S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period ended April 4, 1999
Commission file number 0-14887
T H E L I P O S O M E C O M P A N Y, I N C.
(Exact name of registrant as specified in its charter)
Delaware 22-2370691
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Research Way, Princeton Forrestal Center, Princeton, N.J.
08540
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:(609) 452-7060
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date:
Class April 20, 1999
Common Stock, $.01 par value 38,511,736
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Part I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
April 4, 1999 and January 3, 1999 3
Consolidated Statements of Operations
for the Three Month Periods Ending
April 4, 1999 and March 29, 1998 4
Consolidated Statements of Cash Flows
for the Three Month Periods Ending
April 4, 1999 and March 29, 1998 5
Notes to Consolidated Financial Statements 6-8
ITEM 2
Management's Discussion and Analysis
of Financial
Condition and Results of Operations 9-15
Part II. OTHER INFORMATION 16
Signatures 17
************************************************
Note concerning trademarks:Certain names mentioned in
this report are trademarks owned
by The Liposome Company, Inc. or
its affiliates or licensees.
ABELCET is a registered trademark
of The Liposome Company, Inc.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
Current assets: 4/4/99 1/3/99
Cash and cash equivalents $ 20,364 $ 8,074
Short-term investments 24,517 34,339
Accounts receivable, net of allowance for doubtful
accounts ($629 for 1999, $579 for 1998) 5,616 5,340
Inventories 6,287 5,566
Prepaid expenses 1,158 1,266
Other current assets 120 560
Total current assets 58,062 55,145
Property, plant and equipment, net 22,359 23,165
Restricted cash 11,930 11,930
Intangibles, net 319 334
Total assets $ 92,670 $ 90,574
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,816 $ 3,991
Accrued expenses and other current liabilities 6,466 7,357
Current obligations under capital leases 2,139 2,093
Current obligations under note payable 303 303
Total current liabilities 12,724 13,744
Long-term obligations under capital leases 3,957 4,509
Long-term obligations under note payable 504 580
Total liabilities 17,185 18,833
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common Stock, par value $.0l; 60,000 shares authorized;
38,489 and 38,327 shares issued and outstanding 385 383
Additional paid-in capital 266,581 265,254
Accumulated other comprehensive loss (360) (366)
Accumulated deficit (191,121) (193,530)
Total stockholders' equity 75,485 71,741
Total liabilities and stockholders' equity $ 92,670 $ 90,574
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended
4/4/99 3/29/98
Product sales $19,341 $16,044
Interest, investment and other income 1,387 1,050
Total revenues................. 20,728 17,094
Cost of goods sold 4,663 4,799
Research and development expense.. 5,711 8,292
Selling, general and administrative
expense... 7,784 8,869
Interest expense............... 161 211
Total expenses................. 18,319 22,171
Net income/(loss).....................$ 2,409 $ (5,077)
Net income/(loss) per share (basic) $ 0.06 $ (0.13)
Net income/(loss) per share (diluted) $ 0.06 $ (0.13)
Weighted average number of common
shares outstanding (basic) 38,378 37,846
Weighted average number of common
shares outstanding (diluted) 40,025 37,846
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
4/4/99 3/29/98
Cash flows from operating activities:
Net income/(loss) $ 2,409 $(5,077)
Adjustments to reconcile net income/(loss)
to net cash provided/(used) by operating activities:
Depreciation and amortization 1,053 1,481
Provision for bad debt 50 --
Other 689 687
Changes in assets and liabilities
Accounts receivable (326) (1,404)
Inventory (721) 1,370
Prepaid expenses 108 (278)
Other current assets 440 (20)
Accounts payable (175) 1,921
Accrued expenses and other current
Liabilities (891) 1,124
Net cash provided/(used) by
operating activities 2,636 (196)
Cash flows from investing activities:
Purchases of short- and long-term investments (955) (583)
Sales of short- and long-term investments... 10,747 10,410
Purchases of property, plant and equipment (382) (363)
Net cash provided by investing activities 9,410 9,464
Cash flows from financing activities:
Exercises of stock options 790 1
Principal payments under note payable (76) (76)
Principal payments under capital
lease obligations (506) (464)
Net cash provided/(used) by financing
Activities 208 (539)
Effects of exchange rate changes on cash 36 (81)
Net increase in cash and cash equivalents 12,290 8,648
Cash and cash equivalents at beginning of
the period 8,074 15,236
Cash and cash equivalents at end of the period $ 20,364 $23,884
See accompanying notes.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The information presented at April 4, 1999 and for the
three month period then ended is unaudited, but includes
all adjustments (consisting only of normal recurring
accruals) that management at The Liposome Company, Inc.
(the "Company") believes to be necessary for the fair
presentation of results for the periods presented. The
January 3, 1999 balance sheet was derived from audited
financial statements. These financial statements should
be read in conjunction with the Company's audited
financial statements for the year ended January 3, 1999,
which were included as part of the Company's Annual
Report on Form 10-K. Certain reclassifications have been
made to the prior year financial statement amounts to
conform with the presentation in the current year
financial statements.
2. Common Stock Outstanding and Per Share Information
The basic earnings per share calculation is based upon
the weighted average number of common shares outstanding
during a period. The diluted earnings per share
calculation is based upon the weighted average number of
common shares outstanding and the dilutive common stock
equivalents outstanding during a period. Common stock
equivalents are outstanding options under the Company's
stock option plans and outstanding warrants.
Below is summary of the shares used in calculating basic
and diluted earnings per share.
Three Months Ended
4/4/99 3/29/98
Weighted average number of
shares of common stock
outstanding 38,378,000 37,846,000
Dilutive stock options 1,647,000 --
Shares used in calculating
diluted earnings per share 40,025,000 37,846,000
The increase in the weighted average number of shares of
common stock outstanding of 532,000 shares for the three
month period is due primarily to the impact of the
issuance of restricted stock, 401(K) contributions and
the exercise of stock options.
On April 23, 1997, the Company issued 1,000,000 shares at
$20.875 per share to a private investor for cash of
$20,875,000. At April 20, 1999, this investor has
reported total holdings of approximately 24.29% of the
Company's outstanding Common Stock.
Options and warrants to purchase 5,793,266 shares of
Common Stock at a range of $1.19 to $24.38 per share were
outstanding at April 4, 1999. These options and warrants
expire on various dates from June 7, 1999 to March 29,
2009. Options and warrants to purchase 1,323,117 of
shares of common stock were excluded from the diluted
earnings per share calculation for the period ended April 4, 1999 as
their effect would have been anti-dilutive.
Common Stock equivalents were not included in the
computation of diluted earnings per share for the prior
year period ended March 29, 1998 because the effect would
be anti-dilutive to the net loss.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.Comprehensive Income
The following table details "Comprehensive Income" as
defined in Statement of Financial Standards ("SFAS") No.
130 for the three month periods ended April 4, 1999 and
March 29, 1998.
Three Months Ended:
4/4/99 3/29/98
Net income/(loss) $ 2,409 $(5,077)
Other comprehensive income/(expenses):
Net unrealized investment (loss)/gain (30) 68
Foreign currency translation adjustment 36 (81)
Comprehensive net income/(loss) $ 2,415 $ (5,090)
4.Inventories
Inventories are carried at the lower of actual cost or
market and cost is accounted for on the first-in first-
out (FIFO) basis. The components of inventories are as
follows:
April 4, January 3,
1999 1999
Finished goods $3,100,000 $2,710,000
Work in process 873,000 1,271,000
Raw materials 2,038,000 1,374,000
Supplies 276,000 211,000
$6,287,000 $5,566,000
5.Supplemental Disclosure of Cash Flow Information
Three Months Ended:
4/4/99 3/29/98
Cash paid during the year for interest $207,000 $271,000
6. Legal Proceedings
The Company is a party in an adversarial proceeding filed
in the United States Bankruptcy Court in Delaware by a
chapter 7 bankruptcy trustee for the estate of the
FoxMeyer Corporation, et al. The complaint seeks to
avoid and recover purported preferential transfers
pursuant to 11 U.S.C. 547 and 550 from the Company in
the amount of $2.3 million. The Company believes it has
meritorious defenses regarding this claim.
The Company is currently a party to various other legal
actions arising out of the normal course of business,
none of which are expected to have a material effect on
the Company's financial position or results of
operations.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Geographic Segment Data
The Company's biopharmaceutical operations are
classified into two geographic areas: Domestic (United
States) and International (primarily Western Europe and
Canada). Financial data (in thousands of dollars) for
the first quarter of 1999 and 1998 is as follows:
Quarter Ended April 4, 1999
Domestic International Total
Sales to unaffiliated customers $15,666 $ 3,675 $19,341
Interest, investment and other income 1,387 -- 1,387
Total revenue $17,053 $ 3,675 $20,728
Net income $ 2,241 $ 168 $ 2,409
Identifiable assets at April 4, 1999 $87,640 $ 5,030 $92,670
Quarter Ended March 29, 1998
Domestic International Total
Sales to unaffiliated customers $ 12,897 $ 3,147 $ 16,044
Interest, investment and other income 1,046 4 1,050
Total revenue $ 13,943 $ 3,151 $ 17,094
Net (loss) $ (3,532) $(1,545) $ (5,077)
Identifiable assets at March 29, 1998 $ 84,965 $ 5,133 $ 90,098
8. Major Customer Revenue Data
In the United States, the Company sells ABELCET to
national and regional wholesalers who in turn re-sell the
product to hospitals and other service providers.
Internationally, sales are primarily made directly to
hospitals. Pursuant to marketing/distribution agreements
with the Company in France, Italy, Spain and certain
other countries, ABELCET is sold to local pharmaceutical
companies who then re-sell the product to hospitals.
For the quarters ended April 4, 1999 and March 29, 1998
sales to wholesalers or other customers in excess of 10%
of the Company's product revenues in any period were as
follows:
Three Months Ended
April 4, 1999 March 29, 1998
Customer A 32% 23%
Customer B 24% 30%
Customer C 16% 17%
Customer D 15% 19%
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion may contain trend information and
other forward-looking statements. The Company's actual
results could differ materially from the Company's historical
results of operations and those discussed in the forward-
looking statements. Factors that could cause actual results
to differ materially include, but are not limited to, those
identified in "Certain Risk Factors." All period references
are to the Company's three month periods ended April 4, 1999
and March 29, 1998 and the fiscal year ended January 3, 1999,
unless otherwise indicated. All per share amounts are
presented on a diluted basis unless otherwise stated.
The following discussion and analysis should be read in
conjunction with the Financial Statements and related notes
thereto contained elsewhere herein, as well as the Company's
1998 Form 10-K and from time-to-time the Company's other
filings with the Securities and Exchange Commission.
Overview
The Liposome Company, Inc. (the "Company") is a
biopharmaceutical company engaged in the discovery,
development, manufacturing and marketing of proprietary lipid-
and liposome-based pharmaceuticals, primarily for the
treatment of cancer and other related life-threatening
illnesses. ABELCET (Amphotericin B Lipid Complex Injection),
the Company's first commercialized product, has been approved
for marketing for certain indications in the United States and
22 foreign markets and is the subject of marketing application
filings in several other countries. In the United States,
ABELCETr has been approved for the treatment of invasive
fungal infections in patients who are refractory to or
intolerant of conventional amphotericin B therapy.
International approvals have been received for primary and/or
refractory treatment of these infections. Currently all
product sales are derived from ABELCET.
The Company markets ABELCET in the U.S. and Canada, with its
own sales force. For other countries, the Company's general
strategy is to market ABELCET through marketing partners.
Specific marketing partnerships are determined on a country-by-
country basis. In addition, sales are realized on a "named
patient" basis in certain countries where marketing approvals
have not yet been received.
The Company is developing EVACETTM (formerly TLC D-99),
liposomal doxorubicin, as a treatment for metastatic breast
cancer and potentially other cancers. Three Phase III
clinical studies of EVACETTM have been completed by the
Company. Results of these clinical trial studies indicate that
EVACETTM is significantly less cardiotoxic than conventional
doxorubicin while maintaining equivalent efficacy. The
Company filed a New Drug Application ("NDA") for EVACETTM with
the U.S. Food and Drug Administration ("FDA") in December
1998. There can be no assurance that the FDA, having accepted
the NDA for EVACETTM, will grant the Company marketing
clearance for this product.
The Company completed preclinical toxicology studies of
TLC ELL-12 (liposomal ether lipid), a new anticancer drug that
may have applications for the treatment of many different
cancers. On October 27, 1998 the Company announced that the
FDA has cleared the Investigational New Drug application for
this product. A Phase I clinical trial has been designed to
enroll adult patients with advanced solid tumors. This trial
commenced in February 1999.
The Company has a continuing discovery research program
concentrating on oncology treatment and has a number of
products in research. These products include: the bromotaxols
(hydrophobic derivatives of paclitaxel), some of which have
shown anticancer activity in several experimental models;
ceramides and sphingosines (molecules widely
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (Continued)
implicated in cell differentiation and apoptosis) certain of
which the Company has identified as displaying anticancer
activity; and fusogenic liposomes (liposomes specifically
designed to fuse to cell membranes), which the Company hopes
to use for the efficient delivery of genes to their intended
targets.
On April 22, 1998 the Company announced it had entered into a
three year contract manufacturing agreement with Astra USA,
Inc. ("Astra"). The Company is processing and packaging
Astra's M.V.I.r-12 Unit Vial, an injectable multi-vitamin
product used by severely ill, hospitalized patients in need of
nutritional supplements. The product is processed and
packaged at the Company's Indianapolis facility, taking
advantage of its modern, large-scale capabilities. Under the
terms of the agreement, Astra supplies bulk quantities of the
vitamin product and the Company sterilizes, fills, packages
and performs quality control on M.V.I.r-12 Unit Vial.
Results of Operations
Revenues
- - Three Months Ended April 4, 1999:
Total revenues for the quarter ended April 4, 1999 were
$20,728,000 an increase of $3,634,000 or 21.3% compared to
$17,094,000 for the quarter ended March 29, 1998. The primary
components of 1999 revenues for the Company are product sales
of ABELCET and interest, investment and other income.
Net product sales of ABELCET for the first quarter ended
April 4, 1999 were $19,341,000 compared to $16,044,000 for the
first quarter of 1998. The sales increase of $3,297,000 or
20.6%, is due primarily to higher U.S. and international sales
volume. Unit shipments of ABELCET worldwide increased by
27.2% over the comparable prior year period.
Domestic sales in the first quarter of 1999 were $15,666,000,
an increase of $2,769,000 or 21.5% from the comparable prior
year period. Unit shipments increased 26.4% compared to the
prior year period. The increase is due to the continuing
penetration of the amphotericin B marketplace due to the
increased safety and efficacy profile of ABELCET versus
conventional amphotericin B. Based on the latest independent
market data available, ABELCET continues to hold the largest
share of the lipid based amphotericin B products sold in the
U.S. During 1997, the Company instituted a tiered pricing
program by offering discounts to high volume purchasers. The
price reduction is affected by chargebacks paid to wholesalers
based on their sales at contract prices to targeted hospitals.
The Company provides a reserve for the impact on sales for
rebates and chargebacks and periodically evaluates the
estimates used in establishing the reserve in order to make
necessary adjustments. The provision for the three months
ended April 4, 1999 was approximately $9,377,000.
International product sales were $3,675,000 in the first
quarter of 1999 versus $3,147,000 in the first quarter of
1998, an increase of $528,000. The increase is primarily due
to ABELCET sales growth in Europe and Canada and initial
launch of ABELCET in Australia. While international sales
revenues increased by 16.8%, unit volume increased by 30.8%.
The principal reason for this difference is the shift of sales
from end users (direct distribution) to marketing partners.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Interest, investment and other income for the three months
ended April 4, 1999 and March 29, 1998 were $1,387,000 and
$1,050,000, respectively. The increase of $337,000 or 32.1%
is primarily due to the impact of the commencement of contract
manufacturing revenues and the availability of higher cash
balances for investment during the quarter.
In future quarters, the Company anticipates continuing
recognition of income related to a manufacturing agreement
with Astra. The anticipated revenues from interest and
investment income will be related to the level of cash
balances available for investment and the rate of interest
earned.
Expenses
- - Three Months Ended April 4, 1999:
The components of total expenses for the quarter ended April
4, 1999 were cost of goods sold, research and development,
selling, general and administrative and interest expense.
Total expenses for the quarter ended April 4, 1999 were
$18,319,000, a decrease of $3,852,000 from the comparable
prior year period.
Cost of goods sold for the quarter ended April 4, 1999 was
$4,663,000 or $136,000 lower than the comparable prior year
period. The decrease is attributable to lower product costs
for ABELCET resulting from manufacturing efficiencies at the
Indianapolis manufacturing facility and improved yields due to
the implementation of certain process enhancements. Gross
margin in the 1999 period was 75.9% compared to 70.1% in the
1998 period, an improvement of 5.8 percentage points. This
improvement is due to the manufacturing efficiencies discussed
above, combined with the increased manufacturing volume as a
result of higher sales.
Research and development expense was $5,711,000 for the first
quarter of 1999, compared to $8,292,000 for the prior year
period. The reduction of $2,581,000 or 31.1% is primarily due
to completion of the Phase III clinical trials of EVACET.for
which the Company filed a NDA with the FDA in December 1998.
Partially offsetting this reduction is increased research and
development activity for TLC ELL-12.
Selling, general and administrative expenses for the quarter
ended April 4, 1999 were $7,784,000 compared to $8,869,000 in
1998 period. The primary reason for the decrease is due to
the shift in European selling and marketing activities to
marketing partners and the resulting reduction of
international selling and marketing costs, combined with lower
U.S. sales and marketing costs in the quarter.
Interest expense was $161,000 in the first quarter of 1999 and
$211,000 in the first quarter of 1998. Interest expense is
related to capital leases for the Princeton and Indianapolis
manufacturing equipment and the mortgage on the Indianapolis
building.
Net Income/ (Loss) and Net Income/ (Loss) per Share
The net income/(loss) was $2,409,000 or $0.06 per share (basic
& diluted) and ($5,077,000) or ($0.13) per share (basic and
diluted) for the first quarters of 1999 and 1998,
respectively. The number of shares of Common Stock used in
1999 included contingently issuable shares since the Company
reported a net income in this period. The Company did not
include such shares in the 1998 period as the inclusion would
have been anti-dilutive.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had $56,811,000 in cash and marketable securities
as of April 4, 1999. Included in this amount were cash and
cash equivalents of $20,364,000, short-term investments of
$24,517,000 and restricted cash of $11,930,000. The Company
invests its cash reserves in a diversified portfolio of high-
grade corporate marketable and United States Government-backed
securities.
Cash and marketable securities (both short-term and restricted
cash) increased $2,468,000 from January 3, 1999 to April 4,
1999. The primary components of the favorable impact on cash
flow was net income (net of depreciation and amortization and
other non-cash charges) for the quarter of $4,201,000 and
stock option exercises of $790,000. The major uses of funds
were the lower accrued liability and other current liabilities
balance of $891,000, higher inventory balance of $721,000 and
repayments on the capital lease and note payable totaling
$582,000.
Inventories at April 4, 1999 increased $721,000 from January
3, 1999, primarily due to the building of raw material levels
to meet current manufacturing demand.
Accrued expenses and other current liabilities at April 4,
1999 were $6,466,000 or $891,000 lower than January 3, 1999.
The decrease in accrued expenses is primarily due to lower
bonus accruals at the end of the first quarter of 1999.
In July 1993, the Company entered into a capitalized lease
financing agreement for certain manufacturing equipment
providing for an initial lease term followed by options to
extend the lease, or to return or purchase the equipment. In
December 1996, the agreement was amended to include an
additional $6,101,000 of manufacturing equipment. In November
1997 and January 1998, the Company exercised its options to
purchase certain manufacturing equipment under the original
1993 lease for $1,583,000 and $495,000, respectively. These
amounts have been refinanced as a capital lease obligation
under the lease agreement for a three-year period. The lease
is collateralized by $4,310,000 in standby letters of credit
which are in turn collateralized by AAA rated securities owned
by the Company. Pursuant to the December 1996 lease
amendment, the Company is required to maintain a minimum
balance of $25,000,000 in cash and marketable securities,
including those securities collateralizing the letters of
credit. In addition, the Company completed a U.S. working
capital revolving credit line agreement in early 1997, with a
maximum capacity of $14,000,000. All borrowings must be
secured by approved accounts receivable and finished goods
inventories. The Company has a pledge of $5,000,000 to
support this agreement, which has been classified as
restricted cash. There have been no advances made against
this line through the date of this report.
On July 14, 1997, the Company reacquired all development,
manufacturing and marketing rights to EVACET TM from Pfizer Inc
("Pfizer"). As part of the agreement, the Company has
obtained from Pfizer a credit line of up to $10,000,000 to
continue the development of EVACET TM. To the extent that any
funding is actually used by the Company, the outstanding
principal and interest would be repayable on the earlier of
180 days after FDA clearance to market EVACET TM or in twenty
quarterly installments commencing July 14, 2002. Pfizer at its
option may elect to receive payment in the form of shares of
Common Stock. At the end of the first quarter of 1999, there
were no borrowings under this facility.
The Company has a mortgage-backed note to partially fund the
purchase of the Indianapolis manufacturing facility. The
principal balance outstanding at April 4, 1999 is $807,000.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
On April 23, 1997 the Company issued 1,000,000 shares of
Common Stock at $20.875 per share to a private investor for
cash of $20,875,000. At April 20, 1999, this investor has
reported total holdings of approximately 24.29% of the
Company's outstanding shares of Common Stock.
The Company expects to finance its operations and capital
spending requirements from, among other things, the proceeds
received from product sales, interest earned on investments
and the proceeds from maturity or sale of certain investments.
Cash may also be provided to the Company by leasing
arrangements for capital expenditures, financing of
receivables and inventory under its line of credit, a line of
credit from a former licensing partner, the licensing of its
products and technology and the sale of equity or debt
securities. The Company believes that its product revenues
and revenues from other sources, coupled with its available
cash and marketable securities reserves, will be sufficient to
meet its expected operating and capital cash flow requirements
for the intermediate term.
Year 2000 Compliance
The Year 2000 computer issue ("Y2K") refers to a condition in
computer software where a two-digit field rather than a four-
digit field is used to distinguish a calendar year. For
example, 1998 would be stored as "98", rather than "1998".
The basic problem is that when the year changes from 1999 (99)
to the year 2000 (00), some computer programs will be unable
to distinguish the correct date. Such a situation could
significantly interfere with the conduct of the Company's
business, disrupt its operations and materially impact its
financial condition.
In order to address this situation, the Company has conducted
a Year 2000 assessment of its core business information
systems including a wide variety of other information systems
and related business processes (hereinafter, collectively
referred to as the "Systems") used in its operations. The
goal of the assessment was to identify and determine the Y2K
readiness of the Company's Systems. The task of assessing the
Systems from a Y2K readiness perspective has been
accomplished. Accordingly, the Company has developed a
comprehensive remediation plan and scheduled the necessary
hardware, software, and sub-component upgrades to remediate
non-Y2K compliant systems. The Systems investigated were
categorized into the following three areas:
The first category involves the traditional management
information systems that include computers, telecommunication
devices, application software, operating system software, and
related peripherals. Due to the fact that the majority of the
Systems installed and in use at the Company are new and
utilize current technologies the effort and expense to bring
these Systems into Y2K compliance will not be material.
Overall estimated costs for Systems remediation is expected to
be less than $100,000. A portion of this estimate, $50,000,
is for the replacement or upgrade of components that are, or
would have been, included in 1999 and 2000 capital budgets but
have been accelerated due to the Y2K issue. Roughly one third
of the estimated $100,000 expense has already been expended to
make the required hardware and software upgrades. The
remaining Systems will be brought into compliance by mid-year.
The second category involves manufacturing and facility
systems including machines and devices used to manufacture,
store, and test the Company's product. It also includes the
systems that control and monitor the Company's facilities such
as HVAC, fire suppression, and elevators. Equipment used in
the manufacture and storage of product has been reviewed with
regard to Y2K readiness. Again, because of the absence of
older legacy
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000 Compliance(Continued)
systems, a minimal amount of effort is required to make these
systems compliant. Of the systems reviewed, 98% were found to
be compliant with no remedial actions required. The estimated
cost to bring the non-compliant equipment up to standard will
be less than $30,000. These upgrades will be completed by the
middle of 1999.
The third category involves research systems including
computer-controlled devices, calibration equipment, and
similar instruments. Review of Research & Development
equipment found the majority of the computers and laboratory
equipment to be Y2K compliant. Cost of replacing non-Y2K
ready equipment was $30,000 and has been completed.
In addition to the assessment of the Systems, key suppliers
and customers have been identified. A survey form was
developed and has been sent to each of these business entities
in order to determine if their systems are Y2K compliant.
This is significant since delays in the shipment and receipt
of critical supplies can impact the Company's production.
Problems would also exist if customers become unable to pay
for the Company's product (e.g., their accounts payable system
fails) or if they cannot electronically order, store, or track
product in compliance with FDA requirements. The Company is
proactively addressing the Y2K issue with these vendors and
suppliers in order to minimize risk from these external
factors.
Based on the assessment of its Systems, the Company believes
that the costs of addressing the Y2K issue will be less than
$200,000. Also based on the assessment of its Systems, the
Company believes that it has minimized the potential for
disruption of its business because of the Y2K event. However,
if key third parties such as suppliers and customers are not
Y2K ready, such problems could have a material adverse impact
on the Company's business. To minimize the impact of supplier
product shortages that may result, the Company plans to have
sufficient supplies on hand to meet its production
requirements. The Company will also encourage its customers
to have an adequate supply of ABELCET on hand to meet their
anticipated needs.
Certain Risk Factors
This Quarterly Report on Form 10-Q contains certain forward-
looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors
created thereby. Examples of these forward-looking statements
include, but are not limited to, (i) the progress of clinical
trials and preclinical studies regarding EVACET TM, TLC ELL-12
and other oncology products in the Company's research
pipeline, (ii) the ability of ABELCET to maintain its
position as the leading lipid-based formulation of
amphotericin B in the U.S., (iii) the likelihood of future
domestic and international regulatory approvals for EVACET TM or
any other product in the research pipeline, (iv) possible new
licensing or contract manufacturing agreements, (v) future
product revenues from ABELCET, EVACET TM or any other product
in the research pipeline, (vi) the future uses of capital, and
financial needs of the Company, (vii) manufacturing
efficiencies and other benefits to be realized from use of the
Indianapolis facility and (viii) resolution of Year 2000
computer issues. While these statements are made by the
Company based on management's current beliefs and judgment,
they are subject to risks and uncertainties that could cause
actual results to vary. In evaluating such statements,
stockholders and investors should specifically consider a
number of factors and assumptions, including those discussed
in the text and financial statements and their accompanying
footnotes in this Report.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain Risk Factors (Continued)
Among these factors and assumptions that could affect the
forward-looking statements in this Report are the following:
(a) the commercialization of ABELCET is still ongoing and the
ultimate rate of sales of ABELCET is uncertain; (b) the
Company's other products are in development and have not yet
received regulatory approvals for sale, and it is difficult to
predict if and when such approvals will be received and, if
approved, whether the products can be successfully
commercialized; (c) competitors of the Company have developed
and are developing products that are competitive with the
Company's products; (d) the rate of sales of the Company's
products could be affected by regulatory actions, decisions by
government health administration authorities or private health
coverage insurers as to the level of reimbursement for the
Company's products; (e) risks associated with international
sales, such as currency exchange rates, currency controls,
tariffs, duties, taxes, export license requirements and
foreign regulations; (f) uncertainty that key customers,
vendors and suppliers of the Company will be Y2K compliant;
(g) the levels of protection afforded by the Company's patents
and other proprietary rights is uncertain and may be
challenged; and (h) the Company has incurred losses in each
prior year since its inception and there can be no assurance
of profitability in any future period.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is a party in an adversarial proceeding
filed in the United States Bankruptcy Court in
Delaware by a chapter 7 bankruptcy trustee for the
estate of the FoxMeyer Corporation, et al. The
complaint seeks to avoid and recover purported
preferential transfers pursuant to 11 U.S.C. 547
and 550 from the Company in the amount of $2.3
million. The Company believes it has meritorious
defenses regarding this claim.
The Company is currently a party to various other
legal actions arising out of the normal course of
business, none of which are expected to have a
material effect on the Company's financial position
or results of operations.
ITEM 6. Exhibits and Reports on Form 8K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter for which this report on Form 10-Q is
filed, no reports on Form 8-K have been filed.
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
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.
DATE: May 4, 1999
THE LIPOSOME COMPANY, INC.
By: /s/ Charles A. Baker
Charles A. Baker
Chairman of the Board and
Chief Executive Officer
By: /s/ Lawrence R. Hoffman
Lawrence R. Hoffman
Vice President and
Chief Financial Officer
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