FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from............... to ...............
Commission file number 1-10546
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3078632
(State of Incorporation) (I.R.S. Identification No.)
10030 Barnes Canyon Road
San Diego, California 92121
(858) 812-7001
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
The number of shares outstanding of the issuer's common stock, $.01 par value,
as of November 12, 1999 was 18,727,017 shares.
INDEX
MOLECULAR BIOSYSTEMS, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
-September 30, 1999 and March 31, 1999
Consolidated Statements of Operations
-Three months ended September 30, 1998 and 1999
-Six months ended September 30, 1998 and 1999
Consolidated Statements of Cash Flows
-Six months ended September 30, 1998 and 1999
Notes to Financial Statements
-September 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
1999 1999
----------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 1,056 $ 2,384
Marketable securities, available-for-sale 16,982 10,673
Accounts and notes receivable 2,320 3,025
Inventories 748 570
Prepaid expenses and other assets 425 338
----------- ------------
Total current assets 21,531 16,990
----------- ------------
Property and equipment, at cost:
Building and improvements 11,113 11,113
Equipment, furniture and fixtures 2,893 3,003
Construction in progress 930 523
----------- ------------
14,936 14,639
Less: Accumulated depreciation and amortization 6,672 7,178
----------- ------------
Total property and equipment 8,264 7,461
----------- ------------
Other assets, net 2,054 1,937
----------- ------------
$ 31,849 $ 26,388
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,278 $ 1,288
Accounts payable and accrued liabilities 7,395 5,705
Compensation accruals 2,165 1,343
----------- ------------
Total current liabilities 10,838 8,336
----------- ------------
Long-term debt, net of current portion 4,804 4,155
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000 shares
authorized, 18,580,745 and 18,727,017 shares
issued and outstanding, respectively 186 186
Additional paid-in capital 134,347 134,388
Accumulated deficit (117,969) (120,301)
Unrealized gain on available-for-sale securities 6 3
Less 42,298 shares of treasury stock, at cost (363) (379)
----------- ------------
Total stockholders' equity 16,207 13,897
----------- ------------
$ 31,849 $ 26,388
----------- ------------
----------- ------------
See accompanying notes.
3
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Revenues:
Revenues under collaborative agreements $ 1,248 $ 1,500 $ 2,498 $ 3,000
Product and royalty revenues 1,418 357 2,785 517
License fees - - 16,371 -
---------- ---------- ----------- ----------
2,666 1,857 21,654 3,517
---------- ---------- ----------- ----------
Operating expenses:
Research and development costs 2,409 1,036 4,636 2,448
Costs of products sold 1,801 116 3,440 (529)
Selling, general and administrative expenses 5,740 1,705 9,609 4,098
Other nonrecurring charges - - 9,378 -
---------- ---------- ----------- ----------
9,950 2,857 27,063 6,017
---------- ---------- ----------- ----------
Loss from operations (7,284) (1,000) (5,409) (2,500)
Interest expense (154) (114) (314) (234)
Interest income 370 184 795 402
---------- ---------- ----------- ----------
Loss before income taxes (7,068) (930) (4,928) (2,332)
Foreign income tax provision - - (1,400) -
---------- ---------- ----------- ----------
Net Loss $ (7,068) $ (930) $ (6,328) $ (2,332)
---------- ---------- ----------- ----------
Loss per common share - basic and diluted $ (0.38) $ (0.05) $ (0.34) $ (0.12)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average common shares outstanding 18,581 18,727 18,547 18,729
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
See accompanying notes.
4
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
1998 1999
----------- ----------
Cash flows from operating activities:
Net loss $ (6,328) $ (2,332)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 215 641
Write-off of license fees 8,500 -
Loss on disposals of property and equipment - 124
Premium received on Chugai Investment (2,371) -
Changes in operating assets and liabilities:
Receivables (9,352) (901)
Inventories 274 178
Prepaid expenses and other assets 140 282
Accounts payable and accrued liabilities 2,841 (106)
Deferred contract revenues (1,575) -
Compensation accruals (339) (781)
----------- ----------
Cash used in operating activities (7,995) (2,895)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (501) (57)
Proceeds from sale of property and equipment - 12
Additions to patents and license rights (50) -
Purchase of license rights from Shionogi (2,000) (1,500)
Decrease in other assets 96 117
Decrease in marketable securities 2,189 6,306
----------- ----------
Cash provided by (used in) investing activities (266) 4,878
----------- ----------
Cash flows from financing activities:
Net proceeds from sale of Common Stock to Chugai 8,300 -
Net proceeds from stock options exercised 281 -
Purchase of treasury stock - (16)
Principal payments on long-term debt (635) (639)
----------- ----------
Cash provided by (used in) financing activities 7,946 (614)
----------- ----------
Increase (decrease) in cash and cash equivalents (315) 1,328
Cash and cash equivalents, beginning of period 1,064 1,056
----------- ----------
Cash and cash equivalents, end of period $ 749 $ 2,384
----------- ----------
----------- ----------
Supplemental cash flow disclosures:
Interest income received $ 944 $ 597
----------- ----------
----------- ----------
Interest paid $ 312 $ 234
----------- ----------
----------- ----------
See accompanying notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION-
These interim Consolidated Financial Statements of Molecular
Biosystems, Inc. and Subsidiaries (the "Company") should be read in conjunction
with the Consolidated Financial Statements of the Company and related Notes
filed with the Company's Annual Report on Form 10-K for the year ended March 31,
1999.
These interim Consolidated Financial Statements of the Company have not
been audited by independent public accountants. However, in the opinion of the
Company, all adjustments required for a fair presentation of the financial
position of the Company as of September 30, 1999, and the results of its
operations for the six-months ended September 30, 1998 and 1999, and its cash
flows for the six-months ended September 30, 1998 and 1999, have been made. The
results of operations for these interim periods are not necessarily indicative
of the operating results for the full year.
(2) COMMITMENTS AND CONTINGENCIES-
In July, 1997 the Company and its marketing partner, Mallinckrodt Inc.
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- - seeking declarations that certain of their ultrasound contrast agent patents
are invalid.
The complaint alleges that each of the defendants' patents is invalid
on a variety of independent grounds under U.S. patent law. In addition to
requesting that all of the patents in question be declared invalid, the
complaint requests a declaration that, contrary to defendants' contentions, the
Company and Mallinckrodt do not infringe the defendants' patents, and asks that
defendants be enjoined from proceeding against the Company and Mallinckrodt for
infringement until the status of defendants' patents has been determined by the
court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON-Registered Trademark-, the Company's advance-generation ultrasound
contrast agent, and will attempt to prevent its commercialization.
All of the defendants except Nycomed filed motions to dismiss the
complaint on jurisdictional grounds. In January 1998, the court dismissed each
of the defendants except Nycomed, ruling that the court lacked jurisdiction over
those defendants with respect to the Company's claims of patent invalidity and
non-infringement. The court's ruling does not purport to rule on the merits of
the Company's claims; the dismissal was based solely on jurisdictional grounds.
Following Sonus's dismissal as a defendant in the MBI Case, Sonus
activated a patent infringement lawsuit (the "Sonus Case") which it had filed in
August 1997 against the Company and Mallinckrodt in the United States District
Court for the Western District of Washington. Although the complaint was filed
in August 1997, Sonus had agreed not to proceed with the Sonus Case until the
jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges
that the manufacture and sale of OPTISON by the Company and Mallinckrodt
infringe two patents owned by Sonus. MBI counterclaimed for a declaration of
invalidity and non-
6
infringement with respect to the Sonus patents. These two patents are the same
patents for which the Company was seeking a declaration of invalidity in the MBI
Case.
Beginning in July 1997, the Company received the first of five notices
from the PTO granting the Company's petitions for reexamination which it had
filed with respect to five patents held by three potential competitors, Sonus,
Nycomed and ImaRx. Each of the five notices stated there was a substantial new
question of patentability raised by the Company's petitions with respect to all
claims of the patents. Each of the patents in the reexamination process is
related to the use of perfluorocarbon gases in ultrasound contrast agents and is
included among the patents for which the Company was seeking a declaration of
invalidity in the MBI Case (and for which the Company is continuing to seek a
declaration of invalidity in the case of Nycomed's patents).
In late 1997 and early 1998, the PTO issued office actions in
connection with the Company's patent reexamination petitions filed against
Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of
these patents based on prior art not previously disclosed to the PTO by Sonus,
Nycomed or ImaRx during prosecution of their patent applications.
In June 1998, the PTO issued a final rejection of all claims of the
two Sonus patents involved in the Sonus Case. In December 1998, the Company
received correspondence from the PTO with respect to the two Sonus patents
involved in the reexamination proceedings. On the basis of amendments after
final rejection, the PTO has indicated that certain claims in Sonus' U.S. Patent
No. 5,558,094 (`094) are allowable by the agency. According to the PTO
correspondence, none of the original `094 patent claims which Sonus had asserted
against MBI will be allowed by the PTO without amendment. The PTO has also
indicated that certain claims of Sonus' U.S. Patent 5,573,751 (`751) are
allowable by the agency. According to the PTO correspondence, certain of the
`751 patent claims which Sonus has asserted against the Company will be allowed
in their original form. In January 1999, the PTO issued reexamination
certificates for the `094 and `751 patents.
In August 1998, the PTO issued a final rejection of all relevant
claims of the Nycomed patent involved in the MBI Case. If the PTO rejection is
maintained on any appeal subsequently filed by Nycomed, the patent Nycomed is
attempting to assert against the Company and Mallinckrodt to block the
manufacture and sale of OPTISON will be invalidated.
In May and June 1999, the Company received correspondence from the
PTO with respect to the ImaRx patents involved in the reexamination proceedings.
The PTO indicated that all claims of U.S. Patent No. 5,547,656 (`656) and U.S.
Patent No. 5,527,521(`521) will be allowed in their original form.
On May 5, 1999, the Company and Mallinckrodt received notice of a
lawsuit filed against them by DuPont Pharmaceuticals Company ("DuPont") and
ImaRx in the United States District Court for the District of Delaware (the
"DuPont Case"). The lawsuit alleges that the manufacture and sale of OPTISON
infringes the `656 patent owned by ImaRx and exclusively licensed to DuPont. MBI
counterclaimed for a declaration of invalidity and noninfringement with respect
to the `656 patent. In June 1999, DuPont and ImaRx amended their complaint in
the DuPont Case to add allegations that the manufacture and sale of OPTISON also
infringes the `521 patent owned by ImaRx and exclusively licensed to DuPont.
7
Litigation or administrative proceedings relating to these matters
could result in a substantial cost to the Company; and given the complexity of
the legal and factual issues, the inherent vicissitudes and uncertainty of
litigation, and other factors, there can be no assurance of a favorable outcome.
An unfavorable outcome could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there can be
no assurance that, in the event of an unfavorable outcome, the Company would be
able to obtain a license to any proprietary rights that may be necessary to
commercialize OPTISON, either on acceptable terms or at all. If the Company were
required to obtain a license necessary to commercialize OPTISON, the Company's
failure or inability to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
(3) EARNINGS PER SHARE-
The Company follows Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). The statement specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS). SFAS 128
requires companies to compute net income (loss) per share under two different
methods, basic and diluted per share data for all periods for which an income
statement is presented. Basic earnings per share was computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if net income were divided by the weighted-average number of common
shares and potential common shares from outstanding stock options for the
period. Potential common shares were calculated using the treasury stock method
and represent incremental shares issuable upon exercise of the Company's
outstanding options. For the quarters and the six months ended September 30,
1998 and 1999, the diluted loss per share calculation excludes effects of
outstanding stock options as such inclusion would be anti-dilutive.
(4) COST REDUCTION MEASURES-
On November 10, 1998, as a result of the slower than planned ramp up of
OPTISON sales, the Company announced the initiation of a multi-phase program to
reduce expenses and preserve capital. The initial phase of cost reduction
affected approximately 40 employees of the Company's 140-person workforce. The
second reduction in force occurred in April 1999 and affected an additional 26
employees. The Company will implement a further reduction in force in the future
when out-sourcing of the Company's manufacturing operations is complete.
(5) AMENDMENT TO MALLINCKRODT AGREEMENT-
In September 1995, the Company and Mallinckrodt entered into an Amended
and Restated Distribution Agreement ("ARDA"). ARDA grants Mallinckrodt exclusive
rights to market licensed products in certain countries of the world in exchange
for supporting clinical trials of OPTISON, related regulatory submissions and
associated product development. ARDA also calls for additional funding upon the
satisfaction of certain territorial and product development milestones and
requires the Company to spend at a set minimum for clinical trials to support
regulatory filings with the FDA for cardiac indications of OPTISON.
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement has been
incorporated into the Second Amended and Restated License and Distribution
Agreement ("ARDA II"). Under the terms of ARDA II, which were retroactive to
March 1, 1999, Mallinckrodt reimburses MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In addition
8
to the transfer of manufacturing, ARDA II extends Mallinckrodt's responsibility
for funding clinical trials to include all cardiology and radiology clinical
trials for OPTISON in the United States. MBI will continue to conduct all
cardiology trials for OPTISON and will assume responsibility for conducting
radiology trials in the United States. In exchange for the transfer of
manufacturing and increased financial support of clinical trials for OPTISON,
MBI will receive a reduced royalty rate on product sales of OPTISON.
(6) NEW YORK STOCK EXCHANGE LISTING REQUIREMENTS-
In August 1999, the Company received notice that the New York Stock
Exchange (NYSE) had revised its continued listing standards and that the Company
was no longer in compliance with the revised standards. These listing standards
are threefold and include: total market capitalization and stockholders' equity
of not less than $50 million each; total market capitalization of not less than
$15 million over a 30 trading-day period; and a minimum share price of $1 over a
30 trading-day period.
NYSE rules permit companies not in compliance with the new continued
listing standards to submit a plan that demonstrates compliance within 18
months. The Company has submitted a plan. Achievement of any approved plan would
result in MBI being considered "in good standing." Other options available to
the Company include moving to another exchange. There can be no assurance that
the Company's plan will be approved or achieved, or that, if required, the
Company will be able to move to another exchange.
(7) SUBSEQUENT EVENT - MERGER WITH PALATIN TECHNOLOGIES, INC.-
On November 12, 1999, the Company and Palatin Technologies of
Princeton, New Jersey jointly announced that they had signed a definitive
agreement to merge. Under the agreement, stockholders of the Company will
receive shares of common stock of Palatin in exchange for their MBI common
stock. The exchange ratio under the merger agreement will result in shareholders
of each company owning approximately 50% of the merged entity, which will
operate under the name Palatin Technologies and will be headquartered in
Princeton. The merger is subject to shareholder approval. The stock exchange
will be accounted for using purchase accounting.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management discussion and analysis should be read in
conjunction with (1) the current Consolidated Financial Statements and (2) the
Company's Consolidated Financial Statements and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations in its
Annual Report on Form 10-K for the year ended March 31, 1999.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, regulatory approval,
research and development activities and similar matters. A variety of factors
could cause the Company's actual results and experience to differ materially
from the Company's anticipated results or other expectations. The risks and
uncertainties that
9
may affect the operations, performance, development and results of the Company's
business include the expense and uncertain outcome of the litigation described
in Note 2 to the Financial Statements in Item 1 above, including the possibility
of injunctive relief to competitors prohibiting the sale of OPTISON-Registered
Trademark-, a ruling by the Patent and Trademark Office ("PTO") in the pending
patent reexamination proceedings favoring competitors' patents; delays or an
inability to bring OPTISON to market in Europe as a result of regulatory delays
or patent litigation; difficulties and delays with respect to the performance of
clinical trials; delays by regulatory authorities in approving additional
indications for OPTISON, including the evaluation of myocardial perfusion;
inability to successfully transfer OPTISON manufacturing to Mallinckrodt;
difficulties and delays with respect to marketing and sales activities; general
uncertainties accompanying the development and introduction of new products; the
failure of MBI to comply with the New York Stock Exchange (NYSE) listing
criteria; inability to maintain NYSE continuing listing standards; and other
risk factors reported from time to time in the Company's reports filed with the
Securities and Exchange Commission.
RECENT EVENTS
In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement has been
incorporated into the Second Amended and Restated License and Distribution
Agreement ("ARDA II"). Under the terms of ARDA II, which were retroactive to
March 1, 1999, Mallinckrodt will reimburse MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In addition to
the transfer of manufacturing, ARDA II extends Mallinckrodt's responsibility for
funding clinical trials to include all cardiology, as well as radiology and
clinical trials for OPTISON in the United States. MBI will continue to conduct
all cardiology trials for OPTISON and will assume responsibility for conducting
radiology trials in the United States. In exchange for the transfer of
manufacturing and increased financial support of clinical trials for OPTISON,
MBI will receive a reduced royalty rate on product sales of OPTISON.
In August 1999, the Company received notice that the New York Stock
Exchange (NYSE) had revised its continued listing standards and that the Company
was no longer in compliance with the revised standards. These listing standards
are threefold and include: total market capitalization and stockholders' equity
of not less than $50 million each; total market capitalization of not less than
$15 million over a 30 trading-day period; and a minimum share price of $1 over a
30 trading-day period.
NYSE rules permit companies not in compliance with the new continued
listing standards to submit a plan that demonstrates compliance within 18
months. The Company has submitted a plan. Achievement of any approved plan would
result in MBI being considered "in good standing." Other options available to
the Company include moving to another exchange. There can be no assurance that
the Company's plan will be approved or achieved, or that, if required, the
Company will be able to move to another exchange.
On November 12, 1999, the Company and Palatin Technologies of
Princeton, New Jersey jointly announced that they had signed a definitive
agreement to merge. Under the agreement, stockholders of the Company will
receive shares of common stock of Palatin in exchange for their MBI common
stock. The exchange ratio under the merger agreement will result in shareholders
of each company owning approximately 50% of the merged entity, which will
operate under the name Palatin Technologies and will be headquartered in
Princeton. The
10
merger is subject to shareholder approval. The stock exchange will be accounted
for using purchase accounting.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had net working capital of $8.7
million compared to $10.7 million at March 31, 1999. Cash, cash equivalents and
marketable securities were $13.1 million at September 30, 1999 compared to $18.0
million at March 31, 1999.
For the next several years, the Company expects to incur substantial
additional expenditures associated with product development. The Company
anticipates that its existing resources, plus payments under its collaborative
agreement with Mallinckrodt, will enable the Company to fund its operations for
at least the next twelve months. The Company continually reviews its product
development activities in an effort to allocate its resources to those products
that the Company believes have the greatest commercial potential. Factors
considered by the Company in determining the products to pursue may include, but
are not limited to, the projected markets, potential for regulatory approval,
technical feasibility and estimated costs to bring the product to the market.
Based upon these factors, the Company may from time to time reallocate its
resources among its product development activities.
The Company may pursue a number of options to raise additional funds,
including borrowings; lease arrangements; collaborative research and development
arrangements with pharmaceutical companies; the licensing of product rights to
third parties; or additional public and private financing, as capital
requirements change as a result of strategic, competitive, technological and
regulatory factors. There can be no assurance that funds from these sources will
be available on favorable terms, or at all.
RESULTS OF OPERATIONS
REVENUES UNDER COLLABORATIVE AGREEMENTS. Revenues under collaborative
agreements were $1.5 million and $3.0 million for the three-month and six-month
periods ended September 30, 1999 compared to $1.2 and $2.5 million for the same
periods in the prior year. These revenues in both years consist solely of
quarterly payments to support clinical trials, regulatory submissions and
product development received from Mallinckrodt under the Amended and Restated
Distribution Agreement ("ARDA").
PRODUCT AND ROYALTY REVENUES. Revenues from product sales and royalties
were $357,000 and $517,000 for the three-month and six-month periods ended
September 30, 1999 compared to $1.4 and $2.8 million for the same periods in the
prior year.
In the quarter ended September 30, 1999 product and royalty revenues
were calculated by applying a royalty rate to end-user sales under the terms of
ARDA II as described in Note 5 of the Notes to the Financial Statements under
Item 1 above. In the prior year, revenue was recognized based upon shipment of
the product to Mallinckrodt, pursuant to ARDA. Although end-user sales of
OPTISON increased during the current year, the net result was an overall
decrease in revenues from the prior year.
11
In the quarter ended September 30, 1998, product and royalty revenues
came from the Company's sales of OPTISON to Mallinckrodt and were recognized
upon shipment of the product. The transfer price for the Company's sales of
OPTISON to Mallinckrodt was approximately equal to 40% of Mallinckrodt's average
net sales price to its end users of the product for the immediately preceding
quarter. Pursuant to ARDA, the average net sales price to end users was
calculated by dividing the net sales for the preceding quarter by the total
number of units shipped to end users whether paid for or shipped as samples.
Consistent with industry practice, the Company considered samples a marketing
expense and as such the cost of samples was recorded as selling, general and
administrative expense.
LICENSE FEES. Revenues for the six-month period ended September 30,
1998 include $16.4 million recognized in connection with MBI's partnership with
Chugai Pharmaceutical Co., Ltd., announced on April 8, 1998.
COSTS OF PRODUCTS SOLD. Cost of products sold totaled $116,000 and
($529,000) for the three-month and six-month periods ended September 30, 1999
compared to $1.8 million and $3.4 million for the same periods in the prior
year. Under the terms of ARDA II, which were retroactive to March 1, 1999,
Mallinckrodt has agreed to reimburse MBI for all fully allocated manufacturing
expenses, including incremental costs related to the technology transfer. The
manufacturing expenses from March 1999 were included in the prior fiscal year.
As a result, the recoupment of these expenses is reflected as a negative expense
in the current fiscal year.
RESEARCH AND DEVELOPMENT COSTS. For the three-month and six-month
periods ended September 30, 1999, the Company's research and development costs
totaled $1.0 million and $2.4 million, as compared to $2.4 million and $4.6
million for the same periods in the prior year. The decrease is due to
previously announced cost reduction measures and the extension of Mallinckrodt's
responsibility for funding clinical trials under ARDA II as described in Note 5
of the Notes to the Financial Statements under Item 1 above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three-month and
six-month periods ended September 30, 1999, the Company's selling, general and
administrative costs totaled $1.7 million and $4.1 million, as compared to $5.7
million and $9.6 million for the same periods in the prior year. The higher
expenses for the same period in the prior year were due primarily to continuing
legal expenses and marketing costs associated with the launch of OPTISON. In
addition, current year expense decreased due to previously announced cost
reduction measures.
OTHER NONRECURRING CHARGES AND FOREIGN INCOME TAXES. Nonrecurring
charges for the six-month period ended September 30, 1998 includes a non-cash,
non-recurring expense of $8.5 million related to the sale to Chugai of territory
rights previously reacquired from Shionogi & Co., Ltd. Additionally, the company
paid $1.4 million in foreign taxes related to the Chugai alliance.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense for the
three-month and six-month periods ended September 30, 1999 amounted to $114,000
and $234,000, compared to $154,000 and $314,000 for the same period in the prior
year, and consisted of mortgage interest on the Company's manufacturing building
and interest on a note payable which is secured by the tangible assets of the
Company. The interest rate on the mortgage was 8% in September 1999. The note
payable bears interest at the prime rate and is payable in monthly installments
of principal plus interest over five years. The note payable was renegotiated in
September 1998
12
lowering the interest rate from prime plus one to the prime rate and releasing a
compensating balance requirement. The interest rate on the note was 8.25% in
September 1999.
Interest income for the three-month and six-month periods ended
September 30, 1999 amounted to $184,000 and $402,000, compared to $370,000 and
$795,000 for the same period in the prior year. The decrease in interest income
in the current year is due to lower average cash and marketable securities
balances. The Company's cash is invested primarily in short-term, fixed
principal investments, such as U.S. Government agency issues, corporate bonds,
certificates of deposit and commercial paper.
YEAR 2000 READINESS. The Year 2000 problem is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations, which could disrupt
operations, including product development, manufacturing, the processing of
transactions and other normal business activities. The Year 2000 problem may
also create unforeseen risks to the Company from its internal computing systems
as well as from computer systems of third parties with which it deals.
The Company has conducted a comprehensive review of its information
technology ("IT") and non information technology ("Non-IT") systems to identify
the systems that could be affected by the "Year 2000" issue and has developed a
plan to assess and resolve Year 2000 problems with its IT and Non-IT systems.
The plan includes five phases: inventory, assessment, evaluation, implementation
and testing.
The Company has completed the inventory phase on its IT and Non-IT
systems and has identified all IT and Non-IT systems that the Company believes
are at risk. The Company has also completed the assessment phase (in which
systems that were inventoried are prioritized), the evaluation phase which
involves testing systems and determining which IT and Non IT systems to update
or retire, and the implementation phase which involves repairing/replacing all
noncompliant systems (both IT and Non-IT), converting data as necessary, and
obtaining compliance statements. Finally, the Company will test and validate the
updated noncompliant IT and Non-IT systems for compliance. This final phase of
the process is expected to be complete by the end of November 1999.
In addition, the Company is in the process of conducting a
comprehensive review of its vendors, service providers (including financial
institutions and insurance companies), and collaborative partners. Although this
assessment is not yet complete, the Company is not currently aware of any
material Year 2000 issues with respect to its dealings with such third parties.
However, if the Company discovers Year 2000 problems with such third parties'
systems, the Company will be unable to control whether its current and future
suppliers', service providers' or collaborative partners' systems are Year 2000
compliant. To the extent that such third parties would be hindered by Year 2000
problems, the Company's operations could be materially adversely affected.
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The Company anticipates that its assessment of both internal and third
party IT and Non-IT systems will be complete by the end of November 1999. At
this time, the Company believes that the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. Total costs
to date and estimated costs required to fix the Year 2000 problem are not
material. To date, the Company has not used, and does not plan to use, any
independent verification and validation process to assess the reliability of the
Company's risk and cost estimates. Since no significant issues have arisen, the
Company does not have a contingency plan to address any material Year 2000
issues. If significant Year 2000 issues arise, the Company may not be able to
timely develop and implement a contingency plan and the Company's operations
could be adversely affected.
PROSPECTIVE INFORMATION
The Company is involved in several legal and administrative proceedings
which could result in a substantial cost to the Company. Given the complexity of
the legal and factual issues and the uncertainty of litigation, there can be no
assurance of a favorable outcome. An unfavorable outcome could have a material
adverse effect on the Company's business, financial condition and results of
operations. For a detailed discussion of these matters, see Note 2 in Notes to
the Financial Statements under Item 1 above.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption
"Interest Expense and Interest Income" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
See Note 2 in Notes to the Financial Statements, which is incorporated
by reference in this response.
Item 2-3 - The Company has nothing to report with respect to these items during
the quarter ended September 30, 1999.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on August 27, 1999. As of
June 29, 1999, the record date, 18,572,995 shares were entitled to vote at the
meeting. Of these 18,572,995 shares, 866,467 were not voted. The following
actions were taken at the meeting:
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The following directors were re-elected for the upcoming year:
DIRECTOR FOR WITHHELD
David W. Barry, M.D. 16,900,707 805,821
Robert W. Brightfelt 16,660,415 1,046,113
Charles C. Edwards, M.D. 16,864,866 841,662
Jerry T. Jackson 16,950,947 755,581
Gordon C. Luce 16,842,311 864,217
David Rubinfien 16,843,650 862,878
Bobba Venkatadri 16,919,785 786,743
The selection of Arthur Andersen LLP as the Company's independent
auditor was ratified. 17,487,763 shares were voted in favor of the proposal,
142,309 shares were voted against the proposal, 76,456 shares abstained and 0
shares were not voted (includes broker non-votes).
Company shareholder Rami Reddy Mutyala, Ph.D., of San Diego, California,
informed the Company that he intended to present a proposal at the Annual
Meeting of Stockholders. Dr. Mutyala's proposal was included in the Proxy
Statement distributed to stockholders on August 2, 1999. Dr. Mutyala, or his
qualified representative, failed to attend the annual meeting. As a result,
pursuant to Rule 14a-8(h) of the proxy rules, Dr. Mutyala's proposal was
withdrawn.
Item 5 - OTHER INFORMATION
DATES FOR SUBMISSION OF STOCKHOLDER PROPOSALS:
Any stockholder of the Company who wishes to present a proposal to be
considered at the 2000 Annual Meeting of Stockholders and who, pursuant to Rule
14a-8 of the Securities and Exchange Commission, wishes to have the proposal
included in the Company's proxy statement and form of proxy for that meeting,
must submit the proposal in writing to the Company at 10030 Barnes Canyon Road,
San Diego, California 92121, so that it is received by April 4, 2000.
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SUBSEQUENT EVENT - MERGER WITH PALATIN TECHNOLOGIES, INC.
On November 12, 1999, the Company and Palatin Technologies of
Princeton, New Jersey jointly announced that they had signed a definitive
agreement to merge. Under the agreement, stockholders of the Company will
receive shares of common stock of Palatin in exchange for their MBI common
stock. The exchange ratio under the merger agreement will result in shareholders
of each company owning approximately 50% of the merged entity, which will
operate under the name Palatin Technologies and will be headquartered in
Princeton. The merger is subject to shareholder approval. The stock exchange
will be accounted for using purchase accounting.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.1 Second Amended and Restated License and Distribution
Agreement between the Company and Mallinckrodt, effective
March 1, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLECULAR BIOSYSTEMS, INC.
/s/ ELIZABETH HOUGEN
- -----------------------------
Elizabeth Hougen
Executive Director, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
11/15/99
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Date
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