<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-10546
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3078632
(State of Incorporation) (I.R.S. Identification No.)
10030 Barnes Canyon Road
San Diego, California 92121
(858) 812-7001
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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.
X Yes No
--- ---
The number of shares outstanding of the issuer's common stock, $.01 par value,
as of February 1, 2000 was 18,724,017 shares.
<PAGE>
Molecular Biosystems, Inc. ("the Company") is filing this Form 10-Q/A to expand
upon and clarify certain information included in the prior filing.
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
-------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,056 $ 1,755
Marketable securities, available-for-sale 16,982 10,895
Accounts and notes receivable 2,320 2,617
Inventories 748 331
Prepaid expenses and other assets 425 254
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Total current assets 21,531 15,852
-------------- --------------
Property and equipment, at cost:
Building and improvements 11,113 11,113
Equipment, furniture and fixtures 2,893 2,982
Construction in progress 930 497
-------------- --------------
14,936 14,592
Less: Accumulated depreciation and amortization 6,672 7,382
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Total property and equipment 8,264 7,210
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Other assets, net 2,054 1,877
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$ 31,849 $ 24,939
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,278 $ 1,288
Accounts payable and accrued liabilities 7,395 6,000
Compensation accruals 2,165 1,191
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Total current liabilities 10,838 8,479
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Long-term debt, net of current portion 4,804 3,835
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000 shares
authorized, 18,580,745 and 18,724,017 shares
issued and outstanding, respectively 186 186
Additional paid-in capital 134,347 134,388
Accumulated deficit (117,969) (121,591)
Unrealized gain on available-for-sale securities 6 21
Less 40,470 and 42,298 shares of treasury stock,
at cost, respectively (363) (379)
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Total stockholders' equity 16,207 12,625
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$ 31,849 $ 24,939
============== ==============
</TABLE>
See accompanying notes.
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Revenues under collaborative agreements $ 1,500 $ - $ 3,998 $ 3,000
Product and royalty revenues 685 433 3,471 950
Milestone payments - 2,000 - 2,000
Other - 60 - 60
-------------- ------------- -------------- --------------
2,185 2,493 7,469 6,010
-------------- ------------- -------------- --------------
Operating expenses:
Research and development costs 2,358 839 6,995 3,287
Cost of products sold 2,668 183 6,108 (346)
Selling, general and administrative expenses 3,092 2,605 12,701 6,703
Cost reduction measures:
Asset disposals 3,143 - 3,143 -
Severance costs 2,328 - 2,328 -
Technology transfer 265 - 265 -
Exit costs 384 - 384 -
-------------- ------------- -------------- --------------
14,238 3,627 31,924 9,644
-------------- ------------- -------------- --------------
Loss from operations (12,053) (1,134) (24,455) (3,634)
Gain on disposal of asset held for sale - - 6,993 -
Interest expense (142) (110) (456) (344)
Interest income 325 154 1,120 556
-------------- ------------- -------------- --------------
Loss before income taxes (11,870) (1,090) (16,798) (3,422)
Foreign income tax provision - (200) (1,400) (200)
-------------- ------------- -------------- --------------
Net Loss $ (11,870) $ (1,290) $ (18,198) $ (3,622)
============== ============= ============== ==============
Loss per common share - basic and diluted $ (0.64) $ (0.07) $ (0.98) $ (0.19)
============== ============= ============== ==============
Weighted average common shares outstanding 18,581 18,724 18,558 18,727
============== ============= ============== ==============
</TABLE>
See accompanying notes.
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (18,198) $ (3,622)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 988 887
Write-off of patents and license fees 295 -
Disposals/write-downs of property and equipment 2,824 139
Gain on sale of former Shionogi territory license rights (6,993) -
Premium received on Chugai Investment (2,371) -
Changes in operating assets and liabilities:
Receivables (5,284) (622)
Inventories 223 416
Prepaid expenses and other assets 297 497
Accounts payable and accrued liabilities 2,876 188
Deferred contract revenues (1,575) -
Compensation accruals 761 (974)
-------------- --------------
Cash used in operating activities (26,157) (3,091)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (846) (68)
Proceeds from sale of property and equipment 3 12
Additions to patents and license rights (30) -
Purchase of license rights from Shionogi (2,000) (1,500)
Proceeds from sale of territorial license rights 15,493 -
Decrease in other assets 98 177
Purchases of marketable securities (35,703) (14,745)
Maturities of marketable securities 40,953 20,847
-------------- --------------
Cash provided by investing activities 17,968 4,723
-------------- --------------
Cash flows from financing activities:
Net proceeds from sale of Common Stock to Chugai 8,300 -
Net proceeds from stock options exercised 281 41
Purchase of treasury stock - (16)
Principal payments on long-term debt (954) (958)
-------------- --------------
Cash provided by (used in) financing activities 7,627 (933)
-------------- --------------
Increase (decrease) in cash and cash equivalents (562) 699
Cash and cash equivalents, beginning of period 1,064 1,056
-------------- --------------
Cash and cash equivalents, end of period $ 502 $ 1,755
============== ==============
Supplemental cash flow disclosures:
Interest income received $ 1,401 $ 702
============== ==============
Interest paid $ 454 $ 344
============== ==============
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION-
These interim Consolidated Financial Statements of Molecular
Biosystems, Inc. and Subsidiaries (the "Company") should be read in conjunction
with the Consolidated Financial Statements of the Company and related Notes
filed with the Company's Annual Report on Form 10-K for the year ended March 31,
1999. Certain reclassifications have been made to the prior year to conform to
the current year presentation.
These interim Consolidated Financial Statements of the Company have not
been audited by independent public accountants. However, in the opinion of the
Company, all adjustments required for a fair presentation of the financial
position of the Company as of December 31, 1999, and the results of its
operations for the nine-months ended December 31, 1998 and 1999, and its cash
flows for the nine-months ended December 31, 1998 and 1999, have been made. The
results of operations for these interim periods are not necessarily indicative
of the operating results for the full year.
(2) COMMITMENTS AND CONTINGENCIES-
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-Registered Trademark-, the Company's advance-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
<PAGE>
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. MBI counterclaimed
for a declaration of invalidity and non-infringement with respect to the Sonus
patents. 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.
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 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 noninfringement
<PAGE>
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.
(3) EARNINGS PER SHARE-
The Company follows 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 were calculated using the treasury stock method
and represent incremental shares issuable upon exercise of the Company's
outstanding options. For the quarters and the nine months ended December 31,
1998 and 1999, the diluted loss per share calculation excludes effects of
outstanding stock options of 3,662,368 and 3,878,870, respectively, as such
inclusion would be anti-dilutive.
(4) 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
occurred in November 1998 and affected approximately 40 employees of the
Company's 140-person workforce. The second reduction in force occurred in April
1999 and affected an additional 26 employees. In addition, attrition since
November 1998 has further reduced the current workforce to approximately 56
employees. On March 30, 2000, the Company announced plans to restructure and
further reduced its workforce by 33 employees. The Company will implement an
additional reduction in workforce when the out-sourcing of manufacturing
operations is complete, which is estimated to occur in December 2001.
The impact of the cost reduction measures on the Company's financial
statements for the nine months ended December 31, 1999 included a write-off of
$600,000 in fixed assets through accelerated depreciation. For the nine months
ended December 31, 1998, the impact included $3.1 million in asset disposals,
$2.3 million in severance costs, $300,000 in costs related to technology
transfer and $400,000 in exit costs. In addition, $1.1 million of inventories
were expensed through cost of sales as a result of the planned out-sourcing of
manufacturing.
<PAGE>
The Company expects to write off an additional $1.0 million in accelerated
depreciation over the next 24 months as the manufacturing process is
out-sourced.
A summary of the nine-month period activity related to the accrual for
cost reduction measures is provided below.
<TABLE>
<S> <C>
Accrued at March 31, 1999 ...................................... $ 2,000,000
Severance .................................................. (500,000)
Exit costs ................................................. (400,000)
Technology transfer ........................................ (300,000)
-----------
Accrued at December 31, 1999 ................................... $ 800,000
===========
</TABLE>
(5) AMENDMENT TO MALLINCKRODT AGREEMENT-
In September 1995, the Company and Mallinckrodt entered into an Amended
and Restated Distribution Agreement ("ARDA"). ARDA grants Mallinckrodt exclusive
rights to market licensed products in certain countries of the world in exchange
for supporting clinical trials of OPTISON, related regulatory submissions and
associated product development. ARDA also calls for additional funding upon the
satisfaction of certain territorial and product development milestones and
requires the Company to spend at a set minimum for clinical trials to support
regulatory filings with the FDA for cardiac indications of OPTISON.
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement has been
incorporated into the Second Amended and Restated License and Distribution
Agreement ("ARDA II"). Under the terms of ARDA II, which were retroactive to
March 1, 1999, Mallinckrodt reimburses MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In addition to
the transfer of manufacturing, ARDA II extends Mallinckrodt's responsibility for
funding clinical trials to include all cardiology and 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. 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.
(6) STOCK EXCHANGE LISTING -
In August 1999, the Company received notice that the New York Stock
Exchange (NYSE) had revised its continued listing standards and that the Company
was no longer in compliance with the revised standards. These listing standards
are threefold and include: total market capitalization and stockholders' equity
of not less than $50 million each; total market capitalization of not less than
$15 million over a 30 trading-day period; and a minimum share price of $1 over a
30 trading-day period. The Company submitted a plan to meet the revised
standards, which was rejected by the NYSE. As a result, the Company was delisted
by the NYSE effective after the close of trading on January 4, 2000.
<PAGE>
Effective January 5, 2000, trading of the Company common stock was
moved to the NASD Over-The-Counter Bulletin Board. A new trading symbol of
"MBIO" was assigned to the Company by NASD. The Company common stock traded on
the New York Stock Exchange under the symbol "MB" through the close of business
January 4, 2000.
(7) MERGER WITH PALATIN TECHNOLOGIES, INC.-
On November 12, 1999, the Company and Palatin Technologies of
Princeton, New Jersey jointly announced that they had signed a definitive
agreement to merge. Under the agreement, stockholders of the Company will
receive 0.525 shares of common stock of Palatin in exchange for their MBI common
stock. The exchange ratio under the merger agreement will result in shareholders
of each company owning approximately 50% of the merged entity, which will
operate under the name Palatin Technologies and will be headquartered in
Princeton. The merger is subject to shareholder approval. The stock exchange
will be accounted for using purchase accounting.
On March 14, 2000, the Company announced that it received notice from
Palatin Technologies Inc. of Palatin's intent to discontinue the proposed merger
with MBI and negotiations were terminated.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management discussion and analysis should be read in
conjunction with (1) the current Consolidated Financial Statements and (2) the
Company's Consolidated Financial Statements and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations in its
Annual Report on Form 10-K and Form 10-K/A for the year ended March 31, 1999.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, regulatory approval,
research and development activities and similar matters. A variety of factors
could cause the Company's actual results and experience to differ materially
from the Company's anticipated results or other expectations. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include the expense and uncertain outcome of
the litigation described in Note 2 to the Financial Statements in Item 1 above,
including the possibility of injunctive relief to competitors prohibiting the
sale of OPTISON-Registered Trademark- , a ruling by the Patent and Trademark
Office ("PTO") in the pending patent reexamination proceedings favoring
competitors' patents; difficulties and delays with respect to the performance of
clinical trials; delays by regulatory authorities in approving additional
indications for OPTISON, including the evaluation of myocardial perfusion;
inability to successfully transfer OPTISON manufacturing to Mallinckrodt;
difficulties and delays with respect to marketing and sales activities; general
uncertainties accompanying the development and introduction of new products; and
other risk factors reported from time to time in the Company's reports filed
with the Securities and Exchange Commission.
<PAGE>
RECENT EVENTS
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement has been
incorporated into the Second Amended and Restated License and Distribution
Agreement ("ARDA II"). Under the terms of ARDA II, which were retroactive to
March 1, 1999, Mallinckrodt will reimburse MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In addition to
the transfer of manufacturing, ARDA II extends Mallinckrodt's responsibility for
funding clinical trials to include all cardiology, as well as radiology and
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. In exchange for the transfer of
manufacturing and increased financial support of clinical trials for OPTISON,
MBI will receive a royalty on end-user product sales of OPTISON.
In August 1999, the Company received notice that the New York Stock
Exchange (NYSE) had revised its continued listing standards and that the Company
was no longer in compliance with the revised standards. These listing standards
are threefold and include: total market capitalization and stockholders' equity
of not less than $50 million each; total market capitalization of not less than
$15 million over a 30 trading-day period; and a minimum share price of $1 over a
30 trading-day period. The Company submitted a plan to meet the revised
standards, which was rejected by the NYSE. As a result, the Company was delisted
by the NYSE effective after the close of trading on January 4, 2000.
Effective January 5, 2000, trading of the Company common stock was
moved to the NASD Over-The-Counter Bulletin Board. A new trading symbol of
"MBIO" was assigned to the Company by NASD. The Company common stock traded on
the New York Stock Exchange under the symbol "MB" through the close of business
January 4, 2000.
On November 12, 1999, the Company and Palatin Technologies of
Princeton, New Jersey jointly announced that they had signed a definitive
agreement to merge. Under the agreement, stockholders of the Company will
receive 0.525 shares of common stock of Palatin in exchange for their MBI common
stock. The exchange ratio under the merger agreement will result in shareholders
of each company owning approximately 50% of the merged entity, which will
operate under the name Palatin Technologies and will be headquartered in
Princeton. The merger is subject to shareholder approval. The stock exchange
will be accounted for using purchase accounting.
On March 14, 2000, the Company announced that it received notice from
Palatin Technologies Inc. of Palatin's intent to discontinue the proposed merger
with MBI and negotiations were terminated.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had net working capital of $7.4
million compared to $10.7 million at March 31, 1999. Cash, cash equivalents and
marketable securities were $12.6 million at December 31, 1999 compared to $18.0
million at March 31, 1999. The Company expects to write off an additional $1.0
million in accelerated depreciation over the next 24 months as the manufacturing
process is out-sourced.
<PAGE>
For the next several years, the Company expects to incur substantial
additional expenditures associated with product development and litigation. The
Company anticipates that its existing resources, plus reimbursements from
Mallinckrodt under ARDA II, will enable the Company to fund its operations for
at least the next nine 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.
RESULTS OF OPERATIONS
REVENUES UNDER COLLABORATIVE AGREEMENTS. Revenues under collaborative
agreements were $3.0 million for the nine-month period ended December 31, 1999
compared to $4.0 million for the same period in the prior year. Revenues in both
years consisted solely of quarterly payments to support clinical trials,
regulatory submissions and product development received from Mallinckrodt under
the Amended and Restated Distribution Agreement ("ARDA"). As of September 30,
1999, these payments were completed. Effective March 1, 1999, the ARDA agreement
with Mallinckrodt was replaced by ARDA II. Revenues and associated manufacturing
costs are both expected to be significantly lower in the near term under ARDA
II.
PRODUCT AND ROYALTY REVENUES. Revenues from product sales and royalties
were $433,000 and $950,000 for the three-month and nine-month periods ended
December 31, 1999 compared to $685,000 and $3.5 million for the same periods in
the prior year.
In the nine months ended December 31, 1999, royalty revenues amounted
to $886,000 from Mallinckrodt and $64,000 from Abbott Laboratories. Royalties
from Mallinckrodt were calculated by applying a royalty rate to end-user sales
under the terms of ARDA II. ARDA II changed the nature of revenues recognized by
the Company from product revenues recognized upon shipment to royalty revenues
recognized as a percentage of end-user sales. As a result, there were no product
sales revenues for the nine months ended December 31, 1999.
In the nine months ended December 31, 1998, product and royalty
revenues were $3.5 million. Royalty revenues amounted to $122,000 from Abbott
Laboratories. Product revenues came from the Company's sales of OPTISON to
Mallinckrodt and were recognized upon shipment of the product. 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 was 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 considered
samples a marketing expense and as such the cost of samples was recorded as
selling, general and administrative expense.
<PAGE>
MILESTONE PAYMENTS. Revenues from milestone payments were $2.0 million
for the nine-month period ended December 31, 1999. There were no milestone
payments during the same period in the prior year. Revenues in the current year
represent a $2.0 million milestone payment from Chugai Pharmaceutical Co., Ltd.
(Chugai) which was received during the third quarter for the initiation of
pivotal trials in Japan for OPTISON.
OTHER. Other revenues were $60,000 for the nine-month period ended
December 31, 1999, representing non-refundable amounts received from ISIS
Pharmaceuticals.
COST OF PRODUCTS SOLD. Cost of products sold totaled $183,000 and
($346,000) for the three-month and nine-month periods ended December 31, 1999
compared to $2.7 million and $6.1 million for the same periods in the prior
year. Under the terms of ARDA II, which were retroactive to March 1, 1999,
Mallinckrodt has agreed to reimburse MBI for all fully allocated manufacturing
expenses, including incremental costs related to the technology transfer. The
manufacturing expenses from March 1999 were included in the prior fiscal year.
As a result, the recoupment of these March 1999 expenses totalling $540,000 are
reflected as a negative expense in the current fiscal year.
RESEARCH AND DEVELOPMENT COSTS. For the three-month and nine-month
periods ended December 31, 1999, the Company's research and development costs
totaled $839,000 and $3.3 million, as compared to $2.4 million and $7.0 million
for the same periods in the prior year. Approximately $3.2 million of the $3.7
million decrease in the nine-month period ended December 31, 1999 was due to
Mallinckrodt's responsibility under ARDA II for funding clinical trials, and the
remaining decrease of $500,000 was due to cost reduction measures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three-month and
nine-month periods ended December 31, 1999, the Company's selling, general and
administrative costs totaled $2.6 million and $6.7 million, as compared to $3.1
million and $12.7 million for the same periods in the prior year. The higher
expenses for the same period in the prior year were due primarily to continuing
legal expenses and marketing costs associated with the launch of OPTISON. In
addition, current year expense decreased due to cost reduction measures.
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 occurred in November 1998 and affected
approximately 40 employees of the Company's 140-person workforce. The second
reduction in force occurred in April 1999 and affected an additional 26
employees. In addition, attrition since November 1998 has further reduced the
current workforce to approximately 56 employees. On March 30, 2000, the Company
announced plans to restructure and further reduced its workforce by 33
employees. The Company will implement an additional reduction in workforce when
the out-sourcing of manufacturing operations is complete, which is estimated to
occur in December 2001.
The impact of the cost reduction measures on the Company's financial
statements for the nine months ended December 31, 1999 included a write-off of
$600,000 in fixed assets through accelerated depreciation. For the nine months
ended December 31, 1998, the impact included $3.1 million in asset disposals,
$2.3 million in severance costs, $300,000 in costs related to technology
transfer and $400,000 in exit costs. In addition, $1.1 million of inventories
were expensed through cost of sales as a result of the planned out-sourcing of
manufacturing. The
<PAGE>
Company expects to write off an additional $1.0 million in accelerated
depreciation over the next 24 months as the manufacturing process is
out-sourced.
A summary of the nine-month period activity related to the accrual for
cost reduction measures is provided below.
<TABLE>
<S> <C>
Accrued at March 31, 1999 .......................................... $2,000,000
Severance ...................................................... (500,000)
Exit costs ..................................................... (400,000)
Technology transfer ............................................ (300,000)
----------
Accrued at December 31, 1999 ....................................... $ 800,000
==========
</TABLE>
GAIN ON DISPOSAL OF ASSET HELD FOR SALE. Gain on disposal of asset held
for sale totaled $7.0 million for the nine months ended December 31, 1998. The
Company resold territory rights to Chugai for $14.0 million, as well as a $2.4
million premium received for the sale of MBI common stock to Chugai. This gain
is the net of the cost of these rights previously reacquired from Shionogi & Co.
for $8.5 million and related transaction fees of $878,000.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense for the
three-month and nine-month periods ended December 31, 1999 amounted to $110,000
and $344,000, compared to $142,000 and $456,000 for the same period in the prior
year, and consisted of mortgage interest on the Company's manufacturing building
and interest on a note payable which is secured by the tangible assets of the
Company. The interest rate on the mortgage was 8% in December 1999. The note
payable bears interest at the prime rate and is payable in monthly installments
of principal plus interest over five years. The note payable was renegotiated in
September 1998 lowering the interest rate from prime plus one to the prime rate
and releasing the Company from a compensating balance requirement. The interest
rate on the note was 8.5% in December 1999.
Interest income for the three-month and nine-month periods ended
December 31, 1999 amounted to $154,000 and $556,000, compared to $325,000 and
$1.1 million for the same period in the prior year. The decrease in interest
income in the current year is due to lower average cash and marketable
securities balances. The Company's cash is invested primarily in short-term,
fixed principal investments, such as U.S. Government agency issues, corporate
bonds, certificates of deposit and commercial paper.
FOREIGN INCOME TAX PROVISION. The Company paid $200,000 in foreign
taxes during the quarter ended December 31, 1999 related to a milestone payment
received from Chugai and $1.4 million in foreign taxes related to the Chugai
alliance during the nine-month period ended December 31, 1998.
YEAR 2000 READINESS. The Year 2000 problem is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. This problem could 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 completed a comprehensive review of its
internal computing systems and of its vendors, service providers (including
financial institutions and insurance companies), and collaborative partners.
<PAGE>
Subsequent to December 31, 1999, the Company had not experienced any significant
costs or disruptions associated with the Year 2000 problem.
PROSPECTIVE INFORMATION
The Company is involved in several legal and administrative proceedings
which could result in a substantial cost to the Company. Given the complexity of
the legal and factual issues and the uncertainty of litigation, 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLECULAR BIOSYSTEMS, INC.
/s/ BOBBA VENKATADRI
- --------------------------------
Bobba Venkatadri
President and Chief Executive Officer
5/22/00
- --------------------------------
Date
