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 2, 2000 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 Identification No.)
incorporation or organization)
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 24, 2000
Common Stock, $.01 par value 40,025,839
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 2, 2000 and January 2, 2000 3
Consolidated Statements of Operations
For the Three Month Periods Ending
April 2, 2000 and April 4, 1999 4
Consolidated Statements of Cash Flows
for the Three Month Periods Ending
April 2, 2000 and April 4, 1999 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(R) is registered trademark of The
Liposome Company, Inc.
Page 2 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
Current assets: 4/2/00 1/2/00
Cash and cash equivalents $ 45,239 $ 34,461
Short-term investments 31,941 36,880
Accounts receivable, net of allowance for
doubtful accounts ($1,044 for 2000,
$819 for 1999) 7,073 6,208
Inventories 5,903 6,118
Prepaid expenses 819 750
Other current assets 556 558
Total current assets 91,531 84,975
Property, plant and equipment, net 19,058 19,977
Restricted cash 5,514 5,522
Intangibles, net 274 284
Total assets $116,377 $110,758
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,171 $ 3,755
Accrued expenses and other current
liabilities 9,418 8,747
Deferred liability 3,018 3,018
Current obligations under capital leases 1,855 2,126
Total current liabilities 16,462 17,646
Long-term obligations under capital leases 2,102 2,383
Total liabilities 18,564 20,029
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common Stock, par value $.0l; 120,000 shares
authorized; 39,893 and 39,220 shares issued
and outstanding 400 393
Additional paid-in capital 275,560 272,110
Treasury Stock at cost (885) (950)
Accumulated other comprehensive loss (544) (345)
Accumulated deficit (176,718) (180,479)
Total stockholders' equity 97,813 90,729
Total liabilities and
stockholders' equity $116,377 $110,758
See accompanying notes.
Page 3 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended
4/2/00 4/4/99
Product sales $ 21,952 $ 19,341
Interest, investment and other income 1,758 1,387
Total revenues 23,710 20,728
Cost of goods sold 4,394 4,663
Research and development expense 6,099 5,711
Selling, general and administrative
expense 9,099 7,784
Interest expense 97 161
Total expenses 19,689 18,319
Net income before taxes $ 4,021 $ 2,409
Provision for income taxes 260 --
Net income $ 3,761 $ 2,409
Net income per share (basic) $ 0.10 $ 0.06
Net income per share (diluted) $ 0.09 $ 0.06
Weighted average number of shares
outstanding (basic) 39,377 38,378
Weighted average number of shares
outstanding (diluted) 40,747 40,025
See accompanying notes.
Page 4 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
4/2/00 4/4/99
Cash flows from operating activities:
Net income $ 3,761 $ 2,409
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,028 1,053
Provision for bad debts 225 50
Stock based compensation and other 390 689
Changes in assets and liabilities
Accounts receivable (1,090) (326)
Inventories 215 (721)
Prepaid expenses (69) 108
Other current assets 2 440
Accounts payable (1,584) (175)
Accrued expenses and other current
liabilities 671 (891)
Net cash provided by operating activities 3,549 2,636
Cash flows from investing activities:
Purchases of short- and long-
term investments (7,230) (955)
Sales of short- and long-term investments 12,110 10,747
Restricted cash 8 --
Purchases of property, plant and equipment (99) (382)
Net cash provided by investing activities 4,789 9,410
Cash flows from financing activities:
Exercises of stock options 3,067 790
Issuance of Treasury Stock 65 --
Principal payments under note payable -- (76)
Principal payments under capital lease
obligations (552) (506)
Net cash provided by financing activities 2,580 208
Effects of exchange rate changes on cash (140) 36
Net increase in cash and cash equivalents 10,778 12,290
Cash and cash equivalents at beginning of
the period 34,461 8,074
Cash and cash equivalents at end of
the period $ 45,239 $ 20,364
See accompanying notes.
Page 5 of 17
THE LIPOSOME COPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The information presented at April 2, 2000, 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 2, 2000 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 2, 2000, which
were included as part of the Company's Annual Report on Form 10-
K. Certain reclassifications may 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
4/2/00 4/4/99
Weighted average number of shares
of common stock outstanding 39,377,000 38,378,000
Dilutive stock options and warrants 1,370,000 1,647,000
Shares used in calculating
diluted earnings per share 40,747,000 40,025,000
Weighted average number of diluted shares outstanding for the
three month period ended April 2, 2000 and April 4, 1999,
increased by 722,000 shares. The increase is primarily due to
the impact of the exercise of stock options, partially offset by
the reduction in contingently issuable shares.
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 24, 2000, this investor has reported total holdings of
approximately 22.35% of the Company's outstanding Common Stock.
Options and warrants to purchase 5,426,972 shares of Common Stock
at a range of $1.19 to $27.63 per share were outstanding at April
2, 2000. These options and warrants expire on various dates from
July 11, 2000 to March 13, 2010.
Page 6 of 17
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 period ended April 2, 2000 and April 4, 1999.
Three Months Ended
4/2/00 4/4/99
Net income $ 3,761 $ 2,409
Other comprehensive income/(expenses):
Net unrealized investment loss (59) (30)
Foreign currency translation adjustment (140) 36
Comprehensive net income $ 3,562 $ 2,415
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 2, 2000 January 2, 2000
Finished goods $3,310,000 $2,858,000
Work in process 455,000 479,000
Raw materials 1,989,000 2,594,000
Supplies 149,000 187,000
$5,903,000 $6,118,000
5. Supplemental Disclosure of Cash Flow Information
Three Months Ended:
4/2/00 4/4/99
Cash paid during the year for interest $128,000 $207,000
6. Legal Proceedings
On April 11, 2000 the Company reached an agreement with the
Foxmeyer Bankruptcy Trustee whereby the preference claim against
the Company was fully discharged, subject to the approval of the
Bankruptcy Court. The Company paid no funds to the Bankruptcy
Trustee in exchange for this discharge.
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.
Page 7 of 17
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 three months of 2000 and 1999 is as
follows:
Quarter Ended April 2, 2000
Domestic International Total
Sales to unaffiliated customers $ 17,326 $ 4,626 $ 21,952
Interest, investment and other income 1,758 -- 1,758
Total revenue $ 19,084 $ 4,626 $ 23,710
Net income $ 3,306 $ 455 $ 3,761
Identifiable assets at
April 2, 2000 $111,735 $ 4,642 $116,377
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
8. Major Customer Revenue Data
In the United States, the Company sells ABELCET(R) primarily 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 marketing partners pursuant to
marketing/distribution agreements with the Company who then re-
sell the product to hospitals.
For the three months ended April 2, 2000 and April 4, 1999 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 2, 2000 April 4, 1999
Customer A 19% 32%
Customer B 19% 24%
Customer C 15% 16%
Customer D 13% 15%
Page 8 of 17
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 2, 2000 and April 4,
1999 and the fiscal year ended January 2, 2000, 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 1999
Form 10-K and from time-to-time the Company's other filings with
the Securities and Exchange Commission.
Merger with Elan Corporation, plc
On March 6, 2000 the Company announced that it has entered into a
definitive merger agreement under which Elan Corporation, plc
("Elan") will acquire the Company. Under the terms of the
agreement, Elan will acquire all of the Company's outstanding
stock in a tax-free, stock-for-stock transaction. The Company's
shareholders will receive 0.3850 of an Elan ADS for each share of
The Liposome Company stock. Based on the closing price of Elan
ADS's on March 3, 2000 of $39.6875, the transaction has a value
of $15.28 per Company share and an aggregate value of
approximately $575 million, including options and warrants and
adjusting for net cash on the Company's balance sheet and before
the contingent payment described below. Elan may make a cash
payment to the Company shareholders of up to $98 million,
contingent partly on both the approval of MYOCET(TM) (formerly known
as EVACET(TM)) for the European Union, and obtaining price
approvals in the U.K. and Germany by March 31, 2001, and partly
on MYOCET(TM) reaching certain sales milestones outside the U.S.
Elan has also entered into an agreement with Ross Financial
Corporation, the Company's major shareholder, to vote in favor of
the transaction. The transaction is subject to regulatory
approvals and to the Company's shareholders' approval. A proxy
statement, which describes the proposed merger, merger agreement,
related Elan stock issuance and the issuance of contingent value
rights, was mailed on April 14, 2000, to the Company's
stockholders of record on March 29, 2000. A special meeting date
for the Company's stockholders to vote on the proposed merger was
set for May 12, 2000.
Overview
The Liposome Company, Inc. (the "Company") is a biopharmaceutical
company engaged in the discovery, development, manufacturing and
marketing of proprietary lipid- and lipid-based pharmaceuticals,
primarily for the treatment of cancer and other related life-
threatening illnesses. ABELCET(R) (Amphotericin B Lipid Complex
Injection), the Company's first commercialized product, has been
approved for marketing for certain indications in the United
States and 25 foreign markets and is the subject of marketing
application filings in several other countries. In the United
States, ABELCET(R) 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(R).
The Company markets ABELCET(R), its sole marketed product, in the
U.S. and Canada, with its own sales force. For other countries,
the Company's strategy is to market ABELCET(R) 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. On August 31, 1999, the
Company received approval from the U.S.
Page 9 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (Continued)
Food and Drug Administration ("FDA") for a new 50 milligram vial
size of ABELCET(R), which was launched in late September 1999. The
50 milligram vial is also available in the UK and Spain, with
applications pending in additional countries. Previously,
ABELCET(R) was only available in the 100 milligram vial size. The
50 milligram vial is expected to provide economies in dosing for
hospitals, particularly for pediatric patients.
The Company is developing MYOCET(TM), liposomal doxorubicin, as a
treatment for metastatic breast cancer and potentially other
cancers. The Company filed a New Drug Application ("NDA") for
MYOCET(TM) with the FDA in December 1998. The Company has also filed
for marketing clearance of MYOCET(TM) in the European Union and
Canada in June 1999 and July 1999, respectively, and anticipates
a decision on the European and Canadian regulatory filings before
the end of 2000. On September 16, 1999, the Oncologic Drugs
Advisory Committee ("ODAC") to the FDA found that there was not
sufficient evidence to recommend for approval the Company's NDA
for MYOCET(TM) for the first-line treatment of metastatic breast
cancer in combination with cyclophosphamide. After consulting
with the FDA, the Company, on October 14, 1999, announced that it
was withdrawing its original NDA for MYOCET(TM) and would submit
additional analyses to the FDA. The Company completed further
analyses of clinical data and provided them to the FDA in
December 1999. The Company announced on February 3, 2000, that it
had met with the FDA to discuss the additional analyses and based
on those discussions, the Company believes that additional
clinical data will be needed in order to obtain marketing
clearance for MYOCET(TM) in the U.S. The Company intends to work
with the FDA to define a role for MYOCET(TM) in the management of
metastatic breast cancer and other cancers. There can be no
assurance that the FDA will grant the Company marketing clearance
for MYOCET(TM). On April 14, 2000 the Company announced that the
Committee for Proprietary Medicinal Products ("CPMP"), the
scientific committee of the European Agency for the Evaluation of
Medicinal Products ("EMEA"), reached a positive opinion on the
approval of MYOCET(TM) in combination with cyclophosphamide in the
European Union* for the treatment of women with metastatic breast
cancer. This favorable CPMP opinion now has to be endorsed by the
European Commission before MYOCET(TM) receives final marketing
authorization in this indication, which is anticpated before the
end of 2000.
During August 1999, the Company announced it had entered into
clinical trial collaborations with Aventis Pharmaceuticals, Inc.
("AP") (formerly Rhone-Poulenc Rorer Pharmaceuticals, Inc.) and
Bristol-Myers Squibb ("BMS"). The clinical trial with AP is
designed to evaluate the safety of MYOCET(TM) in combination with
Taxotere(R) (docetaxel) for the treatment of metastatic breast
cancer. The clinical trial collaboration with BMS is designed to
evaluate the safety of MYOCET(TM) in combination with Taxol(R)
(paclitaxel) for the treatment of patients with metastatic breast
cancer. These studies commenced patient enrollment in the latter
part of 1999. In August 1999, the Company also announced that it
had initiated a clinical trial of MYOCET(TM) in combination with the
monoclonal antibody Herceptin(R) (Trastuzumab). This clinical trial
is designed to evaluate the safety and efficacy of MYOCET(TM) in
combination with Herceptin(R) for the first-line treatment of
metastatic or locally advanced breast cancer.
On December 9, 1999 the Company announced its participation in
the New Jersey Technology Tax Transfer Program (the "Program").
The state of New Jersey has authorized the Company to sell $10
million in New Jersey State income tax benefits over the next
several years. During the fourth quarter of 1999, the Company
received $3,018,000 from the sale of $3,659,000 of its New Jersey
State net operating loss carryforwards. These funds have been
included as cash reserves with an offsetting deferred liability
recorded. The Program requires that the Company maintain certain
employment levels in New Jersey and that the proceeds from the
sale of the tax benefits be spent in New Jersey during the year
2000. Accordingly, the recognition of the tax benefit has been
deferred until all conditions stipulated in the Program have been
met.
Page 10 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview (Continued)
On October 20, 1999, The Liposome Company's Board of Directors
enlarged the Board from 9 to 10 Directors and elected Kenneth E.
Johns, Jr. to fill the open position. Mr. Johns is engaged in the
private practice of law in Dallas, Texas and is a Special
Assistant to the President of Ross Financial Corporation. Ross
Financial Corporation is the Company's largest shareholder and
owns approximately 22.35% of the Company's Common Stock.
On October 27, 1998 the Company announced that the FDA had
cleared its Investigational New Drug application for TLC ELL-12
(liposomal ether lipid). A Phase I clinical trial has been
designed to enroll adult patients with advanced solid
tumors. Patient enrollment for this trial commenced in February
1999. The Company intends to open a second clinical site during
the second quarter of 2000 in order to accrue additional patients
in this clinical study.
The Company has a continuing discovery research program
concentrating on oncology treatment and has a number of products
in research. These products include: bromotaxane (hydrophobic
derivatives of paclitaxel), some of which have shown anticancer
activity in several experimental models; ceramides and
sphingosines (molecules widely 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 AstraZeneca PLC
("Astra") (formerly Astra USA, Inc.). 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. In early 1999, the Company
commenced manufacturing and recording revenues related to the
Astra agreement.
Results of Operations
Revenues
Three Months Ended April 2, 2000:
Total revenues for the three months ended April 2, 2000 were
$23,710,000 an increase of $2,982,000 or 14.4% compared to
$20,728,000 for the quarter ended April 4, 1999. The primary
components of revenues for the Company are product sales of
ABELCET(R) and interest, investment and other income.
Net product sales of ABELCET(R) for the first quarter ended April
2, 2000 were $21,952,000 compared to $19,341,000 for the first
quarter of 1999. The sales increase of $2,611,000 or 13.5%, is
due primarily to higher U.S. and international sales volume and
improved weighted average pricing in the U.S. market. Unit
shipments of ABELCET(R) worldwide increased by 7.2% over the
comparable prior year period.
Domestic sales in the first quarter of 2000 were $17,326,000, an
increase of $1,660,000 or 10.6% from the comparable prior year
period, while unit shipments increased 2.6%. Based on the latest
independent market data available, ABELCET(R) 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
Page 11 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
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. The
provision for the three months ended April 2, 2000 was
approximately $9,104,000. During September 1999, the Company
received FDA marketing clearance and launched a new ABELCET(R) vial
size (50-milligram). The Company expects that this new vial size
will encourage more cost-effective utilization of ABELCET(R),
particularly for pediatric patients.
International product sales were $4,626,000 in the first quarter
of 2000 versus $3,675,000 in the first quarter of 1999, an
increase of $951,000 or 25.9%, while unit volume increased by
26.8%. The increase in revenue is primarily due to ABELCET(R)
sales growth in Europe.
Interest, investment and other income for the three months ended
April 2, 2000 and April 4, 1999 were $1,758,000 and $1,387,000,
respectively. The increase of $371,000 or 26.7% is primarily due
to higher interest income, as a result of a significantly greater
cash balance available for investment during the first quarter of
2000.
Expenses
- - Three Months Ended April 2, 2000:
The components of total expenses for the three months ended April
2, 2000 were cost of goods sold, research and development,
selling, general and administrative and interest expense. Total
expenses for the quarter ended April 2, 2000 were $19,689,000, an
increase of $1,370,000 or 7.5% from the comparable prior year
period.
Cost of goods sold for the quarter ended April 2, 2000 was
$4,394,000 or $269,000 lower than the comparable prior year
period. The decrease is attributable to lower production costs
for ABELCET(R) resulting from manufacturing efficiencies at the
Indianapolis manufacturing facility. Gross margin in the 2000
period was 80.0% compared to 75.9% in the 1999 period, an
improvement of 4.1 percentage points. This improvement is due to
lower manufacturing and distribution costs, combined with the
effect of the increase in the weighted average selling price.
These were partially offset by an increased royalty rate due to
higher sales dollars.
Research and development expense was $6,099,000 for the first
quarter of 2000, compared to $5,711,000 for the prior year
period. The increase of $388,000 or 6.8% is primarily due to
greater developmental activity particularly related to ELL-12.
Selling, general and administrative expenses for the quarter
ended April 2, 2000 were $9,099,000 compared to $7,784,000 in the
1999 period. The major reason for the increase of $1,315,000 or
16.9% is due to the legal, accounting and investment banking
costs associated with the Elan merger agreement and a retention
program for the sales force.
Interest expense was $97,000 in the first quarter of 2000 and
$161,000 in the first quarter of 1999. Interest expense is
related to capital leases for the Princeton and Indianapolis
manufacturing equipment. The decrease of $64,000 is related to
the payoff of the mortgage on the Indianapolis land and building
in the third quarter of 1999, as well as the overall reduction in
the debt outstanding on capital leases.
Page 12 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Income Taxes
After 18 years of consecutive losses, the Company reported its
first profitable year in 1999. Accordingly, the Company recorded
provisions for Federal, state and foreign taxes of $790,000 and
$260,000 for the full year 1999 and the first quarter of 2000,
respectively. No tax provision was recorded in the first quarter
of 1999, as there was no history of sustained profitability. The
Company's effective tax rate for 1999 and the first quarter of
2000 was 5.7% and 6.6%, respectively, versus the U.S. and state
blended statutory rate of approximately 40%. The relationship of
the tax expense to income before taxes for both periods differs
from the U.S. statutory rate primarily because of the utilization
of previously fully valued net operating loss carryforwards, the
tax treatment of foreign operations by foreign jurisdictions and
Federal alternative minimum tax ("AMT") considerations. As the
ultimate realization of the net deferred tax assets is uncertain,
valuation allowances have been retained. Contingent upon the
achievement of profitability for two consecutive years,
management will recognize the tax benefit in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109.
Net Income and Net Income per Share
Net income for the first quarter of 2000 was $3,761,000 or $0.10
per share (basic) and $0.09 per share (diluted) compared to a net
income of $2,409,000 or $0.06 per share (basic and diluted) for
the first quarter of 1999. Weighted average shares used in the
basic per share calculations were 39,377,000, and 38,378,000,
respectively. The increase of 999,000 shares from 1999 to 2000
was attributable to the exercise of stock options. Weighted
average shares used in the diluted per share calculations were
40,747,000, and 40,025,000, respectively. The increase of 722,000
shares from 1999 to 2000 was attributable to the exercise of
stock options, partially offset by the reduction in the
contingently issuable shares.
Liquidity and Capital Resources
The Company had $82,694,000 in cash and marketable securities as
of April 2, 2000. Included in this amount were cash and cash
equivalents of $45,239,000, short-term investments of $31,941,000
and restricted cash of $5,514,000. The Company invests its cash
reserves in a diversified portfolio of high-grade corporate
marketable and United States Government-backed securities. The
market value of certain securities in the Company's investment
portfolio at January 2, 2000 was below their acquisition cost.
This unrealized loss of $492,000 is recorded as a reduction of
shareholders' equity.
Cash and marketable securities (both short-term and restricted
cash) increased $5,831,000 from January 2, 2000 to April 2, 2000.
The primary components of the favorable impact were cash flow
from operations (net income plus depreciation, amortization and
other non-cash charges) of $5,244,000, and the exercise of stock
options of $3,067,000. The major uses of funds were the payments
of accounts payable of $1,584,000, a higher accounts receivable
balance, net of an increase in the allowance of $865,000, and the
repayments on the capital leases of $552,000.
Inventories at April 2, 2000 are less than January 2, 2000 by
approximately $215,000. The major reason for the reduction is the
draw down of the strategic inventory build which occurred during
1999 in accordance with the Company's Y2K preparation.
Page 13 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
Accounts payable, accrued expenses and other current liabilities
at April 2, 2000 were $11,589,000 or $913,000 lower than January
2, 2000. The decrease is primarily due to the payment of amounts
accrued at the end of 1999.
Deferred liability at April 2, 2000 was $3,018,000, which was
recorded in the fourth quarter of 1999. This balance reflects the
receipt of proceeds from the sale of New Jersey State net
operating loss carryforwards at the end of 1999. These funds have
been included as cash reserves in 1999, with an offsetting
deferred liability recorded.
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 re-financed as a
capital lease obligation under the lease agreement for a three-
year period. The lease is collateralized by $4,122,000 in standby
letters of credit which are in return 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.
As part of the agreement to repurchase the development,
manufacturing and marketing rights to MYOCET(TM) , the Company
obtained from Pfizer a credit line of up to $10,000,000 to
continue the development of MYOCET(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 MYOCET(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 April 2, 2000, there were no borrowings under this facility.
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 MYOCET(TM), TLC ELL-12 and other
products in the Company's research pipeline, (ii) the ability of
ABELCET(R) 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
MYOCET(TM) or any other product in the research pipeline, (iv) the
expansion of sales efforts regarding ABELCET(R) in additional
countries where the drug is not currently approved, (v) possible
new licensing or contract manufacturing agreements, (vi) future
product revenues from ABELCET(R), MYOCET(TM) or any other product in
the research pipeline, (vii) the future uses of capital, and
financial needs of the Company, (viii) continued manufacturing
efficiencies and other benefits to be realized from use of the
Indianapolis facility. 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 the
financial statements and their accompanying footnotes in this
Report.
Page 14 of 17
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(R), the Company's sole marketed
product, is still ongoing and is subject to intense competition;
(b) the Company's other products are in development and have not
yet received regulatory approvals for sale, and it is difficult
to predict 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) the levels of
protection afforded by the Company's patents and other
proprietary rights is uncertain and may be challenged; and (g)
except for 1999, the Company has incurred losses in each year
since its inception in 1981 and there can be no assurance of
profitability in any future period.
Page 15 of 17
THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 11, 2000 the Company reached an agreement with
the Foxmeyer Bankruptcy Trustee whereby the preference
claim against the Company was fully discharged, subject
to the approval of the Bankruptcy Court. The Company
paid no funds to the Bankruptcy Trustee in exchange for
this discharge.
The Company is currently a party to various 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
A Form 8-K was filed by the Company on March 8, 2000
regarding the merger with Elan Corporation, plc.
A Form 8-K was filed by the Company on April 14, 2000
regarding the recommended approval of MYOCET(TM) by the
European Committee for Proprietary Medicinal Products and
the special meeting of stockholders to be held on May 12,
2000 in connection with the proposed merger with Elan
Corporation, plc.
Page 16 of 17
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 10, 2000
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
Page 17 of 17
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