
which included a twenty-five percent staff reduction, key employees
were being contacted by other companies and agencies about employment
opportunities elsewhere. The Board believed the repricing of the
options was the most effective employment retention tool available.
OTHER OPTION GRANTS
The Company has granted to employees, consultants and scientific
advisors options to purchase shares of common stock. These options are
exercisable per the terms specified in each individual option and lapse
pursuant to the terms in the applicable plan. The options were granted
at amounts per share which were not less than the fair market value at
the date of grant.
Additional information with respect to the Company's option plans is as
follows:
<TABLE>
<CAPTION>
EMPLOYEE OPTION PLANS DIRECTORS' OPTION PLAN
-------------------------------- -----------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------ --------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding at March 31, 1996 2,167,955 6.00 - 31.13 60,000 8.13 - 17.00
Granted 914,375 6.50 - 11.13 15,000 6.88
Exercised (295,500) 6.00 - 10.63 - -0- -0-
Expired or lapsed (176,760) 6.00 - 31.13 - -0- -0-
--------- ----- ----- ------- ---- -----
Options Outstanding at March 31, 1997 2,610,070 6.00 - 22.25 75,000 6.88 - 17.00
--------- ----- ----- ------- ---- -----
Granted 724,100 6.63 - 10.38 78,000 9.13 9.25
Exercised (100,340) 6.00 - 8.63 - -0- -0-
Expired or lapsed (248,250) 6.25 - 22.25 - -0- -0-
--------- ----- ----- ------- ---- -----
Options Outstanding at March 31, 1998 2,985,580 6.00 - 22.25 153,000 6.88 - 17.00
--------- ----- ----- ------- ---- -----
Granted 1,194,288 0.93 - 9.69 - -0- -0-
Exercised (42,625) 6.00 - 10.13 - -0- -0-
Expired or lapsed (434,912) 3.31 - 22.00 - -0- -0-
--------- ----- ----- ------- ---- -----
Options Outstanding at March 31, 1999 3,702,331 0.93 - 22.25 153,000 6.88 - 17.00
--------- ----- ----- ------- ---- -----
Options exercisable at March 31, 1999 2,402,807 -0- -0- 153,000 -0- -0-
--------- -------
Reserved for future grants at March 31, 1999 1,674,404 -0- -0- 25,000 -0- -0-
--------- -------
</TABLE>
The following table summarizes information about fixed stock options
outstanding at March 31, 1999:
45
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------
Weighted-Avg Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Prices at 3/31/99 Life (years) Price at 3/31/99 Price
--------------- ---------- ------------ ----- ---------- -----
<S> <C> <C> <C> <C> <C>
0.9281- 7.00 1,339,880 8.34 4.8179 580,116 6.4920
7.125 - 9.6875 1,610,068 8.04 8.7301 1,151,306 8.0887
9.875 -22.25 905,383 6.16 14.2934 824,385 14.5654
--------- ---- ------- --------- -------
0.9281-22.25 3,855,331 7.70 8.4682 2,555,807 9.8153
</TABLE>
As permitted, the Company has adopted the disclosure only provisions of
SFAS 123 effective April 1, 1996. Accordingly, no compensation expense
has been recognized for the stock option plans. Had compensation cost
for the Company's 1999 grants for stock-based compensation plans been
determined consistent with SFAS 123, the Company's net loss, net loss
applicable to common share owners, and net loss per common share for
March 31, 1997, 1998 and 1999 would approximate the pro forma amounts
below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Fiscal Years Ended, March 31,
-------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Net income (loss) - as reported $(13,284) $(21,260) $(21,240)
Net income (loss) - pro forma $(14,559) $(23,877) $(26,429)
Earning per share (loss) - as reported $ (0.78) $ (1.19) $ (1.14)
Earning per share (loss) - pro forma $ (0.86) $ (1.34) $ (1.42)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. The fair value of each option grant was estimated on the
date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions used for grants in fiscal year
1999: risk free rate of 4.75%, expected option life of 4 years,
expected volatility of 65% and a dividend rate of zero. The weighted
average fair value of options granted from the Employee stock option
plans during fiscal 1997, 1998 and 1999 was $9.29, $7.85 and $5.43,
respectively. The weighted average fair value of options granted from
the Outside Director stock option plan during fiscal 1997 and 1998 was
$6.88 and $9.19, respectively.
NOTES RECEIVABLE FROM SALE OF COMMON STOCK-
During fiscal year 1997, the Company repurchased 21,500 shares of
Common Stock and forgave notes receivable from related parties of
approximately $390,000 relating to the exercise of options to purchase
common stock of the Company by officers and other employees. Of this
amount, approximately $109,000 was included in accounts and notes
receivable and represents taxes payable by the individuals at the time
of these option exercises plus accrued interest thereon, as well as
accrued interest on purchase price notes. The amounts relating to the
purchase price of the common stock are recorded as a reduction to
stockholders' equity.
9. SIGNIFICANT RESEARCH CONTRACTS
The Company conducts all of its research and development activities on
its own behalf. Under the terms of its collaborative research
agreements, the Company retains all ownership rights to its proprietary
technologies, subject to licensing arrangements made with its
licensees.
In December 1987, December 1988 and March 1989, the Company entered
into respective agreements (the Original Agreements) with Nycomed A.S.
(Nycomed), a Norwegian corporation, Mallinckrodt, Inc. (Mallinckrodt),
of St. Louis, Missouri and Shionogi & Co., Ltd. (Shionogi), a Japanese
46
<PAGE>
corporation, under which the Company granted exclusive licenses,
restricted to certain geographic areas, to test, evaluate, develop and
sell products covered by specified patents of the Company relating
directly to the design, manufacture or use of microspheres for
ultrasound imaging in vascular applications. The Company also granted
rights to sublicense, use, make and sell the licensed products under
specified royalty arrangements.
Under the terms of the Original Agreements, as amended, the Company
earned and received license fees of $6.5 million. The Original
Agreements also provide for total payments to the Company aggregating
up to $66.5 million, to continue product development, clinical trials,
preproduction and premarketing activities relating to the Company's
ultrasound imaging contrast agents for vascular applications. These
amounts are to be received in installments based on the achievement of
certain milestones by the Company.
In September 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA"), as well as a related investment
agreement, with Mallinckrodt. Under ARDA, the geographical scope of
Mallinckrodt's exclusive right was expanded to include all of the
countries of the world other than those covered by the Company's
license agreements with Shionogi and Nycomed. Additionally, the
duration of Mallinckrodt's exclusive right was also extended from
October 1999 until the later of July 1, 2003 or three years after the
date that the Company obtains approval from the United States Food and
Drug Administration ("FDA") to market OPTISON for an intravenous
myocardial perfusion indication.
The agreement provides the Company with between $33.0 million and $42.5
million in financing (including the $13.0 million common stock
investment discussed below). Under the terms of the agreement,
Mallinckrodt must make guaranteed payments to the Company totaling
$20.0 million over four years to support clinical trials, related
regulatory submissions and associated product development of the
licensed products, which include but are not limited to ALBUNEX and
OPTISON. These payments will be made in 16 quarterly installments of
$1.0 million for the first four quarters, $1.25 million for the
following eight quarters and $1.5 million for the final four quarters.
The payments may be accelerated in the event that the Company's
cumulative outlays for clinical trials are in excess of the amounts
received at any point in time. However, the quarterly payments may not
be postponed. As of March 31, 1999 the first 14 quarterly payments had
been received by the Company.
ARDA requires the Company to spend at least $10.0 million of the $20.0
million it receives over four years on clinical trials to support
regulatory filings with the FDA for cardiac indications of the licensed
products. The Company's expenditure of this $10.0 million will be made
in accordance with the directions of a joint steering committee which
the Company and Mallinckrodt established in order to expedite the
development and regulatory approval of OPTISON by enabling the parties
to share their expertise relating to clinical trials and the regulatory
approval process. The Company and Mallinckrodt have each appointed
three of the six members of the joint steering committee.
In connection with ARDA, the Company also entered into an investment
agreement whereby the Company sold 1,118,761 unregistered shares of its
common stock to Mallinckrodt for $13.0 million, or a price of $11.62
per share before related costs. Combined with the 181,818 shares of the
Company's common stock that Mallinckrodt acquired in December 1988,
Mallinckrodt currently owns approximately 7.3% of the Company's issued
and outstanding shares.
In addition, ARDA grants the Company the option (at its own discretion)
to repurchase all of the shares of the Company's common stock that
Mallinckrodt purchased under the investment agreement for $45.0
million, subject to various price adjustments. This option is
exercisable beginning the later of July 1, 2000 or the date that the
Company obtains approval from the FDA to market OPTISON for an
intravenous myocardial perfusion indication and ending on the later of
June 30, 2003 or three years after the date that the Company obtains
approval from the FDA to market OPTISON for an intravenous myocardial
perfusion. If the Company exercises this option, the Company may
co-market ALBUNEX, OPTISON and related products in all of the countries
covered by the amended distribution agreement.
In December 1996, the Company and Mallinckrodt amended ARDA to expand
the geographical scope of Mallinckrodt's exclusive marketing and
distribution rights for ALBUNEX, OPTISON and related products. The
amendment extended Mallinckrodt's exclusive territory to include the
territory that the
47
<PAGE>
Company had formerly licensed to Nycomed consisting of Europe,
Africa, India and parts of Asia. Under the amendment to ARDA,
Mallinckrodt agreed to pay fees up to $12.9 million plus 40 percent
of product sales to cover royalties and manufacturing. Mallinckrodt
made an initial payment of $7.1 million, consisting of
reimbursement to the Company of $2.7 million that the Company paid
to Nycomed to reacquire the exclusive product rights in Nycomed's
territory, payment of $3.0 million to the Company under the terms
of ARDA upon the extension of Mallinckrodt's exclusive rights to
Nycomed's former territory, and payment of $1.4 million to Nycomed
in satisfaction of the Company's obligation to pay 45 percent of
any amounts that the Company receives in excess of $2.7 million
upon the licensing of the former Nycomed territory to a third
party. Of the remaining $5.8 million that may be paid, Mallinckrodt
will pay $4.0 million to the Company (upon the achievement of the
specified product development milestone) and $1.8 million to
Nycomed (representing 45% of the $4.0 million payment to the
Company). There can be no assurance, however, that this milestone
will be satisfied. The Company has included all costs related to
the reacquisition of its license rights from Nycomed in other
nonrecurring charges in the financial statements. Of these costs,
approximately $1.0 million was paid in fiscal 1996 and the
remainder was paid in fiscal 1997.
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties agreement
will be incorporated into an amendment to ARDA. In addition to the
transfer of manufacturing, the amended agreement will extend
Mallinckrodt's responsibility for funding clinical trials to include
all cardiology, as well as radiology, clinical trials for OPTISON in
the United States. MBI will continue to conduct all cardiology trials
for OPTISON and will assume responsibility for conducting radiology
trials in the United States. Under the amended agreement, which will be
retroactive to March 1, 1999, Mallinckrodt will reimburse MBI for all
manufacturing expenses, including incremental costs related to the
technology transfer. In exchange for the transfer of manufacturing and
increased financial support of clinical trials for OPTISON, MBI will
receive a reduced royalty rate on product sales of OPTISON.
Mallinckrodt is the Company's principal strategic marketing partner for
its ALBUNEX and OPTISON ultrasound contrast agents for all areas of the
world except Japan, Taiwan and South Korea, which are exclusively
licensed to Chugai. Under the Company's arrangements with Mallinckrodt,
Mallinckrodt has substantial control over all aspects of marketing the
Company's product in its territories.
In October 1995, the Company entered into an agreement whereby it
reacquired all rights to INFOSON (the European designation for
ALBUNEX), OPTISON and related products from Nycomed, the Company's
European licensee. The Company agreed to pay Nycomed $2.7 million and
45% of any amounts in excess of $2.7 million that the Company receives
in payment for the transfer of marketing rights in the former Nycomed
territory to a third party. The Company also agreed to pay Nycomed a
royalty based on future sales, as defined in the agreement. As stated
above, the license rights were resold to Mallinckrodt for amounts
stipulated in the amendment to ARDA.
In September 1996, the Company entered into an agreement with Shionogi
pursuant to which the Company reacquired all rights to manufacture,
market and sell its ALBUNEX family of products in the territory
consisting of Japan, Taiwan and South Korea, formerly exclusively
licensed to Shionogi. This agreement settled an outstanding dispute
between the two companies concerning the license and distribution
agreement for ALBUNEX and resulted in the dismissal of all claims
raised by the companies against each other. Under the agreement, the
Company paid $3.0 million to Shionogi and agreed to pay an additional
$5.5 million over the next three years, of which $4.0 million had been
paid at March 31, 1999.
In April 1998, the Company and Chugai entered into a strategic alliance
to develop and commercialize OPTISON (which may be marketed under a
different name) and ORALEX in Japan, Taiwan and South Korea. In
exchange for granting to Chugai a royalty-based license to market these
products in the named countries, MBI received an upfront license fee
from Chugai of $14.0 million. In addition, Chugai made an equity
investment in the Company's common stock. The Company is eligible to
receive milestone payments of up to $20 million based on the
achievement of certain product development goals and will receive
royalties from Chugai from the sale of commercialized products in the
territory.
48
<PAGE>
During the years ended March 31, 1997, 1998 and 1999, the Company
received contract research payments and earned revenue under the above
agreements as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
---------------------------------
1997 1998 1999
<S> <C> <C> <C>
Contract payments received:
Chugai $ - $ 1,575 $ 14,796
US Government - 95 -
Mallinckrodt 10,200 5,000 5,500
-------- ------- --------
Total $ 10,200 $ 6,670 $ 20,296
======== ======= ========
Contract payments earned:
Chugai $ - $ - $ 16,371
US Government - 95 -
Mallinckrodt 10,200 5,000 5,500
-------- ------- --------
Total $ 10,200 $ 5,095 $ 21,871
======== ======= ========
</TABLE>
10. OTHER NONRECURRING CHARGES
Other nonrecurring charges include the following for the years
presented:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------
1997 1998 1999
<S> <C> <C> <C>
Write-off of license rights of former Nycomed territory $ 3,000 $ - $ -
(Note 9)
Impact of Cost Reduction Measures (Note 2) - - 6,120
Write-off of reacquired Shionogi license rights (Note 3) - - 8,500
Bankers fees related to Chugai (Note 3) - - 878
------- --- -------
$ 3,000 $ - $15,498
======= === =======
</TABLE>
As a result of slower than planned OPTISON sales, the Company initiated
a cost reduction plan in fiscal 1999 to reduce expenses and preserve
capital. The impact of the cost reduction measures, out-sourcing of the
Company's manufacturing operations and discontinuation of certain
projects resulted in a one-time charge of $6.1 million. The Company
wrote off $1.2 million in fixed assets through accelerated depreciation
during fiscal year 1999 and expects to write-off another $1.6 million
in fixed assets through accelerated depreciation over the next 12
months as the manufacturing process is out-sourced.
In fiscal 1999, the Company wrote off $8.5 million of license rights
related to the sale to Chugai of territory rights previously reacquired
from Shionogi. In addition, the Company incurred a one-time charge of
$878,000 in bankers fees in connection with the Chugai Agreement.
In September 1996, the Company entered into an agreement with Nycomed
for the repurchase of the rights to manufacture, market and sell its
ALBUNEX family of products in the territory formerly exclusively
licensed to Nycomed (see note 9). As a result, during fiscal year 1997
the Company wrote off the license rights of the former Nycomed
territory in the amount of $3.0 million.
49
<PAGE>
11. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations for the years ended March 31, 1999 and 1998 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended: Jun 30 Sep 30 Dec 31 Mar 31
-------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues $ 18,988 $ 2,666 $ 2,185 $ 2,113
Research and Development Costs 2,227 2,409 2,358 2,089
Total Operating Costs and Expenses 17,113 9,950 14,238 5,311
Net Income/(Loss) 740 (7,068) (11,870) (3,042)
Income/(Loss) Per Common Share 0.04 (0.38) (0.64) (0.16)
Weighted Average Common Shares Outstanding 18,512 18,581 18,581 18,581
Quarter Ended: Jun 30 Sep 30 Dec 31 Mar 31
-------------- ------ ------ ------ ------
Fiscal 1998
Revenues $ 1,474 $ 1,426 $ 1,373 $ 1,973
Research and Development Costs 2,185 2,680 2,939 3,274
Total Operating Costs and Expenses 6,736 6,401 7,517 8,127
Net Income/(Loss) (4,799) (4,621) (5,903) (5,937)
Income/(Loss) Per Common Share (0.27) (0.26) (0.33) (0.33)
Weighted Average Common Shares Outstanding 17,752 17,768 17,813 17,793
</TABLE>
12. SUBSEQUENT EVENTS
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON, the only advanced generation cardiac ultrasound
imaging agent commercially available in the United States and Europe,
from MBI to Mallinckrodt. The parties agreement will be incorporated
into an amendment to ARDA. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology,
as well as radiology, clinical trials for OPTISON in the United States.
MBI will continue to conduct all cardiology trials for OPTISON and will
assume responsibility for conducting radiology trials in the United
States. Under the terms of the amended agreement, which will be
retroactive to March 1, 1999, Mallinckrodt will reimburse MBI for all
manufacturing expenses, including incremental costs related to the
technology transfer. In exchange for the transfer of manufacturing and
increased financial support of clinical trials for OPTISON, MBI will
receive a reduced royalty rate on product sales of OPTISON.
In May and June 1999, the Company received correspondence from the PTO
with respect to the ImaRx patents involved in the reexamination
proceedings. The PTO indicated that all claims of U.S. Patent No.
5,547,656 (`656) and U.S. Patent No. 5,527,521(`521) will be allowed in
their original form.
In May 1999, the Company and Mallinckrodt received notice of a lawsuit
filed against them by DuPont Pharmaceuticals Company ("DuPont) and
ImaRx in the United States District Court for the District of Delaware
(the "DuPont Case"). The lawsuit alleges that the manufacture and sale
of OPTISON infringes the `656 patent owned by ImaRx and exclusively
licensed to DuPont. MBI has counterclaimed for a declaration of
invalidity and non-infringement with respect to the `656 patent. In
June 1999, DuPont and ImaRx amended their complaint in the DuPont case
to add allegations that the manufacture and sale of OPTISON also
infringes the `521 patent owned by ImaRx and exclusively licensed to
DuPont.
Litigation or administrative proceedings relating to these matters
could result in a substantial cost to the Company; and given the
complexity of the legal and factual issues, the inherent vicissitudes
and uncertainty of litigation, and other factors, there can be no
assurance of a favorable outcome. An unfavorable outcome could have a
material adverse effect on the Company's business, financial
50
<PAGE>
condition and results of operations. Moreover, there can be no
assurance that, in the event of an unfavorable outcome, the Company
would be able to obtain a license to any proprietary rights that
may be necessary to commercialize OPTISON, either on acceptable
terms or at all. If the Company were required to obtain a license
necessary to commercialize OPTISON, the Company's failure or
inability to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
51
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated in this report by
reference to the information contained under the caption "Election of Directors"
in the Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders to be held on August 26, 1999 ("1999 Proxy Statement"). Information
concerning executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated in this
report by reference to the information contained under the caption "Executive
Compensation" in the Company's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership is incorporated in this report by
reference to the information contained under the caption "Stock Ownership" in
the Company's 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated in this report by reference to the information contained under the
caption "Certain Relationships and Related Transactions" in the Company's 1999
Proxy Statement.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
<TABLE>
<S> <C>
(a) (1) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(2) The financial statements and financial statement schedules
filed as a part of this Report are listed in the "Index to
Consolidated Financial Statements and Schedules".
(3) Exhibits -Exhibits marked with an asterisk are filed with this
Report; all other Exhibits are incorporated by reference.
Exhibits marked with a dagger are management contracts or
compensatory plans or arrangements.
3.1 Certificate of Incorporation of the Company, as amended to
date (by amendments filed March 4, 1981, March 30, 1982, March
14, 1983, April 18, 1983, and November 20, 1987).
(Incorporated by reference from Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1988.)
3.2 Certificate of Amendment to Certificate of Incorporation of
Molecular Biosystems, Inc. dated August 20, 1996.
(Incorporated by reference from Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1998.)
3.3 Certificate of Incorporation of Syngene, Inc. as amended
September 20, and December 31, 1989. (Incorporated by
reference from Exhibit 3.2 to the Company's Annual Report of
Form 10-K for the fiscal year ended March 31, 1990.)
3.4 By-Laws of the Company, as amended and restated September 18,
1990. (Incorporated by reference from Exhibit 3.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991).
3.5 First Amendment, dated August 20, 1992 to the By-Laws of the
Company, as amended and restated September 18, 1990.
(Incorporated by reference from Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1994.)
3.6 By-Laws of Syngene, Inc. (Incorporated by reference from
Exhibit 3.4 to the Company's Annual Report on form 10-K for
the fiscal year ended March 31, 1990.)
10.1 Restated License Agreement dated June 1, 1989 between the
Company and Steven B. Feinstein, M.D., and related Research
and Supply Agreement dated June 1, 1989. (Incorporated by
reference from Exhibits 10.1 and 10.2 to the Company's Current
Report on Form 8-K filed on June 9, 1989.)
10.2 Amendment to Research Support and Supply Agreement dated
December 15, 1992 between the Company and Steven B. Feinstein,
M.D. (Incorporated by reference from Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)
10.3 License and Cooperative Development Agreement dated December
31, 1987 between the Company and Nycomed AS ("Nycomed"), and
related Investment Agreement dated December 31, 1987,
Registration Agreement dated December
53
<PAGE>
31, 1987 and Common Stock Purchase Warrant dated January
19, 1988. (Incorporated by reference from Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1988.)
10.4 Amendment to License and Cooperative Development Agreement
dated June 15, 1989 between the Company and Nycomed.
(Incorporated by reference from Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1989.)
10.5 Amendment No. 3 to License and Cooperative Development
Agreement dated October 24, 1995 between the Company and
Nycomed Imaging AS. (Incorporated by reference from Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended December 31, 1995.)
10.6 Amended and Restated Distribution Agreement dated September 7,
1995 between the Company and Mallinckrodt Medical, Inc.
(Incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995.)
10.7 Amendment to Amended and Restated Distribution Agreement dated
November 4, 1996 between the Company and Mallinckrodt Medical,
Inc. (Incorporated by reference from Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997.)
10.8 Investment Agreement dated December 7, 1988 between the
Company and Mallinckrodt Medical, Inc.(Incorporated by
reference from Exhibit 10.9 to the Company's Annual Report on
form 10-K for the fiscal year ended March 31, 1989.)
10.9 Investment Agreement dated September 7, 1995 between the
Company and Mallinckrodt Medical, Inc. (Incorporated by
reference from Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q/A for the quarterly period ended December 31,
1995.)
10.10 Cooperative Development and Marketing Agreement effective
March 31, 1998 between the Company and Chugai Pharmaceutical
Co., Ltd. (Incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K dated April 7, 1998)
10.11 Common Stock Purchase Agreement effective March 31, 1998
between the Company and Chugai Pharmaceutical Co., Ltd.
(Incorporated by reference from Exhibit 2.2 to the Company's
Current Report on Form 8-K dated April 7, 1998)
10.12 Letter Agreement dated February 18, 1991 between the Company
and Schering Aktiengesellschaft. (Incorporated by reference
from Exhibit 10.9 to the Company's Annual Report of Form 10-K
for the fiscal year ended March 31, 1991.)
10.13 Settlement Agreement and Mutual Release dated September 10,
1996 between the Company and Shionogi & Co., Ltd.
(Incorporated by reference from Exhibit 10.11 to the Company's
Annual Report of Form 10-K for the fiscal year ended March 31,
1997.)
10.14 Exclusive License Agreement dated April 1, 1992 between the
Company and The Regents of the University of California.
(Incorporated by reference from Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)
54
<PAGE>
10.15 License Agreement dated August 23, 1991 between the Johns
Hopkins University, Towson State University and the Company.
(Incorporated by reference from Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)
10.16 License Agreement dated November 11, 1991 between the Company
and the Regents of the University of Michigan. (Incorporated
by reference from Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992.)
10.17 Exclusive License Agreement dated July 31, 1990 between the
Company and the Regents of the University of California, and
Amendment Agreement dated April 1, 1992. (Incorporated by
reference from Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.18 License Option Agreement dated January 29, 1993 between the
Company and Abbott Laboratories. (Incorporated by reference
from Exhibit 10.1 to the Company's Current Report on Form 8-K
dated January 29, 1993.)
10.19+ Molecular Biosystems, Inc. Pre-1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989.)
10.20+ Molecular Biosystems, Inc. 1984 Incentive Stock Option Plan
and 1984 Nonstatutory Stock Option Plan, as amended by First
and Second Amendments. (Incorporated by reference from Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1988.)
10.21+ Third and Fourth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989.)
10.22+ Fifth Amendment to Molecular Biosystems, Inc. 1984 Incentive
Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
(Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1990.)
10.23+ Sixth and Seventh Amendments to Molecular Biosystems, Inc.
1984 Incentive Stock Option Plan and 1984 Nonstatutory Stock
Option Plan. (Incorporated by reference from Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1991.)
10.24+ Eighth and Ninth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)
10.25+ Form of Stock Option Agreement used with the Company's 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1988.)
10.26+ Molecular Biosystems, Inc. 1993 Stock Option Plan.
(Incorporated by reference from Exhibit 4.2 to the Company's
Registration Statement No. 33-78572 on Form S-8, dated May 3,
1994, filed on May 5, 1994.)
55
<PAGE>
10.27+ Form of Stock Option Agreement used with the Company's 1993
Stock Option Plan. (Incorporated by reference from Exhibit
10.33 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.)
10.28+ Molecular Biosystems, Inc. 1993 Outside Directors Stock Option
Plan. (Incorporated by reference from Exhibit 4.2 to the
Company's Registration Statement No. 33-78564 on Form S-8,
dated May 3, 1994, filed on May 5, 1994.)
10.29+ Form of Stock Option Agreement used with the Company's 1993
Outside Directors Stock Option Plan. (Incorporated by
reference from Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994.)
10.30+ First Amendment to the Molecular Biosystems, Inc. 1993 Stock
Option Plan (Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed on
September 15, 1997 (Registration No. 333-35633.)
10.31+ Molecular Biosystems, Inc. 1997 Outside Directors Stock Option
Plan (Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed on
September 15, 1997 (Registration No. 333-35631.)
10.32+ Second Amendment to 1993 Stock Option Plan. (Incorporated by
reference from Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.)
10.33+ Third Amendment to 1993 Stock Option Plan. (Incorporated by
reference from Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.)
10.34+ 1998 Stock Option Plan. (Incorporated by reference to the
Company's Proxy Statement on Form 14A for the fiscal year
ended March 31, 1998.)
10.35+* 1998 Stock Option Plan (as amended and restated through
September 22, 1998.)
10.36+ Employment Agreement dated April 25, 1995 between the Company
and Kenneth J. Widder, M.D. (Incorporated by reference from
Exhibit 10.30 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.)
10.37+ Employment Agreement dated November 1, 1995 between the
Company and Bobba Venkatadri. (Incorporated by reference from
Exhibit 10.41 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996.)
10.38+ First Amendment to Employment Agreement dated April 30, 1996
between the Company and Bobba Venkatadri. (Incorporated by
reference from Exhibit 10.34 to the Company's Annual Report of
Form 10-K for the fiscal year ended March 31, 1997.)
56
<PAGE>
10.39+ Partnership Agreement dated October 18, 1996 between the
Company and Bobba and Annapurna Venkatadri. (Incorporated by
reference from Exhibit 10.36 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997).
10.40+ Employment Agreement dated as of September 1, 1997 between the
Company and Gerard A. Wills. (Incorporated by reference from
Exhibit 10.38 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.)
10.41+ Employment Agreement dated as of September 1, 1997 between the
Company and William I. Ramage. (Incorporated by reference from
Exhibit 10.39 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.)
10.42+ Employment Agreement dated as of December 1, 1997 between the
Company and Thomas Jurgensen. (Incorporated by reference from
Exhibit 10.40 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.)
10.43+ Employment Agreement dated as of September 1, 1997 between the
Company and Joni Harvey. (Incorporated by reference from
Exhibit 10.41 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.)
10.44+ Employment Agreement dated as of September 1, 1997 between the
Company and Howard Dittrich. (Incorporated by reference from
Exhibit 10.42 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.)
10.45+ Separation Agreement effective May 30, 1997 between the
Company and Allan Mizoguchi, Ph.D. (Incorporated by reference
from Exhibit 10.43 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998.)
10.46+ Separation Agreement effective May 30, 1997 between the
Company and James Barnhart, Ph.D. (Incorporated by reference
from Exhibit 10.44 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998.)
10.47+ Separation Agreement effective September 4, 1998 between the
Company and Kenneth J. Widder, M.D. (Incorporated by reference
from Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998.)
10.48+* Separation Agreement effective December 31, 1998 between the
Company and Gerard A. Wills.
10.49+* Separation Agreement effective March 3, 1999 between the
Company and William T. Ramage.
10.50+* Separation Agreement effective March 3, 1999 between the
Company and Thomas Jurgensen.
57
<PAGE>
10.51 Triple Net Lease dated June 19, 1995 between the Company and
Radnor/Collins/Sorrento Partnership. (Incorporated by
reference from Exhibit 10.43 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)
10.52 First Amendment to Sublease dated February 27, 1998 between
the Company and Dura Pharmaceuticals, Inc. (Incorporated by
reference from Exhibit 10.46 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.)
10.53 Sublease dated October 1, 1997 between the Company and Dura
Pharmaceuticals, Inc. (Incorporated by reference from Exhibit
10.47 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998.)
10.54 Equipment Lease Agreement dated June 30, 1997 between the
Company and Mellon US Leasing. (Incorporated by reference from
Exhibit 10.48 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.)
10.55 Sublease dated February 16, 1998 between the Company and
ComStream Corporation. (Incorporated by reference from Exhibit
10.49 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998.)
10.56 Promissory note dated December 31, 1993 between the Company
and James L. Barnhart. (Incorporated by reference from Exhibit
10.48 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.)
10.57 Second Amendment to Promissory note dated June 24, 1996
between the Company and James L. Barnhart. (Incorporated by
reference from Exhibit 10.52 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996.)
10.58 Promissory note dated December 31, 1993 between the Company
and John W. Young. (Incorporated by reference from Exhibit
10.49 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.)
10.59* License Agreement dated March 26, 1999 between the Company and
Schering Aktiengesellschaft.
19 Documents not previously filed are marked with an asterisk (*).
23* Consent of Arthur Andersen LLP.
</TABLE>
58
<PAGE>
(b) REPORT ON FORM 8-K
A Current Report on Form 8-K dated November 10, 1998 was filed on
January 11, 1999 reporting the following: (1) that as a result of slower
than planned ramp up of OPTISON sales, the Company had initiated a
multi-phase program to reduce expenses and preserve capital; (2) that
changes in management had occurred; and (3) that the U.S. Patents &
Trademark Office would allow certain of the `751 patent claims filed by
Sonus Pharmaceuticals to be filed against the Company in their original
form.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 28, 1999.
MOLECULAR BIOSYSTEMS, INC.
By: /s/ Bobba Venkatadri
--------------------------------
Bobba Venkatadri
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bobba Venkatadri President, Chief Executive June 28, 1999
- -------------------------------- Officer (Principal Executive
Bobba Venkatadri Officer)
/s/ Elizabeth L. Hougen Executive Director-Finance June 28, 1999
- -------------------------------- and Chief Financial Officer
Elizabeth L. Hougen (Principal Financial and
Accounting Officer)
/s/ Robert W. Brightfelt Director June 28, 1999
- --------------------------------
Robert W. Brightfelt
/s/ Charles C. Edwards, M.D. Director June 28, 1999
- --------------------------------
Charles C. Edwards, M.D.
/s/ Gordon C. Luce Director June 28, 1999
- --------------------------------
Gordon C. Luce
/s/ David Rubinfien Director June 28, 1999
- --------------------------------
David Rubinfien
/s/ David W. Barry, M.D. Director June 28, 1999
- --------------------------------
David W. Barry, M. D.
/s/ Jerry Jackson Director June 28, 1999
- --------------------------------
Jerry Jackson
</TABLE>
60
<PAGE>
EXHIBIT 10.35
MOLECULAR BIOSYSTEMS, INC.
1998 STOCK OPTION PLAN
(AS AMENDED AND RESTATED THROUGH
SEPTEMBER 22, 1998)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1998 Stock Option Plan is intended to promote the
interests of Molecular Biosystems, Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate equity
programs:
(i) the Discretionary Option Grant Program under
which eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Salary Investment Option Grant Program
under which eligible employees may elect to have a portion of their base
salary invested each year in special options,
(iii) the Stock Issuance Program under which
eligible persons may, at the discretion of the Plan Administrator, be issued
shares of Common Stock directly, either through the immediate purchase of
such shares or as a bonus for services rendered the Corporation (or any
Parent or Subsidiary), and
(iv) the Automatic Option Grant Program under
which eligible non-employee Board members shall automatically receive options
at periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Six shall apply to
all equity programs
<PAGE>
under the Plan and shall govern the interests of all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The following provisions shall govern the
administration of the Plan:
(i) The Board shall have the authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders but may delegate such authority in whole or in
part to the Primary Committee.
(ii) Administration of the Discretionary Option
Grant and Stock Issuance Programs with respect to all other persons eligible
to participate in those programs may, at the Board's discretion, be vested in
the Primary Committee or a Secondary Committee, or the Board may retain the
power to administer those programs with respect to all such persons.
(iii) The Primary Committee shall have the sole and
exclusive authority to determine which Section 16 Insiders and other highly
compensated Employees shall be eligible for participation in the Salary
Investment Option Grant Program for one or more calendar years. However, all
option grants under the Salary Investment Option Grant Program shall be made
in accordance with the express terms of that program, and the Primary
Committee shall not exercise any discretionary functions with respect to the
option grants made under that program.
(iv) Administration of the Automatic Option Grant
Program shall be self-executing in accordance with the terms of that program.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem
appropriate for proper administration of the Plan, to make all factual
determinations, to construe and interpret the provisions of the Plan and the
awards thereunder and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made
under the Discretionary Option Grant and Stock Issuance Programs, which
eligible persons are to receive such awards, the time or times when such
awards are to be made, the number of shares to be covered by each such award,
the vesting schedule (if any) applicable to the award, the status of a
granted option as either an Incentive Option or a Non-Statutory Option and
the maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding
award with the consent of the holder or accelerate the vesting of such award;
and
(iv) to take such other discretionary actions as
permitted pursuant
2.
<PAGE>
to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary
Committee shall serve for such period of time as the Board may determine and
may be removed by the Board at any time. The Board may also at any time
terminate the functions of any Secondary Committee and reassume all powers
and authority previously delegated to such committee.
D. Service on the Primary Committee or the Secondary
Committee shall constitute service as a Board member, and members of each
such committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No
member of the Primary Committee or the Secondary Committee shall be liable
for any act or omission made in good faith with respect to the Plan or any
options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the
Discretionary Option Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the
board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors
who provide services to the Corporation (or any Parent or
Subsidiary).
B. Only Employees who are Section 16 Insiders or other
highly compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to
participate in the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock initially reserved for issuance over the term of the
Plan shall not exceed the number of shares authorized under the Predecessor
Plans being subsumed under this Plan plus Two Million (2,000,000) shares
newly authorized by the Board subject to stockholder approval. There are
approximately Four Hundred Eighty Eight Thousand
3.
<PAGE>
(488,000) shares which are authorized but not yet subject to any outstanding
option under the Predecessor Plans. There are approximately Three Million
One Hundred Thousand (3,100,000) shares authorized under the Predecessor
Plans which are subject to currently outstanding option grants.
B. No one person participating in the Plan may receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than Six Hundred and Fifty Thousand (650,000) shares of
Common Stock in the aggregate per calendar year, beginning with the 1998
calendar year.
C. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plans)
shall be available for subsequent issuance under the Plan to the extent those
options expire, terminate or are cancelled for any reason prior to exercise
in full. Unvested shares issued under the Plan and subsequently repurchased
by the Corporation, at the original exercise or issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent options or direct stock issuances under the Plan. However, should
the exercise price of an option under the Plan be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock
issuance under the Plan, then the number of shares of Common Stock available
for issuance under the Plan shall be reduced by the gross number of shares
for which the option is exercised or which vest under the stock issuance, and
not by the net number of shares of Common Stock issued to the holder of such
option or stock issuance. Shares of Common Stock underlying one or more
stock appreciation rights exercised under the Plan shall NOT be available for
subsequent issuance.
D. If any change is made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities by which the
share reserve is to increase each calendar year pursuant to the automatic share
increase provisions of the Plan, (iii) the number and/or class of securities for
which any one person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar year,
(iv) the number and/or class of securities for which grants are subsequently to
be made under the Automatic Option Grant Program to new and continuing
non-employee Board members, (iv) the number and/or class of securities and the
exercise price per share in effect under each outstanding option under the Plan
and (v) the number and/or class of securities and price per share in effect
under each outstanding option incorporated into this Plan from the Predecessor
Plans. Such adjustments to the outstanding options are to be effected in a
manner which shall preclude the enlargement or dilution of rights and benefits
under such options. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive.
4.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below. Each document
evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by
the Plan Administrator at the time of the option grant, but in no event shall
the exercise price per share be less than one eighty-five percent (85%) of
the fair market value of the common stock on the date of grant.
2. The exercise price shall become immediately due
upon exercise of the option and shall, subject to the provisions of Section
II of Article Six and the documents evidencing the option, be payable in cash
or check made payable to the Corporation. Should the Common Stock be
registered under Section 12 of the 1934 Act at the time the option is
exercised, then the exercise price may also be paid as follows:
(i) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide irrevocable
instructions to (a) a Corporation-approved brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date, sufficient funds
to cover the aggregate exercise price payable for the purchased shares
plus all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have
5.
<PAGE>
a term in excess of ten (10) years measured from the option grant date.
C. CESSATION OF SERVICE.
1. The following provisions shall govern the
exercise of any options outstanding at the time of the Optionee's cessation
of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable
for such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by
the Optionee at the time of death may be subsequently exercised by his
or her Beneficiary.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated
for Misconduct or should the Optionee engage in Misconduct while his or
her options are outstanding, then all such options shall terminate
immediately and cease to be outstanding.
2. The Plan Administrator shall have complete
discretion, exercisable either at the time an option is granted or at any
time while the option remains outstanding:
(i) to extend the period of time for which the
option is to remain exercisable following the Optionee's cessation of
Service to such period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) to permit the option to be exercised, during
the applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
6.
<PAGE>
D. STOCKHOLDER RIGHTS. The holder of an option shall have
no stockholder rights with respect to the shares subject to the option until
such person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have
the discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the
lifetime of the Optionee, Incentive Options shall be exercisable only by the
Optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following the Optionee's death.
Non-Statutory Options shall be subject to the same restrictions, except that
a Non-Statutory Option may, to the extent permitted by the Plan
Administrator, be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's immediate family or to a trust
established exclusively for Optionee and/or one or more such family members.
The terms applicable to the assigned portion shall be the same as those in
effect for the option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall NOT be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
B. EXERCISE PRICE. The exercise price per share shall not
be less than eighty five percent (85%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of
the shares of Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee under the Plan
(or any other option plan of the Corporation or any Parent or Subsidiary) may
for the first time become exercisable as Incentive Options during any one
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are
granted.
7.
<PAGE>
D. 10% STOCKHOLDER. If any Employee to whom an Incentive
Option is granted is a 10% Stockholder, then the exercise price per share
shall not be less than one hundred ten percent (110%) of the Fair Market
Value per share of Common Stock on the option grant date, and the option term
shall not exceed five (5) years measured from the option grant date.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in
Control but not otherwise fully-vested shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Change
in Control, become exercisable for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding
option shall not so accelerate if and to the extent: (i) such option is, in
connection with the Change in Control, assumed or otherwise continued in full
force and effect by the successor corporation (or parent thereof) pursuant to
the terms of the Change in Control, (ii) such option is replaced with a cash
incentive program of the successor corporation which preserves the spread
existing at the time of the Change in Control on the shares of Common Stock
for which the option is not otherwise at that time exercisable and provides
for subsequent payout in accordance with the same vesting schedule applicable
to those option shares or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Change in Control,
except to the extent: (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Change in
Control, all outstanding options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent thereof)
or otherwise expressly continued in full force and effect pursuant to the
terms of the Change in Control.
D. Each option which is assumed in connection with a
Change in Control shall be appropriately adjusted, immediately after such
Change in Control, to apply to the number and class of securities which would
have been issuable to the Optionee in consummation of such Change in Control
had the option been exercised immediately prior to such Change in Control.
Appropriate adjustments to reflect such Change in Control shall also be made
to (i) the exercise price payable per share under each outstanding option,
PROVIDED the aggregate exercise price payable for such securities shall
remain the same, (ii) the maximum number and/or class of securities available
for issuance over the remaining term of the Plan and (iii) the maximum number
and/or class of securities for which any one person may be granted options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.
8.
<PAGE>
E. The Plan Administrator may at any time provide that one
or more options will automatically accelerate in connection with a Change in
Control, whether or not those options are assumed or otherwise continued in
full force and effect pursuant to the terms of the Change in Control. Any
such option shall accordingly become exercisable, immediately prior to the
effective date of such Change in Control, for all of the shares of Common
Stock at the time subject to that option and may be exercised for any or all
of those shares as fully-vested shares of Common Stock. In addition, the
Plan Administrator may at any time provide that one or more of the
Corporation's repurchase rights shall not be assignable in connection with
such Change in Control and shall terminate upon the consummation of such
Change in Control.
F. The Plan Administrator may at any time provide that one
or more options will automatically accelerate upon an Involuntary Termination
of the Optionee's Service within a designated period (not to exceed
twenty-four (24) months) following the effective date of any Change in
Control in which those options do not otherwise accelerate. Any options so
accelerated shall remain exercisable for fully-vested shares until the
EARLIER of (i) the expiration of the option term or (ii) the expiration of
the one (1) year period measured from the effective date of the Involuntary
Termination. In addition, the Plan Administrator may at any time provide
that one or more of the Corporation's repurchase rights shall immediately
terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one
or more options will automatically accelerate in connection with a Hostile
Take-Over. Any such option shall become exercisable, immediately prior to
the effective date of such Hostile Take-Over, for all of the shares of Common
Stock at the time subject to that option and may be exercised for any or all
of those shares as fully-vested shares of Common Stock. In addition, the Plan
Administrator may at any time provide that one or more of the Corporation's
repurchase rights shall terminate automatically upon the consummation of such
Hostile Take-Over. Alternatively, the Plan Administrator may condition such
automatic acceleration and termination upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed twenty-four (24)
months) following the effective date of such Hostile Take-Over. Each option
so accelerated shall remain exercisable for fully-vested shares until the
expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in
connection with a Change in Control or Hostile Take Over shall remain
exercisable as an Incentive Option only to the extent the applicable One
Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent
such dollar limitation is exceeded, the accelerated portion of such option
shall be exercisable as a Non-Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it
may determine, grant to selected Optionees stock appreciation rights which
will allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that
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option in exchange for a distribution from the Corporation in an amount equal
to the excess of (a) the Option Surrender Value of the number of shares for
which the option is surrendered over (b) the aggregate exercise price payable
for such shares. The distribution may be made in shares of Common Stock
valued at Fair Market Value on the option surrender date, in cash, or partly
in shares and partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.
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ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment
Option Grant Program for one or more calendar years beginning after the Plan
Effective Date and select the Section 16 Insiders and other highly
compensated Employees eligible to participate in the Salary Investment Option
Grant Program for each such calendar year. Each selected individual who
elects to participate in the Salary Investment Option Grant Program must,
prior to the start of each calendar year of participation, file with the Plan
Administrator (or its designate) an irrevocable authorization directing the
Corporation to reduce his or her base salary for that calendar year by an
amount not less than Ten Thousand Dollars ($10,000.00) nor more than One
Hundred Thousand Dollars ($100,000.00). The Primary Committee shall have
complete discretion to determine whether to approve the filed authorization
in whole or in part. To the extent the Primary Committee approves the
authorization, the individual who filed that authorization shall be granted
an option under the Salary Investment Grant Program on the first trading day
in January for the calendar year for which the salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one
or more documents in the form approved by the Plan Administrator; PROVIDED,
however, that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be
Thirty-three Percent (33%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option and shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder
is utilized, payment of the exercise price for the purchased shares must be
made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of
Common Stock subject to the option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):
X = A DIVIDED BY (B x 67%), where
X is the number of option shares,
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A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
B is the Fair Market Value per share of Common Stock on
the option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the
calendar year for which the salary reduction is in effect. Each option shall
have a maximum term of ten (10) years measured from the option grant date.
D. CESSATION OF SERVICE. Each option outstanding at the
time of the Optionee's cessation of Service shall remain exercisable, for any
or all of the shares for which the option is exercisable at the time of such
cessation of Service, until the EARLIER of (i) the expiration of the option
term or (ii) the expiration of the three (3)-year period following the
Optionee's cessation of Service. To the extent the option is held by the
Optionee at the time of his or her death, the option may be exercised by his
or her Beneficiary. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to remain outstanding
with respect to any and all shares of Common Stock for which the option is
not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile
Take-Over while the Optionee remains in Service, each outstanding option
shall automatically accelerate so that each such option shall, immediately
prior to the effective date of the Change in Control or Hostile Take-Over,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all
of those shares as fully-vested shares of Common Stock. Each such option
accelerated in connection with a Change in Control shall terminate upon the
Change in Control, except to the extent assumed by the successor corporation
(or parent thereof) or otherwise continued in full force and effect pursuant
to the terms of the Change in Control. Each such option accelerated in
connection with a Hostile Take-Over shall remain exercisable until the
expiration or sooner termination of the option term.
B. Upon the occurrence of a Hostile Take-Over, the
Optionee shall have a thirty (30)-day period in which to surrender to the
Corporation each of his or her outstanding options. The Optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Option Surrender Value of the shares of Common
Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the surrender of the option to
the Corporation.
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IV. REMAINING TERMS
The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
options made under the Discretionary Option Grant Program.
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ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Up to Ten percent (10%) of the shares of Common Stock
available under the Plan may be issued under the Stock Issuance Program
without any intervening options. Shares of Common Stock may also be issued
under the Stock Issuance Program pursuant to share right awards which entitle
the recipients to receive those shares upon the attainment of designated
performance goals or Service requirements. Each such award shall be
evidenced by one or more documents which comply with the terms specified
below.
A. PURCHASE PRICE.
1. The purchase price per share of Common Stock
subject to direct issuance shall be fixed by the Plan Administrator, but in
no event shall the price per share be less than one hundred percent (100%) of
the fair market value of the common stock on the date of issuance.
2. Subject to the provisions of Section II of
Article Six, shares of Common Stock may be issued under the Stock Issuance
Program for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the Corporation
(or any Parent or Subsidiary).
B. VESTING/ISSUANCE PROVISIONS.
1. The Plan Administrator may issue shares of
Common Stock which are fully and immediately vested upon issuance or which
are to vest in one or more installments over the Participant's period of
Service or upon attainment of specified performance objectives.
Alternatively, the Plan Administrator may issue share right awards which
shall entitle the recipient to receive a specified number of vested shares of
Common Stock upon the attainment of one or more performance goals or Service
requirements established by the Plan Administrator.
2. Any new, substituted or additional securities
or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive with respect to
his or her unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the
same vesting requirements applicable to the
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Participant's unvested shares of Common Stock and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder
rights with respect to the issued shares of Common Stock, whether or not the
Participant's interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any
regular cash dividends paid on such shares.
4. Should the Participant cease to remain in
Service while holding one or more unvested shares of Common Stock, or should
the performance objectives not be attained with respect to one or more such
unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall
have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant
the cash consideration paid for the surrendered shares and shall cancel the
unpaid principal balance of any outstanding purchase-money note of the
Participant attributable to the surrendered shares.
5. The Plan Administrator may waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other
assets attributable thereto) which would otherwise occur upon the cessation
of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock
as to which the waiver applies. Such waiver may be effected at any time,
whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
6. Outstanding share right awards shall
automatically terminate, and no shares of Common Stock shall actually be
issued in satisfaction of those awards, if the performance goals or Service
requirements established for such awards are not attained. The Plan
Administrator, however, shall have the authority to issue shares of Common
Stock in satisfaction of one or more outstanding share right awards as to
which the designated performance goals or Service requirements are not
attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights
shall terminate automatically, and all the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control, except to the extent (i) those repurchase rights are
assigned to the successor corporation (or parent thereof) or otherwise
continue in full force and effect pursuant to the terms of the Change in
Control or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the
automatic
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termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an
Involuntary Termination of the Participant's Service within a designated
period (not to exceed twenty-four (24) months) following the effective date
of any Change in Control or Hostile Take-Over in which those repurchase
rights are assigned to the successor corporation (or parent thereof) or
otherwise continue in full force and effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
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ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates
specified below:
1. Each individual who is first elected or
appointed as a non-employee Board member at any time after the Plan Effective
Date shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase Fifteen Thousand (15,000)
shares of Common Stock, provided that individual has not previously been in
the employ of the Corporation or any Parent or Subsidiary and is not a 5%
Stockholder or Affiliate (the "Commencement Grant").
2.. On the date of each Annual Stockholders Meeting
held after the Plan Effective Date, each individual who is to continue to
serve as a non-employee Board member, whether or not that individual is
standing for re-election to the Board, shall automatically be granted a
Non-Statutory Option to purchase Six Thousand Five Hundred (6,500) shares of
Common Stock, provided such individual has served as a non-employee Board
member for at least six (6) months and is not a 5% Stockholder or Affiliate
(the "Annual Grant"), and provided that such individual has not received an
automatic option grant under the Plan or the Predecessor Plans within the
immediately preceding six month period.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to
one hundred percent (100%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall be payable in one or
more of the alternative forms authorized under the Discretionary Option Grant
Program. Except to the extent the sale and remittance procedure specified
thereunder is utilized, payment of the exercise price for the purchased
shares must be made on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10)
years measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's
cessation of Board service prior to vesting in those shares. Each
Commencement Grant and each Annual Grant shall vest, and the Corporation's
repurchase right shall lapse, at the time of the next Annual Stockholders
Meeting.
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E. CESSATION OF BOARD SERVICE. The following provisions
shall govern the exercise of any options outstanding at the time of the
Optionee's cessation of Board service:
(i) Any option outstanding at the time of the
Optionee's cessation of Board service for any reason shall remain
exercisable for a twelve (12)-month period following the date of such
cessation of Board service, but in no event shall such option be
exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by
the Optionee at the time of death may be subsequently exercised by his
or her Beneficiary.
(iii) Following the Optionee's cessation of Board
service, the option may not be exercised in the aggregate for more than
the number of shares in which the Optionee was vested on the date of
such cessation of Board service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding for any and all shares in which
the Optionee is not otherwise at that time vested.
(iv) However, should the Optionee cease to serve
as a Board member by reason of death or Permanent Disability, then all
shares at the time subject to the option shall immediately vest so that
such option may, during the twelve (12)-month exercise period following
such cessation of Board service, be exercised for all or any portion of
those shares as fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile
Take-Over, the shares of Common Stock at the time subject to each outstanding
option but not otherwise vested shall automatically vest in full so that each
such option may, immediately prior to the effective date of such Change in
Control the Hostile Take-Over, be exercised for all or any portion of those
shares as fully-vested shares of Common Stock. Each such option accelerated
in connection with a Change in Control shall terminate upon the Change in
Control, except to the extent assumed by the successor corporation (or parent
thereof) or otherwise continued in full force and effect pursuant to the
terms of the Change in Control. Each such option accelerated in connection
with a Hostile Take-Over shall remain exercisable until the expiration or
sooner termination of the option term.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Change in Control
or Hostile Take-Over.
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C. Upon the occurrence of a Hostile Take-Over, the
Optionee shall have a thirty (30)-day period in which to surrender to the
Corporation each of his or her outstanding options. The Optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Option Surrender Value of the shares of Common
Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the surrender of the option to
the Corporation.
D. Each option which is assumed in connection with a
Change in Control shall be appropriately adjusted to apply to the number and
class of securities which would have been issuable to the Optionee in
consummation of such Change in Control had the option been exercised
immediately prior to such Change in Control. Appropriate adjustments shall
also be made to the exercise price payable per share under each outstanding
option, PROVIDED the aggregate exercise price payable for such securities
shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for options
made under the Discretionary Option Grant Program.
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ARTICLE SIX
MISCELLANEOUS
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell
or transfer all or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price under the Discretionary Option Grant Program
or the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In no event may the maximum credit
available to the Optionee or Participant exceed the sum of (i) the aggregate
option exercise price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability
incurred by the Optionee or the Participant in connection with the option
exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of options or the issuance or vesting of such
shares under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide
any or all holders of Non-Statutory Options or unvested shares of Common
Stock under the Plan with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options or the vesting of their shares.
Such right may be provided to any such holder in either or both of the
following formats:
STOCK WITHHOLDING: The election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such Non-Statutory Option or the vesting of such shares, a
portion of those shares with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%)) designated
by the holder.
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STOCK DELIVERY: The election to deliver to the
Corporation, at the time the Non-Statutory Option is exercised or the shares
vest, one or more shares of Common Stock previously acquired by such holder
(other than in connection with the option exercise or share vesting
triggering the Taxes) with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%)) designated
by the holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the
Plan Effective Date. However, the Salary Investment Option Grant Program
shall not be implemented until such time as the Primary Committee or the
Board may deem appropriate. Options may be granted under the Discretionary
Option Grant or Automatic Option Grant Program at any time on or after the
Plan Effective Date.
B. The Plan shall serve as the successor to the
Predecessor Plans, and no further options or direct stock issuances shall be
made under the Predecessor Plans after the Plan Effective Date. All options
outstanding under the Predecessor Plans on the Plan Effective Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated
shall continue to be governed solely by the terms of the documents evidencing
such option, and no provision of the Plan shall be deemed to affect or
otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two
relating to Changes in Control, may, in the Plan Administrator's discretion,
be extended to one or more options incorporated from the Predecessor Plans
which do not otherwise contain such provisions.
D. The Plan shall terminate upon the EARLIEST of (i) the
tenth anniversary of the Plan Effective Date, (ii) the date on which all
shares available for issuance under the Plan shall have been issued as
fully-vested shares or (iii) the termination of all outstanding options in
connection with a Change in Control. Upon such plan termination, all
outstanding options and unvested stock issuances shall thereafter continue to
have force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no
such amendment or modification shall adversely affect the rights and
obligations with respect to stock options or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant
consents to such amendment or modification. In addition, certain amendments
may require stockholder approval pursuant to applicable laws or regulations.
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B. Options to purchase shares of Common Stock may be
granted under the Discretionary Option Grant and Salary Investment Option
Grant Programs and shares of Common Stock may be issued under the Stock
Issuance Program that are in each instance in excess of the number of shares
then available for issuance under the Plan, provided any excess shares
actually issued under those programs shall be held in escrow until there is
obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If
such stockholder approval is not obtained within twelve (12) months after the
date the first such excess issuances are made, then (i) any unexercised
options granted on the basis of such excess shares shall terminate and cease
to be outstanding and (ii) the Corporation shall promptly refund to the
Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any
stock option under the Plan and the issuance of any shares of Common Stock
(i) upon the exercise of any granted option or (ii) under the Stock Issuance
Program shall be subject to the Corporation's procurement of all approvals
and permits required by regulatory authorities having jurisdiction over the
Plan, the stock options granted under it and the shares of Common Stock
issued pursuant to it.
B. No shares of Common Stock or other assets shall be
issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities
laws, including the filing and effectiveness of the Form S-8 registration
statement for the shares of Common Stock issuable under the Plan, and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person)
or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person's Service at any time for any
reason, with or without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. BENEFICIARY shall mean, in the event the Plan Administrator
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such
person's rights under any outstanding awards held by him or her at the time
of death. In the absence of such designation or procedure, the Beneficiary
shall be the personal representative of the estate of the Optionee or
Participant or the person or persons to whom the award is transferred by will
or the laws of descent and distribution.
C. BOARD shall mean the Corporation's Board of Directors.
D. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization
approved by the Corporation's stockholders, UNLESS securities
representing more than fifty percent (50%) of the total combined voting
power of the voting securities of the successor corporation are
immediately thereafter beneficially owned, directly or indirectly and in
substantially the same proportion, by the persons who beneficially owned
the Corporation's outstanding voting securities immediately prior to
such transaction,
(ii) any stockholder-approved transfer or other
disposition of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by
any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders which
the Board recommends such stockholders accept.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. COMMON STOCK shall mean the Corporation's common stock.
G. CORPORATION shall mean Molecular Biosystems, Inc., a Delaware
corporation, and
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its successors.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the
discretionary option grant program in effect under the Plan.
I. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
J. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in question,
as such price is reported on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
L. 5% STOCKHOLDER OR AFFILIATE shall mean a non-employee Board
member who, directly or indirectly, owns stock (as determined under Code
Section 424(d)) possessing equal to or more than five percent (5%) of the
total combined voting power of the outstanding securities of the Corporation
(or any Parent or Subsidiary) or is affiliated with or is a representative of
such a five percent or greater stockholder.
M. HOSTILE TAKE-OVER shall mean:
(i) the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined
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voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's
stockholders which the Board does not recommend such stockholders to
accept, or
(ii) a change in the composition of the Board over
a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the beginning of
such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board
approved such election or nomination.
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation
following (A) a change in his or her position with the Corporation or
Parent or Subsidiary employing the individual which materially reduces
his or her duties and responsibilities or the level of management to
which he or she reports, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and target bonus
under any performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without
the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized
use or disclosure by such person of confidential information or trade secrets
of the Corporation (or any Parent or Subsidiary), or any intentional
wrongdoing by such person, whether by omission or commission, which adversely
affects the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. This shall not limit the grounds for the
dismissal or discharge of any person in the Service of the Corporation (or
any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
R. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the
A-3.
<PAGE>
requirements of Code Section 422.
S. OPTION SURRENDER VALUE shall mean the Fair Market Value per
share of Common Stock on the date the option is surrendered to the
Corporation or, in the event of a Hostile Take-Over, effected through a
tender offer, the highest reported price per share of Common Stock paid by
the tender offeror in effecting such Hostile Take-Over, if greater. However,
if the surrendered option is an Incentive Option, the Option Surrender Value
shall not exceed the Fair Market Value per share.
T. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant, Salary Investment Option Grant or
Automatic Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation) owns, at
the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
V. PARTICIPANT shall mean any person who is issued shares of
Common Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more. However, solely for purposes of the Automatic
Option Grant Program, Permanent Disability or Permanently Disabled shall mean
the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration
of twelve (12) months or more.
X. PLAN shall mean the Corporation's 1998 Stock Option Plan, as
set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is
authorized to administer the Discretionary Option Grant, Salary Investment
Option Grant and Stock Issuance Programs with respect to one or more classes
of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons
under its jurisdiction. However, the Primary Committee shall have the
plenary authority to make all factual determinations and to construe and
interpret any and all ambiguities under the Plan to the extent such authority
is not otherwise expressly delegated to any other Plan Administrator.
Z. PLAN EFFECTIVE DATE shall mean the date on which the Plan is
approved by the shareholders of the Corporation.
A-4.
<PAGE>
AA. PREDECESSOR PLANS shall mean the Corporation's pre-existing
1993 Stock Option Plan and 1997 Outside Directors' Stock Option Plan, in each
case as in effect immediately prior to the Plan Effective Date hereunder.
BB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders and to administer the Salary Investment Option Grant
Program with respect to all eligible individuals.
CC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment grant program in effect under the Plan.
DD. SECONDARY COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
EE. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act.
FF. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant or stock issuance.
GG. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
HH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
II. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
JJ. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
KK. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Corporation (or
any Parent or Subsidiary).
A-5.
<PAGE>
EXHIBIT 10.48
November 10, 1998
Mr. Gerard A. Wills
Molecular Biosystems, Inc.
10070 Barnes Canyon Road
San Diego, California 92121
RE: TERMS OF SEPARATION FROM MBI
Dear Jerry:
In accordance with our recent discussions, this letter agreement
("Agreement") will set forth the terms of our agreement regarding your
departure from MBI in conjunction with the Company reorganization.
1. DESCRIPTION. Both parties shall regard your departure as a necessary
reduction in force related to the present Company restructuring.
2. TIMING. Your separation shall be effective as of the end of the day,
December 31, 1998 ("Separation Date"). You will be paid all accrued
and unpaid salary through the Separation Date. During the time
between November 10, 1998 and December 31, 1998, you will be
considered a regular, full-time employee, and will be expected to work
at least thirty (30) hours per week in order for your normal benefit
coverage to continue.
3. EFFECTIVE DATE. This Agreement shall become effective on the eighth
day following your execution of this Agreement, unless you have
revoked acceptance during the seven days prior thereto. [SEE
Paragraph 13(b)]. Regardless of when this takes place, this Agreement
shall be deemed to have been in effect retroactive to November 13,
1998. This Agreement shall not become effective unless executed by
you and MBI.
4. RETENTION BONUS. In consideration of your cooperation and assistance
in MBI's recent restructuring, you will be provided with a one-time,
lump sum retention bonus of fifty thousand dollars ($50,000) payable
on November 10, 1998. At your request, MBI will withhold payroll
taxes at the customary rate utilized for lump-sum bonus payments to
employees, unless you choose higher withholding rates.
5. SEPARATION PAYMENTS. In consideration of your undertakings in this
Agreement, MBI shall provide you with severance benefits equivalent to
approximately ten and one-half (10.5) month's current salary
($155,692.31). This amount shall be paid to you in a lump sum on
January 4, 1999. In addition, you will be paid your normal payroll
checks on November 27, December 11 and December 25, 1998. Taxes and
other appropriate deductions will be withheld; however, contributions
to your 401(k), health care reimbursement account, or any other
benefit deductions will not be allowed. Any questions concerning the
scope of your severance package should be directed to the Human
Resources Department.
6. WELFARE AND OTHER BENEFITS. Regular medical, dental, vision, as well
as basic and optional life and accidental death and dismemberment
insurance will continue through December 31, 1998. Long-term
disability coverage will continue through your last day worked. In
addition:
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 2
(a) Medical, dental and vision insurance under MBI's policies for you
and currently insured dependents will be extended through COBRA
from January 1, 1999, through November 30, 1999, at MBI's expense
(unless you obtain other coverage prior to that time, in which
event you must notify MBI). Thereafter, you may elect to
continue COBRA coverage at your expense for an additional seven
(7) months. (Maximum COBRA coverage is eighteen (18) months.)
(b) You will be provided with the information needed to request the
option of converting the group life insurance and/or accidental
death and dismemberment insurance coverage to an individual
policy. You will work directly with CIGNA should you elect this
option. You will need to exercise this option within thirty-one
(31) days of the benefits termination date, December 31, 1998.
(c) You will be provided with the information needed to request the
option of converting the Long-Term Disability (LTD) insurance
coverage to an individual policy. You should work directly with
UNUM should you elect this option. You would need to exercise
this option within thirty-one (31) days of the Separation Date.
(d) Depending upon the amount of your 401(k) plan balance, you may
either elect to remain in the plan with no further deposits
(balance greater than $5,000), or elect a distribution of your
funds (balance less than $5,000). You will notify CIGNA within
thirty (30) days of the Separation Date as to how and to whom
your funds should be distributed. Information on how to initiate
your desired option will be provided by Human Resources.
(e) If you are a participant in the health care reimbursement plan,
your will have until March 31, 1999 to request reimbursement for
charges incurred through the Separation Date. Any such request
should be made directly to UNUM.
(f) You will be paid for all earned and unused vacation hours on
January 4, 1999. You will not accrue any additional vacation
following the Separation Date.
(g) MBI will repurchase from you one thousand eight hundred and
twenty eight (1828) shares of restricted MBI stock at the price
of eight dollars and seventy-five cents ($8.75) per share. This
repurchase amount ($15,995.00) will be paid to you on November
10, 1998.
(h) Your voicemail and pager service will be continued and paid for
by MBI through June 30, 1999. Further, you will be allowed to
retain your MBI computer equipment (laptop, monitor and keyboard)
and cellular phone.
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 3
Representatives of Human Resources will be available to explain
details of the above items.
7. STOCK OPTIONS.
(a) CURRENT OPTIONS. You have been granted stock options as
described in the attached schedule. As of November 10, 1998, MBI
will accelerate the vesting of all unvested options. MBI will
also extend the period of exercisability of those options to the
maximum period available under our plans. (That is, the lapse
dates in the charts, which are already at the maximum, will not
be reduced on account of your ceasing to be an employee).
(b) Until June 30, 1999 ("Reporting Period"), you will be under the
same constraints imposed by MBI and securities laws on MBI vice
presidents regarding the exercise of options and the purchase and
sale of MBI shares. During the Reporting Period, you shall
notify us of your intentions in this regard (including options
exercises) and shall execute such forms, if any, as MBI and the
U.S. securities laws require. If you wish, you may use the
services of MBI's Finance Department to assist you in exercising
your options and selling your shares during the Reporting Period.
You acknowledge that taxes and commissions will be withheld from
any profit you make on the sale of stock following exercise and
sale during the Reporting Period. During the Reporting Period,
you will be notified monthly, along with other MBI Section 16(b)
reporting persons, as to the current trading status of MBI stock
(i.e., "green light", "yellow light", or "red light"). At no
time --- presently, or at any future time, during or after the
Reporting Period --- may you trade on MBI material inside
information.
7. PLACEMENT. MBI will provide you with six (6) months'
outplacement counseling and services through Lee Hecht Harrison
starting January 4, 1999 and running through June 30, 1999.
8. COOPERATION; NO RAIDING; NON-DISPARAGEMENT. You shall cooperate
with MBI in any and all governmental and/or third party
proceedings including, but not limited to, lawsuits and other
disputes. Following your separation, such cooperation shall be
at MBI's expense (except that MBI cannot pay for the content of
sworn testimony). You shall keep MBI advised of contacts by
governmental agencies and third parties, and shall reasonably
cooperate with MBI in handling any response. At your request,
MBI shall provide counsel to you, if the parties deem counsel
necessary or desirable, in any such proceeding. You shall not
voluntarily cooperate with, testify for, or otherwise assist
parties adverse to MBI in a dispute, although you may respond to
compulsory process (i.e., a valid subpoena).
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 4
For a period of one (1) year following the Separation Date, you
shall not contact persons employed by MBI at the time to recruit
them for your business or any business by which you are employed
or with which you are affiliated, or otherwise encourage them to
leave MBI.
You shall not materially disparage MBI, and MBI shall not
materially disparage you, to any third parties.
9. CONTACTS BY POTENTIAL EMPLOYERS. Potential employers contacting
MBI will be told only that your separation was as the result of a
reduction in force (layoff); your title; your dates of
employment; and your final salary. MBI will provide you with
positive references.
10. EMPLOYMENT BY COMPETITORS. This Agreement does not limit your
ability to work for competitors of MBI, provided that, for a
period of one (1) year from the Separation Date, reasonably in
advance of accepting any employment with the company, individual,
or other entity engaged or planning to engage in the development,
manufacture, or marketing of ultrasound contrast agents
("Competitor"), you shall notify the President or Chief Executive
Officer of MBI. Prior to accepting any such employment, or
promptly following your engagement in any consulting relationship
with a Competitor, you shall give MBI the opportunity to discuss
your plans with you in order to explore any possible problems or
conflicts. While MBI shall not disparage you or attempt to
dissuade any Competitor from employing or engaging you, you
acknowledge that MBI may contact such Competitor informing it
truthfully of your confidentiality obligations to MBI. MBI shall
have no liability to you in the event of a decision by a
Competitor not to employ or engage you following contact by MBI.
Failure to provide this notice to MBI during this period shall be
deemed a material breach of this Agreement. You remain bound by
your confidentiality obligations to MBI even if you work for a
Competitor.
11. CONFIDENTIALITY. You will not remove any MBI information,
documents, or other property from its premises, and you will
return any MBI information currently in your possession or
control off MBI's premises. In addition:
(a) You acknowledge that in the course of your employment with
MBI you have had and will have access to and familiarity
with information of substantial value to MBI which is not
old or generally known to the public and which gives MBI an
advantage over its competitors who do not know or use it
including, but not limited to, strategies, business plans,
research, formulas and formulations, techniques, designs,
drawings, processes, inventions, developments, equipment,
prototypes, sales and customer information, and financial
information, relating to the business, products, and
practices of MBI (hereinafter referred to as "Confidential
Informa-
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 5
tion"). You agree at all times following your
termination to regard and preserve as confidential such
Confidential Information, and to refrain from publishing
or disclosing any part of such Confidential Information
and from using it except on behalf of MBI. You further
agree at all times to refrain from any other acts or
omissions that would reduce the value of such
Confidential Information to MBI and to take all
reasonably necessary and desirable precautions to prevent
such Confidential Information from being disseminated to
any third parties.
(b) You acknowledge that a breach of the terms of this paragraph
would threaten MBI with immediate and irreparable harm not
readily compensable in money damages, and that MBI would be
entitled to injunctive and declaratory relief to stop or
prevent any such breach.
Nothing in this paragraph shall be construed to prevent you from
using or disclosing your general knowledge of the imaging
industry (as opposed to MBI-specific information) acquired at any
time prior to or during the course of your employment.
12. GENERAL RELEASE. In consideration for the payments and other
consideration described in this Agreement, you hereby
unconditionally, irrevocably, and absolutely release and
discharge MBI, its employees, officers, directors, agents,
stockholders, independent contractors, attorneys, consultants,
predecessors, successors and assigns from any and all claims
related in any way to any acts, transactions, or occurrences
between you and MBI to date, including but not limited to all
losses, liabilities, claims, charges, demands and causes of
action, known or unknown, suspected or unsuspected, arising
directly or indirectly out of, or in any way connected with, your
employment with or termination from MBI. This includes, but is
not limited to, any claim of employment discrimination arising
under federal, state or local law, including the Age
Discrimination in Employment Act of 1967, as amended, the
Americans with Disabilities Act, the California Fair Employment
and Housing Act, any other statutory cause of action, and any
tort or contract claims.
WAIVER OF ADDITIONAL CLAIMS. Section 1542 of the Civil Code of the
State of California provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
You waive and relinquish any right or benefit which you may have under
this section or any other provision of the statutory or nonstatutory
law or any other jurisdiction to the full extent that you may lawfully
waive all such rights and benefits. In connection with such
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 6
waiver and relinquishment, you acknowledge that you are aware that
you, your attorneys or agents may hereafter discover claims or
facts in addition to or different from those which they now know or
believe to exist, but that it is your intention thereby fully,
finally, and forever to release all claims, disputes, and
differences, known or unknown, suspected or unsuspected, which now
exist, may exist, or have existed between the parties, their
employees, agents, assigns, and other privies. Unless this
provision shall have been procured by fraud, the releases given
herein shall be effective regardless of the discovery or existence
of any such claim or fact.
13. ACKNOWLEDGEMENTS. You hereby further acknowledge and agree as
follows:
(a) NO PRE-EXISTING OBLIGATION. You acknowledge that but for
the entry by you and MBI into this Agreement, you are not
entitled to the additional payments and other consideration
provided for in these agreements (with the exception of
federal rights such as COBRA).
(b) TIME FOR REVIEW; EFFECTIVE DATE. You acknowledge that you
have been given twenty-one (21) days to consider the terms
of this Agreement. In addition, both parties acknowledge
that you may revoke your acceptance of this Agreement within
seven (7) days following your signature (which may occur
during the twenty-one (21) day period), and that at your
option, you may elect not to use the full twenty-one (21)
day period;
(c) ADVICE OF COUNSEL AND OTHER PROFESSIONAL ADVISORS. You
acknowledge that you have been advised in writing to consult
with an attorney and an accountant or tax advisor before
entering into these agreements. You acknowledge either that
you have done so and received counseling to your
satisfaction, or that you have declined to do so and
voluntarily executed this Agreement without fraud or undue
influence.
(d) EFFECTIVE DATE. This Agreement shall not become effective
or enforceable until seven (7) days after you sign this
Agreement. In other words, you may revoke your acceptance
of this Agreement within seven (7) days after you sign it.
Your revocation must be in writing and received by Laura
Gross within the seven (7) day period in order to be
effective. If you do not revoke acceptance within the seven
(7) day period, Your acceptance of this Letter Agreement
shall become binding and enforceable.
14. CONSEQUENCES OF BREACH. If you breach this Agreement, MBI may
terminate it, cease providing payments and benefits hereunder and
recover all payments and benefits already paid, in addition to
any other remedies it may have.
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 7
15. OTHER MATTERS. You will receive materials prepared by Human
Resources describing various rights and duties, including
optional benefits, which will come into effect following your
termination. You will also receive instruments as are customarily
submitted to terminated employees. You will cooperate fully in
these separation meetings and execute or complete such
instruments at the time of your termination.
16. PROHIBITION AGAINST ASSIGNMENT. You shall not assign this
Agreement or any of the rights, interests and benefits hereunder.
However, you may provide for the assignment, gift, bequest, or
transfer of such benefits under this Agreement to your
survivor(s), or to a trust for their benefit, on your death, or
in the event that you suffer a major disability.
17. ENTIRE AGREEMENT. This Agreement between the parties dated
November 13, 1998, constitutes the entire agreement between the
parties hereto and contains all of the agreements between the
parties with respect to its subject matter. This Agreement
supersedes any and all other agreements, either oral or in
writing, between the parties hereto with respect to their subject
matter.
18. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective heirs, legal
representatives, executors, administrators, and successors.
19. GOVERNING LAW. This Agreement shall be subject to and governed
by the laws of the State of California irrespective of the fact
that you may become a resident of a different state.
20. AMENDMENT OF AGREEMENT. No change or modification of this
Agreement shall be valid unless the same is in writing and signed
by both parties. No waiver of any provision of this Agreement
shall be valid unless in writing and signed by the person or
party to be charged.
21. SEVERABILITY. If any portion or portions of this Agreement shall
be, for any reason, deemed to be invalid or unenforceable, the
remaining portion or portions shall nevertheless be valid,
enforceable and carried into effect, unless to do so would
clearly violate the present legal and valid intention of the
parties hereto.
22. HEADINGS. The headings of this Agreement are inserted for
convenience only and are not to be considered in construction of
the provisions hereof.
23. WAIVER OF BREACH. The waiver by either of the parties hereto of
any breach of any provision hereof shall not be construed to be a
waiver of any succeeding breach of that provision or a waiver of
any other provision of this Agreement.
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 8
24. INDEMNIFICATION. With respect to any claim against you arising
out of your work for MBI as an officer or employee, you shall
have rights of indemnification against MBI under MBI's
certificate of incorporation and bylaws equivalent to those of an
MBI officer.
* * * *
If you are in agreement with these items, please execute the duplicate
originals of this Agreement and return them to Laura Gross.
Let me take this opportunity to thank you for your services to MBI over
the past several years. We all wish you every success in your future
endeavors.
Sincerely,
Bobba Venkatadri
President and Chief Executive Officer
AGREED TO BY:
- --------------------------------------
Gerard A. Wills
Date:
--------------------------------
<PAGE>
Mr. Gerard A. Wills
November 10, 1998
Page 9
ATTACHMENT
<PAGE>
EXHIBIT 10.49
February 19, 1999
William Ramage, D. Phil.
P.O. Box 676042
Rancho Santa Fe, California 92067-6042
Re: TERMS OF SEPARATION FROM MBI
Dear Doctor Ramage:
In accordance with our recent discussions, this letter agreement
("Agreement") will set forth the terms of our agreement regarding your
departure from MBI.
1. SEPARATION DATE. Your separation shall be effective as of the end
of the day November 23, 1998 ("Separation Date").
2. EFFECTIVE DATE. This Agreement shall become effective on the
eighth day following your execution of this Agreement, unless you have
revoked acceptance during the seven days prior thereto ("Effective Date").
(See Paragraph 11(b) and (d).) Regardless of the exact day this takes place,
this Agreement shall be deemed to have been in effect retroactive to November
24, 1998.
3. SEPARATION PAYMENTS. MBI shall pay you the equivalent of nine
months' salary at your salary rate in effect as of the Separation Date. The
payments shall take place as follows:
(a) On the Effective Date, MBI shall pay you a lump sum equivalent to
five months' salary, minus the total salary payments you have
received from MBI since the Separation Date or the gross amount
of $43,750, less applicable witholdings.
(b) The remaining four months' salary shall be paid in accordance
with MBI's regular payroll periods, commencing with the next
payroll period following the effective date.
Taxes and other appropriate payroll deductions will be withheld, although
401(k) deductions shall no longer be made.
4. OTHER BENEFITS.
(a) MBI shall pay the COBRA premiums for eligible health, dental and
vision insurance coverage in effect as of the Separation Date for
you and covered dependents for nine months from the Separation
Date (i.e., through
<PAGE>
Dr. William Ramage
February 19, 1999
Page 2
August 31, 1999). In the event you become eligible for benefits
under another plan(s) prior to the expiration of this period, MBI
shall no longer be obligated to pay such benefit premiums. You
are required to notify MBI and are expected to enroll in the new
group plan at the first eligible opportunity unless you choose,
at your sole expense, to continue COBRA benefits through MBI. If
you fail to notify MBI of your eligibility for alternative
benefits, MBI shall have the right to discontinue payment of
COBRA premiums upon thirty (30) days notice. In no event shall a
cash payment be made to eligible employees in lieu of the payment
of COBRA premiums.
Following the nine-month period you are eligible for COBRA
coverage at MBI's expense, you may elect to continue COBRA
coverage, at your own expense, for up to an additional nine
months. If you wish to exercise this option, please contact
Human Resources.
As you have previously contributed to two months COBRA coverage
(January and February 1999), you will be reimbursed for this
expense ($1,969.00) on the Effective Date of the Agreement.
(b) You were provided with the information needed to request the
option of converting the group life insurance and/or accidental
death and dismemberment insurance coverage to an individual
policy at your expense. You will work directly with MBI's
insurance company (CIGNA) should you elect this option. This
option must have been exercised within thirty-one days from the
last day of the month of Separation (November 30, 1998).
(c) You were provided with the information needed to request the
option of converting the Long-Term Disability (LTD) insurance
coverage to an individual policy. You will work directly with
MBI's insurance company (UNUM) should you elect this option.
This option must have been exercised within thirty-one days of
the Separation Date.
(d) If the balance in your 401(k) plan account is greater than
$3,500, you may elect either to remain in the plan with no
further deposits or to have the account balance distributed as
you direct in accordance with applicable regulations. If it is
less than $3,500, then the account balance will be distributed as
you direct in accordance with applicable regulations. If you
elect distribution of your account balance, you will work with
CIGNA to accomplish this. Information on how to initiate your
desired option will be provided by Human Resources.
<PAGE>
Dr. William Ramage
February 19, 1999
Page 3
(e) If you are a participant in MBI's Flexible Spending Accounts for
calendar year 1998, you will need to submit requests for
reimbursement for charges incurred through the Separation Date by
February 28, 1999. Any such request should be made directly to
UNUM.
(f) You have been paid for any earned and unused vacation time
through the Separation Date.
You may contact MBI Human Resources with any questions or for procedural
assistance on these items.
5. STOCK OPTIONS. You have been granted MBI stock options as
described in the attached schedule. As of the Effective Date, MBI will
accelerate the vesting of all unvested options. MBI will also extend the
period of exercisability of those options to the latest date available under
our plans (that is, the lapse dates in the charts, which are already at the
maximum, will not be reduced on account of your ceasing to be an employee.)
If you wish, you may use the services of MBI's Finance Department to assist
you in exercising your options and selling your shares. You acknowledge that
taxes and commissions will be withheld from any profit you make on the sale
of stock following exercise and sale.
6. CONTINUED REPORTING RESPONSIBILITIES. From the Separation Date
through May 24, 1999, you will be under the constraints imposed by MBI and
the U.S. securities laws on MBI vice presidents regarding the exercise of
options and the purchase and sale of MBI shares. During the Reporting
Period, you shall notify us of your intentions in this regard (including
options exercises) and shall execute such forms, if any, as MBI and the U.S.
securities laws require. During the Reporting Period, you will be notified
monthly, along with other MBI Section 16(b) reporting persons, as to the
current trading status of MBI stock (i.e., "green," "yellow," or "red
light"). At no time -- presently or at any future time, during or after the
Reporting Period, may you trade on MBI material inside information.
7. COOPERATION; NO RAIDING; NON-DISPARAGEMENT.
(a) You shall reasonably cooperate with MBI in any and all
governmental and/or third party proceedings including but not
limited to lawsuits and other disputes. MBI shall pay you a
reasonable consulting fee to be mutually agreed upon and pay your
other reasonable expenses in connection therewith (except that
MBI may not and shall not pay for the content of sworn
testimony). You shall keep MBI advised of contacts by
governmental agencies and third parties, and shall reasonably
cooperate with MBI in handling any response. At your request,
MBI shall provide counsel to you, if the parties deem counsel
necessary or desirable, in any such proceeding. You shall not
voluntarily cooperate with, testify for, or
<PAGE>
Dr. William Ramage
February 19, 1999
Page 4
otherwise assist parties adverse to MBI in a dispute with MBI,
although you may respond to compulsory process (i.e., a valid
subpoena).
(b) For a period of one (1) year following the Separation Date, you
shall not contact persons employed by MBI to recruit them for
your business or any business by which you are employed or with
which you are affiliated, or otherwise encourage them to leave
MBI, without MBI's prior consent.
(c) You shall not materially disparage MBI, and MBI shall not
materially disparage you, to any third parties.
8. CONTACTS BY POTENTIAL EMPLOYERS. Potential employers contacting
MBI will be told your title; your dates of employment; and your final salary.
They will be told that your separation from MBI took place pursuant to a
negotiated agreement.
9. CONFIDENTIALITY. You will not remove any MBI information,
documents, or other property from MBI's premises. You will return any MBI
information or property currently in your possession or control off MBI's
premises. You represent that following the return of such property, if any,
you have no MBI property or information in your possession. In addition:
(a) You acknowledge that in the course of your employment with MBI
you have had access to and familiarity with information of
substantial value to MBI which is not old or generally known to
the public and which gives MBI an advantage over its competitors
who do not know or use it including but not limited to
strategies, business plans, research, formulas and techniques,
designs, drawings, processes, inventions, developments,
equipment, prototypes, sales and customer information and
financial information, relating to the business, products, and
practices of MBI ("Confidential Information"). You agree at all
times following the Separation Date to regard and preserve as
confidential such Confidential Information, and to refrain from
publishing or disclosing any part of such Confidential
Information and from using it except on behalf of MBI. You
further agree at all times to refrain from any other acts or
omissions that would reduce the value of such Confidential
Information to MBI and to take all reasonably necessary
precautions to prevent such Confidential Information from being
disseminated to any third parties.
Confidential information does not include information that (i)
becomes generally available to the public other than as a result
of a disclosure by you, (ii) was available to you on a
nonconfidential basis prior to its disclosure to you by MBI, or
(iii) becomes available to you on a nonconfidential basis from a
source other
<PAGE>
Dr. William Ramage
February 19, 1999
Page 5
than MBI, provided that source is not known by you (after due
inquiry) to be bound by a confidentiality agreement with MBI.
(b) You acknowledge that a breach of the terms of this paragraph
would threaten MBI with immediate and irreparable harm not
readily compensable in money damages, and that MBI would be
entitled to injunctive and declaratory relief to stop or prevent
any such breach.
Nothing in this paragraph shall be construed to prevent you from using or
disclosing your general knowledge of the imaging industry (as opposed to
MBI-specific information) acquired any time prior to or during the course of
your employment.
10. RELEASE.
(a) GENERAL RELEASE. In consideration for the payments, promises,
and other consideration described in this Agreement, each party
hereby unconditionally, irrevocably, and absolutely releases and
discharges the others (and in MBI's case, its employees,
officers, directors, agents, stockholders, independents
contractors, attorneys, consultants, predecessors, successors and
assigns) from any and all claims related in any way to any acts,
transactions, or occurrences between the parties to date,
including but not limited to all losses, liabilities, claims,
charges, demands, and causes of action, known or unknown,
suspected or unsuspected, arising directly or indirectly out of
or in any way connected with your employment with or separation
from MBI. This includes but is not limited to any claim of
employment discrimination arising under federal, state or local
law, including the Age Discrimination in Employment Act of 1967,
as amended, the Americans with Disabilities Act, the California
Fair Employment and Housing Act, any other statutory cause of
action, and any tort or contract claims.
The above release does not extend to any claims by either party for breach of
this Agreement.
(b) WAIVER OF ADDITIONAL CLAIMS. Section 1542 of the Civil Code of
the State of California provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
<PAGE>
Dr. William Ramage
February 19, 1999
Page 6
Regardless of whether this section is applicable to the
present release, each party waives and relinquishes any right
or benefit which it may have under this section or any other
provision of the statutory or nonstatutory law or any other
jurisdiction to the full extent that such party may lawfully
waive all such rights and benefits. In connection with such
waiver and relinquishment, each party acknowledges that it is
aware that it, its attorneys, or its agents may hereafter
discover claims or facts in addition to or different from
those which they now know or believe to exist, but that it is
their respective intention hereby fully, finally, and forever
to release all claims, disputes, and differences, known or
unknown, suspected or unsuspected, which now exist, or have
existed between the parties, their employees, agents, assigns
and other privies.
11. ACKNOWLEDGMENTS. You further acknowledge and agree as follows:
(a) You acknowledge that but for the entry by you and MBI into this
Agreement, you are not entitled to the additional payments and
other consideration provided for in these agreements (with the
exception of federal rights such as COBRA).
(b) You acknowledge that you have been given twenty-one days to
consider the terms of this Agreement. In addition, both parties
acknowledge that you may revoke your acceptance of this Agreement
within seven days following your signature (which may occur
during the twenty-one-day period), and that at your option you
may elect not to use the full twenty-one-day period.
(c) You acknowledge that you have been advised in writing to consult
with an attorney and an accountant or tax advisor before entering
into this agreement. You acknowledge either that you have done
so and received counseling to your satisfaction, or that you have
declined to do so and voluntarily executed this Agreement without
fraud or undue influence.
(d) This Agreement shall not become effective or enforceable until
seven days after you sign it. In other words, you may revoke
your acceptance of this Agreement within seven days after you
sign it. Your revocation must be in writing and received by MBI
within the seven day period in order to be effective. If you do
not revoke acceptance within the seven day period, your
acceptance of this Agreement shall become binding and
enforceable.
12. CONSEQUENCES OF BREACH. If you breach this Agreement, MBI may
terminate it, cease providing payments and benefits hereunder, and recover
all payments and benefits already paid, in addition to any other remedies it
may have. If MBI breaches this Agreement, you may
<PAGE>
Dr. William Ramage
February 19, 1999
Page 7
terminate it and cease to be bound by any of its provisions, in addition to
any other remedies you may have under applicable law.
13. OTHER MATTERS. You may receive materials prepared by Human
Resources describing various rights and duties, including optional benefits,
which will come into effect following your termination. You will also
receive instruments as are customarily submitted to separated employees. You
will reasonably cooperate in these separation meetings and execute or
complete such instruments.
14. NO ASSIGNMENT. You shall not assign this Agreement or any of the
rights, interests and benefits hereunder. However, you may provide for the
assignment, gift, bequest, or transfer of such benefits under this Agreement
to your survivor(s), or to a trust for their benefit, on your death or in the
event you suffer a major disability.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to its subject matter. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the parties hereto with respect to this subject matter.
16. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective heirs, legal
representatives, executors, administrators, and successors.
17. GOVERNING LAW. This Agreement shall be subject to and governed
by the laws of the State of California.
18. AMENDMENT. No change or modification of this Agreement shall be
valid unless the same is in writing and signed by both parties. No waiver of
any provision of this Agreement shall be valid unless in writing and signed
by the person or party to be charged.
19. SEVERABILITY. If any portion or portions of this Agreement shall
be deemed invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and carried into effect, unless to do so
would clearly violate the present legal and valid intention of the parties.
20. HEADINGS. The headings of this Agreement are inserted for
convenience only and are not to be considered in construction of its
provisions.
<PAGE>
Dr. William Ramage
February 19, 1999
Page 8
21. NON-WAIVER. The waiver by either of the parties hereto of any
breach of any prevision hereof shall not be construed to be a waiver of any
succeeding breach of that provision or a waiver of any other provision of
this Agreement.
22. INDEMNIFICATION. With respect to any claim against you arising
out of your ordinary and reasonable performance of your duties on behalf of
MBI prior to the Separation Date, you shall have indemnification rights under
MBI's certificate of incorporation and bylaws equivalent to those of an MBI
officer.
23. ATTORNEYS' FEES. If either party commences or is made a party to
any litigation, arbitration, mediation or other judicial or administrative
proceeding to enforce, interpret or obtain a declaration of rights under this
Agreement for any claims arising prior to August 31, 1999, the prevailing
party in such proceeding shall be entitled to recover from the other party
all reasonable attorneys' fees, costs, and expenses incurred in connection
with such proceeding or any appeal or enforcement of any judgement entered in
any such proceeding. Any judgement or order entered in any proceeding shall
contain a specific provision providing for the recovery of reasonable
attorneys' fees and costs incurred in enforcing such judgement or order.
* * *
If you are in agreement with these terms, please execute the duplicate
originals of this Agreement and return them to Laura Gross in Human Resources.
Thank you.
Sincerely,
Bobba Venkatadri
President and Chief Executive
Officer
AGREED:
- ----------------------------------
William Ramage, D. Phil.
Date:
----------------------------
<PAGE>
EXHIBIT 10.50
February 19, 1999
Mr. Thomas Jurgensen, Esq.
4486 Exbury Court
San Diego, California 92130
Re: TERMS OF SEPARATION FROM MBI
Dear Mr. Jurgensen:
In accordance with our recent discussions, this letter agreement
("Agreement") will set forth the terms of our agreement regarding your
departure from MBI.
1. SEPARATION DATE. Your separation shall be effective as of the end
of the day November 23, 1998 ("Separation Date").
2. EFFECTIVE DATE. This Agreement shall become effective on the
eighth day following your execution of this Agreement, unless you have
revoked acceptance during the seven days prior thereto ("Effective Date").
(See Paragraph 11(b) and (d).) Regardless of the exact day this takes place,
this Agreement shall be deemed to have been in effect retroactive to November
24, 1998.
3. SEPARATION PAYMENTS. MBI shall pay you the equivalent of nine
months' salary at your salary rate in effect as of the Separation Date. The
payments shall take place as follows:
(a) On the Effective Date, MBI shall pay you a lump sum equivalent to
five months' salary, minus the total salary payments you have
received from MBI since the Separation Date or the gross amount
of $30,673.10, less applicable witholdings.
(b) The remaining four months' salary shall be paid in accordance
with MBI's regular payroll periods, commencing with the next
payroll period following the effective date.
Taxes and other appropriate payroll deductions will be withheld, although
401(k) deductions shall no longer be made.
4. OTHER BENEFITS.
(a) MBI shall pay the COBRA premiums for eligible health, dental and
vision insurance coverage in effect as of the Separation Date for
you and covered dependents for nine months from the Separation
Date (i.e., through August 31, 1999). In the event you become
eligible for benefits under another plan(s)
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 2
prior to the expiration of this period, MBI shall no longer be
obligated to pay such benefit premiums. You are required to
notify MBI and are expected to enroll in the new group plan at
the first eligible opportunity unless you choose, at your sole
expense, to continue COBRA benefits through MBI. You notified us
by telephone message February 4, 1999 of your receipt of benefits
under the plan of your new employer. Therefore, this will confirm
that MBI will discontinue COBRA benefits effective March 1, 1999.
In no event shall a cash payment be made to eligible employees in
lieu of the payment of COBRA premiums.
Should you remain on COBRA for the entire nine-month period for
which you are eligible at MBI's expense, you may elect to
continue COBRA coverage, at your own expense, for up to an
additional nine months. If you wish to exercise this option,
please contact Human Resources.
(b) You were provided with the information needed to request the
option of converting the group life insurance and/or accidental
death and dismemberment insurance coverage to an individual
policy at your expense. You will work directly with MBI's
insurance company (CIGNA) should you elect this option. This
option must have been exercised within thirty-one days from the
last day of the month of Separation (November 30, 1998).
(c) You were provided with the information needed to request the
option of converting the Long-Term Disability (LTD) insurance
coverage to an individual policy. You will work directly with
MBI's insurance company (UNUM) should you elect this option.
This option must have been exercised within thirty-one days of
the Separation Date.
(d) If the balance in your 401(k) plan account is greater than
$3,500, you may elect either to remain in the plan with no
further deposits or to have the account balance distributed as
you direct in accordance with applicable regulations. If it is
less than $3,500, then the account balance will be distributed as
you direct in accordance with applicable regulations. If you
elect distribution of your account balance, you will work with
CIGNA to accomplish this. Information on how to initiate your
desired option will be provided by Human Resources.
(e) If you are a participant in MBI's Flexible Spending Accounts for
calendar year 1998, you will need to submit requests for
reimbursement for charges incurred through the Separation Date by
February 28, 1999. Any such request should be made directly to
UNUM.
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 3
(f) You have been paid for any earned and unused vacation time
through the Separation Date.
You may contact MBI Human Resources with any questions or for procedural
assistance on these items.
5. STOCK OPTIONS. You have been granted MBI stock options as
described in the attached schedule. As of the Effective Date, MBI will
accelerate the vesting of all unvested options. MBI will also extend the
period of exercisability of those options to the latest date available under
our plans (that is, the lapse dates in the charts, which are already at the
maximum, will not be reduced on account of your ceasing to be an employee.)
If you wish, you may use the services of MBI's Finance Department to assist
you in exercising your options and selling your shares. You acknowledge that
taxes and commissions will be withheld from any profit you make on the sale
of stock following exercise and sale.
6. CONTINUED REPORTING RESPONSIBILITIES. From the Separation Date
through May 24, 1999, you will be under the constraints imposed by MBI and
the U.S. securities laws on MBI vice presidents regarding the exercise of
options and the purchase and sale of MBI shares. During the Reporting
Period, you shall notify us of your intentions in this regard (including
options exercises) and shall execute such forms, if any, as MBI and the U.S.
securities laws require. During the Reporting Period, you will be notified
monthly, along with other MBI Section 16(b) reporting persons, as to the
current trading status of MBI stock (i.e., "green," "yellow," or "red
light"). At no time -- presently or at any future time, during or after the
Reporting Period, may you trade on MBI material inside information.
7. COOPERATION; NO RAIDING; NON-DISPARAGEMENT.
(a) You shall reasonably cooperate with MBI in any and all
governmental and/or third party proceedings including but not
limited to lawsuits and other disputes. MBI shall pay you a
reasonable consulting fee to be mutually agreed upon and pay your
other reasonable expenses in connection therewith (except that
MBI may not and shall not pay for the content of sworn
testimony). You shall keep MBI advised of contacts by
governmental agencies and third parties, and shall reasonably
cooperate with MBI in handling any response. At your request,
MBI shall provide counsel to you, if the parties deem counsel
necessary or desirable, in any such proceeding. You shall not
voluntarily cooperate with, testify for, or otherwise assist
parties adverse to MBI in a dispute with MBI, although you may
respond to compulsory process (i.e., a valid subpoena).
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 4
(b) For a period of one (1) year following the Separation Date, you
shall not contact persons employed by MBI to recruit them for
your business or any business by
which you are employed or with which you are affiliated, or
otherwise encourage them to leave MBI, without MBI's prior
consent.
(c) You shall not materially disparage MBI, and MBI shall not
materially disparage you, to any third parties.
8. CONTACTS BY POTENTIAL EMPLOYERS. Potential employers contacting
MBI will be told your title; your dates of employment; your final salary.
9. CONFIDENTIALITY. You will not remove any MBI information,
documents, or other property from MBI's premises. You will return any MBI
information or property currently in your possession or control off MBI's
premises. You represent that following the return of such property, if any,
you have no MBI property or information in your possession. In addition:
(a) You acknowledge that in the course of your employment with MBI
you have had access to and familiarity with information of
substantial value to MBI which is not old or generally known to
the public and which gives MBI an advantage over its competitors
who do not know or use it including but not limited to
strategies, business plans, research, formulas and techniques,
designs, drawings, processes, inventions, developments,
equipment, prototypes, sales and customer information and
financial information, relating to the business, products, and
practices of MBI ("Confidential Information"). You agree at all
times following the Separation Date to regard and preserve as
confidential such Confidential Information, and to refrain from
publishing or disclosing any part of such Confidential
Information and from using it except on behalf of MBI. You
further agree at all times to refrain from any other acts or
omissions that would reduce the value of such Confidential
Information to MBI and to take all reasonably necessary
precautions to prevent such Confidential Information from being
disseminated to any third parties.
Confidential information does not include information that (i)
becomes generally available to the public other than as a result
of a disclosure by you, (ii) was available to you on a
nonconfidential basis prior to its disclosure to you by MBI, or
(iii) becomes available to you on a nonconfidential basis from a
source other than MBI, provided that source is not known by you
(after due inquiry) to be bound by a confidentiality agreement
with MBI.
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 5
(b) You acknowledge that a breach of the terms of this paragraph
would threaten MBI
with immediate and irreparable harm not readily compensable in
money damages, and that MBI would be entitled to injunctive and
declaratory relief to stop or prevent any such breach.
Nothing in this paragraph shall be construed to prevent you from using or
disclosing your general knowledge of the imaging industry (as opposed to
MBI-specific information) acquired any time prior to or during the course of
your employment.
10. RELEASE.
(a) GENERAL RELEASE. In consideration for the payments, promises,
and other consideration described in this Agreement, each party
hereby unconditionally, irrevocably, and absolutely releases and
discharges the others (and in MBI's case, its employees,
officers, directors, agents, stockholders, independents
contractors, attorneys, consultants, predecessors, successors and
assigns) from any and all claims related in any way to any acts,
transactions, or occurrences between the parties to date,
including but not limited to all losses, liabilities, claims,
charges, demands, and causes of action, known or unknown,
suspected or unsuspected, arising directly or indirectly out of
or in any way connected with your employment with or separation
from MBI. This includes but is not limited to any claim of
employment discrimination arising under federal, state or local
law, including the Age Discrimination in Employment Act of 1967,
as amended, the Americans with Disabilities Act, the California
Fair Employment and Housing Act, any other statutory cause of
action, and any tort or contract claims.
The above release does not extend to any claims by either party for breach of
this Agreement.
(b) WAIVER OF ADDITIONAL CLAIMS. Section 1542 of the Civil Code of
the State of California provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Regardless of whether this section is applicable to the present
release, each party waives and relinquishes any right or benefit
which it may have under this section or any other provision of
the statutory or nonstatutory law or any other jurisdiction to
the full extent that such party may lawfully waive all such
rights and benefits. In connection with such waiver and
relinquishment, each party
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 6
acknowledges that it is aware that it, its attorneys, or its
agents may hereafter discover claims or facts in addition to or
different from those which they now know or believe to exist, but
that it is their respective intention hereby fully, finally, and
forever to release all claims, disputes, and differences, known
or unknown, suspected or unsuspected, which now exist, or have
existed between the parties, their employees, agents, assigns and
other privies.
11. ACKNOWLEDGMENTS. You further acknowledge and agree as follows:
(a) You acknowledge that but for the entry by you and MBI into this
Agreement, you are not entitled to the three months of additional
salary payments and COBRA premiums and other consideration
provided for in these agreements (with the exception of federal
rights such as COBRA).
(b) You acknowledge that you have been given twenty-one days to
consider the terms of this Agreement. In addition, both parties
acknowledge that you may revoke your acceptance of this Agreement
within seven days following your signature (which may occur
during the twenty-one-day period), and that at your option you
may elect not to use the full twenty-one-day period.
(c) You acknowledge that you have been advised in writing to consult
with an attorney and an accountant or tax advisor before entering
into this agreement. You acknowledge either that you have done
so and received counseling to your satisfaction, or that you have
declined to do so and voluntarily executed this Agreement without
fraud or undue influence.
(d) This Agreement shall not become effective or enforceable until
seven days after you sign it. In other words, you may revoke
your acceptance of this Agreement within seven days after you
sign it. Your revocation must be in writing and received by MBI
within the seven day period in order to be effective. If you do
not revoke acceptance within the seven day period, your
acceptance of this Agreement shall become binding and
enforceable.
12. CONSEQUENCES OF BREACH. If you breach this Agreement, MBI may
terminate it, cease providing payments and benefits hereunder, and recover
all payments and benefits already paid, in addition to any other remedies it
may have. If MBI breaches this Agreement, you may terminate it and cease to
be bound by any of its provisions, in addition to any other remedies you may
have under applicable law.
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 7
13. OTHER MATTERS. You may receive materials prepared by Human
Resources describing various rights and duties, including optional benefits,
which will come into effect following your termination. You have been given
instruments customarily submitted to separated employees. You will
reasonably cooperate in these separation meetings and execute or complete
such instruments.
14. NO ASSIGNMENT. You shall not assign this Agreement or any of
the rights, interests and benefits hereunder. However, you may provide for
the assignment, gift, bequest, or transfer of such benefits under this
Agreement to your survivor(s), or to a trust for their benefit, on your death
or in the event you suffer a major disability.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to its subject matter. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the parties hereto with respect to this subject matter.
16. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective heirs, legal
representatives, executors, administrators, and successors.
17. GOVERNING LAW. This Agreement shall be subject to and governed
by the laws of the State of California.
18. AMENDMENT. No change or modification of this Agreement shall be
valid unless the same is in writing and signed by both parties. No waiver of
any provision of this Agreement shall be valid unless in writing and signed
by the person or party to be charged.
19. SEVERABILITY. If any portion or portions of this Agreement shall
be deemed invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and carried into effect, unless to do so
would clearly violate the present legal and valid intention of the parties.
20. HEADINGS. The headings of this Agreement are inserted for
convenience only and are not to be considered in construction of its
provisions.
21. NON-WAIVER. The waiver by either of the parties hereto of any
breach of any prevision hereof shall not be construed to be a waiver of any
succeeding breach of that provision or a waiver of any other provision of
this Agreement.
<PAGE>
Thomas E. Jurgensen, Esq.
February 19, 1999
Page 8
22. INDEMNIFICATION. With respect to any claim against you arising
out of your ordinary and reasonable performance of your duties on behalf of
MBI prior to the Separation Date, you shall have indemnification rights under
MBI's certificate of incorporation and bylaws equivalent to those of an MBI
officer.
23. ATTORNEYS' FEES. If either party commences or is made a party to
any litigation, arbitration, mediation or other judicial or administrative
proceeding to enforce, interpret or obtain a declaration of rights under this
Agreement for any claims arising prior to August 31, 1999, the prevailing
party in such proceeding shall be entitled to recover from the other party
all reasonable attorneys' fees, costs, and expenses incurred in connection
with such proceeding or any appeal or enforcement of any judgement entered in
any such proceeding. Any judgement or order entered in any proceeding shall
contain a specific provision providing for the recovery of reasonable
attorneys' fees and costs incurred in enforcing such judgement or order.
* * *
If you are in agreement with these terms, please execute the duplicate
originals of this Agreement and return them to Laura Gross in Human Resources.
Thank you.
Sincerely,
Bobba Venkatadri
President and Chief Executive
Officer
AGREED:
- ----------------------------------
Thomas Jurgensen
Date:
----------------------------
<PAGE>
Exhibit 10.59
LICENSE AGREEMENT
This License Agreement ("Agreement") is made effective the 26th day of March,
1999 by and between Molecular Biosystems, Inc., a corporation organized under
the laws of Delaware, having its principal place of business at 10030 Barnes
Canyon Road, San Diego, California 92121, USA ("MBI") and Schering
Aktiengesellschaft, a corporation organized under the laws of the Federal
Republic of Germany and having its principal place of business at 13342 Berlin,
Germany ("Schering").
WHEREAS Schering and MBI are both engaged (inter alia) in the research,
development and marketing of pharmaceutical specialties, including diagnostic
substances and products;
WHEREAS MBI is manufacturing and marketing an ultrasound contrast agent
consisting of albumin microspheres of fluorinated hydrocarbon, such agent
currently being advertised and sold under the tradename OPTISON-Registered
Trademark- and which has been launched for the first time in January 1998;
WHEREAS Schering owns certain patent rights and desires to grant MBI a license
under its patent rights (as hereinafter described)
NOW THEREFORE the parties agree as follows:
ARTICLE 1: DEFINITIONS
As used in this Agreement, the following terms, when capitalized, shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
1.1 "Affiliate" shall mean any corporation or other business organization (i)
in which all or part of the voting capital is owned, directly or through
one or more intermediaries, by one of the parties; or (ii) which owns,
directly or through one or more intermediaries, all or part of the voting
capital of one of the parties; or (iii) which directly or through one or
more intermediaries controls or is controlled by either party. As used in
this definition, "control" shall mean the power to direct or cause the
direction of the management and the policies of an entity, whether through
the ownership of a majority of the outstanding voting shares or by contract
or otherwise.
<PAGE>
1.2 *** shall mean *** , having a
place of business at *** .
1.3 "Effective Date" shall mean the date first written above.
1.4 *** shall mean *** , having a
place of business at *** .
1.5 "Net Sales" shall mean the gross revenues from sales of a product by MBI
and/or its Affiliates and/or sublicensees to third parties, less deductions
for (a) value added tax separately recorded and any other sales and excise
taxes and duties paid or allowed by a selling party and any other
governmental charges imposed upon the use or sales of the product, (b)
rebates or allowances, quantity or cash discounts, chargebacks or fees,
including commission, actually granted on the product to third parties, but
not where said rebate, allowance, discount, chargeback, fee or commission
is conditional on the purchase of additional products, and in each case in
amounts customary in the trade; (c) allowances or credits to third parties
on account of rejection, outdating or return of such product, and (d)
transportation charges including insurance actually paid by MBI or an
Affilliate of MBI and which cannot be reclaimed from a third party.
1.6 "Patent Rights" shall mean the US Patent No. 4,276,885, and the Canadian
Patent CA 1171952, both owned by Schering, including any continuations,
continuations in part, divisions, provisional or any substitute
applications, any reissue, reexamination, renewal or extension (including
any supplemental certificates) of such patent, any additional foreign
equivalents thereto and any confirmation patents or registration patents or
patents of addition based on such patent.
1.7 "Product" shall mean an ultrasound contrast agent consisting of albumin
microspheres of fluorinated hydrocarbon and which is currently sold under
the trade name OPTISON.
1.8 "Third Party" means any entity other than MBI or Schering and their
respective Affiliates and sublicensees.
1.9 "Territory" shall mean all countries of the world.
ARTICLE 2: LICENSE
Schering hereby grants MBI (*)** under its Patent Rights to
*** the Product in the Territory, with no right to grant
sublicenses, provided, however that, subject to the provisions set forth in
*** MBI *** sublicense to ***
to market and sell the Product in the Territory,
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE>
and further provided that *** shall have ***
to grant further sublicenses.
ARTICLE 3: PAYMENTS
In recognition of the rights granted to it hereunder, MBI shall make to Schering
the following payments:
3.1 Upon the signing of this Agreement, MBI shall pay to Schering the amount
of *** .
3.2 Upon one year from the Effective Date, MBI shall pay to Schering the amount
of *** . Should the parties in the future enter
into any license agreement between Schering (either alone or together with
a Third Party) and MBI or (*)** that refers to the
manufacture or marketing of the Product, then the amount of
*** payable under this Article 3.2 will be credited against
any license fees or payments that MBI *** will then
owe to Schering under such license agreement, at terms and conditions then
to be agreed between MBI *** and Schering.
3.3 MBI shall further pay a *** on all Net Sales of the
Product in the U.S. and Canada provided that Net Sales of the Product in
the U.S. and Canada have exceeded *** through
the life of the Patents, further provided however, that from ***
on, the *** payable pursuant to this section
shall be calculated solely from the Net Sales of the Product in Canada once
Net Sales of the Product in Canada have exceeded
*** ). The *** accruing under this
Agreement shall be calculated quarterly and shall be made within sixty (60)
days after the end of each calendar quarter in which the Net Sales
occurred.
3.4 All payments accruing under this Agreement shall be made in US dollars by
wire transfer to a bank account designated by Schering .
3.5 MBI's obligation to pay *** under Article 3.3 shall cease when
the last of the Patent Rights shall have expired.
ARTICLE 4: REPORTS AND RECORDS
4.1 A report summarizing the Net Sales of the Product during the relevant
quarter shall be delivered to Schering within sixty (60) days following the
end of each calendar quarter for which *** are due.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE>
4.2 MBI will maintain complete and accurate records which are relevant to
revenues, costs, expenses and payments under this Agreement and such
records shall be open during reasonable business hours for a period of
*** from creation of individual records for examination at
Schering's expense by a certified public accountant selected by Schering
(subject to the consent of MBI, such consent not to be unreasonably
withheld or delayed), for the sole purpose of verifying for Schering the
correctness of calculations and classifications of such revenues, costs,
expenses or payments made under this Agreement. Results of any such audit
shall be provided to MBI. If there is a dispute between the parties
following any audit performed pursuant to Section 4.2, either party may
refer the issue (an "Audit Disagreement") to an independent certified
public accountant for resolution. In the event an Audit Disagreement is
submitted for resolution by either party, the parties shall comply with the
following procedures. (i) The party submitting the Audit Disagreement for
resolution shall provide written notice to the other party that it is
invoking the procedures of this Section 4.2. (ii) Within thirty (30)
business days of the giving of such notice, the parties shall jointly
select a recognized international accounting firm to act as an independent
expert to resolve such Audit Disagreement. (iii) The Audit Disagreement
submitted for resolution shall be described by the parties to the
independent expert, which description may be in written or oral form,
within ten (10) business days of the selection of such independent expert.
(iv) The independent expert shall render a decision on the matter as soon
as practicable. (v) The decision of the independent expert shall be final
and binding unless such Audit Disagreement involves alleged fraud, breach
of this Agreement or construction or interpretation of any of the terms and
conditions thereof. (vi) All fees and expenses of the independent expert,
including any third party support staff or other costs incurred with
respect to carrying out the procedures specified at the direction of the
independent expert in connection with such Audit Disagreement, shall be
borne by each party in inverse proportion to the disputed amounts awarded
to the party by the independent expert through such decision (e.g. Schering
disputes $100, the independent expert awards Schering $60, then Schering
pays forty (40%) percent and MBI pays sixty (60%) percent of the
independent expert's costs).
ARTICLE 5: PATENT MAINTENANCE
5.1 Schering shall maintain during the term of this Agreement the Patent Rights
in the Territory.
5.2 Schering agrees not to assert the Patent Rights against MBI or any
MBI-licensed manufacturer or seller of the Product in the Territory.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE>
5.3 MBI agrees (i) not to challenge, or to cause, assist or support any of its
Affiliates, *** any Third Party, directly or indirectly, in
challenging the validity or enforceability of the Patent Rights and (ii)
not to allege, or to cause, assist or support any of its Affiliates
(including *** ) *** any Third Party, directly or
indirectly, in alleging that the Product does not infringe the Patent
Rights. MBI further agrees to obtain a similar declaration from its
sublicensee(s) prior to or simultanously with the grant of any sublicense.
Any violation by MBI of this provision shall be deemed a breach of a
material obligation of this Agreement.
ARTICLE 6: TERM AND TERMINATION
6.1 Except as otherwise provided herein, this Agreement shall terminate when
the last of the Patent Rights has expired.
6.2 Failure of Schering or MBI to comply with any of the respective material
obligations and conditions contained in this Agreement shall entitle the
other party to give the party in default notice requiring it to cure such
default. If such default is not cured within ninety (90) days after
receipt of such notice, the notifying party shall be entitled (without
prejudice to any of its other rights conferred on it by this Agreement) to
terminate this Agreement by giving a notice to take effect immediately.
Notwithstanding the foregoing, in the event of a non-monetary default, if
the default is not reasonably capable of being cured within the ninety (90)
day cure period by the defaulting party and such defaulting party is
making a good faith effort to cure such default, the notifying party may
not terminate this Agreement, provided however, that the notifying party
may terminate this Agreement if such default is not cured within one
hundred eighty (180) days of such original notice of default. The right of
either party to terminate this Agreement as hereinabove provided shall not
be affected in any way by its waiver of, or failure to take action with
respect to, any previous default.
6.3 In the event that one of the parties hereto shall go into liquidation, a
receiver or a trustee be appointed for the property or estate of that party
and said receiver or trustee is not removed within *** , or
the party makes an assignment for the benefit of creditors (collectively, a
"Bankruptcy Event"), and whether any of the aforesaid Bankruptcy Events be
the outcome of the voluntary act of that party, or otherwise, the other
party shall be entitled to terminate this Agreement by giving a written
notice to that party.
ARTICLE 7: NOTICES
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE>
Any notice pursuant to this Agreement shall be in writing and shall be
personally delivered by mail or express delivery service to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice)
if to MBI: Molecular Biosystems, Inc.
10030 Barnes Canyon Road
San Diego, CA, 92121
Attention: President and CEO
With a copy to: Molecular Biosystems, Inc.
10030 Barnes Canyon Road
San Diego, CA, 92121
Attention: Legal Department
if to Schering: Schering Aktiengesellschaft
D-13342 Berlin
Germany
Attention: Head of SBU Diagnostics
with a copy to: Schering Aktiengesellschaft
D-13342 Berlin
Germany
Attention: Legal Department
ARTICLE 8: ASSIGNMENT
The rights and obligations of either party may not be assigned to any Affiliate
or any Third Party without the prior written consent of the other party, such
consent shall not be unreasonably withheld. Notwithstanding the foregoing, the
rights and obligations of MBI under this Agreement may be assigned to
*** without the consent of Schering in the event that MBI shall
transfer manufacture of the Product to *** should otherwise
succeed MBI in manufacture of the Product.
ARTICLE 9: MISCELLANEOUS
9.1 This Agreement shall be governed by and interpreted under the laws of the
State of *** as applied to contracts entered into and performed
entirely in *** by *** residents. Venue for any
litigation arising from this Agreement shall take place in the State or
Federal courts of the State of *** located in the
*** of the City of *** .
9.2 The headings contained herein are for the purposes of convenience only.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE>
9.3 The parties hereto acknowledge that this Agreement sets forth the entire
Agreement and understanding of the parties hereto as to the subject matter
hereof, and shall not be subject to any change, amendment, or modification
except by the execution of a written instrument subscribed to by the
parties hereto.
9.4 The failure of either party to assert a right hereunder or to insist upon
compliance with any term of this Agreement shall not constitute a waiver of
that right or excuse a similar subsequent failure to perform any such term
or condition by the other party.
9.5 If any term, covenant, or condition of this Agreement or the application
thereof to either party or circumstances shall, to any extent, be held to
be invalid or unenforceable, then (i) the remainder of this Agreement, or
the application of such term, covenant or condition to parties or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and any term, covenant, or
condition of this Agreement shall be valid and be enforced to the fullest
extent permitted by law; and (ii) the parties hereto covenant and agree to
renegotiate any such term, covenant or application thereof in good faith in
order to provide a reasonably acceptable alternative to the term, covenant
or condition of this Agreement or the application thereof that is invalid
or unenforceable, it being the intent of the parties that the basic
purposes of this Agreement are to be effectuated.
9.6 Ambiguities, if any, of this Agreement shall not be construed against
either party, irrespective of which party may be deemed to have authored
the ambiguous provision.
9.7 This Agreement may be executed in one or more counterparts (and by
facsimile), each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.8 The status of the parties under this Agreement shall be that of independent
contractors. Neither party shall have the right to enter into any
agreements on behalf of the other party, nor shall it represent to any
person that it has any such right or authority. Nothing in this Agreement
shall be construed as establishing a partnership or joint venture
relationship between the parties.
9.9 This Agreement does not create a partnership for US Federal income tax
purposes (as defined in section 761 of the US Internal Revenue Code), for
any US state or local jurisdiction, or in any country other than the US.
Therefore, there is no requirement to file Form 1065, USD Partnership
Return of Income, any similar US state or local income tax return or any
similar document with tax authorities in any country other than the US.
<PAGE>
IN WITNESS WHEREOF, authorized representatives of the parties have duly executed
this Agreement as of the Effective Date.
SCHERING AKTIENGESELLSCHAFT MOLECULAR BIOSYSTEMS, INC.
By: /s/ H.M. Rook By: /s/ Bobba Venkatadri
-------------------------------- --------------------------------
Name: H.M. Rook Name: Bobba Venkatadri
------------------------------ -------------------------------
Title: Head of SBU DIagnostics Title: President & CEO
----------------------------- -----------------------------
By: /s/ Fritesch By: /s/ Kevin Helmbacher
-------------------------------- --------------------------------
Name: Fritesch Name: Kevin Helmbacher
------------------------------ -------------------------------
Title: Licensing Diagnostics Title: General Counsel
----------------------------- ------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements, File Numbers 33-723, 33-24508, 33-78564, 33-78572 and
333-02389.
ARTHUR ANDERSEN LLP
San Diego, California
June 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MOLECULAR BIOSYSTEMS, INC. DATED MARCH 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 2,320
<ALLOWANCES> 0
<INVENTORY> 748
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<COMMON> 186
<OTHER-SE> 16,027
<TOTAL-LIABILITY-AND-EQUITY> 31,849
<SALES> 4,083
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