<PAGE>
EXHIBIT 99.2
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, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. 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 auditing standards generally
accepted in the United States. 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, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
San Diego, California
May 10, 2000
1
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,056 $ 1,756
Marketable securities, available-for-sale (Note 4)........ 16,982 10,287
Accounts and notes receivable............................. 2,320 1,820
Inventories............................................... 748 203
Prepaid expenses and other assets......................... 425 204
--------- ---------
Total current assets.................................... 21,531 14,270
--------- ---------
Property and equipment, at cost:
Building and improvements................................. 11,113 11,226
Equipment, furniture and fixtures......................... 2,893 2,930
Construction in progress.................................. 930 --
--------- ---------
14,936 14,156
Less: Accumulated depreciation and amortization........... 6,672 7,572
--------- ---------
Total property and equipment............................ 8,264 6,584
--------- ---------
Other assets, net......................................... 2,054 1,790
--------- ---------
$ 31,849 $ 22,644
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,278 $ 1,285
Accounts payable and accrued liabilities (Notes 1, 2 and
7)...................................................... 7,395 7,218
Compensation accruals (Note 2)............................ 2,165 1,943
--------- ---------
Total current liabilities............................... 10,838 10,446
--------- ---------
Long-term debt, net of current portion (Note 6):............ 4,804 3,529
--------- ---------
Commitments and contingencies (Note 7):
Stockholders' equity (Note 8):
Common Stock, $.01 par value, 40,000,000 shares
authorized, 18,580,745 and 18,858,789 shares issued and
outstanding, respectively............................... 186 186
Additional paid-in capital................................ 134,347 134,388
Accumulated deficit....................................... (117,969) (125,537)
Unrealized loss on available-for-sale securities.......... 6 11
Less 40,470 and 42,298 shares of treasury stock, at cost,
respectively............................................ (363) (379)
--------- ---------
Total stockholders' equity.............................. 16,207 8,669
--------- ---------
$ 31,849 $ 22,644
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues (Note 9):
Revenues under collaborative agreements................... $ 5,095 $ 5,498 $ 3,000
Milestone payments........................................ -- -- 4,000
Product and royalty revenues.............................. 1,151 4,083 1,525
-------- -------- -------
6,246 9,581 8,525
-------- -------- -------
Operating expenses:
Research and development costs (Note 9)................... 11,078 9,083 4,261
Costs of products sold.................................... 5,791 7,840 (107)
Selling, general and administrative expenses.............. 11,912 14,191 10,166
Cost reduction measures (Note 2):
Asset disposals......................................... -- 3,143 --
Severance costs......................................... -- 2,328 1,653
Technology transfer..................................... -- 265 --
Exit costs.............................................. -- 384 --
-------- -------- -------
28,781 37,234 15,973
-------- -------- -------
Loss from operations...................................... (22,535) (27,653) (7,448)
Gain on disposal of assets held for sale (Note 10).......... -- 6,993 --
Interest expense............................................ (721) (574) (447)
Interest income............................................. 1,996 1,394 727
-------- -------- -------
Loss before income taxes.................................... (21,260) (19,840) (7,168)
Foreign income tax provision................................ -- (1,400) (400)
-------- -------- -------
Net Loss................................................ $(21,260) $(21,240) $(7,568)
======== ======== =======
Loss per common share--basic and diluted.................... $ (1.19) $ (1.14) $ (0.40)
======== ======== =======
Weighted average common shares outstanding.................. 17,793 18,564 18,749
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN ACCUMULATED TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCK INCOME TOTAL
---------- -------- ---------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1997..................... 17,745,897 $177 $127,483 $ (75,469) $(363) $(82) $ 51,746
Comprehensive Loss
Net loss............... -- -- -- (21,260) -- -- (21,260)
Unrealized loss on
available-for-sale
securities........... -- -- -- -- -- 15 15
Exercise of stock
options................ 100,340 1 662 -- -- -- 663
---------- ---- -------- --------- ----- ---- --------
Balance at March 31,
1998..................... 17,846,237 178 128,145 (96,729) (363) (67) 31,164
Comprehensive Loss
Net loss............... -- -- -- (21,240) -- -- (21,240)
Unrealized gain on
available-for-sale
securities........... -- -- -- -- -- 73 73
Sale of common stock to
Chugai................. 691,883 7 5,922 -- -- -- 5,929
Exercise of stock
options................ 42,625 1 280 -- -- -- 281
---------- ---- -------- --------- ----- ---- --------
Balance at March 31,
1999..................... 18,580,745 186 134,347 (117,969) (363) 6 16,207
Comprehensive Loss
Net loss............... -- -- -- (7,568) -- -- (7,568)
Unrealized gain on
available-for-sale
securities........... -- -- -- -- -- 5 5
Purchase of treasury
stock.................. (1,828) -- -- -- (16) -- (16)
Issuance of stock
grants................. 279,872 -- -- -- -- --
Options issued in lieu of
salary................. -- -- 41 -- -- -- 41
---------- ---- -------- --------- ----- ---- --------
Balance at March 31,
2000..................... 18,858,789 $186 $134,388 $(125,537) $(379) $ 11 $ 8,669
========== ==== ======== ========= ===== ==== ========
<CAPTION>
COMPREHENSIVE
LOSS
--------------
<S> <C>
Balance at March 31,
1997.....................
Comprehensive Loss
Net loss............... $(21,260)
Unrealized loss on
available-for-sale
securities........... 15
Exercise of stock
options................
--------
Balance at March 31,
1998..................... (21,245)
========
Comprehensive Loss
Net loss............... (21,240)
Unrealized gain on
available-for-sale
securities........... 73
Sale of common stock to
Chugai.................
Exercise of stock
options................
--------
Balance at March 31,
1999..................... (21,167)
========
Comprehensive Loss
Net loss............... (7,568)
Unrealized gain on
available-for-sale
securities........... 5
Purchase of treasury
stock.................. --
Issuance of stock
grants.................
Options issued in lieu of
salary................. --
--------
Balance at March 31,
2000..................... $ (7,563)
========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(21,260) $(21,240) $ (7,568)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,085 1,915 1,126
Disposals/write-downs of tangible and intangible
property.............................................. 20 3,092 466
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........................................... (702) (1,171) 500
Inventories........................................... (1,560) 1,154 545
Prepaid expenses and other assets..................... (45) 326 221
Accounts payable and accrued liabilities.............. 2,814 397 1,407
Deferred contract revenue............................. 1,575 (1,575) --
Compensation accruals................................. 614 (62) (222)
-------- -------- --------
Cash used in operating activities............... (17,459) (26,528) (3,525)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,387) (791) (13)
Proceeds from sale of property and equipment.............. -- 42 17
Write off of patents and license rights................... 17 -- --
Additions to patents and license rights................... (32) (30) --
Purchase of license rights from Shionogi.................. (2,000) (2,000) (1,500)
Proceeds from sale of territorial license rights.......... -- 15,493 --
Decrease in other assets.................................. 37 132 264
Purchases of marketable securities........................ (25,566) (42,988) (22,447)
Maturities of marketable securities....................... 46,135 49,353 29,147
-------- -------- --------
Cash provided by investing activities........... 17,204 19,211 5,468
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale/leaseback transaction.................. 1,331 -- --
Net proceeds from sale of common stock to Chugai.......... -- 8,300 --
Net proceeds from issuance of Common Stock................ 663 281 --
Purchase of treasury stock................................ -- -- (16)
Increase in additional paid in capital.................... -- -- 41
Principal payments on long-term debt...................... (1,262) (1,272) (1,268)
-------- -------- --------
Cash provided by (used in) financing
activities.................................... 732 7,309 (1,243)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 477 (8) 700
Cash and cash equivalents, beginning of year................ 587 1,064 1,056
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 1,064 $ 1,056 $ 1,756
======== ======== ========
Supplemental cash flow disclosures:
Interest income received.................................. $ 2,101 $ 1,744 $ 1,039
======== ======== ========
Interest paid............................................. $ 715 $ 568 $ 448
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--
Molecular Biosystems, Inc. ("MBI" or the "Company"), a Delaware corporation
incorporated on April 14, 1980, is the developer of OPTISON-Registered
Trademark-, the only U.S. Food and Drug Administration-approved intravenous
ultrasound contrast agent. On May 8, 2000, the Company entered into a new
agreement with Mallinckrodt, Inc. ("Mallinckrodt"), a global manufacturer of
specialty medical products. The agreement known as "OPTISON Product Rights
Agreement" ("OPRA") supersedes all previous agreements with Mallinckrodt and
requires Mallinckrodt to assume full control of the OPTISON business, including
responsibility for all related intellectual property disputes, clinical
development, and manufacturing. MBI will receive an ongoing royalty of 5% of
ultrasound contrast agents by Mallinckrodt and its partner, Nycomed.
Mallinckrodt's territory is world wide, excluding Japan, South Korea and Taiwan.
In addition, MBI will pay Mallinckrodt a total of seven million dollars as part
of the intellectual property settlement. Chugai Pharmaceuticals, a
pharmaceutical company in Japan, is MBI's OPTISON partner for Japan, South Korea
and Taiwan. MBI receives a 28% royalty on product sales from Chugai plus certain
milestone payments and has no manufacturing or clinical development
responsibilities.
The restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of patent
litigation with certain competitors claiming patent rights in various ultrasound
contrast agent technologies.
The Company's annual continuing operations have been unprofitable since
1992. The Company plans to use its existing cash and future cash flows from
royalties and milestone payments to pursue alliances and business development
opportunities in the life sciences industry. The Company believes that operating
losses may occur for at least the next several years. 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 other future alliances and
investment opportunities and are therefore uncertain. The Company anticipates
that its cash and marketable securities on hand and future cash flows will
enable the Company to fund its operations and obligations, including the amounts
owed to Mallinckrodt pursuant to OPRA, for at least the next fifteen months.
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.
6
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are the primary source of revenues
for the Company. Milestone payments earned in connection with research
activities performed under the terms of collaborative agreements are 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, Mallinckrodt paid 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 were
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 was
designated for clinical development expenses and was recorded as deferred
revenue until such expenses were incurred, and the remaining half of each
payment was designated to fund ongoing research and development activities and
was recognized as research was performed. As of March 31, 2000, these payments
were completed.
REVENUE RECOGNITION FOR PRODUCT SOLD--
For fiscal years 1998 and 1999, the Company recognized revenue when goods
were shipped to its customer, Mallinckrodt. Under ARDA, 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. Effective March 1, 1999, the agreement with
Mallinckrodt was replaced by ARDA II. Under the terms of ARDA II, the Company
received a 20% royalty from Mallinckrodt on product sales of OPTISON. Pursuant
to ARDA II, 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 is recorded as selling, general and administrative expense.
Effective May 8, 2000, Mallinckrodt assumed full control of and
responsibility for the manufacture of OPTISON pursuant to OPRA. See "Description
of Business" above.
The Company has not provided for potential uncollectible accounts, based on
its collection history and credit worthiness of its one customer, Mallinckrodt.
7
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The cost basis for determining realized gains and
losses is based on specific identification.
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,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Raw materials and supplies.................................. $551 $203
Work in process............................................. 92 --
Finished goods.............................................. 105 --
---- ----
$748 $203
==== ====
</TABLE>
Work in process and finished goods include the cost of materials, direct
labor and manufacturing overhead.
8
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 lease term for
leasehold improvements.
PATENTS AND LICENSE RIGHTS AND OTHER 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 as a result of
the 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, 2000 is approximately $1.5 million
which is the portion of this prepayment that has not yet been expensed. OPRA
obligates Mallinckrodt to assume financial responsibility for the licensing
agreement related to this prepayment. Additionally, other assets at March 31,
1999 and 2000 include a real estate investment of $300,000 related to an
employment agreement with one of the Company's officers.
IMPAIRMENT OF LONG-LIVED ASSETS--
The Company complies 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 Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability
that future undiscounted net cash flows, without interest charges, will be less
than the carrying amount of the assets. Impairment is measured at fair value.
Fair value is determined by an evaluation of available price information at
which assets could be bought or sold including quoted market prices, if
available, or the present value of the estimated future discounted cash flows
based on reasonable and supportable assumptions.
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
restructuring and the discontinuation of certain projects. These assets
principally relate to tenant improvements at the Company's research facility not
transferable to other facilities. This facility was abandoned in fiscal 1999.
9
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES--
Accounts payable and accrued liabilities consist of the following major
classes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Accrued legal and professional fees......................... $3,423 $6,432
License rights payable and related fees (Note 7)............ 1,500 450
Restructuring accruals...................................... 649 --
Accounts payable--trade..................................... 1,226 65
Other miscellaneous accruals................................ 597 271
------ ------
$7,395 $7,218
====== ======
</TABLE>
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--
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, 1998, 1999, and 2000, the diluted loss per share
calculation excludes effects of 3,139,000, 3,855,000 and 3,884,000 outstanding
stock options, respectively, as such inclusion would be anti-dilutive.
GEOGRAPHIC AND CUSTOMER INFORMATION--
The Company derived all of its product revenues from sales in the United
States to its sole customer Mallinckrodt. The Company operates out of one
factory in San Diego, California, has one product that is an ultrasound imaging
agent and is managed on an aggregate basis. Based on the above factors, the
Company has determined that it operates in one reportable segment.
SALES OF ASSETS--
During 2000 and 1999, the Company sold certain fully depreciated equipment.
These sales resulted in gains of $17,000 and $42,000, respectively, which have
been reflected in the accompanying statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, and accounts payable and accrued liabilities approximate
their fair values due to their short-term
10
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
nature. The Company's long term debts approximate fair value as they carry a
variable market rate of interest. Financial instruments which potentially
subject the Company to concentration of credit risk consist primarily of trade
accounts receivable. The Company believes it is not exposed to any significant
credit risk on its accounts receivable.
NEW ACCOUNTING STANDARDS--
In 1999, the Company adopted the provisions of AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal use" ("SOP 98-1"). This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal-use software as well as assists in
determining when computer software is for internal use. The adoption had no
material impact on the Company's financial statements or related disclosure
thereto.
In 1998, the Company adopted the provisions of AICPA Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). This
Statement provides guidance on the financial reporting of start-up and
organization costs and requires that such costs of start-up activities be
expensed as incurred. The adoption had no material impact on the Company's
Financial Statements or Related Disclosure thereto.
In December 1999, the Securities and Exchange Commission issued the Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements (SAB
101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. The Company has performed an evaluation of SAB 101 and
believes that its revenue recognition policies are in conformity with the
provisions of SAB 101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This Statement was amended by SFAS No. 137
which refers the effective date to all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 is effective for the Company's first quarter
in the fiscal year beginning April 1, 2001 and is not expected to have a
material effect on the Company's financial position or results of operations.
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 was a reduction
principally in administrative, development and support staff. Phase II was the
out-sourcing of the product packaging operations. 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. In addition, attrition since November 1998 further reduced the
workforce to approximately 56 employees. On March 30, 2000, the Company
announced plans to restructure and reduce its workforce by another 33 employees.
Effective May 8, 2000, an additional 20 employees involved with the manufacture
of OPTISON were transferred to Mallinckrodt
11
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COST REDUCTION MEASURES (CONTINUED)
as part of its takeover of the OPTISON manufacturing pursuant to OPRA. All
employees expected to be terminated as a result of this program were notified of
such termination and their estimated severance benefits were accrued.
For the fiscal year ended March 31, 2000, the impact of the cost reduction
measures on the Company's financial statements included $1.7 million in accrued
severance costs and a write-off of $700,000 in fixed assets through accelerated
depreciation.
For the fiscal year ended March 31, 1999, the impact of the cost reduction
measures included $3.1 million in asset disposals, $2.3 million in severance
costs, $265,000 in costs related to technology transfer and $384,000 in exit
costs. In addition, $1.1 million of inventories were expensed through cost of
sales, and $1.2 million in fixed assets were written off through accelerated
depreciation.
A summary of the $8.4 million cost reduction measures charge reflected in
the accompanying statements of operations for the year ended March 31, 1999 is
as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
Non cash charges:
Accelerated depreciation, recorded prospectively in
operations, resulting from a change in estimates of the
useful lives of manufacturing assets.................... $1.2
Write off of abandoned fixed assets ($2.8) and other
capitalized assets ($0.3)............................... 3.1
Inventory disposed of..................................... 1.1
----
$5.4
====
Cash charges:
Severance................................................. 2.3
Exit costs................................................ .4
Technology transfer....................................... .3
----
$3.0
----
Less amounts paid through March 31, 1999:
Severance................................................. 1.0
All other................................................. --
----
Accrued at March 31, 1999................................... $2.0
====
</TABLE>
At March 31, 1999, $1.3 million of the cost reduction accrual was included
in compensation accruals and the remaining $0.7 million was included in accounts
payable and accrued liabilities in the accompanying balance sheet.
12
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COST REDUCTION MEASURES (CONTINUED)
A summary of the fiscal year 2000 activity related to the accrual for cost
reduction measures is provided below:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
Accrued at March 31, 1999................................... $ 2.0
Severance paid............................................ (1.3)
Additional severance accrued.............................. 1.7
Exit costs................................................ (0.4)
Technology transfer....................................... (0.3)
-----
Accrued at March 31, 2000................................... $ 1.7
=====
</TABLE>
At March 31, 2000, the $1.7 million cost reduction accrual was included in
compensation accruals in the accompanying balance sheet.
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 which covers Japan, Taiwan and
South Korea, to develop OPTISON (which may be marketed under a different name),
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 $14.0 million (See Note 10) 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. The Company has satisfied all existing
contractual obligations related to the license granted to Chugai.
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 is included in "Gain on disposal of asset" (See Note
10) 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. As of March 31, 2000, the Company has received
$4 million in milestone payments from Chugai.
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
13
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MARKETABLE SECURITIES (CONTINUED)
investments as available-for-sale securities. The following table summarizes
available-for-sale securities at March 31, 2000 (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........................ $ 3,304 $-- $ -- $ 3,304
Certificate of Deposit.............. 3,000 -- -- 3,000
Corporate obligations............... 3,972 11 -- 3,983
------- --- ----------- -------
Marketable securities
available-for-sale................ $10,276 $11 $ -- $10,287
======= === =========== =======
</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 years ended March 31, 2000, 1999 or 1998.
The amortized cost and estimated fair value of debt and marketable
securities at March 31, 2000, 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
(in thousands):
<TABLE>
<CAPTION>
COST LESS
PREMIUMS/ ESTIMATED
DISCOUNTS FAIR
AMORTIZED VALUE
--------- ---------
<S> <C> <C>
Due in one year or less................................. $10,276 $10,287
Due after one year...................................... -- --
------- -------
$10,276 $10,287
======= =======
</TABLE>
5. INCOME TAXES
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."
14
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Computed statutory tax............................ $(7,342) $(7,221) $(2,437)
State income taxes................................ (1,275) (1,274) (430)
Tax exempt interest............................... (64) (23) --
Foreign Income Tax................................ -- 1,400 400
Losses without income tax benefit................. 8,634 8,508 2,857
Other............................................. 47 10 10
------- ------- -------
Provision for income taxes........................ $ -- $ 1,400 $ 400
======= ======= =======
</TABLE>
At March 31, 2000, the Company has deferred tax assets of approximately
$46.6 million relating to the following tax loss carryforwards for income tax
purposes (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
-------- ----------
<S> <C> <C>
Federal ($103,400) and state ($45,500) net operating
losses............................................... $148,900 2000-2019
Research and development credit--federal............... 2,734 2000-2014
Research and development credit--state................. 1,513 2000-2014
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 $0.4 million and $1.4 million included
in the Company's fiscal 2000 and 1999 net losses, respectively, represents
foreign taxes paid related to the Chugai transaction.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Note payable--due 2004...................................... $3,682 $3,614
Note payable--due 2001...................................... 2,400 1,200
------ ------
6,082 4,814
Less--current portion....................................... 1,278 1,285
------ ------
$4,804 $3,529
====== ======
</TABLE>
The note payable due in 2004 bears interest at a variable rate based upon
the weighted average Federal Reserve Eleventh District cost of funds as quoted
in The Wall Street Journal plus 2.35 percent.
15
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The interest rate on this note is adjusted semi-annually and was 8.0% at
March 31, 1999 and 2000. 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, 2000, maturities
of this note in each of the next four fiscal years are: $85,000, $92,000,
$100,000 and $3,337,000.
The note payable due in April, 2001 bears interest at the prime rate (9.0%
at March 31, 2000) and is payable in monthly installments of $100,000 plus
accrued interest through March 2001. The loan contains covenants relating to
cashflow coverage and minimum cash balances. The Company is in compliance with
the loan covenants. 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 primarily
by equipment and fixtures in addition to all other tangible assets of the
Company.
7. COMMITMENTS AND CONTINGENCIES
LEASES--
In 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,
accounted for as an operating lease. The outstanding balance on this line of
credit at March 31, 2000 was $622,000. Future minimum rental commitments for the
Company's noncancelable operating lease were as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, AMOUNT
--------------------------- --------
<S> <C>
2001........................................................ $379
2002........................................................ 234
2003........................................................ 9
2004........................................................ --
2005........................................................ --
----
Total minimum lease payments................................ $622
====
</TABLE>
In fiscal 1998, the Company entered into a lease for its corporate
headquarters. The Company was obligated to pay real estate taxes, insurance and
utilities on its portion of the leased property. 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 February 2000, the
end of the lease term, as exit costs in fiscal year 1999. Rental expense for the
years ended March 31, 1998 and 1999 was $245,000 and $297,000, respectively.
LICENSE AGREEMENTS--
MALLINCKRODT, INC. MBI's distribution agreement with Mallinckrodt forms the
basis of its product development and marketing program for OPTISON. On May 8,
2000, the Company entered into an agreement with Mallinckrodt known as the
"OPTISON Product Rights Agreement" ("OPRA"). This agreement supersedes all
previous agreements and requires Mallinckrodt to assume full control of the
OPTISON business, including responsibility for all related intellectual property
disputes, clinical development and manufacturing. MBI will receive an ongoing
royalty of 5% on sales of ultrasound
16
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
contrast agents by Mallinckrodt and its partner, Nycomed. The Mallinckrodt
territory is worldwide, excluding Japan, South Korea and Taiwan. In addition,
the Company will pay a total of $7.0 million to Mallinckrodt as part of an
intellectual property settlement (see Note 12.)
This restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of patent
litigation with certain competitors claiming patent rights in various ultrasound
contrast agent technologies. MBI will pay Mallinckrodt a total of seven million
dollars as part of this intellectual property settlement. Three million dollars
of this settlement was paid in May 2000. An additional three million dollars
will be satisfied through the transfer of property owned by MBI to Mallinckrodt
as soon as practicable. MBI is required to make the final one million-dollar
payment to Mallinckrodt upon receipt of a milestone payment form Chugai
Pharmaceutical Co., Ltd.
OPRA also obligates Mallinckrodt to assume financial responsibility for a
license agreement with Steven B. Feinstein, M.D. covering the exclusive right to
develop, use and sell any products derived from patents and applications
involving sonicated gas-filled albumin microspheres used for imaging and any
future related patents and applications. Beginning in 1999, the agreement
requires payment of minimum royalties of $600,000 each year. Minimum royalty
payments are decreased as certain levels of OPTISON sales are reached.
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) 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 $14.0 million. Chugai will pay the Company a 28% royalty on net
sales of licensed products that Chugai manufactures. 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. As of March 31, 2000, the Company had received
$4.0 million in milestone payments from Chugai.
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 Steven 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. Minimum royalty payments are decreased as certain
levels of OPTISON sales are reached. OPRA obligates Mallinckrodt to assume
financial responsibility for this license agreement
17
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ABBOTT LICENSE. On December 16, 1993, MBI entered into an exclusive license
agreement with Abbott Laboratories under which Abbott acquired the exclusive
worldwide right to make, have made, use and sell products based on nucleic acid
probe technology for in vitro diagnosis of infectious diseases and cancer.
Abbott is obligated to pay MBI quarterly royalties on product sales made by
Abbott or its sublicensee.
PATENT MATTERS--
The Company's products are covered by a number of issued United States and
foreign patents, and MBI has filed a number of patent applications in the United
States and other countries. Under OPRA (see "Description of Business"), while
ownership of the patents and trademarks remains with MBI, all patents and
trademarks rights covering OPTISON worldwide, excluding the territory granted to
Chugai, were transferred to Mallinckrodt. Mallinckrodt will assume
responsibility for the protection of proprietary technologies deemed to be
material to its business prospects.
The Company was accused in various lawsuits of infringing certain patents
belonging to its competitors in its manufacture and sale of OPTISON in the
United States. Additionally, Nycomed accused the Company of infringing certain
European Patents. Effective May 5, 2000, the Company reached a settlement in
these patent disputes between the Company, Nycomed, Mallinckrodt and Sonus.
Pursuant to OPRA, Mallinckrodt has assumed responsibility for any future
intellectual property disputes relating to MBI's ultrasound contrast patents.
The Company also owns certain other patents that are unrelated to OPTISON.
In May 2000, the Company licensed to Genta Inc. a patent portfolio relating to
"antisense" molecular therapeutic technology for $2.8 million. Of this amount,
$400,000 is payable in cash and $2.4 million will be paid in unrestricted shares
of Genta stock upon completion of an S-3 registration statement. All costs
related to this patent had been expensed in prior years. In 1992, MBI entered
into a nonexclusive license with Isis Pharmaceuticals, Inc. for this technology
in return for a license fee and royalties.
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 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,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Options granted............................................. 3,855 3,884
Future grants of options.................................... 1,699 1,663
----- -----
5,554 5,547
===== =====
</TABLE>
18
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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 successor 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. Additionally, the
1998 Plan permits certain senior executives, as defined, to reduce their
compensation and receive options with an intrinsic value equal to that reduction
in compensation. In 1999, the Company's chief executive officer elected to
reduce his compensation by $20,000 and receive options to purchase 10,613 shares
at $0.93 per share on January 4, 1999 when the fair market value was $2.81 per
share. The compensation expense related to the grant of these options is
included in operations for fiscal 1999. On April 1, 1999, the Company's chief
executive officer elected to receive an additional grant of 11,662 shares at
$0.89 per share on April 1, 1999 when the fair market value was $2.69 per share.
The compensation expense related to this grant was included in operations for
fiscal 2000.
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 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.
19
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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
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.
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>
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 --
Expired or lapsed.............................. (248,250) 6.25 - 22.25 --
--------- ------------ ------- ------------
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 --
Exercised...................................... (42,625) 6.00 - 10.13 --
Expired or lapsed.............................. (434,912) 3.31 - 22.00 --
--------- ------------ ------- ------------
Options Outstanding at March 31, 1999.......... 3,702,331 0.93 - 22.25 153,000 6.88 - 17.00
--------- ------------ ------- ------------
Granted........................................ 259,562 0.88 - 2.38 --
Exercised...................................... -- --
Expired or lapsed.............................. (230,473) 1.75 - 22.25 --
--------- ------------ ------- ------------
Options Outstanding at March 31, 2000.......... 3,731,420 0.88 - 20.38 153,000 6.88 - 17.00
========= ------------ ======= ------------
Options exercisable at March 31, 2000.......... 3,185,218 153,000
========= =======
Reserved for future grants at March 31, 2000... 1,638,165 25,000
========= =======
</TABLE>
20
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at March 31, 2000:
<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 3/31/00 LIFE (YEARS) PRICE AT 3/31/00 PRICE
--------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
0.8750 -
7.00 ......... 1,520,157 7.64 $ 4.4004 1,128,703 $ 5.0372
7.125 -
9.6875......... 1,527,775 7.06 $ 8.2329 1,401,693 $ 8.2879
9.875 -
20.375 ......... 836,488 5.26 $14.3083 807,822 $14.4228
--------- ---- -------- --------- --------
0.8750 -
20.375 ......... 3,884,420 6.90 $ 8.0430 3,338,218 $ 8.6751
========= ==== ======== ========= ========
</TABLE>
As permitted, the Company has adopted the disclosure only provisions of SFAS
123. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net loss and net
loss per common share for March 31, 1998, 1999 and 2000 would approximate the
pro forma amounts below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
FISCAL YEARS ENDED, MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)--as reported.................. $(21,260) $(21,240) $(7,568)
Net income (loss)--pro forma.................... $(23,877) $(26,429) $(9,055)
Earning per share (loss)--as reported........... $ (1.19) $ (1.14) $ (0.40)
Earning per share (loss)--pro forma............. $ (1.34) $ (1.42) $ (0.48)
</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 2000: risk free rate of 6.0%, expected option life of 4
years, expected volatility of 80% and a dividend rate of zero. The weighted
average fair value of options granted from the Employee stock option plans
during fiscal 1998, 1999 and 2000 was $7.85, $5.43 and $2.11, respectively. The
weighted average fair value of options granted from the Outside Director stock
option plan during fiscal 1998, 1999 and 2000 was $6.88, $9.19 and $1.93,
respectively.
9. SIGNIFICANT RESEARCH CONTRACTS
Pursuant to OPRA, the Company has no future responsibility for the
development of OPTISON and currently has no plans to engage in any research or
development activities. OPRA supersedes all previous agreements with
Mallinckrodt and requires Mallinckrodt to assume full control of the OPTISON
business.
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 corporation, under which the
Company granted exclusive licenses, restricted to certain
21
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SIGNIFICANT RESEARCH CONTRACTS (CONTINUED)
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.
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. The
agreement provided 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 made guaranteed payments to the
Company totaling $20.0 million over four years to support clinical trials,
related regulatory submissions and associated OPTISON product development. These
payments were 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. As of March 31, 2000, all quarterly payments had
been received by the Company.
ARDA required the Company to spend at least $10.0 million of the $20.0
million it received 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 was 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 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 6.9% of the Company's issued and outstanding shares.
In December 1996, the Company and Mallinckrodt amended ARDA to expand the
geographical scope of Mallinckrodt's exclusive marketing and distribution rights
for OPTISON 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.
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement was
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 reimbursed MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In addition to
the transfer of manufacturing, ARDA II extended Mallinckrodt's responsibility
for funding clinical trials to include all cardiology and radiology clinical
trials for OPTISON in the United States. In exchange for the transfer of
manufacturing and increased financial support of clinical trials for OPTISON,
MBI received a royalty on end-user product sales of OPTISON.
22
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SIGNIFICANT RESEARCH CONTRACTS (CONTINUED)
On May 8, 2000, the Company entered into the OPRA agreement with
Mallinckrodt. This agreement supersedes all previous agreements and requires
Mallinckrodt to assume full control of the OPTISON business, including
responsibility for all related intellectual property disputes, clinical
development and manufacturing (see Note 12.)
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. As of March 31, 2000, all payments to
Shionogi had been made.
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)
in Japan, Taiwan and South Korea in exchange for granting to Chugai a
royalty-based license to market these products in the named countries. 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. As of
March 31, 2000, the Company had received $4.0 million in milestone payments from
Chugai.
10. GAIN ON DISPOSAL OF ASSETS HELD FOR SALE
The accompanying 1999 statement of operations reflects a gain on the
disposal of assets held for sale. This gain resulted from the resale of
territorial rights which had been reacquired from licensees in prior periods as
follows:
In the Company's fiscal 1989, Shionogi & Co. Ltd. (Shionogi) acquired from
MBI the rights to develop, market, manufacture and sell certain of the Company's
contrast agent products in specified territories (Japan, Korea, Taiwan). In
fiscal 1997, as a result of a change of strategic focus at Shionogi, Shionogi
sold these territorial rights back to the Company for $8.5 million. MBI
accounted for this transaction as the purchase of an asset held for sale in the
amount of $8.5 million. Effective April 1, 1998, the Company entered into an
agreement to resell the above rights to Chugai. The key terms of that agreement
are as follows:
The Company granted Chugai an exclusive license under the Company's patents
and technology related to FS069 (OPTISON) and another product ORALEX, to sell,
distribute, develop, have developed, make and have made licensed products in
Japan, Korea and Taiwan. Chugai also granted the Company a license to any
improvements made by Chugai to the products. Under the agreement, any further
development as well as the attainment of any regulatory approvals within the
subject territory are the sole responsibility of Chugai.
23
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. GAIN ON DISPOSAL OF ASSETS HELD FOR SALE (CONTINUED)
At the time of this agreement, OPTISON was an FDA approved product and was
being sold in the U.S., and further development of ORALEX was terminated by the
Company in 1999.
I. Chugai paid the Company a non-refundable license fee of $14.0 million
payable in a series of payments with the full amount paid within 300
days of the effective date of the agreement.
II. Chugai shall also pay the Company non-refundable milestone payments of
$20 million if and when various clinical and regulatory milestones are
achieved by Chugai.
These above payments are contingent upon Chugai attaining the above
milestones. The Company has no obligation to and does not participate in
the development activities or clinical trials of Chugai.
III. Chugai shall also pay to the Company earned royalties on Chugai's sales
of the products and minimum royalties for certain years of sales after
the launch of the products. The previous agreement with Shionogi also
provided for a royalty on sales of the product at a rate which closely
approximated the Chugai royalty rate.
IV. Chugai also made an equity investment in the form of a common stock
purchase of 691,883 MBI shares at a premium of $2.4 million.
V. Term of the agreement is 15 years from the effective date of April 1,
1998.
VI. MBI has an ongoing indemnification obligation to Chugai to protect its
Japanese patents, if and when challenged.
Accordingly, MBI has recorded this asset sale to Chugai as a gain on
disposal of assets held for sale in its fiscal 1999 statement of
operations, as follows:
<TABLE>
<CAPTION>
AMOUNT IN
MILLIONS
---------
<S> <C>
Up-front non-refundable payment received by MBI............. $14.0
Premium on sale of equity................................. 2.4
Less asset held for sale.................................. (8.5)
Less transaction fee...................................... (0.9)
-----
Net gain on disposal...................................... $ 7.0
=====
</TABLE>
24
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000 and 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
QUARTER ENDED: JUN 30 SEP 30 DEC 31 MAR 31
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 2000
Revenues.............................................. $ 1,660 $ 1,857 $ 2,493 $ 2,515
Research and Development Costs........................ 1,412 1,036 839 974
Total Operating Costs and Expenses.................... 3,160 2,857 3,627 6,329
Net Loss.............................................. (1,402) (930) (1,290) (3,946)
Loss Per Common Share................................. (0.07) (0.05) (0.07) (0.21)
Weighted Average Common Shares Outstanding............ 18,730 18,727 18,724 18,724
<CAPTION>
QUARTER ENDED: JUN 30 SEP 30 DEC 31 MAR 31
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues.............................................. $ 2,617 $ 2,666 $ 2,185 $ 2,113
Research and Development Costs........................ 2,227 2,409 2,358 2,089
Total Operating Costs and Expenses.................... 7,735 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............ 18,843 18,581 18,581 18,581
</TABLE>
12. SUBSEQUENT EVENTS
On May 5, 2000, the Company reached a settlement in various ongoing patent
disputes between the Company, Nycomed, Mallinckrodt and Sonus. In addition,
Mallinckrodt assumed responsibility for any future intellectual property
disputes relating to MBI's ultrasound contrast patents.
On May 8, 2000, the Company and Mallinckrodt agreed to restructure their
agreement known as ARDA II to allow Mallinckrodt to assume full control of the
OPTISON business, including responsibility for all related intellectual property
disputes, clinical development, manufacturing and real estate. The agreement was
incorporated into a document called "OPTISON Product Rights Agreement" ("OPRA").
Under OPRA, the Company will receive an ongoing royalty of 5% on sales of
ultrasound agents in the Mallinckrodt territory, which is worldwide, excluding
Japan, South Korea and Taiwan. In addition, MBI will pay Mallinckrodt a total of
seven million dollars as part of the intellectual property settlement. Three
million dollars of the settlement was paid in May 2000. An additional three
million dollars will be satisfied through the transfer of property owned by MBI
to Mallinckrodt as soon as practicable. MBI is required to make the final one
million-dollar payment to Mallinckrodt upon receipt of a milestone payment form
Chugai.
The implementation of the OPRA agreement will involve transferring all
property, plant, equipment and inventory used in the manufacture of OPTISON to
Mallinckrodt. Effective May 8, 2000, twenty employees involved in the
manufacturing process were transferred to Mallinckrodt leaving MBI with three
employees.
25
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
--------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,756 $ 2,930
Marketable securities, available-for-sale (Note 3)........ 10,287 6,904
Accounts and notes receivable............................. 1,820 664
Inventories............................................... 203 --
Prepaid expenses and other assets......................... 204 15
--------- ---------
Total current assets.................................... $ 14,270 $ 10,513
--------- ---------
Property and equipment, at cost: (Note 2)
Building and improvements................................. 11,226 --
Equipment, furniture and fixtures......................... 2,930 --
--------- ---------
14,156 --
Less: Accumulated depreciation and amortization........... 7,572 --
--------- ---------
Total property and equipment............................ 6,584 --
--------- ---------
Other assets, net (Note 4).................................. 1,790 1,634
--------- ---------
$ 22,644 $ 12,147
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,285 $ 600
Accounts payable and accrued liabilities (Note 2) 7,218 2,613
Compensation accruals..................................... 1,943 769
--------- ---------
Total current liabilities............................... 10,446 3,982
--------- ---------
Long-term debt, net of current portion...................... 3,529 --
--------- ---------
Commitments and contingencies (Note 2)
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized, 18,858,789 and 18,766,413 shares issued and
outstanding, respectively (Note 5)...................... 186 186
Additional paid-in capital................................ 134,388 134,667
Accumulated deficit....................................... (125,537) (126,321)
Other comprehensive income................................ 11 12
Less 42,298 shares of treasury stock, at cost............. (379) (379)
--------- ---------
Total stockholders' equity.............................. 8,669 8,165
--------- ---------
$ 22,644 $ 12,147
========= =========
</TABLE>
26
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Revenues under collaborative agreements............... $ 1,500 $ -- $ 3,000 $ --
Product and royalty revenues.......................... 357 323 517 630
License fees.......................................... -- 15 -- 41
------- ------- ------- -------
1,857 338 3,517 671
------- ------- ------- -------
Operating expenses:
Research and development costs........................ 1,036 -- 2,448 368
Costs of products sold................................ 116 -- (529) --
Selling, general and administrative expenses.......... 1,705 931 4,098 1,787
Other nonrecurring charges............................ -- -- -- 2,220
------- ------- ------- -------
2,857 931 6,017 4,375
------- ------- ------- -------
Loss from operations.................................. (1,000) (593) (2,500) (3,704)
------- ------- ------- -------
Interest expense........................................ (114) (26) (234) (124)
Interest income......................................... 184 117 402 244
Other income (Note 3)................................... -- -- -- 2,800
------- ------- ------- -------
Other income, net..................................... 70 91 168 2,920
------- ------- ------- -------
Net loss................................................ $ (930) $ (502) $(2,332) $ (784)
======= ======= ======= =======
Loss per common share--basic and diluted (Note 6)....... $ (0.05) $ (0.03) $ (0.12) $ (0.04)
======= ======= ======= =======
Weighted average common shares outstanding.............. 18,727 18,766 18,729 18,797
======= ======= ======= =======
</TABLE>
27
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,332) $ (784)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 641 193
Non-cash gain on license of intellectual property....... -- (2,400)
Other nonrecurring charges.............................. -- 2,220
Loss on disposals of property and equipment............. 124 --
Loss on sale of marketable securities................... -- 186
Changes in operating assets and liabilities:
Accounts and notes receivable........................... (901) 1,156
Inventories............................................. 178 203
Prepaid expenses and other assets....................... 282 189
Other assets............................................ 117 156
Accounts payable and accrued liabilities................ (106) (817)
Compensation accruals................................... (781) (1,174)
Legal settlement payment to Mallinckrodt................ -- (3,000)
------- -------
Cash used in operating activities..................... (2,778) (3,872)
------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (57) --
Proceeds from sales of property and equipment............. 12 134
Purchase of license rights from Shionogi.................. (1,500) --
Purchase of marketable securities......................... -- (1,800)
Proceeds from sales of marketable securities.............. 6,306 7,397
------- -------
Cash provided by investing activities................. 4,761 5,731
------- -------
Cash flows from financing activities:
Purchase of treasury stock................................ (16) --
Principal payments on long-term debt...................... (639) (685)
------- -------
Cash used in financing activities..................... (655) (685)
------- -------
Increase in cash and cash equivalents....................... 1,328 1,174
Cash and cash equivalents, beginning of period.............. 1,056 1,756
------- -------
Cash and cash equivalents, end of period.................... $ 2,384 $ 2,930
======= =======
Supplemental cash flow disclosures:
Interest paid............................................. $ 234 $ 124
======= =======
Non-cash transactions:
Issurance of stock to employees........................... $ -- $ 279
======= =======
Receipt of stock for licensing agreement.................. $ -- $ 2,400
======= =======
Transfer of property and legal settlement payment to
Mallinckrodt............................................ $ -- $ 3,000
======= =======
</TABLE>
28
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM 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, 2000.
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, consisting of normal recurring accruals required for a
fair presentation of the financial position of the Company as of September 30,
2000, and the results of its operations for the three and six months ended
September 30, 1999 and 2000, and its cash flows for the six months ended
September 30, 1999 and 2000, have been made. The results of operations for these
interim periods are not necessarily indicative of operating results for the full
year.
Certain reclassifications have been made to conform prior period data to the
current presentation. These reclassifications had no effect on reported losses.
(2) COMMITMENTS AND CONTINGENCIES
In May 2000, the Company and Mallinckrodt, Inc. ("Mallinckrodt") agreed to
restructure their relationship to allow Mallinckrodt to assume full control of
the OPTISON business, including responsibility for all related intellectual
property disputes, clinical development, manufacturing and real estate. The
restructuring of the Company's relationship with Mallinckrodt is a result of the
settlement of patent litigation with certain competitors claiming patent rights
in various ultrasound contrast agent technologies. Under the terms of the
restructured agreement, the Company paid Mallinckrodt $3 million in cash and
transferred certain real and other property to Mallinckrodt, which is expected
to be sold for a net gain of approximately $3 million. The transfer of property
has been reflected in the accompanying consolidated balance sheet as a reduction
of "property and equipment" and as a reduction of "long-term debt." The sale of
the property by Mallinckrodt must result in the receipt of $3 million to
Mallinckrodt otherwise the Company is required to fund the difference. The
Company is required to make an additional $1 million payment to Mallinckrodt
upon the Company's receipt of a milestone payment from Chugai Pharmaceutical
Co., Ltd.
In August 2000, the Company completed the transfer of certain real and other
property to Mallinckrodt as required under the terms of the restructuring
agreement with Mallinckrodt. In August 2000, the Company and Mallinckrodt also
amended their restructuring agreement to clarify that Mallinckrodt would
continue to pay a 3% royalty to the Company on sales of OPTISON in the United
States until sales reach a cumulative aggregate of $66,667,000. The amendment
also clarifies that Mallinckrodt will reimburse the Company for a $450,000
credit available to the Company from Schering AG if Mallinckrodt utilizes this
credit in the event that Mallinkrodt enters into a license agreement with
Schering AG.
(3) OTHER INCOME
Other income for the six months ended September 30, 2000 includes $2.8
million for the licensing of a portfolio of patents and technology to Genta,
Inc. relating to antisense technology for therapeutic and diagnostic
applications. This license agreement includes grants of exclusive and
non-exclusive rights to Genta on a royalty-free basis in return for $400,000 in
cash and 376,471 shares of Genta common stock. The Company sold 372,787 shares
of Genta common stock in August 2000, realizing net
29
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) OTHER INCOME (CONTINUED)
proceeds of $2,189,949. The remaining 3,684 Genta common shares are reflected as
marketable securities in the accompanying consolidated balance sheet.
(4) OTHER ASSETS
A portion of the balance included in "other assets" represents the Company's
interest in the residence (the "Property") of the President and CEO (the
"Employee"), equal to $300,000. In the event of termination of the Employee, the
Company's $300,000 interest in the Property will be converted to a non-interest
bearing note receivable, the balance of which is to be paid over a period of two
years from termination according to the employment agreement amended on
September 22, 2000.
(5) COMMON STOCK OUTSTANDING
Common stock issued to the Company's employees during the fourth quarter of
fiscal year 2000, in lieu of a cash bonus, was canceled and then reissued during
fiscal year 2001 for a lower number of shares in order to reflect the bonus as
net of tax liabilities. As a result, the amount of the Company's outstanding
common stock decreased from 18,858,789 at March 31, 2000 to 18,766,413 at
September 30, 2000, a decrease of 92,376 shares.
(6) EARNINGS PER SHARE
Basic earnings per share were computed by dividing net 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 and warrants. For
the three and six months ended September 30, 1999 and 2000, the diluted loss per
share calculation excludes effects of outstanding stock options as such
inclusion would be anti-dilutive.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretations No. ("FIN") 44, "Accounting for Certain Transactions involving
Stock Compensation: an interpretation of FASB Opinion No. 25." FIN 44 affects
awards and modifications made after December 15, 1998. Management believes that
their accounting policies comply with the applicable provisions of FIN 44.
(8) SUBSEQUENT EVENTS
On October 11, 2000, the Company, Alliance Pharmaceutical Corp. ("Alliance")
and Alliance Merger Subsidiary, Inc. ("Merger Sub"), a wholly-owned subsidiary
of Alliance, entered into an agreement and plan of merger pursuant to which
Merger Sub will be merged into the Company and the Company will become a
wholly-owned subsidiary of Alliance. Under the merger agreement, stockholders of
the Company will receive 770,000 shares of Alliance common stock in exchange for
their shares of the Company's common stock (subject to a downward adjustment in
certain circumstances). Closing of the merger is subject to the approval of the
merger by the Company's stockholders and to the satisfaction of other conditions
precedent described in the merger agreement.
30
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) SUBSEQUENT EVENTS (CONTINUED)
As a result of the proposed merger with Alliance, the Company's bank facilities
require payment of all outstanding balance as well as the Company has agreed to
certain other restrictions during the period prior to closing. The Company
estimates the outstanding balance at the time of the expected merger to be
approximately $300,000, which is classified as current portion of long-term
debt.
On October 16, 2000 the Company entered into an agreement to provide
consulting services to Alliance in contemplation of the proposed merger. Under
the agreement, which has a 120-day term, Alliance will pay the Company a fee of
approximately $8,450 per week for the services of 2 employees of the Company.
On October 17, 2000, Isis Pharmaceuticals, Inc. ("Isis") filed suit against
the Company in the Superior Court of the State of California seeking to reform
the license agreement entered into between the Company and Isis in September
1992 to reduce the royalty payable to the Company to the rate payable to the
Company in a license agreement entered into in May 2000 between the Company and
Genta, Inc. The Company disputes Isis's claim that the Company is obligated to
conform the Isis license to the Genta license.
On October 24, 2000, the Company received an unsolicited merger offer from
CEL-SCI Corporation. The Company's Board of Directors voted unanimously to
reject this offer.
31
