-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HZakDkm0qjrsrgGBH1NKRazKpLzPMDYghe+3rdsfwSC1y6cJ6n6Qp2DUeRMB0JjI Znfe0xKwIMzbqi6kuMrkBg== 0000786557-00-000004.txt : 20000329 0000786557-00-000004.hdr.sgml : 20000329 ACCESSION NUMBER: 0000786557-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000102 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIPOSOME CO INC CENTRAL INDEX KEY: 0000786557 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 222370691 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14887 FILM NUMBER: 581041 BUSINESS ADDRESS: STREET 1: ONE RESEARCH WAY STREET 2: PRINCETON FORRESTAL CTR CITY: PRINCETON STATE: NJ ZIP: 08540-6619 BUSINESS PHONE: 6094525691 MAIL ADDRESS: STREET 1: ONE RESEARCH WAY CITY: PRINCETON STATE: NJ ZIP: 08540 10-K 1 8 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 F O R M 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended January 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 incorporation or organization) Identification No.) One Research Way, Princeton Forrestal Center, Princeton, New Jersey, 08540 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(609) 452-7060 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0l Par Value; Preferred Stock Purchase Rights; Depositary Shares each representing 1/10 of a share of Registrant's Series A Cumulative Convertible Exchangeable Preferred Stock; Series A Cumulative Convertible Exchangeable Preferred Stock, $.01 Par Value (Title of Class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of the voting stock held by non-affiliates of the registrant as of February 29, 2000, was approximately $378,893,223 based upon the last reported sales price of the registrant's Common Stock on the NASDAQ National Market. At February 29, 2000 there were 39,471,893 shares of the Registrant's Common Stock outstanding. The Exhibit Index appears on pages 60-61. THE LIPOSOME COMPANY, INC. 1999 ANNUAL REPORT - FORM 10-K TABLE OF CONTENTS ITEM NO. PAGE Part I 4 1. Business 4 Overview/Merger/Business Strategy 4 Product Development 6 Manufacturing 10 Marketing Strategy 10 Credit and Working Capital Practices 11 Human Resources 11 Patents and Proprietary Technology 11 Governmental Regulation 12 Competition 13 Additional Risk Factors 13 2. Properties 16 3. Legal Proceedings 16 4. Submission of Matters to a Vote of Security Holders 16 Part II 17 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 6. Selected Financial Data 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 7a. Quantitative and Qualitative Disclosures About Market Risk 27 8. Financial Statements and Supplementary Data 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27 Part III 27 10. Directors and Executive Officers of the Registrant 27 11. Executive Compensation 31 12. Security Ownership of Certain Beneficial Owners And Management 35 13. Certain Relationships and Related Transactions 36 Part IV 36 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 36 This report on Form 10-K contains forward-looking statements concerning the business, financial performance and financial condition of the Company, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statement. Factors that could cause such differences include, but are not limited to, those discussed in this Form 10-K, including without limitation, the discussion in Part I Item 1, Additional Risk Factors. The following discussion should also be read in conjunction with Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations as well as the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included herein. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "potential," "continue," "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions. These statements are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results and events may vary significantly from those discussed in the forward-looking statements. These forward-looking statements are made as of the date of this annual report, and we assume no obligation to update them or to explain the reasons why actual results may differ. In light of these assumptions, risks and uncertainties, the forward-looking events discussed in this annual report may not occur. PART I Item l. Business OVERVIEW/MERGER WITH ELAN CORPORATION, plc/BUSINESS STRATEGY The Liposome Company, Inc. (together with its subsidiaries, 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. Organized in 1981, the Company's marketed product and products in development are based on its knowledge and understanding of lipids, the substances that comprise the membrane of all living cells. The products developed by the Company with this technology include drug delivery vehicles and novel pharmaceuticals utilizing modulated cell signaling and bio-active lipids. To supplement and expand its internal discovery capabilities, the Company may in-license pharmaceutical compounds for further development, manufacturing and marketing. On March 6, 2000 the Company announced that it 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 ADR for each share of Company Common Stock. Based on the closing price 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 Company shareholders of up to $98 million, contingent partly on the approval of EVACET for the European Union, and partly on EVACET 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 and the Company's shareholder approvals and is expected to close in the second quarter of 2000. 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 24 foreign markets and is the subject of marketing application filings in several other countries. In the United States, ABELCET has been cleared for marketing 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 revenues are derived from ABELCET. During 1999, the Company marketed ABELCET in the U.S. and Canada with its own sales force. For other countries, the Company's strategy is to market ABELCET through marketing alliances. Specific marketing alliances 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 EVACET (formerly TLC D-99), liposomal doxorubicin, as a treatment for metastatic breast cancer and potentially other cancers. The Company also plans to conduct additional studies of EVACET in combination with other anticancer agents. TLC ELL-12, a liposomal ether lipid, potentially provides advantages over existing chemotherapeutic agents. Ether lipid has been shown in previous human studies to be an effective anticancer agent, but was highly toxic to red blood cells. TLC ELL-12 does not appear to have this toxicity. More importantly, unlike most chemotherapeutic agents, it does not interact with DNA. ELL-12 has not caused bone marrow suppression in animal studies and is not likely to be carcinogenic or mutagenic in its own right. If this holds true in humans, TLC ELL-12 would be a significant advance in cancer chemotherapy. TLC ELL-12 entered Phase I clinical trials at Duke University Medical Center 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: bromotaxane (a hydrophobic derivative of paclitaxel), which has 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 June 25, 1997 the Company announced results of a Phase III study of VENTUS as the treatment for Acute Respiratory Distress Syndrome, an inflammatory condition affecting the lungs. The Company's analysis of the two arms of the study showed no significant difference between patients receiving VENTUS or placebo either in reducing the time on mechanical ventilation or in 28 day mortality. No safety concerns for the drug were identified. The Company does not intend to perform any further significant development of VENTUS for this indication. Following the results of the VENTUS clinical trial, the Company announced its intention to focus its resources on the development of an oncology franchise. As part of implementing this strategy, the Company restructured its operations to reflect ongoing operating realities and to focus the organization on the development and marketing of oncology and related pharmaceuticals. The restructuring eliminated 137 positions, which resulted in unusual charges of $2,550,000 in the second quarter of 1997. Additionally, in order to gain operational access to a second, potentially significant oncology-related drug, the Company reacquired, on July 14, 1997, all development, manufacturing and marketing rights to EVACET from Pfizer Inc. ("Pfizer"), which had previously been co- developing EVACET with the Company. The Company assumed control over and the cost of all clinical studies, including the ongoing Phase III clinical studies that were previously being conducted by Pfizer. Pfizer will receive royalties on worldwide (except Japan) commercial sales of EVACET. In July and August 1997, the Company entered into agreements to settle patent litigation with the University of Texas and M.D. Anderson Cancer Center ("UT") and with NeXstar Pharmaceuticals, Inc. ("NeXstar") (now Gilead Sciences, Inc.) and Fujisawa U.S.A., Inc. Under the UT settlement, the Company received an exclusive license under UT's patent and paid past royalties in a combination of cash and stock, agreed to pay royalties on future sales of ABELCET, and issued to UT a ten year warrant to purchase 1 million shares of the Company's Common Stock at $15.00 per share. Pursuant to the NeXstar settlement, the Company received a payment of $1,750,000 in 1997 and began receiving quarterly payments based on worldwide sales of AmBisome beginning in 1998. PRODUCT DEVELOPMENT The following table summarizes the principal product development activities of the Company: Product/Program Use Status(1) Marketing Rights Anti- infective and Cancer ABELCET United States Systemic fungal Marketing and The Company infections in sales patients refractory to, or intolerant of, amphotericin B. International Systemic fungal Approved in: The Company; infections (first France, Italy, Laboratorios and/ or second- United Kingdom, Esteve, SA line indications) Canada, Spain and (Spain, other countries. Portugal) Other marketing approvals Wyeth-Lederle pending. (France, Italy, UK, Nordic countries, Netherlands and Greece) EVACET Metastatic breast New Drug The Company (Formerly cancer Application in TLC D-99) U.S. withdrawn. Further clinical studies required for U.S. approval. Applications pending in Europe and Canada. TLC ELL-12 Various cancers Phase I clinical The Company studies initiated in February 1999. Bromotaxane Various cancers Preclinical The Company toxicology studies Ceramides Various cancers Research The Company and sphingosines Gene Therapy Efficient delivery Research The Company Delivery of genes to target using fusogenic liposomes (1) Research denotes work up to and including bench scale production of a formulation that meets the basic product performance characteristics established for the product including demonstration of in vivo efficacy in animal models. Preclinical testing denotes work to refine product performance characteristics and studies relating to product composition, stability, scale-up, toxicity and efficacy to create a prototype formulation in preparation for the filing of an IND application with the FDA for authority to commence testing in humans (clinical studies). Phase I-III clinical studies denote safety and efficacy tests in human patients in accordance with FDA guidelines as follows: Phase I: Dosage and tolerance studies. Phase II: Detailed evaluations of safety and efficacy. Phase III: Larger scale evaluation of safety and efficacy potentially requiring larger patient numbers, depending on the clinical indication for which marketing approval is sought. See "Governmental Regulation" and "Additional Risk Factors." Technology The Company's products are based on its proprietary knowledge of lipid technology to employ liposomes or lipid complexes as a vehicle to deliver an active therapeutic ingredient, or in the case of bioactive lipids, to develop novel therapeutics based on lipids that are biologically active. Liposomes are microscopic man-made spheres composed of lipids that can be engineered to entrap drugs or other biologically active molecules. A lipid complex is an organized assembly of phospholipids whereby an active pharmaceutical is interspersed and tightly bound to adjoining lipid molecules. In many cases, lipid complexed and liposomal pharmaceuticals can provide less toxicity and/or better efficacy than might otherwise result from the underlying active ingredient. Lipid technology is broad and offers numbers of opportunities for the development of new therapeutics. Recent advances in the understanding of the biological roles of lipids suggest that, in addition to forming a protective barrier enabling cells to live, they also serve other purposes, such as communicating information that originates in the external environment to the internal chemistry of the cell. Based on these discoveries, scientists at the Company believe that lipids or lipid derivatives are likely to play a pivotal role in modulating cellular chemistry and hence cell function. The research now underway at the Company is based on these new understandings of the role of lipids. This role has profound pharmacological implications, i.e., that lipids themselves can be biologically active and therapeutically useful. Products ABELCET (Amphotericin B Lipid Complex Injection) ABELCET (Amphotericin B Lipid Complex Injection) has been developed for the treatment of systemic fungal infections such as candidiasis, aspergillosis and cryptococcal meningitis occurring primarily in immunocompromised patients such as cancer chemotherapy patients, organ and bone marrow transplant recipients and people with AIDS. Amphotericin B, the active ingredient in ABELCET, is a broad-spectrum anti-fungal agent that is believed to act by penetrating the cell wall of a fungus, thereby killing it. In its conventional form, amphotericin B is particularly toxic to the kidneys, an adverse effect that often restricts the amount that can be administered to a patient. While still a nephrotoxic drug, ABELCET is able to deliver much greater amounts of amphotericin B while significantly reducing the kidney toxicity associated with the conventional drug. At the end of 1999, ABELCET has received regulatory marketing approval in the United States and twenty-four international markets including France, Italy, the United Kingdom, Canada and Spain. Marketing applications are in various stages of review in several additional countries. Systemic fungal infections are a major threat to those patients whose immune systems are compromised. The Company is marketing ABELCET in the United States for the treatment of these infections in patients who have failed on or who are intolerant of conventional amphotericin B. In France and certain other countries ABELCET is marketed as a second line treatment for certain severe systemic fungal infections. In Italy, Spain, the United Kingdom and other countries, ABELCET has also been approved as a primary (first-line) therapy for certain fungal infections. In May 1995, the Company filed a New Drug Application ("NDA")for ABELCET with the United States Food and Drug Administration ("FDA"). Following a priority review, the product was cleared for marketing in November 1995 for the treatment of aspergillosis in patients who have failed on, or who are intolerant of, amphotericin B. The Company commenced shipments of ABELCET in the U.S. in December 1995. In October 1996, following a second priority review, the FDA cleared for marketing an expanded label for ABELCET to include the treatment of all fungal infections in patients who have failed on, or who are intolerant of, amphotericin B. In February 1995, the Company received its first approval to market ABELCET from the Medicines Control Agency of the United Kingdom. ABELCET was approved in Spain in late 1995 and in certain smaller countries during 1996. During the latter part of 1997 and the beginning of 1998, the Company received approvals to market ABELCET in Italy, Austria, Spain, France, Switzerland, Canada, Norway and Hong Kong. In September 1998, the Company received approval to market ABELCET in Australia. During 1999, the Company received approval to market ABELCET in the Netherlands, Hungary and Turkey. The Company believes it may receive marketing approvals in additional countries during 2000 and in later years. EVACET (Liposomal Doxorubicin) The Company is developing EVACET, liposomal doxorubicin (formerly TLC D-99), as a treatment for metastatic breast cancer. Doxorubicin, one of the most widely-used chemotherapeutic drugs, is used in the treatment of many solid tumors, leukemias and lymphomas. A substantial portion of the usage of doxorubicin is believed to be for the treatment of breast cancer, and about 40% of the U.S. usage is believed to be for the treatment of metastatic breast cancer. However, doxorubicin, in addition to the acute toxicities typical of chemotherapeutic drugs, can cause irreversible cardiac damage which is often the cumulative dose-limiting factor for such anthracycline (anticancer) chemotherapeutic agents. The individual maximum dosage given to a patient is limited by these and other toxic side effects. EVACET, a liposomal formulation of the chemotherapeutic agent doxorubicin, is designed to reduce significantly the cardiotoxic activity of the parent drug (i.e. doxorubicin) while maintaining efficacy. Three Phase III trials have been conducted by the Company: a single-agent trial (n=224) in which EVACET was compared directly to doxorubicin, a combination trial (n=297) in which EVACET was compared to doxorubicin when each was administered in combination with cyclophosphamide, and a European combination trial (n=160) in which EVACET was compared to epirubicin, an anthracycline therapy widely used in Europe, when each was administered in combination with cyclophosphamide. In December 1998, the Company filed an NDA with the FDA for marketing clearance for EVACET as a first line treatment for metastatic breast cancer. In February 1999, the FDA notified the Company that it had accepted its application for review. On September 16, 1999, the Oncologic Drug Advisory Committee ("ODAC")to the U.S. Food and Drug Administration found that there was not sufficient evidence to recommend for approval the Company's NDA for EVACET for the first line treatment of metastatic breast cancer in combination with cyclophosphamide. Accordingly, the ODAC panel voted against recommending the Company's NDA for EVACET. In response to the September 1999 ODAC meeting, the Company met with the FDA in October 1999 and elected to resubmit the EVACET NDA pending completion of additional analyses suggested by the agency. The Company completed these analyses and met with the agency in February 2000 to review the data as a potential step toward the resubmission of the EVACET NDA. Based on discussions with the FDA, the Company now believes that additional clinical data will be needed in order to obtain marketing approval for EVACET in the United States. The EVACET dossier remains under review by the European and Canadian regulatory agencies and the Company expects a decision on these regulatory filings before the end of 2000. However, there can be no assurance that the Company will receive marketing clearance from the FDA or foreign regulatory authorities to market EVACET in the United States or abroad. The Company reacquired all development, manufacturing and marketing rights to EVACET from Pfizer in July 1997. Pfizer had previously been co- developing EVACET with the Company. The Company assumed control over and the cost of all clinical studies including the ongoing Phase III clinical studies noted above that were previously being conducted and funded by Pfizer. Pfizer was also reimbursing the Company for substantially all of the development costs of EVACET that were being incurred by the Company. Pfizer made available a credit line of up to $10 million to continue the development of EVACET, and 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 or in twenty quarterly installments commencing July 14, 2002. Pfizer is entitled to receive royalties on worldwide (except Japan) commercial sales of EVACET. There were no borrowings outstanding under this credit facility at the end of 1999. TLC ELL-12 (Liposomal Ether Lipid) The Company is developing TLC ELL-12 (a liposomal ether lipid), a new cancer therapeutic that may have applications for the treatment of many different cancers including prostate cancer and non-small-cell lung carcinoma. TLC ELL-12 is believed to employ a different mechanism of action than conventional anticancer agents; it does not interact directly with DNA and is not myelosuppressive. Thus, it may complement many standard chemotherapeutic agents. In preclinical studies conducted by the Company's scientists, TLC ELL-12 has been shown to be active in tumor models of melanoma, lung cancer, leukemia and multiple drug resistant cell lines. Additionally, it has been shown to be active in a model of human prostate cancer. Ether lipids are called such because their chemical construction includes an ether bond. They have been shown to be active against human tumors but have toxic side effects at therapeutic doses that severely limit their use as a human therapeutic agent. TLC ELL-12 is a liposomal form of ether lipid. In animal models it has been shown to be significantly more potent than non-liposome encapsulated ether lipid and, at putative therapeutic doses, has not demonstrated toxicities. Its mechanism of action is believed to involve the modulation of signal transduction processes without direct interaction with DNA. It may be for this reason that in animal studies TLC ELL-12 has been shown not to possess many of the toxicities, particularly myelosuppression, that are seen with many other cancer drugs. The Company commenced Phase I clinical trials of TLC ELL-12 in February 1999 at Duke University Medical Center. This clinical trial is still ongoing. Research Programs Bromotaxane Bromotaxane (a hydrophobic derivative of paclitaxel) has shown anticancer activity in several experimental models. In a model of a human ovarian cancer tumor, mice treated with bromotaxane have remained tumor free for extended periods of time. The Company entered a hydrophobic taxane derivative, into a formal development program in 1999, leading to the possible commencement of human clinical studies in 2001. Ceramides and Sphingosines Ceramides and sphingosines are molecules widely implicated in cell differentiation and apoptosis. The Company has identified and developed a family of such molecules displaying anticancer activity. In vitro, they have been shown to be active against several human cancers including non- small-cell lung, breast, renal cell, ovarian and colon cancer, as well as against drug resistant cell lines. One compound thus far apparently has activity against a multiple drug resistant tumor in vivo. The Company is conducting research to identify molecules within this family that could be attractive product candidates. Gene Therapy The Company is conducting research to discover a means for efficiently delivering genes to their intended targets. Company researchers have successfully put DNA into liposomes and have achieved fusion of these liposomes to cells, thereby accomplishing the direct delivery of the liposome contents into the cell interior. Company scientists have also succeeded in protecting these liposomes from degradation and are able to modulate their circulation time. The research team is now attempting to develop systems to target these fusogenic liposomes to particular cell types. Research Costs During 1999, 1998 and 1997, the Company's research and development costs were approximately $25.5 million, $26.4 million and $28.9 million, respectively. There can be no assurance that any of the products described above, or resulting from the Company's research programs, will be successfully developed, prove to be safe and efficacious at each stage of clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at reasonable costs or be successfully marketed. MANUFACTURING The Company owns a 55,000 square foot manufacturing facility in Indianapolis, Indiana, designed for the production of large commercial quantities of its products. In August 1997, following a retrofit of a portion of the facility to manufacture ABELCET, the Company received FDA approval for commercial production of ABELCET from that facility. The facility has also been approved by several international regulatory authorities. During 1997, the Company transferred the production of ABELCET from its Princeton manufacturing facility to Indianapolis in order to take advantage of the manufacturing economies available from producing ABELCET on a larger scale. The Company also has a multiproduct manufacturing facility at its Princeton site. This facility was designed to manufacture clinical and initial commercial quantities of the Company's products and to accommodate manufacturing for future products using similar processes. This facility has been approved by the FDA for the manufacture of ABELCET for sale in the United States and by regulatory authorities in other countries. The Company believes that its current facilities, staff and sources and availability of raw materials are adequate for the manufacture of preclinical and clinical supplies of its products and for the production of commercial quantities of ABELCET. There is no assurance that EVACET or other developmental products can be successfully manufactured on a commercial scale at the Company's current facilities. In April 1998, the Company entered into a three-year agreement with AstraZeneca PLC ("Astra") (formerly Astra USA, Inc.), a subsidiary of Astra AB of Sweden, to manufacture Astra's M.V.I.- 12 Unit Vial (hereinafter referred to as, "MVI"). MVI is used by severely ill, hospitalized patients in need of nutritional supplements. The Company will manufacture MVI at its Indianapolis manufacturing facility. Under the terms of the Agreement, AstraZeneca PLC ("Astra") (formerly Astra USA) will supply bulk quantities of the vitamin product and will market the finished product. The Company will sterilize, fill, package and perform quality control on MVI for Astra. MARKETING STRATEGY In the United States and Canada, the Company markets ABELCET through its own sales force of approximately forty experienced representatives. Sales representatives are based in key cities throughout North America and are solely dedicated to the marketing of ABELCET to hospitals. Internationally, the Company determines whether to market ABELCET directly or with a partner on a country-by-country basis. In addition, sales are realized on a named patient basis in certain countries where marketing approval has not yet been received. In December 1995, the Company entered into a marketing and distribution agreement with Laboratorios Esteve SA ("Esteve") for the marketing of ABELCET in Spain and Portugal. Esteve is a leading marketer of pharmaceutical products in Spain and is headquartered in Barcelona, Spain. Under the agreement, Esteve shall promote and sell ABELCET, and the Company is responsible for overall strategy and product management. In the third quarter, 1997, the Company entered into agreements with affiliates of Wyeth-Ayerst International, Inc. ("Wyeth-Ayerst"), a division of American Home Products Corporation, to be its marketing partners in France and Italy. Subsequently, the Company entered into additional agreements with Wyeth-Ayerst to include the marketing of ABELCET in the Nordic countries. Wyeth-Ayerst has a strong presence in the European hospital market and is skilled in the infectious disease and oncology sectors, which are primary areas of ABELCET usage. During 1998, the Company entered into agreements with affiliates of Wyeth-Ayerst to market ABELCET in Austria and Greece and Amgen Australia Pty. Ltd., a division of Amgen (NASDAQ: AMGN), to market ABELCET in Australia. During 1999, the company entered into agreements with affiliates of Wyeth-Ayerst to market ABELCET in Hungary, the Netherlands and the United Kingdom. Prior to engaging Wyeth-Ayerst, the Company sold ABELCET in the United Kingdom through its own sales force. For financial information concerning the Company's domestic and international operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Revenues" and Note 10 to the Consolidated Financial Statements. CREDIT AND WORKING CAPITAL PRACTICES In the United States, the Company sells ABELCET primarily to drug wholesalers who, in turn, sell the product to hospitals and certain other third parties. In some cases, product is sold by the Company directly to institutions. International sales generally are made to the Company's marketing partners, in countries where such agreements have been established, and directly to hospitals in countries where the Company has retained marketing rights. Hospitals overseas in general are funded directly by the governments of the respective countries. The Company's credit practices and related working capital needs are believed to be comparable to those of other market participants. Collection periods tend to be longer for sales outside the United States. The Company maintains credit insurance on large, selected accounts in the United States subject to a deductible. Customers may return defective or out of date merchandise for credit or replacement. Such returns have been insignificant. HUMAN RESOURCES At the end of 1999, the Company had 306 full-time employees, 25 of who hold Ph.D. degrees and 3 of whom hold M.D. degrees or the foreign equivalent. Of these employees, 203 are engaged in research, development, clinical development and manufacturing activities, 60 in sales and marketing and 43 in administration. The Company considers its relations with its employees to be excellent. None of its employees is covered by a collective bargaining agreement. The Company attempts to offer competitive compensation and fringe benefits programs to its employees. PATENTS AND PROPRIETARY TECHNOLOGY The Company considers the protection of its proprietary technology rights to be important to its business. In addition to seeking United States patent protection for many of its inventions, the Company files patent applications in Canada, Japan, Western European countries and additional foreign countries on a selective basis in order to protect the inventions deemed to be important to the development of its foreign business. At the end of 1999, the Company had 99 United States patents as well as 696 foreign counterpart patents, and 29 United States patent applications and 196 foreign counterpart patent applications (including those filed in designated countries under patent treaties) pending. Patents issued and applied for cover inventions, including new types of liposomes and their preparation processes, for the therapeutic application of liposomes, lipid purification, lipid based delivery systems and product compositions. The Company has acquired and licensed proprietary technology from universities, research organizations and other companies in return for payments and continuing royalty obligations. The Company has obtained patents in the United States for inventions which may be employed with respect to ABELCET, EVACET, TLC ELL-12 and the family of ceramides as well as aspects of the Company's technology in gene therapy delivery and has patent applications pending in Europe and Japan for such inventions. The Company has been awarded patents and has patent applications pending for inventions, which may be employed with respect to these and other products, in various selected countries as well. The Company owns worldwide rights to manufacture and market ABELCET under its patent rights and other proprietary technology rights. In connection with the reacquisition of product rights from Bristol-Myers Squibb ("BMS") in January 1993, the Company agreed to pay royalties to BMS on sales of ABELCET. The Company also pays royalties to the University of Texas on ABELCET sales pursuant to a litigation settlement finalized in July 1997. This settlement gave the Company exclusive rights under a patent assigned to the University of Texas by inventors at the M.D. Anderson Cancer Center relating to liposomal amphotericin B. A portion of these royalties is offset against the royalty payments to BMS. Other public and private institutions, including universities, may have filed applications for, or have been issued patents with respect to technology potentially useful or necessary to the Company. The scope and validity of such patents, the extent to which the Company may wish or need to acquire licenses under such patents, and the cost or availability of such licenses, are currently unknown. The Company also intends to rely on trade secrets and proprietary know-how and continuing technological innovation to maintain and develop its commercial position. The Company has entered into confidentiality agreements with its employees, consultants and advisors, and various companies with which it does business. The Company owns rights in the trademarks employed in its business. "ABELCET" is a registered trademark in the United States and all of the European countries in which Amphotericin B Lipid Complex Injection is approved for marketing. EVACET is a trademark of the Company pending registration in a number of countries. Other trademarks used by the Company include the graphic ball logo, the name CLEAR, the slogan, Expanding the Horizons of Biotechnology, and other trademarks and service marks identifying the Company's products and services. GOVERNMENTAL REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor in the production and marketing of the Company's products and in its ongoing research and development activities. In order to test clinically, to produce and to market products for human therapeutic use, mandatory procedures and safety standards established by the FDA and comparable agencies in foreign countries must be followed. The standard process required by the FDA before a pharmaceutical agent may be marketed in the United States includes (i) preclinical tests, (ii) submission to the FDA of an application for an Investigational New Drug ("IND"), which must become effective before human clinical trials may commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug in its intended application, (iv) submission to and acceptance by, the FDA of an NDA with respect to drugs or a Product License Application ("PLA") with respect to biologics, and (v) FDA approval of the NDA or PLA prior to any commercial sale or shipment of the drug or biologic. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered or licensed by the FDA. Domestic manufacturing establishments are subject to inspections by the FDA and by other federal, state and local agencies and must comply with Good Manufacturing Practices as appropriate for production. Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug to humans, the drug is tested for dosage and tolerance. Phase II involves detailed evaluation of safety and efficacy. Phase III trials consist of larger scale evaluation of safety and efficacy and may require larger patient numbers, depending on the clinical indication for which marketing approval is sought. The process of completing clinical testing and obtaining FDA approval for a new product is likely to take a number of years and require the expenditure of substantial resources. The FDA may grant an unconditional approval of a drug for a particular indication or may grant approval conditioned on further postmarketing testing. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially approved. The FDA may also require postmarketing testing and surveillance programs to monitor the drug's efficacy and possible side effects. Results of these postmarketing programs may prevent, or limit, the further marketing of the products. Sales of pharmaceutical products outside of the United States are subject to regulatory requirements that vary widely from country to country. In the European Union ("EU"), the general trend has been toward coordination of common standards for clinical testing of new drugs. Generally, the level of regulation in the EU and other foreign jurisdictions is somewhat less comprehensive and burdensome than regulation in the United States, but there are differences and, in a few instances, foreign regulations may be more burdensome than FDA requirements. The time required to obtain regulatory approval from the comparable regulatory agencies in each foreign country may be longer or shorter than that required for FDA approval. In addition, the Company is and may be subject to regulation under state and federal law regarding occupational safety, laboratory practices, the use and handling of radioisotopes, environmental protection and hazardous substance control and to other present and possible future local, state, federal and foreign regulation. COMPETITION Competition in the pharmaceutical field generally, and in the liposome and lipid-based pharmaceutical industries in particular, is intense and is based on such factors as product performance, safety, patient compliance, ease of use, price, physician acceptance, marketing, distribution and adaptability to various modes of administration. Technological competition may be based on the development of alternative products and approaches aimed at the treatment, diagnoses or prevention of the same diseases as the Company's products. Competition from other companies will be based on scientific and technological factors, the availability of patent protection, the ability to commercialize technological developments, the ability to obtain government approval for testing, manufacturing and marketing and the economic factors resulting from the use of those products, including their price. There are many companies, both public and private, including well-known pharmaceutical and chemical companies, many of which have greater capital resources than the Company, that are seeking to develop lipid and liposome based products as well as products based on other drug-delivery technologies for therapeutic applications. The Company is aware that other companies are developing and marketing lipid-based amphotericin B products. The Company's two principal competitors in the lipid-based amphotericin B market are Gilead Sciences, Inc. (NASDAQ:GILD) and ALZA Corporation (NYSE:AZA). Each of these companies' liposomal amphotericin B products has regulatory approval in the United States and other countries. The two principal competitors referred to in the preceding paragraph also have liposomal anthracycline products. The FDA has granted accelerated approval to one competitor for its product for the treatment of Kaposi's Sarcoma where other agents have failed and has cleared for marketing the product of another competitor for the treatment of Kaposi's Sarcoma. These products are currently being marketed in the U.S. and certain other countries for these indications. In June, 1999, the FDA granted approval to one competitor for the treatment of refractory ovarian cancer. This liposomal anthracycline is indicated for women with ovarian cancer who have disease that is refractory to paclitaxel and platinum based chemotherapy regimens. Other groups active in the field include colleges, universities, and public and private research institutions which are becoming more active in seeking patent protection. These institutions have also become increasingly competitive in recruiting personnel from a limited number of scientists and technicians. ADDITIONAL RISK FACTORS The growth, financial performance and business condition of the Company may be affected by a number of risk factors, including the matters discussed below. You should carefully consider the following risks in addition to the other information presented in this form 10-K in evaluating the Company and its business. Uncertainty of Government Regulatory Requirements; Lengthy Approval Process Human therapeutic products, vaccines and in vivo diagnostic products are subject to rigorous preclinical and clinical testing and approval by the FDA and comparable agencies in other countries and, to a lesser extent, by state regulatory authorities prior to marketing. The process of obtaining such approvals, especially for human therapeutic products, is likely to take a number of years and will involve the expenditure of substantial resources. If the FDA requests additional data, these time periods can be materially increased. Even after such additional data is submitted, there can be no assurance of obtaining FDA approval. In addition, product approvals may be withdrawn or limited for noncompliance with regulatory standards or the occurrence of unforeseen problems following initial marketing. The Company may encounter significant delays or excessive costs in their respective efforts to secure necessary approvals or licenses. Future federal, state, local or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's products. Failure to obtain or maintain requisite governmental approvals, or failure to obtain approvals of the intended clinical uses requested, could delay or preclude the Company from further developing particular products or from marketing their products, or limit the commercial use of the products and thereby have a material adverse effect on the Company's liquidity and financial condition. The Company must demonstrate through preclinical studies and clinical trials that the product is safe and effective for use in each targeted indication. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the Company's clinical trials will demonstrate the safety and efficacy of any products or will result in marketable products. Many pharmaceutical and drug delivery companies have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. Volatility of Stock Price There has been a history of significant volatility in the market prices for shares of companies in the biopharmaceutical industry. The market price of the shares of the Company's Common Stock has been volatile. Factors such as announcements of technological innovations or new commercial products by the Company or its competitors, developments relating to regulatory approvals, governmental regulation, developments regarding product development activities, developments or disputes relating to patent or proprietary rights, as well as period-to-period fluctuations in revenues and financial results, may have a significant impact on the market price of the Company's Common Stock. Uncertainty of Pharmaceutical Pricing and Adequate Third-Party Reimbursement The Company's business may be materially adversely affected by the continuing efforts of worldwide governmental and third party payers to contain or reduce the costs of pharmaceutical products. An increasing emphasis on managed care and consolidation of hospital purchasing in the United States has and will continue to put pressure on pharmaceutical pricing, which could reduce the price that the Company is able to charge for any current or future products. In addition, price competition may result from competing product sales, attempts to gain market share or introductory pricing programs, all of which could have a material adverse effect on the Company's results of operations and financial condition. The Company's ability to generate significant revenues from its products may also depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health coverage insurers and other payers. If purchasers or users of the Company's products are not entitled to adequate reimbursement for the cost of such products, they may forego or reduce such use. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third party coverage will be available. Adequacy of Product Liability Insurance The testing, manufacturing and marketing of the Company's products entail an inherent risk of adverse events that could expose the Company to product liability claims. The Company has obtained insurance against the risk of product liability claims. However, there is no guarantee that this insurance will be adequate, that the amount of this insurance can be increased, or that the policies can be renewed. Moreover, the amount and scope of any coverage obtained may be inadequate to protect the Company in the event of a successful product liability claim. Dependence on Key Personnel and Consultants The Company's ability to successfully develop, manufacture and market products and to maintain a competitive position will depend in large part on its ability to attract and retain highly qualified scientific and management personnel and to develop and maintain relationships with leading research institutions and consultants. Competition for such personnel and relationships is intense, and there can be no assurance that the Company will be able to continue to attract and retain such personnel. Dependence Upon Suppliers The Company currently relies on a limited number of suppliers to provide the materials used to manufacture its products, certain of which materials are purchased only from one supplier. In the event the Company could not obtain adequate quantities of necessary materials from its existing suppliers, there can be no assurance that the Company would be able to access alternative sources of supply within a reasonable period of time or at commercially reasonable rates. In particular, the Company presently acquires amphotericin B, a principal ingredient in ABELCET, from one supplier on what the Company believes are favorable terms. Although the Company has qualified an alternative supplier for amphotericin B, the loss of the Company's current supplier could have a material adverse effect on the Company. The unavailability of adequate commercial quantities, the inability to develop alternative sources, a reduction or interruption in supply or a significant increase in the price of materials could have a material adverse effect on the Company's ability to manufacture and market its product. The Company's Dependence on and the Uncertainty of Protection of Patents and Proprietary Rights The protection provided to the Company by its patents and proprietary rights is key. The Company has a number of United States and foreign patents and patent applications relating to various aspects of lipid and liposome technologies. The patent position of biopharmaceutical companies generally is highly uncertain and involves complex legal and factual questions. There can be no assurance that any patents will afford the Company commercially significant protection for its proprietary technology or have commercial application, and litigation may be necessary to determine the validity and scope of the Company's proprietary rights. Moreover, the patent laws of foreign countries and the enforcement of such laws may afford less protection than comparable U.S. laws. Competition The Company is aware of various products under development or manufactured by competitors that are used for the prevention, diagnosis or treatment of certain diseases the Company has targeted for product development, some of which use therapeutic approaches that compete directly with certain of the Company's product candidates. Some of the Company's competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company. In addition, many of the Company's competitors have significantly greater experience than the Company in preclinical testing and human clinical trials of new or improved pharmaceutical products and in obtaining approval from the U.S. Food and Drug Administration ("FDA") and other regulatory approvals on products for use in health care. In particular, the Company is aware that other companies are developing lipid-based or liposomal amphotericin B products and have obtained regulatory approvals for such products in certain markets. Two competitors received approvals for lipid-based amphotericin B products in certain markets before ABELCET was approved, which may confer a competitive advantage for their products. In the United States, although ABELCET was the first lipid-based amphotericin B product to be approved for marketing, one competitor's product was approved in the fourth quarter of 1996, and another competitor's product was approved in August 1997. Other companies are developing anti-fungal products that may compete with the Company's product. Although it cannot be predicted how the existence of competing lipid-based and non lipid based products may affect the U.S. antifungal market, it is possible that the Company's share of this market will continue to decline and that price competition will reduce the overall size of the market. In addition, other companies are also developing liposomal anthracycline products similar to EVACET, two of which have been cleared by the FDA for treatment of Kaposi's Sarcoma and one of which has been cleared for the treatment of refractory ovarian cancer. The Company is also competing with respect to manufacturing efficiency and marketing capabilities, areas in which the Company has limited experience. Dependence on ABELCET Revenues The Company currently derives a substantial portion of its revenues from the sale of ABELCET; its only approved product. The Company's annual operating results depend upon a variety of factors including the price, volume and timing of ABELCET sales. If demand for ABELCET were to decline or revenues were to fall, whether by introduction of competitive products or otherwise, the Company's financial results would be adversely affected. There can be no assurance that the Company's revenues from the sale of ABELCET will not decline due to the aforementioned factors. Uncertainty of Future Financial Results; Fluctuations in Operating Results The Company's quarterly operating results depend upon a variety of factors, including the price, volume and timing of ABELCET sales; timing and amount of royalties, fees and contract revenues; the availability of third-party reimbursement; and the regulatory approvals of new products, or expanded labeling of existing products. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the timing of approvals and the success of product launches in international markets, the expansion of clinical trials for ABELCET and EVACET, changes in the Company's level of research expenditures, and variations in gross margins that may be caused by increased costs of raw materials, competitive pricing pressures, or the mix between product sales in the United States and sales to the Company's international marketing partners and distributors. The Company expects quarter-to-quarter fluctuations to continue in the future, and there can be no assurance that the Company's revenues will not decline or that the Company will be profitable in future periods. The Company's Marketing Staff Competes with Large Pharmaceutical Companies The pharmaceutical industry is highly competitive. The Company's products compete, and products the Company may develop are likely to compete, with products of other companies that currently have extensive and well-funded marketing and sales operations. Because these companies are capable of devoting significantly greater resources to their marketing efforts, the Company's marketing or sales efforts may not compete successfully against the efforts of these other companies. Item 2. Properties The Company leases space in all of one and a portion of two other facilities in the vicinity of Princeton, New Jersey and owns a manufacturing facility in Indianapolis, Indiana. The Company currently leases a building of approximately 50,000 square feet that houses scientific laboratories, manufacturing facilities and certain offices in the Princeton Forrestal Center located near Princeton, New Jersey. The lease, with an initial term of twelve years, commenced January 1, 1995, and includes options to renew for up to an additional ten years. Lease payments for the year ended January 2, 2000 totaled approximately $568,000. Future lease payments are subject to certain escalation provisions as contained in the lease agreement. The Company also leases approximately 28,500 square feet of office space located in the Princeton Forrestal Center. The lease commenced March 1, 1993 and expires in February 2003. Payments under this lease for the year ended January 2, 2000 totaled approximately $712,000. In January 1995, the Company entered into a lease for approximately 13,200 square feet of office/warehouse space near its corporate offices. In December, 1997, the lease was extended to March 2002. Rent expense for this facility totaled approximately $72,000 for 1999. The Company also leases office space in London, England. A ten year agreement was signed in October 1996, expiring in September 2006. Rent expense was approximately $268,000 for 1999. In July 1992, the Company purchased a pharmaceutical manufacturing facility of approximately 55,000 square feet located on 26 acres of land located in Indianapolis, Indiana. The Company has received FDA and certain international regulatory agency approvals to manufacture commercial supplies of ABELCET from this facility. See "Manufacturing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Item 3. 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. Section 547 and Section 550 from the Company in the amount of $2.3 million. 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 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5.Market for Registrant's Common Equity and Related Stockholder Matters (a) Market Information The Company's Common Stock is traded on the NASDAQ National Market System under the symbol LIPO. The following table sets forth for the periods indicated the high and low sale price for the Common Stock: High Low 1999 4th Quarter $14.00 $6.34 3rd Quarter 28.50 6.75 2nd Quarter 19.25 10.00 1st Quarter 16.06 10.75 High Low 1998 4th Quarter $16.88 $5.13 3rd Quarter 6.25 3.38 2nd Quarter 8.63 4.69 1st Quarter 6.44 4.69 (b) Holders At February 29, 2000, there were approximately 907 stockholders of record of the Company's Common Stock. (c) Dividends The Company has not paid any cash dividends on its Common Stock since its inception and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The declaration and payment of Common Stock dividends, if any, is within the discretion of the Board of Directors and will depend, among other things, upon future earnings, the operating and financial condition of the Company, its capital requirements, and general business conditions. Item 6. Selected Financial Data The following table sets forth consolidated financial data with respect to the Company for each of the five years in the period ending January 2, 2000. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere herein. CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Year Ended______________________ 1/2/00 1/3/99 12/28/97 12/29/96 12/31/95 (In thousands, except per share data) Product sales $86,203 $73,495 $58,452 $52,840 $ 6,164 Collaborative research and development revenues -- -- 2,331 3,228 6,589 Interest, investment and other income 6,267 4,373 4,313 3,864 2,964 Total revenues 92,470 77,868 65,096 59,932 15,717 Cost of goods sold 20,284 20,805 22,029 16,559 2,304 Research and development expense 25,517 26,441 28,894 29,371 30,149 Selling, general and administrative expense 32,277 34,535 39,914 31,541 18,631 Interest expense 551 773 705 339 294 Total expenses 78,629 82,554 91,542 77,810 51,378 Net income/(loss) before dividends & taxes 13,841 (4,686) (26,446) (17,878)(35,661) Preferred Stock dividends -- -- -- (1,235) (5,348) Net income/(loss) before taxes $13,841 $(4,686) $(26,446) $(19,113) $(41,009) Provision for income taxes.... 790 -- -- -- -- Net income/(loss) $13,051 $(4,686) $(26,446) $(19,113) $(41,009) Net income/(loss)per share (basic) $0.34 $(0.12) $(0.71) $(0.57) $(1.50) Net income/(loss)per share (diluted) $0.32 $(0.12) $(0.71) $(0.57) $(1.50) Weighted average number of shares outstanding (basic). 38,825 38,172 37,083 33,292 27,293 Weighted average number of shares outstanding (diluted) 40,284 38,172 37,083 33,292 27,293 CONSOLIDATED BALANCE SHEETS DATA: Year Ended______________________ 1/2/00 1/3/99 12/28/97 12/29/96 12/31/95 (In thousands) Cash and marketable securities(1) $76,863 $54,343 $45,525 $47,180 $72,333 Working capital 67,329 41,401 41,566 46,781 64,422 Total assets 110,758 90,574 91,500 94,555 105,926 Total long-term liabilities 2,383 5,089 6,879 7,555 4,104 Accumulated deficit (180,479)(193,530)(188,844)(162,398)(144,520) Total stockholders' equity $90,729 $71,741 $73,662 $74,861 $89,832 (1)Includes restricted cash of $5,522, $11,930, $11,930, $6,930, and $6,642 in 1999, 1998, 1997, 1996 and 1995, respectively. See Note 1 of Notes to Consolidated Financial Statements. See accompanying notes. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This report on Form 10-K contains forward-looking statements concerning the business, financial performance and financial condition of the Company, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statement. Factors that could cause such differences include, but are not limited to, those discussed in Part I Item 1, Additional Risk Factors. The following discussion and analysis should be read in conjunction with the Financial Statements and related notes thereto contained herein. 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 the approval of EVACET for the European Union, and partly on EVACET 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 and the Company's shareholder approvals and is expected to close in the second quarter of 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 (Amphotericin B Lipid Complex Injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States and 24 foreign markets and is the subject of marketing application filings in several other countries. In the United States, ABELCET 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 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. On August 31, 1999, the Company received approval from the U.S. Food and Drug Administration ("FDA") for a new vial size of ABELCET, which was launched in late September 1999. The ABELCET 50 milligram size is also available in the UK and Spain, with applications pending in additional countries. Previously, ABELCET was only available in the 100 milligram vial size. The 50 milligram size is expected to provide economies in dosing for hospitals, particularly for pediatric patients. The Company is developing EVACET (formerly TLC D-99), liposomal doxorubicin, as a treatment for metastatic breast cancer and potentially other cancers. The Company filed a New Drug Application ("NDA") for EVACET with the FDA in December 1998. The Company has also filed for marketing clearance of EVACET 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 EVACET 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 EVACET and would submit additional analyses to the FDA. The Company completed further analyses of clinical data and provided them to the FDA Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 EVACET in the U.S. The Company intends to work with the FDA to define a role for EVACET in the management of metastatic breast cancer and other cancers. There can be no assurance that the FDA, Canadian or European regulatory authorities will grant the Company marketing clearance for EVACET. 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 EVACET in combination with Taxotere (docetaxel) for the treatment of metastatic breast cancer. This clinical trial collaboration with BMS is designed to evaluate the safety of EVACET in combination with Taxol (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 EVACET in combination with the monoclonal antibody Herceptin (Trastuzumab). This clinical trial is designed to evaluate the safety and efficacy of EVACET in combination with Herceptin 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. 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 22.66% 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 in 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 June 25, 1997, the Company announced results of a Phase III study of VENTUSTM as a treatment for Acute Respiratory Distress Syndrome (ARDS), an inflammatory condition affecting the lungs. The Company's analysis of the two arms of the study showed no significant difference between patients receiving VENTUSTM or placebo either in reducing the time on mechanical ventilation or in 28 day mortality. No safety concerns for the drug were identified. Following the results of the VENTUSTM study, the Company announced its intention to focus its resources on the development of an oncology franchise. As part of implementing this future strategy, the Company restructured its operations to focus the organization on the development Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) and marketing of oncology and related pharmaceuticals. The restructuring eliminated 137 positions, which resulted in unusual charges of $2,550,000 in 1997. Additionally, in order to gain operational access to a second, potentially significant oncology-related drug, the Company reacquired, on July 14, 1997, all development, manufacturing and marketing rights to EVACET from Pfizer Inc. ("Pfizer"), which had previously been co-developing EVACET with the Company. The Company assumed control and the cost of all clinical studies, including the ongoing Phase III clinical studies that were previously being conducted by Pfizer. Pfizer will receive royalties on worldwide (except Japan) commercial sales of EVACET. In 1997, the Company entered into agreements to settle patent litigation with the University of Texas and M.D. Anderson Cancer Center ("UT") and with NeXstar Pharmaceuticals, Inc. ("NeXstar"), (now Gilead Sciences, Inc.) and Fujisawa U.S.A., Inc. Under the UT settlement the Company received an exclusive license under UT's patent, paid past royalties on sales of ABELCET agreed to pay royalties on future sales, and issued to UT a ten-year warrant to purchase 1,000,000 shares of the Company's Common Stock at $15.00 per share. Under the NeXstar settlement, the Company received an initial payment of $1,750,000 in 1997 and began receiving quarterly minimum payments in 1998. These payments are classified as interest, investment and other income based on worldwide sales of AmBisome. The cumulative amount of these receipts through year-end 1999 is approximately $6.0 million. 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 Astra. Results of Operations Revenues Total revenues for the year ended January 2, 2000 were $92,470,000, an increase of $14,602,000 or 18.8% compared to $77,868,000 for the year ended January 3, 1999. The primary components of revenues for the Company are product sales of ABELCET and interest, investment and other income. Collaborative research and development revenue was also included in the 1997 period, due to the co-development agreement with Pfizer. The revenue growth in 1999 is attributable to increased product sales of ABELCET, both in the U.S. and internationally, and higher interest and royalty income. Revenues in 1998 were $77,868,000, an increase of $12,772,000 or 19.6% over the 1997 revenues of $65,096,000. The primary reason for the growth in 1998 was due to increased market penetration of ABELCET worldwide, partially offset by the cessation of the collaborative research and development revenue during the second half of 1997 as a result of the reacquisition of EVACET from Pfizer. Domestic and international net sales for the past three years were: Fiscal Year Ended U.S. International January 2, 2000 $69,126,000 $17,077,000 January 3, 1999 $58,936,000 $14,559,000 December 28, 1997 $49,273,000 $ 9,179,000 Domestic dollar sales in 1999 grew by 17.3% over 1998, while unit shipments increased by 16.4% during the same period. The strong growth is due to the continued market penetration resulting from the successful impact of the tiered pricing program and expansion into the generic amphotericin B marketplace as patients use more drug and are treated for longer periods of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) time. 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 these rebates and chargebacks and periodically evaluates the estimates used in establishing the reserve. The provision for the year ended January 2, 2000 was approximately $38,089,000. During September 1999, the Company received FDA marketing clearance and launched a new ABELCET vial size (50 milligram), which contributed to the U.S. sales increase. The Company expects that this new vial size will encourage more cost-effective utilization of ABELCET in dosing for hospitals, particularly for pediatric patients. The increase in U.S. sales in 1998 from 1997 of $9,663,000 or 19.6% was attributable to the factors previously discussed regarding the implementation of the tiered pricing program and increased market penetration. The rebate and chargeback provision for the year ended January 3, 1999 was approximately $28,684,000. Internationally, the Company has been approved to market ABELCET in 25 markets. In addition, sales are realized on a "named patient" basis in certain countries where marketing approval has not yet been received. In 1999, ABELCET was launched in Australia and Turkey and marketing activities were shifted to a marketing partner in the U.K. During 1998, the Company marketed ABELCET in the U.S., Canada and the U.K. with it's own sales force. For other countries, the Company's general strategy is to market ABELCET through marketing partners, with specific marketing distribution alliances being determined on a country-by-country basis as future market approvals are received. International product sales were $17,077,000 for the year ended January 2, 2000, $2,518,000 higher than the comparable prior year. The majority of the growth is due to the impact of the launch of ABELCET in early 1999 in Australia and in late 1999 in Turkey, combined with sales growth in Canada. While international sales revenues increased by 17.3%, unit volume increased by 25.5%. The principal reason for this difference is due to a lower international average selling price per vial during 1999, resulting from the use of marketing partners in Europe. International sales were $14,559,000 and $9,179,000 for 1998 and 1997, respectively. The majority of the increase is due to the impact of the launch of ABELCET in late 1997 in France, Italy and Canada, combined with sales growth in Spain. While international sales revenues increased by 58.6%, unit volume increased by 91.7%. The principal reason for this difference is the mix of sales to end users (i.e. direct distribution) in certain countries versus sales to marketing partners in others. Collaborative research and development revenues were $2,331,000 for the year ended December 28, 1997. The absence of collaborative research and development revenue in 1999 and 1998 is due to the cessation of development funding by Pfizer pursuant to the July 14, 1997 agreement in which the Company reacquired all development, manufacturing and marketing rights to EVACET from Pfizer. Interest, investment and other income for the year ended January 2, 2000 was $6,267,000 compared to $4,373,000 for the year ended January 3, 1999. This increase of $1,894,000 or 43.3% is primarily a result of higher interest and investment income due to greater average cash balances available for investment in the Company's portfolio during 1999. Also contributing to this increase is net revenue related to the commencement of manufacturing for Astra during the first quarter of 1999, combined with the receipt of royalty payments from NeXstar (now Gilead Sciences, Inc.) as part of the settlement of patent litigation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Interest, investment and other income for the year ended January 3, 1999 was $4,373,000 compared to $4,313,000 for the year ended December 28, 1997. The minimal increase of $60,000 is primarily due to the higher interest and investment income due to greater average cash balances available for investment in the Company's portfolio during 1998, partially offset by lower interest rates. Expenses The components of total expenses are cost of goods sold, research and development, selling, general and administrative and interest expenses. Total expenses for the year ended January 2, 2000 were $78,629,000, a decrease of $3,925,000 or 4.8% below the prior year. Total expenses for the year ended January 3, 1999 were $82,554,000, a decrease of $8,988,000, or 9.8% from 1997. Included in the 1997 expenses was $3,900,000 of unusual charges incurred by the Company following the unfavorable results of the VENTUST clinical study. Cost of goods sold for the year ended January 2, 2000 was $20,284,000 compared to $20,805,000 in the 1998 period. The decrease of $521,000 is attributable to lower production costs for ABELCET resulting from manufacturing efficiencies at the Indianapolis facility, improved yields due to the implementation of certain process enhancements and lower unit overhead absorption related to the contract manufacturing business. Partially offsetting the reduction in the cost of goods is the impact of higher sales volume. Gross margin in the 1999 period was 76.5% compared to 71.7% in the 1998 period, an improvement of 4.8 percentage points. This improvement is due to the manufacturing efficiencies discussed above. Cost of goods sold for the year ended January 3, 1999, was $20,805,000 compared to $22,029,000 in the 1997 period. The $1,224,000 or 5.6% decrease was due to lower manufacturing costs related to the high volume efficiencies realized during 1998 at the Indianapolis facility, combined with the impact of the Company's decision not to manufacture ABELCET during the last half of 1997 in order to reduce inventories. As a result of this decision, certain manufacturing overhead and fixed costs for Indianapolis were reflected in cost of goods sold in the 1997 period even though no product was manufactured. Partially offsetting the decrease is the impact of the higher sales volume in the 1998 period. Gross margin in the 1998 period was 71.7% compared to 62.3% in the 1997 period, an improvement of 9.4 percentage points. This improvement is due to the factors discussed above. Research and development expenses, which also include clinical and regulatory activities, were $25,517,000 for the year ended January 2, 2000, compared to $26,441,000 for 1998 and $28,894,000 for 1997. The reduction of $924,000 is primarily due to the completion, in 1998, of the Phase III clinical trials of EVACET for which the Company filed a NDA. Partially offsetting this reduction is increased research and development activity for other projects in the Company's developmental pipeline. The decrease in spending of $2,453,000 from 1997 to 1998 is primarily due to the completion of the pivotal Phase III studies of EVACET combined with the absence of clinical study costs associated with VENTUST in 1998. Partially offsetting the decrease, is increased research and development activity for TLC ELL-12 and the reorientation of the Princeton manufacturing facility to the production of clinical supplies. Selling, general and administrative expenses for 1999 were $32,277,000, a decrease of $2,258,000 versus 1998. The primary reasons for the decrease is due to the shift in European selling and marketing activities to a marketing partner and the resulting reduction of international selling and marketing costs, combined with lower depreciation and employee benefits costs during 1999. The decrease was partially offset by costs associated with pre-launch marketing and planning expenses for EVACET. Selling, general and administrative expenses for the years ended January 3, 1999 and December 28, 1997 were $34,535,000 and $39,914,000, respectively. The principal reasons for the decrease were the absence in 1998 of the restructuring charge of $2,550,000 recorded in 1997, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) the elimination of litigation costs relating to the University of Texas and NeXstar patent lawsuits and reduced international sales and marketing expenditures. Interest expense was $551,000, $773,000 and $705,000 for 1999, 1998 and 1997, respectively. The decrease from 1998 to 1999 was related to the payoff of the mortgage on the Indianapolis building in the third quarter of 1999, as well as the overall reduction in the debt outstanding on capital leases. The largest components of costs are associated with the capital leases for the Princeton and Indianapolis manufacturing equipment and mortgage interest related to the Indianapolis facility. In November 1997 and January 1998, the Company refinanced certain manufacturing equipment under the original 1993 lease. This refinancing of the Princeton and Indianapolis equipment leases for a three-year period, caused an increase in interest expenses in the 1998 period. Income Taxes After 18 years of consecutive losses, the Company reported its first profitable year in 1999. During 1999, the Company recorded a provision for Federal, state and foreign taxes of $790,000. There was not a requirement to provide tax in 1998 or 1997 since the Company incurred losses in both of these years. The Company's effective tax rate for 1999 was 5.7% versus the U.S. and state blended statutory rate of approximately 40%. The relationship of the tax expense to income before taxes for 1999 differs from the U.S. statutory rate primarily because of the utilization of previously fully reserved 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/ (Loss) and Net Income/(Loss) per Share As a result of the factors discussed above, the Company's net income/(loss) was $13,051,000, ($4,686,000) and ($26,446,000) for the 1999, 1998 and 1997 fiscal years, respectively. The net income/ (loss) per share for these years were $0.32, ($0.12) and ($0.71), respectively. Weighted average shares used in the diluted per share calculations were 40,284,000, 38,172,000 and 37,083,000, respectively. The increase of 2,112,000 shares from 1998 to 1999 was attributable to the inclusion of contingently issuable shares, exercise of stock options and the 401(k) stock match. The increase in average shares outstanding in 1998 compared to 1997 was due to the annualized effect of the private placement in 1997, exercise of stock options, issuance of restricted stock and the 401(k) stock match. During the 1998 and 1997, the number of shares of Common Stock used in each twelve-month period to calculate basic and diluted loss per share were identical as the Company was in a loss position for these fiscal years and the inclusion of contingently issuable shares would have been anti-dilutive. Liquidity and Capital Resources The Company had $76,863,000 in cash and marketable securities as of January 2, 2000. Included in this amount were cash and cash equivalents of $34,461,000, short-term investments of $36,880,000 and restricted cash of $5,522,000. 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 $433,000 is recorded as a reduction of shareholders' equity. Cash and marketable securities (both short-term and restricted cash) increased $22,520,000 from January 3, 1999 to January 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 $20,434,000, the deferred liability related to the sales of loss carryforwards of $3,018,000 and exercise of stock options of $4,224,000. The major uses of funds were the principal repayments on the capital lease and note payable totaling $2,976,000, capital spending of $1,503,000 and the purchase of treasury stock of $950,000. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Inventories at January 2, 2000 increased $552,000 from January 3, 1999, primarily due to the building of raw materials levels to meet current manufacturing demand and to ensure an adequate supply of key ingredients during the Y2K period. At January 3, 1999 inventories were $5,566,000 or $4,964,000 lower than 1997 levels. During 1997, the Company completed its plan to shift manufacturing of ABELCET from Princeton to its new, more cost efficient facility in Indianapolis, Indiana. In order to ensure a smooth transition, the Company increased its inventory of ABELCET during the first half of 1997. FDA approval of the Indianapolis facility was received during the third quarter of 1997, and the Company has reoriented the Princeton manufacturing facility to the production of clinical supplies. Accrued expenses and other current liabilities at January 2, 2000 were $8,747,000 or $1,390,000 higher than January 3, 1999. The increase in accrued expenses and other current liabilities is primarily due to the increased income taxes payable relating to the 1999 profitability, royalty payments and bonuses relating to higher ABELCET sales. Deferred liability at January 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. 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. This agreement expired in January 2000 and the Company has chosen not to renew it. As part of the agreement to repurchase the development, manufacturing and marketing rights to EVACET, the Company obtained from Pfizer a credit line of up to $10,000,000 to continue the development of EVACET. 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 EVACETTM 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 1999, there were no borrowings under this facility. The Company had a mortgage-backed note to partially fund the purchase of the Indianapolis manufacturing facility. During the third quarter of 1999, the Company paid off the remaining principal balance plus accrued interest. 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 February 29, 2000, this investor has reported total holdings of approximately 22.66% 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, 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. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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. The Company began addressing the Y2K computer issue early in 1998 by conducting a Year 2000 implementation and remediation investigation. The goal of the investigation was to identify and determine the Y2K readiness of all hardware systems, software systems and sub-components used in the Company's business environment. The systems investigated were categorized into three areas. The first involved the traditional Management Information Systems that include computers, telecommunication devices, application software, operating system software, and related peripherals. The second involved manufacturing and facility systems including machines and devices used to manufacture, store, and test our product. The third involved research systems including computer-controlled devices, calibration equipment, and similar instruments. The results of the investigation were used to develop a comprehensive remediation plan to perform the necessary hardware, software, and sub-component upgrades to implement corrective action. Compliance testing and remediation efforts were accomplished throughout 1999 and completed in December 1999. With respect to remediation, the Company had prepared various types of contingency plans to address potential problems with each of the major systems. Each software and hardware system was assigned to on-call personnel responsible for bringing the system back on line in the event of a failure. Personnel were also on- site during the transition to Y2K to monitor and test major systems. No Y2K problems have been encountered in either the Company's in-house hardware or software systems or in systems maintained by our customers, suppliers and vendors. As part of its program to safeguard business processes from Y2K associated interruptions the Company will continue to monitor both internal and external systems. As of January 2, 2000, the Company had incurred aggregate costs of approximately $150,000 to address the Year 2000 issue. Certain Risk Factors This Annual Report on Form 10-K 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, TLC ELL-12 and other 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 or any other product in the research pipeline, (iv) the expansion of sales efforts regarding ABELCET in additional countries where the drug is not currently approved, (v) possible new licensing or contract manufacturing agreements, (vi) future product revenues from ABELCET, EVACET 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. Among these factors and assumptions that could affect the forward-looking statements in this Report are the following: (a) the commercialization of ABELCET, the Company's sole marketed product, is still ongoing and is subject to intense competition; (b) the Company's other Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data Reference is made to the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flow, Notes to Consolidated Financial Statements, Financial Statement Schedule and Independent Accountants Reports appearing in Item 14(a) of this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item l0. Directors and Executive Officers of the Registrant Directors The directors (who will serve until their successors are elected) of the Company are as follows: Name Age Position Charles A. Baker 67 Chairman of the Board, President, Chief Executive Officer and Director James G. Andress (2) 61 Director Morton Collins, PhD (1) 64 Director Stuart F. Feiner, Esq. (1) 51 Director Robert F. Hendrickson (2) 67 Director Kenneth E. Johns, Jr., Esq. 55 Director Professor Bengt Samuelsson, MD (1) 65 Director Joseph T. Stewart, Jr. (2) 70 Director Gerald Weissmann, MD (1) 69 Director Horst Witzel, Dr-Ing (2) 72 Director (1) Audit and Finance Committee member (2) Nominating and Compensation Committee member Item l0. Directors and Executive Officers of the Registrant (Continued) Charles A. Baker was named Chairman of the Board, President and Chief Executive Officer of the Company in December 1989. Just prior to joining the Company he was a business development and licensing advisor to several small biotechnology companies. Mr. Baker has served in several capacities in senior management at Squibb Corporation (now Bristol-Myers Squibb Company), including the positions of Group Vice President, Squibb Corporation and President, Squibb International. He has also held various executive positions at Abbott Laboratories and Pfizer Inc. Mr. Baker received an undergraduate degree from Swarthmore College and a J.D. degree from Columbia University. Mr. Baker also serves as a director of Regeneron Pharmaceuticals, Inc. and Progenics Pharmaceuticals, Inc., both biotechnology companies. He is a member of the Council of Visitors of the Marine Biological Laboratory, Woods Hole, Massachusetts, a not-for-profit research organization. James G. Andress has been a director since his appointment in September 1990. Since November 1996, Mr. Andress has been the President and Chief Executive Officer of Warner Chilcott, plc, a pharmaceutical company. From 1989 until 1995, he served as President, Co-Chief Executive Officer and Director of Information Resources, Inc., a decision support software and consumer packaged goods research company. Mr. Andress is the former Chairman of the Pharmaceuticals Group, Beecham Group, plc and the former President and Chief Operating Officer of Sterling Drug, Inc. Mr. Andress is a director of XOMA Corp. and NeoRx, Inc., which are biotechnology companies. He also serves as a director of Sepracor, Inc., a separations technology company, of O.P.T.I.O.N. Care, Inc., a home health care company, of Allstate Insurance Company, and of Information Resources, Inc. Morton Collins, Ph.D., has been a director since November 1982. Dr. Collins has been a General Partner of DSV Partners III, a venture capital limited partnership, since 1981 and a General Partner of DSV Management, Ltd., since 1982. Since 1985, DSV Management, Ltd. has been a General Partner of DSV Partners IV, a venture capital limited partnership. Dr. Collins served as interim Chairman of the Board and Chief Executive Officer of the Company from June to December 1989. He is also a director of ThermoTrex Corporation, a laser and electro-optics company, of Kopin Corporation, a manufacturing company, and of Thermedics Detection, Inc., a manufacturer of industrial and laboratory processes. Stuart F. Feiner, Esq. has been a director since February 1984. Mr. Feiner has been Executive Vice President, General Counsel and Secretary of Inco Limited, an international mining and metals company, since August 1993 and served as Vice President, General Counsel and Secretary from April 1992 to August 1994. Mr. Feiner was President of Inco Venture Capital Management, the venture capital unit of Inco Limited, from January 1984 to April 1992. Mr. Feiner is also a director of ImmunoGen, Inc., a biotechnology company. Robert F. Hendrickson has been a director of the Company since 1992. Mr. Hendrickson was Senior Vice President, Manufacturing and Technology for Merck & Co., Inc., a pharmaceutical company, from 1985 to 1990. Since 1990, Mr. Hendrickson has been a manufacturing consultant with a number of biotechnology and pharmaceutical companies among his clients. He is currently a director of Envirogen Inc., an environmental biotechnology company, a director of Cytogen, Inc. and Unigene Laboratories, Inc., both of which are biotechnology companies, and a trustee of the Carrier Foundation. Kenneth E. Johns, Jr., Esq. joined the Company as a member of the Board of Directors in November 1999. In 1974 Mr. Johns joined Vinson & Elkins LLP, and was a partner at that firm from 1980 until June 1, 1999. Mr. Johns served as a Captain in the United States Air Force Judge Advocate General's Corps. from 1970 to 1974. He is an arbitrator for the National Association of Securities Dealers, the New York Stock Exchange, and the Commodities Futures Association. Since June 1, 1999, Mr. Johns has engaged in the private practice of law and functions as the Special Assistant to the President of Ross Financial Corporation on specific referred matters. Professor Bengt Samuelsson, MD, has been a director of the Company since January 1994. Dr. Samuelsson is Professor of Physiological Chemistry of the Karolinska Institutet in Stockholm, Sweden, a position that he has held since 1972. He was one of three recipients who shared the 1982 Nobel Prize in medicine for their work on prostaglandins, specifically the discovery of Item l0. Directors and Executive Officers of the Registrant (Continued) prostanoids and leukotrienes. In addition to the Nobel Prize, he has received a number of other prestigious awards. Dr. Samuelsson is Chairman of the Nobel Foundation, a member of the Board of Directors of Pharmacia & Upjohn, a pharmaceutical company, a member of the Board of Directors of NicOx SA, Valbonne, France, a biotechnology company, and a member of the Board of Directors of Handelsbanken, Stockholm, Sweden, a Swedish bank. Joseph T. Stewart, Jr., has been a director of the Company since January 1995. Until 1989, he was associated for twenty-two years with Squibb Corporation, where he held several positions of increasing responsibility, including most recently Senior Vice President, Corporate Affairs and previously Vice President, Finance and Planning. He also served as a member of the Board of Directors of Squibb Corporation. Mr. Stewart is currently a director of General American Investors Company, Inc., a trustee of the Foundation of the University of Medicine and Dentistry of New Jersey, and a member of the Council of Visitors of the Marine Biological Laboratory, Woods Hole, Massachusetts, a not-for-profit research organization. Gerald Weissmann, M.D., has been a director of the Company since 1981. Dr. Weissmann has been a Professor of Medicine at the Division of Rheumatology of the Department of Medicine at New York University Medical Center since 1973. Dr. Weissmann is Chairman of the Company's Cancer Scientific Advisory Board. He is also on the Board of Trustees of the Marine Biological Laboratory, Woods Hole, Massachusetts, a not-for-profit research organization. Dr. Horst Witzel has been a director of the Company since July 1990. Dr. Witzel is the former Chairman of the Board of Executive Directors of Schering AG, Berlin, Germany. After his retirement in 1989 he served as a member of the Supervisory Board of Schering AG until May 1994. Mr. Witzel is a director of Cephalon, Inc., a neuroscience company. Executive Officers Who Are Not Directors The executive officers of the Company (who are elected annually by the Board of Directors) are as follows: Name Age Position James A. Boyle, M.D., Ph.D. 63 Senior Vice President, Medical and Regulatory Affairs Ralph del Campo 48 Vice President, Technical Operations Lawrence R. Hoffman 45 Vice President, Finance and Chief Financial Officer Andrew S. Janoff, Ph.D. 51 Vice President, Research and Development Michael McGrane 50 Vice President, General Counsel and Secretary George G. Renton 48 Vice President, Human Resources Donald D. Yarson 46 Senior Vice President, Worldwide Sales, Marketing and Business Development James A. (Tony) Boyle, M.D., Ph.D., joined the Company as Senior Vice President, Medical and Regulatory Affairs in August 1994. Prior to joining the Company, Dr. Boyle was employed by G.D. Searle and Co. from 1986 to 1994 where he held several positions including Vice President, Medical Relations and Vice President, Corporate Medical and Scientific Affairs. Previously, he held senior clinical research positions at Serono Laboratories, Warner Lambert and Pfizer. Dr. Boyle received his M.D. degree (U.K. equivalent) from Glasgow University in 1960 and his Ph.D. degree (U.K. equivalent) in Medicine in 1967. He is Board Certified (U.K. equivalent) in Internal Medicine and Endocrinology. Item l0. Directors and Executive Officers of the Registrant (Continued) Ralph del Campo joined the Company in March 1994 as Vice President, Manufacturing Operations, and was named Vice President, Technical Operations in November 1999. Between 1993 and 1994, he was Senior Vice President, Operations of Melville Biologics, a subsidiary of The New York Blood Center. His prior experience includes positions at Schering Plough Corporation and, from 1977 to 1993, Bristol-Myers Squibb where he had several positions of increasing responsibility including Senior Director, Pharmaceutical Operations and Vice President, Facilities Administration. Mr. del Campo received a B.S. degree in Chemical Engineering from Newark College and an MBA in Pharmaceutical Marketing from Farleigh Dickinson University. Lawrence R. Hoffman joined the Company as Vice President, Finance and Chief Financial Officer in April 1998. His responsibilities include management of the financial and investor relations departments. He has previously been Vice President and Chief Financial Officer of IGI, Inc., where he had been serving in the additional capacity of acting Chief Operating Officer. Prior to joining IGI, Inc., Mr. Hoffman was Treasurer, Secretary and Acting Principal Financial Officer for Sybron Chemicals, Inc. He received a B.S. in accounting from LaSalle University, a J.D. from Temple University and an L.L.M. in Taxation from Villanova. He holds degrees in taxation, accounting and law. Andrew S. Janoff, Ph.D., joined the Company in 1981, was named Vice President of Research in January 1993, and became Vice President of Research and Development in September 1997. He holds an adjunct Professorship in Pathology, Anatomy and Cell Biology at Thomas Jefferson University and is a visiting scientist in the Department of Chemical Engineering at Princeton University. Dr. Janoff is Editor-in-Chief of The Journal of Liposome Research and has served on the Committee on Science and the Arts at The Franklin Institute, Philadelphia, Pennsylvania. Dr. Janoff is author of over one hundred scientific articles, reviews and awarded U.S. and European patents. Prior to joining the Company, Dr. Janoff held joint appointments as Research Fellow in Pharmacology at Harvard Medical School and Research Fellow in Anesthesia at the Massachusetts General Hospital. Dr. Janoff holds a B.S. degree in biology from The American University, Washington, D.C. (1971) and M.S. and Ph.D. degrees in biophysics from Michigan State University (1977 and 1980, respectively). Michael McGrane joined the Company as Vice President, General Counsel and Secretary in December 1998. Prior to joining the Company Mr. McGrane held the position of Vice President, General Counsel and Secretary at Novartis Consumer Health, Inc. from 1997 to 1998. Mr. McGrane joined Sandoz Pharmaceuticals Corporation in 1984, and held the position of Associate General Counsel before the merger of Sandoz with Ciba Geigy to form Novartis in 1997. Before joining Sandoz, he was Regulatory Counsel to the U.S. Food and Drug Administration. Mr. McGrane received his law degree from Georgetown University. He has a BA degree from Cornell College. George G. Renton joined the Company in August 1994 as Vice President, Human Resources. From 1985 until joining the Company, he was employed by the American Cyanamid Company in several positions, including Director, Personnel, Research and Development of the Lederle Laboratories Division. Earlier, he held several positions of increasing responsibility at New York University Medical Center including Assistant Director, Employee Relations. Mr. Renton was awarded a B.S. degree in Education from the State University of New York at Cortland (1975) and a M.S. degree in Industrial/Labor Relations from Cornell University and Baruch College (1985). Donald D. Yarson joined the Company as Vice President, Marketing and Sales in February 1995, and became Senior Vice President, Worldwide Sales, Marketing and Business Development in November 1999. From 1993 until 1995, he was President of TriGenix, Inc., a contract sales, marketing and reimbursement organization. He was Director of Marketing for Genzyme Corporation from 1991 to 1993, and before that he was with Genentech Inc. for over four years, serving most recently as Senior Product Manager for Protropin (human growth hormone). He has also held sales and marketing positions with Ciba Geigy. Mr. Yarson received a B.S. degree from Sacred Heart University in 1975. Section 16(a) Beneficial Ownership Reporting Compliance Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, directors and executive officers of the Company are required to file reports with the SEC indicating their holdings of and transactions in the Company's equity securities. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended January 2, Item l0. Directors and Executive Officers of the Registrant (Continued) 2000, all directors and executive officers filed all required reports on a timely basis, except that, in connection with his services as Chairman of the Company's Cancer Scientific Advisory Board, Dr. Weissmann received a grant of options in September 1998 which remained unreported until the filing of his Form 5 for fiscal year 1999. Item ll. Executive Compensation The following table shows, for the fiscal years ended January 2, 2000, January 3, 1999, and December 28, 1997, the annual and long-term compensation awarded to, earned by or paid to the Chief Executive Officer, and the four other most highly compensated individuals who served as the Company's "executive officers," as that term is defined in Rule 3b-7 adopted by the United States Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as of January 2, 2000 (these individuals, together with the Chief Executive Officer, are sometimes referred to as the "Named Executive Officers"). SUMMARY COMPENSATION TABLE ANNUAL LONG-TERM COMPENSATION COMPENSATION AWARDS RESTRICTED SECURITIES ALL STOCK UNDERLYING OTHER SALARY BONUS AWARD(S) STOCK COMPENSATION NAME AND PRINCIPAL YEAR $ (1) (2) OPTIONS (4) POSITION $ $ (NO. OF $ SHARES) Charles A. Baker 1999 $497,962 $135,000 -- 140,000 $9,600 Chairman of the Board, 1998 394,000 200,000 $463,750 243,900(3) 10,000 President, and Chief 1997 375,000 40,000 -- 281,000 9,500 Executive Officer James A. Boyle, MD, PhD 1999 $272,692 $45,000 -- 7,500 $9,600 Senior Vice President, 1998 262,692 75,000 196,002 49,320(3) 10,000 Medical and Regulatory Affairs 1997 252,253 12,500 12,500 48,800 9,500 Ralph del Campo 1999 $216,769 $90,000 -- 25,000 $9,600 Vice President, Technical 1998 203,692 115,600 236,998 134,820(3) 10,000 Operations 1997 193,889 11,000 11,000 44,800 9,500 Andrew S. Janoff, PhD 1999 $215,500 $70,000 -- 10,000 $9,600 Vice President, Research 1998 197,846 80,000 170,998 71,418(3) 10,000 and Development 1997 186,923 11,000 11,000 43,600 9,500 Donald D. Yarson 1999 $224,423 $110,000 -- 30,000 $9,600 Senior Vice President, 1998 207,692 130,000 346,872 108,000(3) 10,000 Worldwide Sales, Marketing and 1997 181,873 13,750 13,750 120,000 9,500 Business Development (1)Bonuses, all of which have been paid, are shown in the year earned. (2)All restricted stock grants were made on January 25, 1996, January 23, 1997, January 22, 1998 and September 10, 1998 under The Liposome Company 1996 Equity Incentive Plan. The aggregate number of shares held by the Named Executive Officers at the end of 1999 (and their market value as of January 2, 2000) were: Mr. Baker, 93,278 ($1,137,991); Dr. Boyle, 39,661 ($483,864); Mr. del Campo, 48,518 ($591,919); Dr. Janoff, 34,125 ($416,325); and Mr. Yarson, 70,199 ($856,427). The January 25, 1996 and January 23, 1997 grants vested in equal increments over a three-year period. A portion of the January 22, 1998 grant vested on February 11, 2000, and the remaining portion vested in equal increments over a two- year period from the date of grant. The September 10, 1998 grant will vest 48 hours after earnings release for fiscal year 2000. (3)The numbers shown for securities underlying options awarded in 1998 include only the number of shares underlying options that were repriced in 1998 since there were no new options awarded to the executive officers, including the Named Executive Officers, in Item ll. Executive Compensation (Continued) 1998. In addition, in order to qualify for the repricing, each optionee, including each Named Executive Officer, was required to surrender 10% of the shares covered by the options to be repriced. This surrender actually reduced the total number of shares covered by options held by the Named Executive Officers. (4)All other compensation represents amounts credited as Company matching contributions under the Company's 401(k) stock match. Option Grants The following table presents stock options granted for the period from January 4, 1999, through January 2, 2000, to the Named Executive Officers. All grants were made under The Liposome Company 1996 Equity Incentive Plan. OPTION GRANTS IN 1999 FISCAL YEAR POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(2) NUMBER OF PERCENT OF EXERCISE EXPIRATION SECURITIES TOTAL PRICE DATE UNDERLYING OPTIONS ($ PER OPTIONS GRANTED TO SHARE) GRANTED (1) EMPLOYEES NAME (#) IN FISCAL 5% 10% YEAR (%) ($) ($) Charles A. Baker 23,280 1.97 $14.1875 01/21/09 $207,714 $526,389 76,720 6.49 14.1875 01/21/09 684,529 1,734,732 40,000 3.38 7.2500 10/20/09 182,379 462,185 James A. Boyle, MD, PhD7,500 0.63 7.2500 10/20/09 34,196 86,659 Ralph del Campo 25,000 2.11 7.2500 10/20/09 113,987 288,865 Andrew S. Janoff, PhD10,000 0.84 7.2500 10/20/09 45,594 115,546 Donald D. Yarson 16,174 1.36 7.2500 10/20/09 73,745 186,884 13,826 1.17 7.2500 10/20/09 63,039 159,754 (1) All options granted expire ten years from the date of grant and become exercisable ratably over five years beginning approximately one year from the date of grant. (2) The percentage rates of increase shown are assumed rates established by the U.S. Securities and Exchange Commission for purposes of uniform compensation reporting. Accordingly, they do not constitute predictions or estimates by the Company of the future price appreciation of its Common Stock or of the potential realizable value of the options referred to in the table. These "potential realizable values" are not discounted to present value, and the present value of these assumed potential realizable values would be less than the amounts indicated. Item ll. Executive Compensation (Continued) Option Exercises and Fiscal Year-End Values The following table summarizes stock options exercised by the Named Executive Officers in 1999, and the unexercised stock options and the fiscal year-end values of all outstanding options held by the Named Executive Officers as of January 2, 2000. OPTION EXERCISES IN 1999 AND JANUARY 2, 2000 OPTION VALUES 1999 OPTION EXERCISES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT JANUARY 2, 2000 JANUARY 2, 2000 (1) Name SHARES VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ACQUIRED REALIZED (#) (#) ($) ($) ($) (2) Charles A. Baker 153,336 $1,974,201 280,063 216,338 $2,257,438 $773,949 James A. Boyle, MD, PhD -- -- 217,192 14,628 $1,529,801 $93,792 Ralph del Campo -- -- 128,413 31,408 $1,020,883 $174,693 Andrew S. Janoff PhD -- -- 66,234 15,184 $526,560 $90,712 Donald D. Yarson -- -- 67,249 70,751 $534,629 $472,470 (1) Value of unexercised in-the-money options is equal to the fair market value of $12.20 per share of Common Stock, the closing price on the last trading day prior to January 2, 2000, as quoted by the Nasdaq National Market, less the exercise price. (2) "Value realized" reflects the difference between the exercise price and the closing price on the date of exercise of 153,336 shares exercised by Mr. Baker which were transferred to the Baker Family Limited Partnership. Employment Agreement The Company entered into an employment agreement with Mr. Baker, which began in December 1989 and was renewed in 1995. The renewed agreement terminated in accordance with its terms on May 31, 1998; however, it was mutually agreed that Mr. Baker would continue to serve as Chief Executive Officer, Chairman of the Board and President, on the same terms and conditions, at the pleasure of the Board. Under the agreement, Mr. Baker has agreed that he will not during his employment period and for a period of two years after the termination of his employment, without the prior approval of the Company's Board of Directors, engage in any business involved in the research, development, manufacture or sale of lipids or liposomes or products or services which use natural or artificial lipids or liposomes to encapsulate, enhance or deliver any product. If Mr. Baker should be dismissed except for cause or should choose to resign from his position with the Company during the first six months following the effective date of a change of control, Mr. Baker would be entitled to receive his then current monthly base salary for a 12-month period from such effective date and for up to an additional 12-month period if he does not obtain another full-time position. Item ll. Executive Compensation (Continued) In July 1999, Mr. Baker's agreement was amended to change the definition of change of control to conform to the definition in the Company's severance agreements with the other executive officers. (The proposed merger with Elan Corporation, plc, discussed above, would constitute a change of control under both the prior and revised definitions.) In addition, the agreement was amended to provide that any termination after age 65 would constitute a retirement for purposes of Company benefits plans, including option plans. Directors' Compensation Directors who are not employees of the Company receive an annual retainer of $4,000 per quarter, which is paid in Company stock. In addition, during 1999, such directors received $2,000 for each Board meeting attended in person, and $500 for each telephonic Board meeting attended. A director who participates in a regular Board meeting by telephone receives $1,000. For a Board committee meeting held the day before a Board meeting, committee members receive $500 if they attend in person, and for meetings held at other times (except the day of a Board meeting), the fee is $1,000 for attendance in person. For telephonic meetings of Board committees, and for participation by telephone in a regular meeting, members receive a fee of $500. Dr. Weissmann is a consultant to the Company. In the fiscal year ended January 2, 2000, the Company paid $20,000 in fees to Dr. Weissmann for his services as Chairman of the Company's Cancer Scientific Advisory Board. The Company believes that it is very important that it be able to continue to attract the highest caliber of persons to serve as non- employee directors. To do so, the Company must be able adequately to compensate the directors for the responsibility and risk they assume. Since the Company does not offer directors the levels of cash compensation they would normally receive for a directorship of a larger pharmaceutical or other industrial company, stock options offer an appropriate way to partially compensate directors and allow them to share as stockholders in the ultimate success of the Company. The 1991 Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), which was adopted by the stockholders in 1992, constitutes a key element of the Company's long-term program to attract and compensate non-employee directors. The Directors' Plan provides that options to purchase 10,000 shares of Common Stock are automatically granted on July 1 of each year from 1991 until 2001 to each non-employee director. These grants are fully vested on the first anniversary of the date of grant. In addition, each new director receives an initial grant of 10,000 shares, which vests in equal installments over a five-year period. As of February 29, 2000, there were nine non-employee directors participating in the Directors' Plan. Mr. Johns received an initial grant of 10,000 shares on October 20, 1999, the day he was appointed to the Board of Directors. In addition, there were eight grants of options to acquire an aggregate of 80,000 shares of the Company's Common Stock on July 1, 1999 under the Directors' Plan at an exercise price of $19.50 per share. Item l2. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of February 29, 2000, by (i) each director and Named Executive Officer of the Company (as defined under the section entitled "Executive Compensation"), (ii) each stockholder known by the Company to own more than five percent of the outstanding Common Stock, and (iii) all directors and executive officers, including the Named Executive Officers, as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the securities listed below, based on information furnished by such owners, have sole investment and voting power with respect to the shares of Common Stock shown as being beneficially owned by them. Beneficial Owner Number of Shares Percent of Total Ross Financial Corporation (1) 8,945,846 22.66 P.O. Box 31363-SMP Cayman Islands, BWI Charles A. Baker (2)(3)(4)(6) 791,848 2.01 James G. Andress (2)(8) 81,358 * Morton Collins, PhD (2)(8) 140,358 * Stuart F. Feiner, Esq. (2)(8) 52,358 * Robert F. Hendrickson (2)(8) 71,358 * Kenneth E. Johns, Jr., Esq.(7)(8) 1,327 * Professor Bengt Samuelsson, MD (2)(8)71,358 * Joseph T. Stewart, Jr. (2)(8) 46,358 * Gerald Weissmann, MD (2)(5)(8) 86,359 * Horst Witzel, Dr-Ing (2)(8) 106,358 * James A. Boyle, MD, PhD (2)(4)(6) 264,828 * Ralph del Campo (2)(4)(6) 181,795 * Andrew S. Janoff, PhD (2)(4)(6) 106,243 * Donald D. Yarson (2)(4)(6) 148,997 * All Directors and Executive Officers2,329,342 5.9 as a group (17 persons) (2)(4)(6) *Less than 1.0 percent ______________________________ (1) Based on information filed with the SEC on Schedule 13D/A by Ross Financial Corporation dated August 12, 1999. Mr. Kenneth B. Dart is the sole shareholder of STS Inc., which is the sole shareholder of Ross Financial Corporation. Mr. Dart may, therefore, be deemed to be the beneficial owner of the shares held by Ross Financial Corporation. (2) Includes shares of Common Stock issuable upon the exercise of outstanding options granted under the Company's stock option plans which are exercisable within 60 days after February 29, 2000, as follows: Mr. Baker, 300,063; Mr. Andress, 80,000; Dr. Collins, 55,000; Mr. Feiner, 50,000; Mr. Hendrickson, 50,000; Dr. Samuelsson, 70,000; Mr. Stewart, 41,000; Dr. Weissmann, 55,001; Dr. Witzel, 105,000; Dr. Boyle, 217,192; Mr. Del Campo, 128,413; Dr. Janoff, 66,234; Mr. Yarson, 74,448; and all executive officers and directors as a group (17 persons), 1,420,763. (3) Includes 315,463 shares owned by the Baker Family Limited Partnership, of which Mr. Baker is the General Partner. (4) Includes shares held by Charles Schwab Trust Company as trustee of the Company's 401(k) plan as of December 31, 1999, in the following amounts: Mr. Baker, 6,066; Dr. Boyle, 924; Mr. del Campo, 4,864; Dr. Janoff, 5,824; Mr. Yarson, 4,350; and all executive officers and directors as a group (17 persons), 28,521. (5) Does not include 5,790 shares held in trust for the estate of Dr. Weissmann's father-in-law, for which Dr. Weissmann's wife serves as trustee. Dr. Weissmann disclaims beneficial ownership of these shares. Item l2. Security Ownership of Certain Beneficial Owners and Management (Continued) (6) Includes shares of restricted stock granted on January 25, 1996, January 23, 1997, January 22, 1998, and September 10, 1998, under The Liposome Company 1996 Equity Incentive Plan, in the following aggregate amounts: Mr. Baker, 93,278; Dr. Boyle, 39,661; Mr. del Campo, 48,518; Dr. Janoff, 34,125; Mr. Yarson, 70,199; all executive officers and directors as a group (17 persons), 329,315. (7) Does not include 1,000 shares held in an Individual Retirement Account ("IRA") for the sole benefit of Mr. Johns' spouse. (8) During 1999, the Company revised its Director Compensation Plan by paying the quarterly retainer in shares of Common Stock on the last day of each quarter in which the Director serves. See also "Item 1. Business-Overview/Merger With Elan Corporation, plc/Business Strategy". Item l3. Certain Relationships and Related Transactions On January 20, 2000, the Nominating and Compensation Committee approved, and the Board of Directors ratified, a loan policy for the officers of the Company up to the amount due in cash for any required income tax withholding as a result of the vesting of certain restricted stock awards. If the officer borrowing the funds repays the principal amount of the loan on or before the due date (generally the date twelve months from the making of the loan), no interest will accrue on the borrowed funds. The Company will pay to the officer in cash any federal, state and local income taxes resulting from the imputation of interest on the loan. In March 2000, Messrs. Baker, Boyle, del Campo, and Renton borrowed $187,321.88, $89,914.50, $89,914.50, and $74,928.75, respectively, pursuant to the above terms. Each of the borrowers executed a promissory note in favor of the Company with respect to his loan. Each note is secured by the shares of the Company's fully-paid and non-assessable common stock from the restricted stock awards described above, which are, respectively, 50,000, 24,000, 24,000, and 20,000 shares. PART IV Item l4. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) l and 2. Financial Statements and Schedule Consolidated financial statements and financial statement schedule listed in the accompanying index are filed herewith. 3. Exhibits See Exhibit Index included elsewhere in this Report. (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. Index to Financial Statements (Item l4(a)1 and 14(a)2) Page Consolidated Financial Statements Report of Independent Accountants 38 Consolidated Balance Sheets at January 2, 2000 and January 3, 1999 39 Consolidated Statements of Operations for each of the three years in the period ended January 2, 2000 40 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 2, 2000 41 Consolidated Statements of Cash Flows for each of the three years in the period ended January 2, 2000 42 Notes to Consolidated Financial Statements 43-57 Report of Independent Accountants on financial statement schedule 58 Financial statement schedule 59 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Liposome Company, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of The Liposome Company, Inc. and its Subsidiaries ("the Company") at January 2, 2000 and January 3, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Florham Park, New Jersey February 4, 2000, except for Note 15, as to which the date is March 14, 2000 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS 1/2/00 1/3/99 Current assets: Cash and cash equivalents $34,461 $8,074 Short-term investments 36,880 34,339 Accounts receivable, net of allowance for doubtful accounts ($819 for 1999, $579 for 1998) 6,208 5,340 Inventories 6,118 5,566 Prepaid expenses 750 1,266 Other current assets 558 560 Total current assets 84,975 55,145 Property, plant and equipment, net 19,977 23,165 Restricted cash 5,522 11,930 Intangibles, net 284 334 Total assets $110,758 $ 90,574 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $3,755 $ 3,991 Accrued expenses and other current liabilities 8,747 7,357 Deferred liability 3,018 -- Current obligations under capital leases 2,126 2,093 Current obligations under note payable -- 303 Total current liabilities 17,646 13,744 Long-term obligations under capital leases 2,383 4,509 Long-term obligations under note payable -- 580 Total liabilities 20,029 18,833 Commitments and contingencies Stockholders' equity: Capital stock: Common Stock, par value $.01; 120,000 shares authorized; 39,220 and 38,327 shares issued and outstanding 393 383 Additional paid-in capital 272,110 265,254 Treasury Stock - at cost (950) -- Accumulated other comprehensive loss (345) (366) Accumulated deficit (180,479) (193,530) Total stockholders' equity 90,729 71,741 Total liabilities and stockholders' equity $110,758 $ 90,574 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) Year Ended 1/2/00 1/3/99 12/28/97 Product sales $86,203 $73,495 $58,452 Collaborative research and development revenues -- -- 2,331 Interest, investment and other income 6,267 4,373 4,313 Total revenues 92,470 77,868 65,096 Cost of goods sold 20,284 20,805 22,029 Research and development expense 25,517 26,441 28,894 Selling, general and administrative expense 32,277 34,535 39,914 Interest expense 551 773 705 Total expenses 78,629 82,554 91,542 Net income/(loss) before taxes 13,841 (4,686) (26,446) Provision for income taxes 790 -- -- Net income/(loss) $13,051 $(4,686) $(26,446) Net income/(loss) per share (basic) $ 0.34 $ (0.12) $(0.71) Net income/(loss) per share (diluted) $ 0.32 $ (0.12) $(0.71) Weighted average number of common shares outstanding (basic) 38,825 38,172 37,083 Weighted average number of common shares outstanding (diluted) 40,284 38,172 37,083 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Shares Accumulated Total of Additional Accumulated Other Stock- Common Par Paid-in Earnings/ Comprehensive Holders' Stock Value Capital Deficit Income/(Loss) Equity Balance, December 29, 1996 36,061 $361 $237,809 $(162,398) $(911) $74,861 Net loss for 1997 -- -- -- (26,446) -- (26,446) Other Comprehensive Income: Net unrealized investment gain -- -- -- -- 373 373 Foreign currency translation adjustment -- -- -- -- 30 30 Comprehensive Loss (26,043) Issuance of stock: To 401K plan 105 1 1,253 -- -- 1,254 Restricted Stock 27 -- 50 -- -- 50 Payments for past royalties 45 1 255 -- -- 256 Private placement of Common Stock 1,000 10 20,865 -- -- 20,875 Exercise of stock options 425 4 2,398 -- -- 2,402 Issuance of warrant -- -- 165 -- -- 165 Expenses related to Registration of Common Stock -- -- (158) -- -- (158) Balance, December 28, 1997 37,663 377 262,637 (188,844) (508) 73,662 Net loss for 1998 -- -- -- (4,686) -- (4,686) Other Comprehensive Income: Net unrealized investment gain -- -- -- -- 96 96 Foreign currency translation adjustment -- -- -- -- 46 46 Comprehensive Loss (4,544) Issuance of stock: To 401K plan 179 2 945 -- -- 947 Restricted Stock 389 3 -- -- -- 3 Issuance of shares 10 -- 50 -- -- 50 Amortization of Restricted Stock -- -- 1,035 -- -- 1,035 Exercise of stock options 86 1 532 -- -- 533 Warrant amortization -- -- 55 -- -- 55 Balance, January 3, 1999 38,327 383 265,254 (193,530) (366) 71,741 Net income for 1999 -- -- -- 13,051 -- 13,051 Other Comprehensive Income: Net unrealized investment loss -- -- -- -- (421) (421) Foreign currency translation adjustment -- -- -- -- 442 442 Comprehensive Income 13,072 Issuance of stock to 401(k) Plan 67 -- 752 -- -- 752 Amortization of Restricted Stock & options -- -- 1,609 -- -- 1,609 Exercise of stock options 892 10 4,214 -- -- 4,224 Warrant amortization -- -- 56 -- -- 56 Treasury stock at cost (66) -- (950) -- -- (950) Tax effect - stock options exercised -- -- 225 -- -- 225 Balance, January 2, 2000 39,220 $393 $271,160 $(180,479) $(345) $90,729 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) _________Year Ended 1/2/00 1/3/99 12/28/97 Cash flows from operating activities: Net income/(loss) $13,051 $(4,686) $(26,446) Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities: Depreciation and amortization 4,200 5,672 5,135 Provision for bad debt 240 373 206 Issuance of Common Stock and warrants 56 105 421 Stock based compensation and other 3,127 2,144 1,304 Changes in assets and liabilities: Accounts receivable (1,108) 1,437 528 Inventory (552) 4,964 (626) Prepaid expenses 516 (232) (199) Other current assets 2 (344) (169) Accounts payable (236) 1,375 810 Accrued expenses and other current liabilities.................................... 1,390 1,348 (1,673) Deferred liability..................... 3,018 -- -- Net cash provided/(used) by operating activities 23,704 12,156 (20,709) Cash flows from investing activities: Purchases of short- and long-term investments (49,245) (29,595) (30,375) Sales of short- and long-term investments 46,283 13,711 50,798 Restricted cash 6,408 -- (5,000) Purchases of property, plant and equipment (1,503) (1,790) (1,892) Net cash provided/(used) by investing activities 1,943 (17,674) 13,531 Cash flows from financing activities: Proceeds from issuance of Common Stock......... -- -- 20,875 Purchase of Treasury Stock (950) -- -- Exercises of stock options 4,224 533 2,402 Expenses related to registration of Common Stock. -- -- (158) Principal payments under note payable (883) (303) (303) Principal payments under capital lease obligations. (2,093) (1,920 (2,273) Net cash provided/(used) by financing activities 298 (1,690) 20,543 Effects of exchange rate changes on cash 442 46 30 Net increase/(decrease) in cash and cash equivalents.26,387 (7,162) 13,395 Cash and cash equivalents at beginning of year 8,074 15,236 1,841 Cash and cash equivalents at end of year $34,461 $ 8,074 $15,236 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Business And Summary Of Significant Accounting Policies: Business: 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 (Amphotericin B Lipid Complex Injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States and 24 foreign markets and is the subject of marketing application filings in several other countries. In the United States, ABELCET 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 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 EVACET (formerly TLC D-99), liposomal doxorubicin, as a treatment for metastatic breast cancer and potentially other cancers. 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 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. In 1997, the Company entered into agreements to settle patent litigation with the University of Texas and M.D. Anderson Cancer Center ("UT") and with NeXstar Pharmaceuticals, Inc. ("NeXstar"), (now Gilead Sciences, Inc.) and Fujisawa U.S.A., Inc. Under the UT settlement the Company received an exclusive license under UT's patent, paid past royalties on sales of ABELCET agreed to pay royalties on future sales, and issuedto UT a ten-year warrant to purchase 1,000,000 shares of the Company's Common Stock at $15.00 per share. Under the NeXstar settlement, the Company received an initial payment of $1,750,000 in 1997 and began receiving quarterly minimum payments in 1998. These payments are classified as interest, investment and other income based on worldwide sales of AmBisome. The cumulative amount of these receipts through year-end 1999 is approximately $6.0 million. 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 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 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 Astra. Financial Statement Presentation: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. The Company regularly assesses the estimates and management believes that the estimates are reasonable. Consolidated Financial Statements: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition: Revenue from product sales is recognized upon transfer of title to unrelated third parties with provisions for price adjustments to large volume purchasers in the U.S. and for certain government mandated price protection programs. Payments for collaborative research and development are generally received in advance and are recognized as revenue, ratably, as the research and development is performed. Licensing fees, royalty and hurdle payments are recognized in the period earned. Advertising: Advertising costs are expensed in the period incurred. Total advertising costs were approximately $230,000 in 1999, $190,000 in 1998, and $800,000 in 1997. Depreciation and Amortization: Machinery and equipment, building and building improvements and furniture and fixtures, are depreciated by the straight-line method over their estimated useful lives ranging from three to twenty years. Leasehold improvements are amortized by the straight-line method over the lesser of their estimated useful lives or the terms of the related leases. Purchased patents are amortized by the straight-line method over their lives as determined by the country of issuance. The Company periodically reviews the realizability of its patents. Cash Equivalents: The Company considers all highly liquid investments with maturities of three months or less as cash equivalents. Investments: Short-term investments represent marketable securities available for operations, all of which have been classified as available for sale. These investments are stated at fair value, determined at January 2, 2000. Fair values may not be representative of actual values of financial investments that could be realized in the future. For the years ended January 2, 2000, January 3, 1999 and December 28, 1997, investment income included gross realized gains of $20,000, $0, and $2,800 and realized losses of $0, $0, and $9,100, respectively. At January 2, 2000, January 3, 1999 and December 28, 1997, investments included gross unrealized losses of $433,000, $12,000, and $108,000, respectively, and no gross unrealized gains for the periods. In computing realized gains THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) and losses, the Company computes the cost of its investments on a specific identification basis. The fair values of investment securities maturing within one year was $29,618,000. Restricted Cash: The Company has entered into certain financing arrangements that require the issuance of letters of credit that are partially collateralized by specific securities. The aggregate amount of these securities is segregated and identified as restricted cash. The Company is also required to maintain minimum cash balances in connection with certain of these financings. Inventories: Inventories are carried at the lower of actual cost or market and cost is accounted for on the first-in first-out (FIFO) method. Concentration of Credit Risk: The Company's significant concentrations of credit risk are with its cash and investments and its accounts receivable. The investment portfolio consists of a diversified portfolio of high-grade corporate marketable and United States Government-backed securities. Product- related accounts receivable in the U.S. are generally with major distributors and internationally with the Company's marketing partners or hospitals, which are generally funded by their respective governments. The Company provides credit to its customers on an uncollateralized basis after evaluating their credit and utilizes credit insurance, subject to certain deductibles, to protect it from catastrophic losses. Basic and Diluted Income/(Loss) Per Share: Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. For 1998 and 1997, the Company had not included potential common shares in the diluted per share computation as the result is anti-dilutive. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) In Thousands For the years ended 1/2/00 1/3/99 12/28/97 Weighted average number of sh ares of 38,825 38,172 37,083 Common Stock outstanding Dilutive stock options and 1,459 -- -- warrants Shares used in calculating diluted earnings per share 40,284 38,172 37,083 The numerator and denominator of the basic and diluted per share computations were as follows: In Thousands Except Per Share Amounts Weighted Net Income/ Average Per Share (Loss) Shares Amount Year Ended January 2, 2000 Basic income per share available to Common Stockholders $ 13,051 38,825 $0.34 Diluted income per share available to Common Stockholders $ 13,051 40,284 $0.32 Year Ended January 3, 1999 Basic and diluted loss per share available to Common Stockholders $ (4,686) 38,172 $(0.12) Year Ended December 28, 1997 Basic and diluted loss per share available to Common Stockholders $(26,446) 37,083 $(0.71) Basic and diluted net income/(loss) per share is calculated using the weighted average number of common shares for all periods presented. Options and warrants to purchase 6,106,753 shares of Common Stock at a range of $1.19 - $27.63 per share were outstanding during 1999. The options and warrants expire on various dates from April 1, 2000 to December 27, 2009. Reclassification: Certain reclassifications have been made to the prior year financial statement amounts to conform to the presentation in the current year financial statements. Foreign Currency Transactions: Generally, Consolidated Balance Sheet amounts have been translated using exchange rates in effect at the balance sheet dates and the translation adjustments have been included in the foreign currency translation adjustment as a separate component of Consolidated Stockholders' Equity. Amounts related to transactions in the Consolidated Statements of Operations have been translated using the average exchange rates in effect each year and transaction gains and losses have been included therein as other income. During 1999, the Company realized $284,000 foreign currency transaction losses, $122,000 in losses in 1998, and $65,000 in losses in 1997. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Research and Development Expenses: The research and development expenses of the Company, which are expensed as incurred, include those efforts related to collaborative research and development agreements, development of the Company's proprietary products and general research. The expenses include, but are not limited to, medical, biostatistical, regulatory, manufacturing of clinical grade product and scientific support costs. 2. Stockholders' Equity: Common Stock: On April 23, 1997 the Company issued 1,000,000 shares of Common Stock at $20.875 per share to an investment company wholly owned by a private investor for cash of $20,875,000. At February 29, 2000, this investor has reported total holdings of 22.66% of the Company's outstanding shares of Common Stock. On July 1, 1997, the Company and the University of Texas and M.D. Anderson Cancer Center came to an agreement to resolve pending patent litigation. Under the agreement, the Company paid the University of Texas for past royalties consisting of cash and shares of the Company's Common Stock, which resulted in 44,835 Common Stock shares being issued to the University of Texas on October 29, 1997. In addition, the Company issued the University of Texas a ten-year warrant to purchase 1,000,000 shares of the Company's Common Stock at an exercise price of $15 per share. The value of the warrant is being amortized as royalty expense from 1995 to 2004. 3. Stock-Based Compensation Plans: The Company has four stock-based compensation plans that are currently in effect. The 1986 Employee Stock Option Plan and the 1986 Non- Qualified Stock Option Plan will expire on March 3, 2005, but no additional options can be granted under either of these plans after March 7, 1996. The two other plans are the 1996 Equity Incentive Plan ("1996 Plan") and the 1991 Directors' Non-Qualified Stock Option Plan ("Directors' Plan"). A total of 4,500,000 shares of Common Stock are reserved for issuance under the 1996 Plan, which will expire on March 7, 2006. The total number of shares of Common Stock authorized for issuance under the Directors' Plan is 550,000, and that plan will expire on May 21, 2002. The Board of Directors may grant restricted stock, stock appreciation rights and other forms of incentives as well as stock options under the 1996 Plan. Options granted under all plans must have an exercise price equal to or greater than the fair market value of the Company's Common Stock on the date of grant and must have a term no longer than ten years. Options granted under the 1986 Employee Stock Option Plan, the 1986 Non-Qualified Stock Option Plan and the 1996 Plan generally become exercisable in five equal annual installments, although the Board of Directors has discretion to grant options with different vesting schedules under the 1996 Plan. Options under the Directors' Plan are automatically granted to all non-employee directors upon appointment to the Board of Directors and annually on July 1 of each year. The initial grants vest over a five-year period, and subsequent annual grants vest in one year. In July 1997, the Board of Directors approved the repricing of certain stock options. In connection therewith, employees were offered an opportunity to have certain stock options repriced to the then current market price. In exchange for obtaining a lower price, the option holders were required to surrender 20% of the shares covered by their options and to wait a full year before they could exercise any of the repriced options. The repricing was effected either as an amendment of the existing option or as the surrender of the existing option and issuance of a new option, depending on the plan under which the option was issued. The repricing did not affect the term of the options; all repriced options expire ten years from their original date of grant, and the normal THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) vesting schedule will resume after the one-year waiting period. Substantially all of the options eligible for repricing were surrendered and repriced. In September 1998, the Board of Directors approved a repricing of certain stock options under similar conditions as noted above. However, in this instance the option holders were required to surrender 10% of the shares covered by the options in exchange for the issuance of a new option. The majority of the options eligible for repricing were surrendered and repriced. During 1999, the Company revised its Director Compensation Plan by increasing the annual retainer to $16,000, payable quarterly in shares of Common Stock on the last day of each quarter in which the Director serves. The table below summarizes the stock option activity under all of the Company's plans for the years 1997, 1998, and 1999: Weighted Weighted Average Number Average Exercise Fair Options of Options Exercise Price Value at Exercisable Outstanding price Per Share Grant Date Outstanding 12/29/96 1,727,094 4,352,523 $ 10.74 $ 1.03-25.13 Granted 3,486,637 8.11 4.94-27.63 $ 5.56 Exercised (425,428) 5.47 1.03-23.25 Forfeited (2,432,982) 14.80 5.19-27.63 Outstanding 12/28/97 1,828,648 4,980,750 $ 7.39 $ 1.03-24.38 Granted 2,788,101 4.77 3.69-12.50 $ 3.07 Exercised (85,723) 6.19 1.19- 8.75 Forfeited (2,883,291) 7.92 4.06-21.00 Outstanding 1/3/99 2,108,988 4,799,837 $ 5.54 $ 1.03-24.38 Granted 1,336,300 9.42 7.13-27.63 $ 6.02 Exercised (892,353) 4.73 1.03-18.50 Forfeited (187,031) 7.10 4.22-15.00 Outstanding 1/2/00 2,856,180 5,056,753 $ 6.65 $ 1.19-27.63 The weighted average remaining contractual lives of outstanding options at January 2,2000 as approximately 7.1 years. The following table summarized information about stock options outstanding at January 2, 2000: OPTIONS OUTSTANDING OPTIONS EXERCISABLE Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise at 1/2/00 Life Price at 1/2/00 Price $1.19-$4.25 2,148,410 6.2 $4.12 1,585,465 $4.08 $4.31-$7.25 1,891,818 8.1 $6.42 755,828 $5.59 $7.38-$27.63 1,016,525 7.2 $12.44 514,887 $11.35 $1.19-$27.63 5,056,753 7.1 $6.65 2,856,180 $5.79 The Company applies the provisions of Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, compensation expense has been recognized to the extent applicable in the financial statements in respect to the above plans in accordance with APB No. 25. Had THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) compensation costs for the above plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation", the Company's net income/(loss) and net income/(loss) per share applicable to Common Stock would have been adjusted to the pro forma amounts below: 1999 1998 1997 Pro Forma net income/(loss)......$ 6,696,000 $(12,571,000) $(35,197,000) Pro Forma net income/(loss) per share (basic)...................... $ 0.17 $ (0.33) $ (0.95) Pro Forma net income/(loss) per share (diluted).................... $ 0.17 $ (0.33) $ (0.95) As options and stock awards vest over several years and awards are generally made each year, the pro forma impacts shown here are likely to increase given the same level of activity in the future. The pro forma compensation expense related to these plans of $6,355,000, $7,885,000, and $8,751,000 for 1999, 1998 and 1997, respectively, was calculated based on the fair value of each option grant using the Black-Scholes Model with the following weighted-average assumptions used for grants: 1999 1998 1997 Dividend Yield 0.0% 0.0% 0.0% Expected Volatility 82.0% 84.0% 84.0% Risk Free Interest Rate 4.6% 4.6% 5.7% Expected Option Lives (years) 6.8 7.6 7.5 4. Property, Plant and Equipment: Property, plant and equipment consists of the following: 1999 1998 Building and building improvements $6,543,000 $6,504,000 Land and land improvements 685,000 614,000 Furniture and fixtures 1,858,000 1,971,000 Machinery and equipment 20,731,000 19,882,000 Leasehold improvements and other 6,137,000 6,023,000 Construction in process 10,000 811,000 Machinery and equipment and leasehold improvements under capital lease 15,675,000 15,675,000 Total property, plant and equipment 51,639,000 51,480,000 Less: Accumulated depreciation and amortization (31,662,000) (28,315,000) Net property, plant and equipment.... $19,977,000 $23,165,000 5. Inventories: The components of inventory are as follows: 1999 1998 Finished goods $ 2,858,000 $ 2,710,000 Work in process 479,000 1,271,000 Raw materials 2,594,000 1,374,000 Supplies 187,000 211,000 Total $ 6,118,000 $5,566,000 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 6. Commitments and Contingencies: Operating Leases: The initial term of the Company's lease for its research facility in Princeton, New Jersey expires in December 2006 with two five-year renewal options. The lease is collateralized by an investment letter of credit of $1,100,000. Rent expense was approximately $568,000, $568,000 and $627,000 for the years 1999, 1998 and 1997, respectively. The Company's administrative, marketing and executive offices are located in leased space in Princeton, New Jersey. The lease for the premises expires in February 2003. Rent expense was approximately $712,000 for 1999, $792,000 for 1998 and $818,000 for 1997. The Company has administrative and marketing offices in London, England. A ten year agreement was signed in October 1996, expiring in September 2006. Rent expense was approximately $268,000, $342,000 and $284,000 for 1999, 1998 and 1997, respectively. The Company leases a warehousing facility in Cranbury, New Jersey. This lease agreement was originally signed in January 1995 expired in December 1997 and was extended to March 2002. Rent expense for this facility totaled approximately $72,000, $88,000 and $77,000 for the years 1999, 1998 and 1997, respectively. In June 1999, the Company signed a five year agreement with Xerox Corporation to lease copiers for the Princeton locations. Rent expense related to this agreement was $43,000 for 1999. Total rental expense under all operating leases (including those above) was approximately $1,921,000, $2,184,000 and $2,180,000 for 1999, 1998 and 1997, respectively. The Company's future minimum lease payments under noncancelable operating leases at January 2, 2000 are as follows: 2000 $1,693,000 2001 1,690,000 2002 1,755,000 2003 1,736,000 2004 and thereafter 2,836,000 Total $9,710,000 Capital Leases: 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, 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 financed as a capital lease obligation under the lease agreement over a three-year period. The lease is collateralized by $4,122,000 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) The following is a schedule by year of future minimum payments under capital leases together with the present value of the minimum lease payments and the capital lease portion of certain classes of property as of January 2, 2000. 2000 $2,442,000 2001 1,333,000 2002 1,220,000 Total minimum lease payments 4,995,000 Less: Amount representing interest (486,000) Present value of minimum lease payments $4,509,000 Classes of Property: Machinery and equipment $11,470,000 Leasehold improvements 4,205,000 Total machinery and equipment and Leasehold improvements 15,675,000 Less: Accumulated amortization (11,083,000) Net machinery and equipment and leasehold improvements $4,592,000 Lines of Credit: The Company completed a U.S. working capital revolving credit line agreement in early 1997, with a maximum capacity of $14,000,000. All borrowing must be secured by approved accounts receivable and finished goods inventories. There have been no advances made against this line through the end of 1999. This agreement expired in January 2000 and the Company has chosen not to renew it. As part of the agreement to repurchase the development, manufacturing and marketing rights to EVACET, the Company has obtained from Pfizer, a credit line of up to $10,000,000 to continue the development of EVACET. 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 or in twenty quarterly installments commencing July 14, 2002. There have been no advances made against this line through the end of 1999. 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. Section 547 and Section 550 from the Company in the amount of $2.3 million. 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. 7. Long-term Debt: During 1999, the Company repaid the remaining principal balance and accrued interest on a mortgage-backed note which it used to partially fund the purchase of its manufacturing facility in Indianapolis, Indiana. Principal payments of $25,225 plus accrued interest were payable monthly through November 2001. The interest rate was based on the prime rate plus 1/2%, with a floor and ceiling of 6% and 10%, respectively. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 8. Supplemental Information: Accrued Expenses and Other Current Liabilities: The components of accrued expenses and other current liabilities are as follows: 1999 1998 Accrued expenses for preclinical and clinical programs $1,309,000 $1,681,000 Accrued bonus 1,583,000 1,396,000 Accrued royalty/licensing payments 1,505,000 1,110,000 Accrued sales, marketing and administrative 1,347,000 851,000 Accrued taxes 975,000 313,000 Accrued wages and vacation 899,000 774,000 Other 1,129,000 1,232,000 Total $8,747,000 $7,357,000 Statement of Cash Flows: 1999 1998 1997 Supplemental disclosure of cash flow information: Cash paid during the year for interest $586,000 $823,000 $786,000 Non-cash transaction: Refinancing of capital lease $ -- $495,000 $1,583,000 9. Income Taxes: The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Significant components of the Company's deferred tax liabilities and assets as of January 2, 2000 and January 3, 1999 are as follows: Deferred tax assets 1999 1998 Temporary Items Fixed and intangible $ $ assets............. 3,504,000 4,035,000 Reserves and allowances 3,718,000 2,285,000 Inventory........................ 1,374,000 784,000 Deferred income and miscellaneous 316,000 242,000 Total............................ 8,912,000 7,346,000 .... Net Operating Loss Carryforwards Federal.......................... 62,882,000 66,875,000 ....... State (net of Federal 5,811,000 8,869,000 benefit).......... Foreign 1,129,000 1,278,000 ................................ 69,822,000 77,022,000 Total............................ .... Credit Carryforwards Federal.......................... 6,185,000 6,271,000 State (net of Federal 1,247,000 1,247,000 benefit).......... Total............................ 7,432,000 7,518,000 .. Total deferred tax assets 86,166,000 91,886,000 Valuation allowance for deferred tax assets . . . . . . . . . . . Federal.......................... (76,712,00 (79,448,00 ....... 0) 0) State............................ (8,325,000) (11,160,000) ....... Foreign.......................... (1,129,000) (1,278,000) ....... Total (86,166,000) (91,886,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets $-- $-- After 18 years of consecutive losses, the Company reported its first profitable year in 1999. The future profitability of the Company in the competitive biopharmaceutical industry depends on maintaining market share for ABELCET, the Company's sole marketed product, developing new products in view of the delay in getting EVACET approved in the United States and pursuing strategic alternatives that might include merger, acquisition or product in-licensing opportunities. As these factors could significantly reduce future profitability or cause the Company to incur operating losses, the Company believes that the deferred tax asset should not presently be realized. Accordingly, the Company has provided a valuation allowance against the net deferred tax debits due to this uncertainty. The decrease in valuation allowance for the year ended January 2, 2000 was $5,720,000 preceded by an increase for the year ended January 3, 1999 of $15,168,000. Contingent upon the achievement of profitability for two consecutive years coupled with the above factors being successfully addressed, management will recognize the tax benefit in accordance with SFAS No. 109. At January 2, 2000, the Company had approximately $179,664,000 of net operating loss carryforwards and $5,950,000 of general business credit carryforwards for U.S. Federal income tax purposes. These carryforwards expire in the periods 2000 through 2018. The utilization of the net operating loss and general business credit carryforwards may be impacted by the exercise of Common Stock options (see note 3). In addition, the Company has $235,000 of AMT credit carryforward which do not expire. The timing and manner in which these losses are used may be limited as a result of certain ownership changes that may occur as defined by IRS Regulations under Section 382. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) For financial reporting purposes, income before taxes includes the following components. 1999 1998 Pretax income: United States $15,940,00 $(3,346,000) Foreign.................... (2,099,000) (1,340,000) ...... Total $13,841,000) (4,686,000) .... significant components of the provisions for income tax attributable to continuing operations are as follows: 1999 1998 Current: Federal.................... $ 520,000 -- ...... State...................... 170,000 -- ...... Foreign.................... 100,000 -- ...... Total $ 790,000 -- The reconciliation of income tax attributable to continuing operations computed at the U.S. Federal statutory tax rates to income tax expense for the year ending January 2, 2000 is: Amount Percentage Taxes at U.S. Statutory Rate...... $4,844,000 35.0% State income taxes................ 170,000 1.2% Permanent Differences............. 140,000 1.0% Change in valuation allowance..... (5,719,000) (41.3)% Alternative Minimum Tax (net of state benefit) 520,000 3.8% ............ Foreign Operations 835,000 6.0% Total income tax expense.......... $ 790,000 5.7% Earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. Federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various countries. To date, all such amounts are immaterial. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 10. Geographic Segment Data: The Company's biopharmaceutical operations are classified into two geographic areas: Domestic (United States) and International (primarily Western Europe). Financial Data (in thousands of dollars) for the years 1999, 1998 and 1997 is as follows: Year Ended January 2, 2000 Domestic International Total Sales to unaffiliated customers $ 69,126 $ 17,077 $ 86,203 Interest, investment and other income 6,483 (216) 6,267 Total revenue $ 75,609 $ 16,861 $ 92,470 Net income $ 12,816 $ 235 $ 13,051 Identifiable assets at January 2, 2000 $105,903 $ 4,855 $110,758 Year Ended January 3, 1999 Domestic International Total Sales to unaffiliated customers $ 58,936 $ 14,559 $ 73,495 Interest, investment and other income 4,355 18 4,373 Total revenue $63,291 $14,577 $77,868 Net loss $(3,260) $(1,426) $(4,686) Identifiable assets at January 3, 1999 $85,414 $ 5,160 $90,574 Year Ended December 28, 1997 Domestic International Total Sales to unaffiliated customers $ 49,273 $ 9,179 $ 58,452 Collaborative research and development revenues 2,331 -- 2,331 Interest, investment and other income 4,292 21 4,313 Total revenue $ 55,896 $ 9,200 $ 65,096 Net loss $(25,694) $ (752) $(26,446) Identifiable assets at December 28, 1997 $ 86,402 $ 5,098 $91,500 11. Savings and Investment Retirement Plan: The Company has adopted a 401(k) Profit Sharing Plan and Trust ("401(k) Plan") for eligible employees and their beneficiaries. The 401(k) Plan provides for employee contributions through a salary reduction election. Employer discretionary matching contributions are determined annually by the Company and vest over a maximum of a five- year period of service. For the plan years ended January 2, 2000, January 3, 1999 and December 28, 1997, the Company's discretionary matching was based on a percentage of salary reduction elections in the form of the Company's Common Stock. 12. Major Customer and Research and Development 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) For the years ended January 2, 2000, January 3, 1999 and December 28, 1997 sales to wholesalers or other customers in excess of 10% of the Company's product revenues in any year were as follows: 1999 1998 1997 Customer A 21% 21% 20% Customer B 21% 23% 25% Customer C 13% 13% 14% Customer D 13% 14% 16% The Company had entered into various collaborative research and development contracts. The Company earned substantially all of its research and development revenues from one corporate sponsor in 1997. The absence of collaborative research and development revenue in 1999 and 1998 is due to the termination of the collaborative research and development agreement with Pfizer in mid-1997. Payments by corporate sponsors that comprised 10% or more of the Company's total revenues, pursuant to collaborative agreements and licensing and other fees as reported in the statements of operations were $2,331,000 from Pfizer in 1997. 13. Summary of Quarterly Financial Data (Unaudited): Summarized quarterly financial data (in thousands, except for per share data) for the years ended January 2, 2000 and January 3, 1999 are as follows: Quarter 1999 First Second Third Fourth Total revenues $20,728 $23,704 $23,416 $24,622 Total expenses 18,319 20,931 20,025 19,354 Net income before taxes $ 2,409 $ 2,773 $ 3,391 $ 5,268 Provision for income taxes $ -- $ -- $ 300 $ 490 Net income.................... $ 2,409 $ 2,773 $ 3,091 $ 4,778 Net income per share (basic) $ 0.06 $ 0.07 $ 0.08 $ 0.12 Net income per share (diluted) $ 0.06 $ 0.07 $ 0.08 $ 0.12 Weighted average shares outstanding (basic) 38,378 38,635 38,958 39,140 Weighted average shares outstanding (diluted) 40,025 40,272 40,587 40,298 Quarter 1998 First Second Third Fourth Total revenues $17,094 $20,225 $18,647 $21,902 Total expenses 22,171 21,072 18,955 20,356 Net income/(loss $(5,077) $ (847) $ (308) $ 1,546 Net income/(loss) per share (basic) $ (0.13) $ (0.02) $ (0.01) $ 0.04 Net income/(loss) per share (diluted) $ (0.13) $ (0.02) $ (0.01) $ 0.04 Weighted average shares outstanding (basic) 37,846 37,992 38,050 38,254 Weighted average shares outstanding (diluted) 37,846 37,992 38,050 39,856 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Net income/(loss) per share of Common Stock amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year amounts. 14. Unusual Charges and Credits: The Company recorded approximately $3,900,000 of unusual charges for 1997 following unfavorable results of a pivotal Phase III study of VENTUSTM. The primary component of this charge related to an organizational restructuring expense of $2,550,000 (classified as selling, general and administrative expense). A total of 137 positions were eliminated as a result of the restructuring. The balance of the charges were attributable to a provision for royalties on past sales of ABELCET of $768,000 to settle certain litigation concerning that product, including the pro-rata amortization of a ten-year warrant issued as part of the settlement (classified as cost of goods sold), and certain manufacturing overhead costs of $570,000 following the unfavorable VENTUSTM clinical results, (classified as research and development expense). On August 11, 1997, the Company entered into a settlement agreement with NeXstar and Fujisawa USA, Inc., relating to litigation regarding the Company's liposome drying technology patents. Pursuant to this settlement agreement, the Company received an initial payment of $1,750,000 and began receiving quarterly minimum payments in 1998, included in interest, investment and other income, as well as the right to receive future royalty payments based on sales of AmBisome beginning in 1998. 15. Subsequent Event: Merger with Elan Corporation, plc On March 6, 2000 the Company announced that they have 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 ADR for each share of The Liposome Company stock. Based on the closing price 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 the approval of EVACET for the European Union, and partly on EVACET 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 and the Company's shareholder approvals and is expected to close in the second quarter of 2000. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of The Liposome Company, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 4, 2000 (except for Note 15, as to which the date is March 14, 2000) appearing in Item 14 of this Annual Report on Form 10- K also included an audit of the financial statement schedule listed in the Index in Item 14 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Florham Park, New Jersey February 4, 2000 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Schedule II Column A Column B Column C Column D Column E Additions Balance Charged Balance at at to End Beginning Costs and Deductions of Period of Period Expenses Year Ended January 2, 2000 Valuation Allowance for Sales 3,052,000 $ $40,231,000 $(38,736,000) $4,547,000 Rebates and Discounts....... Allowance for Doubtful Accounts............ $579,000 $299,000 $(59,000) $819,000 .. Valuation Allowance for Income Taxes $91,886,000 $ -- $(5,720,000) $86,166,000 Year Ended January 3, 1999 Valuation Allowance for Sales Rebates and Discounts $3,789,000 $30,460,000 $(31,197,000) $3,052,000 Allowance for Doubtful Accounts................. 1,285,000 373,000 (1,079,000) $579,000 .. Valuation Allowance for Income Taxes $76,718,0 $15,168,000 $-- $91,886,00 Year Ended December 28, 1997 Valuation Allowance for Sales Rebates and Discounts $609,000 $13,711,000 $(10,531,000) $3,789,000 Allowance for Doubtful Accounts................. 1,079,000 256,000 (50,000) 1,285,000 .. Valuation Allowance for Income Taxes $65,752,000 $10,966,000 $ -- $76,718,000 Item l4(a)3. Exhibits to Form l0-K (A) Exhibits Each management contract or compensation plan required to be filed pursuant to Item 601 of Regulation S-K is reflected in Exhibit numbers 10-01, 10-02, 10-03 and 10-04. Exhibit Number 3(i)-01 Restated Certificate of Incorporation of the Company, including Designation of Preferences of Series A Cumulative Convertible Exchangeable Preferred Stock, as amended through July 12, 1999. 3(ii) By-Laws of the Company. (Filed with Registration No. 33-23292, and incorporated herein by reference thereto.) 3(iii) Shareholder Rights Agreement dated as of July 11, 1996. (Filed with the Company's Registration Statement on Form 8-A, file number 000-14887, and incorporated herein by reference thereto.) l0-01 The Liposome Company, Inc. l986 Employee Stock Option Plan as amended March 3, 1995. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference thereto.) l0-02 The Liposome Company, Inc. l986 Non-Qualified Stock Option Plan as amended March 3, 1995. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference thereto.) 10-03 The Liposome Company, Inc. 1991 Director's Non-Qualified Stock Option Plan. (Filed with Registration No. 33-66924, and incorporated herein by reference thereto.) 10-04 The Liposome Company, Inc. 1996 Equity Incentive Plan. (Filed with the Company's 1996 Proxy Statement, File No. 000-14887, incorporated herein by reference thereto.) 10-05 Agreement dated June 1, 1995 between the Company and Charles A. Baker. (Filed with the Company's Report on Form 10-Q for the period ended June 30, 1995, and incorporated herein by reference thereto.) 10-05-01 Agreement dated July 8, 1999 amending the Employment Agreement dated June 1, 1995 between the Company and Charles A. Baker. 10-06 Amphotericin B Supply Agreement dated as of January 1, 1993, between the Company and Bristol-Meyers Squibb Company. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference thereto.) 10-07 License Agreement dated as of September 2, 1994, between the Company and Bristol-Meyers Squibb Company. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference thereto.) 10-08 Lease Agreement dated December 14, 1992, between the Company and Peregrine Investment Partners I. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference thereto.) 10-09 First Amendment dated October 29, 1993 to Lease Agreement between the Company and Peregrine Investment Partners I. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference thereto.) Item l4(a)3. Exhibits to Form l0-K (Continued) Exhibit Number 10-10 Second Amendment dated December 31, 1994 to Lease Agreement between the Company and Peregrine Investment Partners I. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference thereto.) 10-11 Third Amendment dated July 27, 1995 to Lease Agreement between the Company and Peregrine Investment Partners I. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference thereto.) 10-12 Lease Agreement dated as of January 1, 1995 between the Company and One Research Way Partners. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference thereto.) 10-13 Credit Agreement dated as of December 31, 1996, among the Company, The Liposome Manufacturing Company, Inc. and General Electric Capital Corporation. (Filed with the Company's Annual Report on Form 10-K for the year ended December 29, 1996, and incorporated herein by reference thereto.) 10-14 Termination Agreement dated July 14, 1997, among The Liposome Company, Inc., Pfizer Inc., and Pfizer Pharmaceuticals Production Corporation. (Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997, and incorporated herein by reference thereto.) 10-15 Settlement Agreement dated August 11, 1997 among The Liposome Company, Inc NeXstar Pharmaceuticals, Inc. ("NeXstar"), (now Gilead Sciences, Inc.) and Fujisawa USA, Inc. (Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997, and incorporated herein by reference thereto.) 10-16 Form of Executive Severance Agreement executed with each Vice President dated as of January 22, 1998. (Filed with the Company's Annual Report on Form 10-K for the year ending January 3, 1999.) 10-17 Form of Indemnification Agreement executed with each officer and director of the Company. 10-18 Agreement dated March 1, 1999 between the Company and Wyeth- Ayerst International Inc. 21 List of Company's subsidiaries. 23 Consent of Independent Accountants. 27 Financial Data Schedule 99-01 Settlement Agreement dated July 1, 1997, among The Liposome Company, Inc., the Board of Regents of the University of Texas System, and the University of Texas M.D. Anderson Cancer Center, including Patent License Agreement as Exhibit B. (Filed with the Company's Registration Statement on Form S-3, Registration No. 333-36931, and incorporated herein by reference thereto.) EXHIBIT INDEX EXHIBIT NO. PAGE 21. Subsidiaries 63 23. Consent of Independent Accountants 64 EXHIBIT 21 Subsidiaries Name Place of Incorporation The Liposome Company Japan, Ltd. Tokyo, Japan Liposome Holdings, Inc. Delaware Nichiyu Liposome Company, Ltd. Tokyo, Japan The Liposome Manufacturing Delaware Company, Inc. The Liposome Company Ltd. United Kingdom Laboratoires Liposome France Liposome SL Spain Liposome Pty Ltd. Australia Liposome Canada Inc. Canada Liposome SrL Italy Liposome S.a.r.l. Switzerland Liposome B.V. Netherlands EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-20339 and 333-20341) of The Liposome Company, Inc. of our report dated February 4, 2000 (except for Note 15, as to which the date is March 14, 2000) relating to the financial statements, which appears in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 4, 2000 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Florham Park, New Jersey March 28, 2000 SIGNATURES Pursuant to the requirements of Section 13 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 this 28th day of March, 2000. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES By: /S/ Charles A. Baker Charles A. Baker Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on the 28th day of March, 2000 on behalf of the Registrant and in the capacities indicated. /S/ Charles A. Baker Chairman of the Board, President Chief Executive Charles A. Baker Officer and Director (Principal Executive Officer) /S/ Lawrence R. Hoffman Vice President and Chief Financial Officer Lawrence R. Hoffman (Principal Accounting Officer) /S/ James G. Andress Director James G. Andress /S/ Morton Collins, Ph.D. Director Morton Collins, Ph.D. /S/ Stuart F. Feiner Director Stuart F. Feiner /S/ Robert F. Hendrickson Director Robert F. Hendrickson /S/ Kenneth E. Johns, Esq. Director Kenneth E. Johns, Esq. /S/ Bengt Samuelsson, Dr. Director Bengt Samuelsson, Dr. /S/ Joseph T. Stewart, Jr. Director Joseph T. Stewart, Jr. /S/ Gerald Weissmann, M.D. Director Gerald Weissmann, M.D. /S/ Horst Witzel, Dr.-Ing. Director Horst Witzel, Dr.-Ing. EX-27 2
5 12-MOS JAN-02-2000 JAN-02-2000 34,461 36,880 7,027 (819) 6,118 84,975 51,639 (31,662) 110,758 17,646 0 0 0 393 90,336 110,758 86,203 92,470 20,284 78,629 0 0 551 13,841 790 13,051 0 0 0 13,051 0.34 0.32
EX-3.01 3 4 RESTATED CERTIFICATE OF INCORPORATION OF THE LIPOSOME COMPANY, INC. Pursuant to Section 245 of the General Corporation Law of the State of Delaware THE LIPOSOME COMPANY, INC., a corporation organized and existing under the laws of the State of Delaware, hereby certifies (1) that the former name of The Liposome Company, Inc. was The Liposome Corporation; (2) that this Restated Certificate of Incorporation of the Liposome Company, Inc. was duly adopted by the Board of Directors of said Corporation in accordance with Section 245 of the General Corporation Law of the State of Delaware on September 14, 1995; (3) that this Restated Certificate of Incorporation restates and integrates, but does not further amend, the original Certificate of Incorporation filed in the office of the Secretary of State of the State of Delaware on August 6, 1981, as heretofore amended or supplemented; and (4) that there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. FIRST. The name of the Corporation is The Liposome Company, Inc. SECOND. The address of the Corporation's registered office in the State of Delaware is No. 1209 Orange St. in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The total number of shares of stock which the Corporation shall have the authority to issue is 122,400,000 shares, which shares shall be classified as follows: (i) 120,000,000 shares of Common Stock, par value $0.01 per share (hereinafter called the "Common Stock"); and (ii) 2,400,000 shares of Serial Preferred Stock, par value $.01 per share (hereinafter called the "Serial Preferred Stock"). Authority is hereby expressly granted to the Board of Directors of the Company to adopt from time to time resolutions providing for the issue of the Serial Preferred Stock in one or more series, which resolutions shall fix the number of shares in each such series and the voting power, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations, and restrictions, of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware. The Certificate of Designation for the 276,000 shares of Series A Cumulative Convertible Exchangeable Preferred Stock issued on January 20, 1993 is attached hereto as Exhibit I. FIFTH. The name and mailing address of the sole incorporator is Roger W. Kapp, 30 Rockefeller Plaza, New York, New York 10112. SIXTH. No election of directors need be by written ballot, unless the By-Laws of the Corporation shall so provide. SEVENTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the By-Laws of the Corporation. EIGHTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of this Article shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to or at the time of such repeal or modification. TENTH. The annual meeting of the stockholders of this Corporation, for the election of directors and the transaction of such other business as may properly come before said meeting, shall be held annually at such place within or without the State of Delaware and at such time as may from time to time be designated by the Board of Directors and set forth in the notice of the meeting. Special meetings of the stockholders of this Corporation, for the transaction of such business as may properly come before said meeting, may be called (i) by the Chairman of the Board of Directors of the Corporation or (ii) by the holders of 20 percent or more of the outstanding shares of the Corporation entitled to vote if such holders shall deliver a written notice signed by each such holder requesting a special meeting and setting forth with reasonable specificity the purpose and proposed agenda thereof to the Chairman of the Board of Directors of the Corporation, by registered or certified mail, return receipt requested. Upon a determination by the Chairman of the Board to call a special meeting or receipt of notice from holders of 20 percent or more of the outstanding shares of the Corporation entitled to vote, the Board of Directors shall, within a reasonable time, designate the time and place of the special meeting and notify the stockholders of the Corporation in such manner as is required by law or this Certificate of Incorporation. IN WITNESS WHEREOF, The Liposome Company, Inc. has caused this Restated Certificate of Incorporation to be executed this 30th day of October, 1995, by Carol J. Gillespie, its Vice President and Secretary, who acknowledges under penalties of perjury that said instrument is the act and deed of The Liposome Company, Inc. and that the facts stated therein are true. THE LIPOSOME COMPANY, INC. By: __________________________ Carol J. Gillespie Vice President and Secretary EXHIBIT I CERTIFICATE OF DESIGNATION OF SERIES A CUMULATIVE CONVERTIBLE EXCHEANGEABLE PREFERRED STOCK ($.01 PAR VALUE) OF THE LIPOSOME COMPANY, INC. Pursuant to Section 151(g) of the General Corporation Law of The State of Delaware CERTIFICATE OF DESIGNATION OF SERIES A CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK ($.01 PAR VALUE) OF THE LIPOSOME COMPANY, INC. Pursuant to Section 151(g) of the General Corporation Law of the state of Delaware THE UNDERSIGNED, being, respectively, the President and the Secretary of The Liposome Company, Inc., a Delaware corporation (the "Company"), DO HEREBY CERTIFY that, pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware the following resolutions were duly adopted by the Board of Directors of the Company and pursuant to authority conferred upon the Board of Directors by the provisions of the Certificate of Incorporation (as amended) of the Company (the "Certificate of Incorporation"), the Board of Directors of the Company, at a meeting duly held on December 2, 1992, adopted resolutions providing for the issuance of a series of its Serial Preferred Stock and fixing the relative powers, preferences, rights, qualifications, limitations and restrictions of such stock. These resolutions are as follows: RESOLVED, that pursuant to authority expressly granted to and vested in the Board of Directors of the Company by the provisions of the Certificate of Incorporation of the Company (as amended) (the "Certificate of Incorporation"), the issuance of a series of preferred stock, par value $.01 per share (the "Preferred Stock"), which shall consist of up to 276,000 of the 2,400,000 shares of Preferred Stock which the Company now has authority to issue, be, and the same hereby is, authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Number of Shares and Designation. 276,000 shares of the preferred stock, $.01 par value per share, of the Company are hereby constituted as a series of the preferred stock designated as Series A Cumulative Convertible Exchangeable Preferred Stock (the "Series A Preferred Stock"). 2. Definitions. For purposes of the Series A Preferred Stock, the following terms shall have the meanings indicated: "Board of Directors" shall mean the board of directors of the Company or any committee authorized by such Board of Directors to perform any of its responsibilities with respect to the Series A Preferred Stock.. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the City of New York are authorized or obligated by law or executive order to close. "Closing Price" of the Common Stock on any day shall mean on such day the reported last sales price, regular way, for the Common Stock or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, for the Common Stock in either case as reported on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ National Market System") or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices for the Common Stock on such day in the over-the-counter market as reported by NASDAQ National Market System or, if bid and asked prices for the Common Stock on each such date shall not have been reported by NASDAQ National Market System, the average of the bid and asked prices of the Common Stock for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board of Directors or, if no such quotations are available, the fair market value of the Common Stock furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose. "Common Stock" shall mean the Common Stock of the Company, par value $.01 per share. "Conversion Price" shall mean the conversion price per share of Common Stock into which the Series A Preferred Stock is convertible, as such Conversion Price may be adjusted pursuant to Section 7 hereof. The initial Conversion Price will be $12.85 (equivalent to the rate of 1.9455 shares of Common Stock for each Depositary Share (which represents ownership of l/10 of a share of Series A Preferred Stock)). "Current Market Price" per share of Common Stock on any date shall mean the average of the daily Closing Prices for the 30 consecutive Trading Dates commencing forty-five Trading Dates before the date of determination. "dividend payment date" shall have the meaning set forth in paragraph (a) of Section 3 hereof. "dividend payment record date" shall have the meaning set forth in paragraph (a) of Section 3 hereof. "Dividend Periods" shall mean quarterly dividend periods commencing on the fifteenth day of January, April, July, and October of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period (other than the initial Dividend Period, which shall commence on the Issue Date and end on and include April 15, 1993). "Issue Date" shall mean the first date on which shares of Series A Preferred Stock are issued. "Person" shall mean any individual, firm, partnership, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Securities" shall have the meaning set forth in paragraph (d)(iii) of Section 7 hereof. "Trading Date" with respect to Common Stock means (i) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business , (ii) if the Common Stock is quoted on the NASDAQ National Market System, or a any similar system of automated dissemination of quotations of securities prices, a day on which trades may be made on such system or (iii) if not quoted as described in clause (ii), days on which quotations are reported by the National Quotation Bureau Incorporated or (iv) otherwise, any Business Day. "Transaction" shall have the meaning set forth in paragraph (e) of Section 7 hereof. "Transfer Agent" means Midlantic National Bank or such other agent or agents of the Company as may be designated by the Board of Directors of the Company as the transfer agent for the Series A Preferred Stock. 3. Dividends. (a) The holders of shares of the Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, cumulative cash dividends at an annual rate of 7-3/4% (an amount equivalent to $1.9375 per annum per share) of Series A Preferred Stock. Such dividends shall be cumulative from the Issue Date, whether or not in any Dividend Period or Periods there shall be funds of the Company legally available for the payment of such dividends and whether or not such dividends are declared, and shall be payable quarterly, when and as declared by the Board of Directors, on January 15, April 15, July 15 and October 15 in each year (each a "dividend payment date"), commencing on April 15, 1993. If April 15, 1993 or any other dividend payment date shall be on a day other than a Business Day, then the dividend payment date shall be on the next succeeding Business Day. Each such dividend shall be payable in arrears to the holders of record of shares of the Series A Preferred Stock, as they appear on the stock records of the Company at the close of business on those dates (each such date, a "dividend payment record date"), not less than 10 days nor more than 60 days preceding the dividend payment dates thereof, as shall be fixed by the Board of Directors. Dividends on the Series A Preferred Stock shall accrue (whether or not declared) on a daily basis from the Issue Date and accrued dividends for each Dividend Period shall accumulate to the extent not paid on the dividend payment date first following the Dividend Period for which they accrue. As used herein, the term "accrued" with respect to dividends includes both accrued and accumulated dividends. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. (b) The amount of dividends payable for each full Dividend Period for the Series A Preferred Stock shall be computed by dividing the annual dividend rate by four (rounded down to the nearest cent). The amount of dividends payable for the initial Dividend Period on the Series A Preferred Stock, or any other period shorter or longer than a full Dividend Period on the Series A Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Holders of shares of Series A Preferred Stock called for redemption on a redemption date falling between the close of business on a dividend payment record date and the opening of business on the corresponding dividend payment date shall, in lieu of receiving such dividend on the dividend payment date fixed therefor, receive such dividend payment together with all other accrued and unpaid dividends on the date fixed for redemption (unless such holder converts such shares in accordance with Section 7 hereof). Holders of shares of Series A Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series A Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Stock which may be in arrears. (c) So long as any shares of the Series A Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on any class or series of stock of the Company ranking, as to dividends, on a parity with the Series A Preferred Stock, for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series A Preferred Stock for all Dividend Periods terminating on or prior to the date of payment, or setting apart for payment, of such full cumulative dividends on such parity stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, upon the shares of the Series A Preferred Stock and any other class or series of stock ranking on a parity as to dividends with the Series A Preferred Stock, all dividends declared upon shares of the Series A Preferred Stock and all dividends declared upon such other stock shall be declared pro rata so that the amounts of dividends per share declared on the Series A Preferred Stock and such other stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of the Series A Preferred Stock and on such other stock bear to each other. (d) So long as any shares of the Series A Preferred Stock are outstanding, no other stock of the Company ranking on a parity with the Series A Preferred Stock as to dividends or upon liquidation, dissolution or winding up shall be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of any such stock) by the Company (except for repurchases from employees and consultants or by conversion into or exchange for stock of the Company ranking junior to the Series A Preferred Stock as to dividends and upon liquidation, dissolution or winding up) unless (i) the full cumulative dividends, if any, accrued on all outstanding shares of the Series A Preferred Stock shall have been paid or set apart for payment for all past Dividend Periods and (ii) sufficient funds shall have been set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock. (e) So long as any shares of the Series A Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock ranking junior to the Series A Preferred Stock, as to dividends and upon liquidation, dissolution or winding up) shall be declared or paid or set apart for payment and no other distribution shall be declared or made or set apart for payment, in each case upon the Common Stock or any other stock of the Company ranking junior to the Series A Preferred Stock as to dividends or upon liquidation, dissolution or winding up, nor shall any Common Stock nor any other such stock of the Company ranking junior to the Series A Preferred Stock as to dividends or upon liquidation, dissolution or winding up be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of any such stock) by the Company (except for repurchases from employees and consultants or by conversion into or exchange for stock of the Company ranking junior to the Series A Preferred Stock as to dividends and upon liquidation, dissolution or winding up) unless, in each case (i) the full cumulative dividends, if any, accrued on all outstanding shares of the Series A Preferred Stock and any other stock of the Company ranking on a parity with the Series A Preferred Stock as to dividends shall have been paid or set apart for payment for all past Dividend Periods and all past dividend periods with respect to such other stock and (ii) sufficient funds shall have been set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock and for the current dividend period with respect to any other stock of the Company ranking on a parity with the Series A Preferred Stock as to dividends. 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of Common Stock or any other series or class or classes of stock of the Company ranking junior to the Series A Preferred Stock upon liquidation, dissolution or winding up, the holders of the shares of Series A Preferred Stock shall be entitled to receive $250 per share plus an amount per share equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. No payment on account of any liquidation, dissolution or winding up of the Company shall be made to the holders of any class or series of stock ranking on a parity with the Series A Preferred Stock in respect of the distribution of assets upon dissolution, liquidation or winding up unless there shall likewise be paid at the same time to the holders of the Series A Preferred Stock like proportionate amounts determined ratably in proportion to the full amounts to which the holders of all outstanding shares of Series A Preferred Stock and the holders of all outstanding shares of such parity stock are respectively entitled with respect to such distribution. If, upon any liquidation, dissolution or winding up of the Company, the assets of the Company, or proceeds thereof, distributable among the holders of the shares of Series A Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares of stock ranking, as to liquidation, dissolution or winding up, on a parity with the Series A Preferred Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Series A Preferred Stock and any such other stock ratably in accordance with the respective amounts which would be payable on such shares of Series A Preferred Stock and any such other stock if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Company with one or more corporations or other entities, (ii) a sale, lease, exchange or transfer of all or any part of the Company's assets or (iii) a statutory share exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. (b) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series A Preferred Stock upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Company, after payment shall have been made in full to the holders of Series A Preferred Stock, as provided in this Section 4, any other series or class or classes of stock ranking junior to the Series A Preferred Stock upon liquidation, dissolution or winding up shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of Series A Preferred Stock shall not be entitled to share therein. (c) Written notice of any liquidation, dissolution or winding up of the Company, stating the payment date or dates when and the place or places where the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage prepaid, not less than thirty (30) days prior to any payment date stated therein, to the holders of record of the Series A Preferred Stock at their respective addresses as the same shall appear on the books of the Transfer Agent. 5. Redemption at the Option of the Company. (a) Series A Preferred Stock may not be redeemed by the Company prior to January 15, 1996, on or after which the Company, at its option, may redeem the shares of Series A Preferred Stock, in whole or in part, out of funds legally available therefor, at any time or from time to time, subject to the notice provisions and provisions for partial redemption described below, during the twelve-month periods beginning on January 15 in each of the following years at the following redemption prices per share plus an amount equal to accrued and unpaid dividends, if any, to (and including) the date fixed for redemption, whether or not earned or declared. YEAR PRICE 1996 $264 1997 $262 1998 $260 1999 $258 2000 $256 2001 $254 2002 $252 2003 and thereafter $250 (b) In the event the Company shall redeem shares of Series A Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock records of the Company. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series A Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (v) the then current conversion price; and (vi) that dividends on the shares to be redeemed shall cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date, unless the Company shall be in default in providing money for the payment of the redemption price (including any accrued and unpaid dividends to (and including) the date fixed for redemption), (i) dividends on the shares of the Series A Preferred Stock so called for redemption shall cease to accrue, (ii) said shares shall be deemed no longer outstanding, and (iii) all rights of the holders thereof as stockholders of the Company (except the right to receive from the Company the moneys payable upon redemption without interest thereon) shall cease. The Company's obligation to provide moneys in accordance with the preceding sentence shall be deemed fulfilled if, on or before the redemption date, the Company shall deposit with a bank or trust company having an office in the Borough of Manhattan, City of New York, and having a capital and surplus of at least $50,000,000, funds necessary for such redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be applied to the redemption of the shares of Series A Preferred Stock so called for redemption. Any interest accrued on such funds shall be paid to the Company from time to time. Any funds so deposited and unclaimed at the end of three years from such redemption date shall be released or repaid to the Company, after which, subject to any applicable laws relating to escheat or unclaimed property, the holder or holders of such shares of Series A Preferred Stock so called for redemption shall look only to the Company for payment of the redemption price. Upon surrender in accordance with said notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), such shares shall be redeemed by the Company at the applicable redemption price aforesaid. If fewer than all the outstanding shares of Series A Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Company from outstanding shares of Series A Preferred Stock not previously called for redemption by lot or pro rata (as near as may be) or by any other method determined by the Company in its sole discretion to be equitable. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. Notwithstanding the foregoing, if notice of redemption has been given pursuant to this Section 5 and any holder of shares of Series A Preferred Stock shall, prior to the close of business on (i) the redemption date, or (ii) if the Company shall so elect and state in the notice of redemption, the date (which date shall be the date fixed for redemption or an earlier date not less than 30 days after the date of mailing of the redemption notice) on which the Company irrevocably deposits with a designated bank or trust company as paying agent, money sufficient to pay, on the redemption date, the redemption price, give written notice to the Company pursuant to Section 7(b) hereof of the conversion of any or all of the shares to be redeemed held by such holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Company), then the conversion of such shares to be redeemed shall become effective as provided in Section 7. 6. Shares to be Retired. All shares of Series A Preferred Stock purchased, redeemed, exchanged, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of preferred stock, without designation as to series and may thereafter be reissued. 7. Conversion. Holders of shares of Series A Preferred Stock shall have the right to convert all or a portion of such shares (including fractions of such shares) into shares of Common Stock, as follows: (a) Subject to and upon compliance with the provisions of this Section 7, a holder of shares of Series A Preferred Stock shall have the right, at his or her option, at any time to convert any of such shares (or fractions thereof) into the number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest l/lOOth of a share) obtained by dividing the aggregate liquidation preference of the shares to be converted by the Conversion Price and by surrender of such shares, such surrender to be made in the manner provided in paragraph (b) of this Section 7; provided, however, that the right to convert shares called for redemption pursuant to Section 5 shall terminate at the close of business on (i) the date fixed for such redemption, or (ii) if the Company shall so elect and state in the notice of redemption, the date (which date shall be the date fixed for redemption or an earlier date not less than 30 days after the date of mailing of the redemption notice) on which the Company irrevocably deposits with a designated bank or trust company as paying agent, money sufficient to pay, on the redemption date, the redemption price, unless the Company shall default in making payment of the amount payable upon such redemption. Subject to the following provisions of this Section 7(a), any share of Series A Preferred Stock may be converted, at the option of its holder, in part into Common Stock under the procedures set forth above. If a part of a share of Series A Preferred Stock is converted, then the Company will convert such share into the appropriate number of shares of Common Stock (subject to paragraph (c) of this Section 7) and issue a fractional share of Series A Preferred Stock evidencing the remaining interest of such holder. (b) In order to exercise the conversion right, the holder of each share of Series A Preferred Stock (or fraction thereof) to be converted shall surrender the certificate representing such share, duly endorsed or assigned to the Company or in blank, at the office of the Transfer Agent in the Borough of Manhattan, City of New York, accompanied by written notice to the Company that the holder thereof elects to convert Series A Preferred Stock or a specified portion thereof. Unless the shares issuable on conversion are to be issued in the same name as the name in which such share of Series A Preferred Stock is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Company, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Company demonstrating that such taxes have been paid or are not required to be paid). Holders of shares of Series A Preferred Stock at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding dividend payment date (except that holders of shares called for redemption on a redemption date falling between the close of business on such dividend payment record date and the opening of business on the corresponding dividend payment date shall, in lieu of receiving such dividend on the dividend payment date fixed therefor, receive such dividend payment together with all other accrued and unpaid dividends on the date fixed for redemption, unless such holder converts such shares called for redemption pursuant to the provisions of this Section 7) notwithstanding the conversion thereof following such dividend payment record date and prior to such dividend payment date. A holder of shares of Series A Preferred Stock on a dividend payment record date who (or whose transferee) tenders any such shares for conversion into shares of Common Stock on the corresponding dividend payment date will receive the dividend payable by the Company on such shares of Series A Preferred Stock on such date. Except as provided above, the Company shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of Common Stock issued upon such conversion. As promptly as practicable after the surrender of certificates for shares of Series A Preferred Stock as aforesaid, the Company shall issue and shall deliver at such office to such holder, or on his or her written order, a certificate or certificates for the number of shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this Section 7, and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled as provided in paragraph (c) of this Section 7. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Series A Preferred Stock shall have been surrendered and such notice received by the Company as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date, unless the stock transfer books of the Company shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such shares shall have been surrendered and such notice received by the Company. All shares of Common Stock delivered upon conversion of the Series A Preferred Stock will upon delivery be duly and validly issued and fully paid and nonassessable. (c) In connection with the conversion of any shares of Series A Preferred Stock, fractions of such shares may be converted; however, no fractional shares or scrip representing fractions of shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of a share of Series A Preferred Stock (or fraction thereof), the Company shall pay to the holder of such share an amount in cash (computed to the nearest cent) equal to the Current Market Price of Common Stock on the Trading Date immediately preceding the date of conversion multiplied by the fraction of a share of Common Stock represented by such fractional interest. If more than one share (or fraction thereof) shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. (d) The Conversion Price shall be adjusted from time to time as follows: (i) In case the Company shall after the Issue Date (A) pay a dividend or make a distribution on its Common Stock in shares of its Common Stock, (B) subdivide or split its outstanding Common Stock into a greater number of shares, (C) combine its outstanding Common Stock into a smaller number of shares or (D) issue any shares of capital stock by reclassification of its Common Stock, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder of any share of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Company which such holder would have owned or have been entitled to receive after the occurrence of any of the events described above had such share been surrendered for conversion immediately prior to the occurrence of such event or the record date therefor, whichever is earlier. An adjustment made pursuant to this subparagraph (i) shall become effective immediately after the close of business on the record date for determination of stockholders entitled to receive such dividend or distribution in the case of a dividend or distribution (except as provided in paragraph (h) below) and shall become effective immediately after the close of business on the effective date in the case of a subdivision, split combination or reclassification. Any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock under clauses (ii) and (iii) below. (ii) In case the Company shall issue after the Issue Date rights or warrants to all holders of Common Stock entitling them (for a period expiring within 45 days after the issuance date) to subscribe for or purchase Common Stock at a price per share less than the Current Market Price per share of Common Stock at the record date for the determination of shareholders entitled to receive such rights or warrants, then the Conversion Price in effect immediately prior thereto shall be adjusted to equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the date of issuance of such rights or warrants by (II) a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants (without giving effect to any such issuance) and (B) the number of shares which the aggregate proceeds from the exercise of such rights or warrants for Common Stock would purchase at such Current Market Price, and the denominator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants (without giving effect to any such issuance) and (B) the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after such record date. In determining whether any rights or warrants entitle the holders of Common Stock to subscribe for or purchase shares of Common Stock at less than such Current Market Price, there shall be taken into account any consideration received by the Company upon issuance and upon exercise of such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (iii) In case the Company shall pay a dividend or make a distribution to all holders of its Common Stock after the Issue Date of any shares of capital stock of the Company or its subsidiaries (other than Common Stock) or evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid from profits or surplus of the Company) or rights or warrants to subscribe for or purchase any of its securities or those of its subsidiaries (excluding those referred to in subparagraph (ii) above) (any of the foregoing being hereinafter in this subparagraph (iii) called the "Securities"), then in each such case, the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (I) the Conversion Price in effect on the record date mentioned below by (II) a fraction, the numerator of which shall be the Current Market Price per share of the Common Stock on the record date mentioned below less the then fair market value (as determined by the Board of Directors, whose determination shall, if made in good faith, be conclusive) as of such record date of the portion of the capital stock or assets or evidences of indebtedness so distributed or of such rights or warrants applicable to one share of Common Stock, and the denominator of which shall be the Current Market Price per share of the Common Stock on such record date, provided, however, that in the event the then fair market value (as so determined) of the portion of Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price per share of the Common Stock on the record date mentioned above, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of shares of Series A Preferred Stock shall have the right to receive the amount and kind of Securities such holder would have received had he converted each such share of Series A Preferred Stock immediately prior to the record date for the distribution of the Securities. Such adjustment shall become effective immediately, except as provided in paragraph (h) below, after the record date for the determination of shareholders entitled to receive such distribution. (iv) Notwithstanding anything in subparagraphs (ii) and (iii) above, if such rights or warrants shall by their terms provide for an increase or increases with the passage of time or otherwise in the price payable to the Company upon the exercise thereof, the Conversion Price upon any such increase becoming effective shall forthwith be readjusted (but to no greater extent than originally adjusted by reason of such issuance or sale) to reflect the same. Upon the expiration or termination of such rights or warrants, if any such rights or warrants shall not have been exercised, then the Conversion Price shall forthwith be readjusted and thereafter be the rate which it would have been had an adjustment been made on the basis that (x) the only rights or warrants so issued or sold were those so exercised and they were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the granting of all such options, rights or warrants whether or not exercised and (y) the Company issued and sold a number of shares of Common Stock equal to those actually issued upon exercise of such rights, and such shares were issued and sold for a consideration equal to the aggregate exercise price in effect under the exercise rights actually exercised at the respective dates of their exercise. For purposes of subparagraphs (ii) and (iv), the aggregate consideration received by the Company in connection with the issuance of shares of Common Stock or of rights or warrants shall be deemed to be equal to the sum of the aggregate offering price (before deduction of underwriting discounts or commissions and expenses payable to third parties) of all such securities plus the minimum aggregate amount, if any, payable upon the exercise of such rights or warrants into shares of common Stock. (v) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; Provided, however, that any adjustments which by reason of this subparagraph (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; and provided, further, any adjustment shall be required and shall be made in accordance with the provisions of this Section 7 (other than this subparagraph (v)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holder of shares of Common Stock. All calculations under this Section 7 shall be made to the nearest cent (with $.005 being rounded upward) or to the nearest l/lOOth of a share (with .005 of a share being rounded upward), as the case may be. Anything in this paragraph (d) to the contrary notwithstanding, the Company shall be entitled, to the extent permitted by law, to make such reductions in the Conversion Price, in addition to those required by this paragraph (d), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights or warrants to purchase stock or securities, or a distribution of other assets or any other transaction which could be treated as any of the foregoing transactions pursuant to Section 306 of the Internal Revenue Code of 1986, as amended, hereafter made by the Company to its stockholders shall not be taxable for such stockholders. (e) In case the Company shall be a party to any transaction (including without limitation a merger, consolidation, sale of all or substantially all of the Company's assets or recapitalization of the Common Stock and excluding any transaction as to which paragraph (d)(i) of this Section 7 applies) (each of the foregoing being referred to as a "Transaction"), in each case as a result of which shares of Common Stock shall be converted into the right to receive stock, securities or other property (including cash or any combination thereof), then the Series A Preferred Stock will thereafter no longer be subject to conversion into Common Stock pursuant to Section 7, but instead shall be convertible into the kind and amount of shares of stock and other securities and property receivable (including cash) upon the consummation of such Transaction by a holder of that number of shares or fraction thereof of Common Stock into which one share of Series A Preferred Stock was convertible immediately prior to such Transaction. The Company shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (e) and it shall not consent or agree to the occurrence of any Transaction until the Company has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Series A Preferred Stock which will contain provisions enabling the holders of the Series A Preferred Stock which remains outstanding after such Transaction to convert into the consideration received by holders of Common Stock at the Conversion Price immediately after such Transaction. In the event that at any time, as a result of an adjustment made pursuant to this Section 7, the Series A Preferred Stock shall become subject to conversion into any securities other than shares of Common Stock, thereafter the number of such other securities so issuable upon conversion of the shares of Series A Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Series A Preferred Stock contained in this Section 7. The Provisions of this paragraph (e) shall similarly apply to successive Transactions. (f) If: (i) the Company shall declare a dividend (or any other distribution) on the Common Stock; or (ii) the Company shall authorize the granting to the holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of any class or any other rights or warrants: or (iii) there shall be any reclassification or change of the Common Stock (other than an event to which paragraph (d)(i) of this Section 7 applies) or any consolidation, merger or statutory share exchange to which the Company is a party and for which approval of any stockholders of the Company is required, or the sale or transfer of all or substantially all of the assets of the Company or any Corporate Change or Ownership Change (each as defined in Section 8 below); or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, except as provided otherwise in Section 8, the Company shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of shares of the Series A Preferred Stock at their addresses as shown on the stock records of the Company, as promptly as possible, but at least 30 days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights or warrants are to be determined or (B) the date on which such reclassification, change, consolidation, merger, statutory share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange these shares of Common Stock for securities or other property deliverable upon such reclassification, change, consolidation, merger, statutory share exchange, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice or any defect therein shall not affect the legality or validity of the proceedings described in this Section (g) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Transfer Agent an officers' certificate signed by the President or a Vice President and the Chief Financial Officer or the Treasurer setting forth the Conversion Price after such adjustment, the method of calculation thereof and setting forth a brief statement of the facts requiring such adjustment and upon which such adjustments are based. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price, the facts requiring such adjustment and upon which such adjustments are based and the date on which such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each share of Series A Preferred Stock at his or her last address as shown on the stock records of the Company. (h) In any case in which paragraph (d) of this Section 7 provides that an adjustment shall become effective immediately after a record date for an event and the date fixed for conversion pursuant to Section 7 occurs after such record date but before the occurrence of such event, the Company may defer until the actual occurrence of such event (A) issuing to the holder of any share of Series A Preferred Stock surrendered for conversion the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of any fraction pursuant to paragraph (c) of this Section 7. (i) For purposes of this Section 7, the number of shares of Common Stock at any time outstanding shall not include any shares of Common Stock then owned or held by or for the account of the Company or any corporation controlled by the Company. (j) Notwithstanding any other provision herein to the contrary, the issuance of any shares of Common Stock pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Company and the investment of additional optional amounts in shares of Common Stock under any such plan shall not be deemed to constitute an issuance of Common Stock. There shall be no adjustment of the Conversion Price in case of the issuance of any stock of the Company in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 7. If any action or transaction would require adjustment of the Conversion Price pursuant to more than one paragraph of this Section 7, only one adjustment shall be made and such adjustment shall be the amount of adjustment which has the highest absolute value. (k) In case the Company shall take any action affecting the Common Stock, other than action described in this Section 7, which in the opinion of the Board of Directors would materially adversely affect the conversion rights of the holders of the shares of Series A Preferred Stock, the Conversion Price for the Series A Preferred Stock may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Directors may determine to be equitable in the circumstances. (1) The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, for the purpose of effecting conversion of the Series A Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all outstanding shares of Series A Preferred Stock not theretofore converted. For purposes of this paragraph (1), the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding shares of Series A Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single holder. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock deliverable upon conversion of the Series A Preferred Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully-paid and nonassessable shares of Common Stock at such adjusted Conversion Price. The Company will endeavor to make the shares of Common Stock required to be delivered upon conversion of the Series A Preferred Stock eligible for trading upon the NASDAQ National Market System or upon any national securities exchange upon which the Common Stock shall then be traded, prior to such delivery. Prior to the delivery of any securities which the Company shall be obligated to deliver upon conversion of the Series A Preferred Stock, the Company will endeavor to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. (m) The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of the shares of Series A Preferred Stock (or any other securities issued on account of the Series A Preferred Stock pursuant hereto) or shares of Common Stock on conversion of the Series A Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Series A Preferred Stock (or any other securities issued on account of the Series A Preferred Stock pursuant hereto) or shares of Common Stock in a name other than the name in which the shares of Series A Preferred Stock with respect to which such Common Stock shares are issued were registered and the Company shall not be required to make any issue or delivery unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the reasonable satisfaction of the Company, that such tax has been paid or is not required to be paid. (n) The Company shall not take any action which results in adjustment of the number of shares of Common Stock issuable upon conversion of a share of Series A Preferred Stock if the total number of shares of Common Stock issuable after such action upon conversion of the Series A Preferred Stock then outstanding, together with the total number of shares of Common Stock then outstanding, would exceed the total number of shares of Common Stock then authorized under the Company's Certificate of Incorporation. Subject to the foregoing, the Company shall take all such actions as it may deem reasonable under the circumstances to provide for the issuance of such number of shares of Common Stock as would be necessary to allow for the conversion from time to time, and taking into account adjustments as herein provided, of outstanding shares of the Series A Preferred Stock in accordance with the terms and provisions of the Company's Certificate of Incorporation. 8. Special Conversion Rights Upon Corporate Change or Ownership Change (a) If a Corporate Change (as defined below) should occur with respect to the Company, each holder of shares of the Series A Preferred Stock shall have the right, at the holder's option, for a period of 45 days after the mailing of a notice by the Company that a Corporate Change has occurred, to convert all, but not less than all, of such holder's shares of the Series A Preferred Stock into Marketable Stock as defined below) with an aggregate Applicable Market Value (as defined below) equal to the aggregate Stated Value as defined below) of the Series A Preferred Stock so converted. The Company or successor corporation, as the case may be, at its option, in lieu of providing Marketable Stock upon any such conversion, may provide the holders who have elected to convert under this Section 8 with cash equal to the Stated Value of the Series A Preferred Stock for which conversion was elected, but only if the Company, in its notice to the holder that a Corporate Change has occurred, has notified such holder of the Company's election to provide such holder with cash equal to such Stated Value in lieu of such Marketable Stock, provided that any such election by the Company shall apply to all shares of the Series A Preferred Stock for which the special conversion was elected. Shares of the Series A Preferred Stock that are not converted as provided above will remain convertible into the kind and amount of securities, cash, or other assets that the holders of the shares of the Series A Preferred Stock would have owned immediately after the Corporate Change if the holders had converted the shares of the Series A Preferred Stock immediately before the effective date of the Corporate Change. The Company will notify the holders of the Series A Preferred Stock of any pending Corporate Change as soon as practicable and in any event within 30 days in advance of the effective date of such Corporate Change. In the event of a pending Corporate Change, the Company (or any successor corporation) shall, unless it has determined to provide the holders who have elected to convert under this Section 8 with cash as provided above, take all action necessary to provide for sufficient shares of Marketable Stock for the conversion of the Series A Preferred Stock as provided herein. (b) If an Ownership Change (as defined below) should occur with respect to the Company, each holder of a share of the Series A Preferred Stock shall have the right, at the holder's option, for a period of 45 days after the mailing of a notice by the Company that an Ownership Change has occurred, to convert all, but not less than all, of such holder's shares of the Series A Preferred Stock into Common Stock of the Company with an aggregate Applicable Market Value equal to the aggregate Stated Value of the Series A Preferred Stock so converted. The Company may, at its option, in lieu of providing Common Stock upon any such conversion, provide the holders who have elected to convert under this Section 8 with cash equal to the Stated Value of the shares of Series A Preferred Stock for which the special conversion was elected, but only if the Company, in its notice to the holder that an Ownership Change has occurred, has notified such holder of the Company's election to provide such holder with cash equal to such Stated Value in lieu of such Common Stock, provided that any such election by the Company shall apply to all shares of the Series A Preferred Stock for which the special conversion was elected. (c) The special conversion right provided in this Section 8 arising upon an Ownership Change will only be applicable with respect to the first Ownership Change that occurs after the date hereof. (d) If a Corporate Change or an Ownership Change shall occur, then, as soon as practicable and in any event within 30 days after the occurrence of such Corporate Change-or Ownership Change, the Company shall mail to each registered holder of a share of Series A Preferred Stock a notice (the "Special Conversion Notice") setting forth details regarding the special conversion right of the holders to convert their shares of Series A Preferred Stock as a result of such Corporate Change or Ownership Change, as the case may be, including, if applicable, notice of the Company's or the successor corporation's election to provide such holder with cash in lieu of Marketable Stock or Common Stock. The holder of a share of Series A Preferred Stock must exercise such conversion right within the 45-day period after the mailing of the Special Conversion Notice by the Company or such special right shall expire. The conversion date for shares so converted shall be the 45th day after the mailing of the Special Conversion Notice. Within five business days thereafter, the Company shall deliver a certificate for the Marketable Stock issuable upon such conversion with a check for any fractional shares issuable or the cash equal to the Stated Value of the Series A Preferred Stock, if the Company has so elected. Exercise of such conversion right shall be irrevocable and no dividend on the shares of Series A Preferred Stock tendered for conversion shall accrue from and after the conversion date. (e) The Special Conversion Notice shall state: (i) the event constituting the Corporate Change or Ownership Change; (ii) the last date upon which holders may submit shares of Series A preferred Stock for conversion; (iii) the Applicable Market Value; (iv) the Conversion Price then in effect under Section 7 and the continuing conversion rights, if any, under Section 5: (v) the name and address of any paying agent and conversion agent; (vi) that holders who want to convert shares of Series A Preferred Stock must satisfy the requirements of Section 7 and must exercise such conversion right within the 45-day period after the mailing of such notice by the Corporation; (vii) that exercise of such conversion right shall be irrevocable and no dividends on shares of Series A Preferred Stock tendered for conversion shall accrue from and after the conversion date; (viii) that the Corporation may, at its option, pay cash equal to the Stated Value of all shares of Series A Preferred Stock for which the special conversion was elected; (ix) that the certificate for the Marketable Stock or the cash, as the case may be, shall be delivered within five business days after the last date upon which holders may submit Series A Preferred Stock for conversion . (f) (i) As used herein, a "Corporate Change" with respect to the Company shall be deemed to have occurred at such time as the Company is a party to a business combination, including a merger or consolidation or the sale of all or substantially all of its assets and as a result of such business combination, the Series A Preferred Stock (or the Depositary Shares representing the Series A Preferred Stock) or the Common Stock thereafter is not traded on the New York Stock Exchange, the American Stock Exchange, or admitted for quotation on the NASDAQ National Market System. A Corporate Change will not, however, be deemed to occur with respect to any transaction in which the consideration received by the holders of Common Stock of the Corporation consists solely of Marketable Stock. (ii) As used herein, an "Ownership Change" with respect to the Company shall be deemed to have occurred at such time as any "person" (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the beneficial owner (as defined below), directly or indirectly, of more than 50% of the outstanding Common Stock of the Company pursuant to a transaction that does not constitute a Corporate Change with respect to the Company. (iii) As used herein, a person shall be deemed to have "beneficial ownership" with respect to, and shall be deemed to "beneficially own," any securities of the Company in accordance with Section 13 of the Exchange Act of 1934 and the rules and regulations (including rule 13d-3, Rule 13d-5, and any successor rules) promulgated by the Securities and Exchange Commission thereunder; provided, however, that a person shall be deemed to have beneficial ownership of all securities that any such person has a right to acquire whether such right is exercisable immediately or only after the passage of time and without regard to the 60 day limitation referred to in Rule 13d-3. (iv) As used herein, the term "Marketable Stock" shall mean Common Stock or common stock of any corporation that is the successor to all or substantially all of the business or assets of the Company as a result of a Corporate Change, that is (or will, upon distribution thereof, be) listed on the New York Stock Exchange, the American Stock Exchange, or approved for quotation on the NASDAQ National Market System. (v) As used in this Section 8, the "Applicable Market Value" of a share of the Common Stock or a share of common stock of a corporation that is the successor to all or substantially all of the business and assets of the Company as the result of a Corporate Change, shall be the average of the Closing Price of such Common Stock for the five trading days ending on the last trading day preceding the date of Corporate Change or Ownership Change. (vi) As used herein, the "Stated Value" of Series A Preferred Stock converted during the 45-day period following the occurrence of a Corporate Change or an Ownership Change shall mean the liquidation preference (as provided in Section 4 hereof) of the Series A Preferred Stock so converted, together with any accrued and unpaid dividends to the conversion date. 9. Ranking. Any class or classes of stock of the Company shall be deemed to rank: (i) prior to the Series A Preferred Stock, as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series A Preferred Stock. (ii) on a parity with the Series A Preferred Stock, as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series A Preferred Stock, if the holders of such class of stock and the Series A Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation prices, without preference or priority of one over the other; and (iii) junior to the Series A Preferred Stock, as to dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock shall be Common Stock or if the holder of Series A Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such stock. 10. Voting. (a) Except as herein provided or as otherwise from time to time required by law, holders of Series A Preferred Stock shall have no voting rights. Whenever, at any time or times, dividends payable on the shares of Series A Preferred Stock at the time outstanding shall be cumulatively in arrears for such number of Dividend Periods (whether or not consecutive) which shall in the aggregate contain not less than 540 days, the holders of Series A Preferred Stock shall have the exclusive right, voting separately as a class with holders of shares of any one or more other series of preferred stock ranking on a parity with the Series A Preferred Stock as to dividends or on the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable (the Series A Preferred Stock and any such other preferred stock, collectively for purposes of this Section 10, the "Defaulted Preferred Stock"), to elect two directors of the Company at the Company's next annual meeting of stockholders and at each subsequent annual meeting of stockholders; provided, however, that if such voting rights shall become vested more than ninety days or less than twenty days before the date prescribed for the annual meeting of shareholders, thereupon the holders of the shares of Defaulted Preferred Stock shall be entitled to exercise their voting rights at a special meeting of the holders of shares of Defaulted Preferred Stock as set forth in paragraphs (b) and (c) of this Section 10. At elections for such directors, each holder of Series A Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Defaulted Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of stock held as may be granted to them). Upon the vesting of such right of the holders of Defaulted Preferred Stock, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of outstanding Defaulted Preferred Stock as hereinafter set forth. The right of holders of Defaulted Preferred Stock, voting separately as a class, to elect members of the Board of Directors as aforesaid shall continue until such time as all dividends accumulated on Defaulted Preferred Stock shall have been paid or declared and funds set aside for payment in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. (b) Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting of the holders of shares of Defaulted Preferred Stock called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such meetings or by the written consent of such holders pursuant to Section 228 of the General Corporation Law of the State of Delaware. (c) At any time when such voting right shall have vested in the holders of shares of Defaulted Preferred Stock entitled to vote thereon, and if such right shall not already have been initially exercised, an officer of the Company shall, upon the written request of 10 of the holders of record of shares of such Defaulted Preferred Stock then outstanding, addressed to the Treasurer of the Company, call a special meeting of holders of shares of such Defaulted Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Company or, if none, at a place designated by the Treasurer of the Company. If such meeting shall not be called by the proper officers of the Company within 30 days after the personal service of such written request upon the Treasurer of the Company, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Treasurer of the Company at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of 10% of the shares of Defaulted Preferred Stock then outstanding may designate in writing any person to call such meeting at the expense of the Company, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the same place as is elsewhere provided in this paragraph. Any holder of shares of Defaulted Preferred Stock then outstanding that would be entitled to vote at such meeting shall have access to the stock books of the Company for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called or held during a period within 45 days immediately preceding the date fixed for the next annual meeting of stockholders. (d) The directors elected pursuant to this Section shall serve until the next annual meeting or until their respective successors shall be elected and shall qualify; any director elected by the holders of Defaulted Preferred Stock may be removed by, and shall not be removed otherwise than by, the vote of the holders of a majority of the outstanding shares of the Defaulted Preferred Stock who were entitled to participate in such election of directors, voting as a separate class, at a meeting called for such purpose or by written consent as permitted by law and the Restated Certificate of Incorporation and By-laws of the Company. If the office of any director elected by the holders of Defaulted Preferred Stock, voting as a class, becomes vacant by reason of death, resignation, retirement, disqualification or removal from office or otherwise, the remaining director elected by the holders of Defaulted Preferred Stock, voting as a class, may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Upon any termination of the right of the holders of Defaulted Preferred Stock to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of Defaulted Preferred Stock, voting as a class, shall terminate immediately. Whenever the terms of office of the directors elected by the holders of Defaulted Preferred Stock, voting as a class, shall so terminate and the special voting powers vested in the holders of Defaulted Preferred Stock shall have expired, the number of directors shall be such number as may be provided for in the By-laws irrespective of any increase made pursuant to the provisions of this Section 10. (e) So long as any shares of the Series A Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Series A Preferred Stock outstanding at the time given in person or by proxy either in writing (as permitted by law and the Certificate of Incorporation and By-laws of the Company) or at any special or annual meeting, shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to the Series A Preferred Stock as to dividends or the distribution of assets upon liquidation, dissolution or winding up; (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation of the Company (including this Certificate) which would adversely affect any right, preference, privilege or voting power of the Series A Preferred Stock or of the holders thereof; Provided, however, that any increase in the amount of authorized preferred stock or the creation and issuance of other series of preferred stock, or any increase in the amount of authorized shares of such series or of any other series of preferred stock, in each case ranking on a parity with or junior to the Series A Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to adversely affect such rights, preferences or voting powers; or (iii) the authorization of any reclassification of the Series A Preferred Stock. The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series A Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption, scheduled to be consummated within three months after such time. 11. Exchange. (a) The Series A Preferred Stock shall be exchangeable in whole, but not in part, at the option of the Company on any dividend payment date beginning January 15, 1996, for the Company's Series A Convertible Subordinated Debentures Due January 15, 2003 (the "Debentures") as described in the Company's Registration Statement on Form S-3 (Registration No. 33-55376), as filed with the Securities and Exchange Commission (and as subsequently amended). Holders of outstanding shares of Series A Preferred Stock will be entitled to receive $250.00 principal amount of Debentures in exchange for each share of Series A Preferred Stock held by them at the time of exchange; provided that the Debentures will be issuable in denominations of $1,000 and integral multiples thereof. If the exchange results in an amount of Debentures that is not an integral multiple of $1,000, the amount in excess of the closest integral multiple of $1,000 will be paid in cash by the Company. (b) The Company will mail to each record holder of the Series A Preferred Stock written notice of its intention to exchange the Series A Preferred Stock for the Debentures no less than 30 nor more than 60 days prior to the date of the exchange (the "Exchange Date"). The notice shall specify the effective date of the exchange and the place where certificates for shares of Series A Preferred Stock are to be surrendered for Debentures and shall state that dividends on Series A Preferred Stock will cease to accrue on the Exchange Date. Prior to giving notice of intention to exchange, the Company shall execute and deliver to a bank or trust company selected by the Company to act as Trustee with respect to the Debentures (which may but need not be the bank named in the Registration Statement referred to above) an Indenture substantially in the form filed as an Exhibit to the Registration Statement with such changes as may be required by law, stock exchange rule, NASDAQ National Market System rule or customary usage. (c) If the Company has caused the Debentures to be authenticated on or prior to the Exchange Date and has complied with the other provisions of this Section 11, then, notwithstanding that any certificates for shares of Series A Preferred Stock have not been surrendered for exchange, on the Exchange Date dividends shall cease to accrue on the Series A Preferred Stock and at the close of business on the Exchange Date the holders of the Series A Preferred Stock shall cease to be stockholders with respect to the Series A Preferred Stock and shall have no interest in or other claims against the Company by virtue thereof and shall have no voting or other rights with respect to the Series A Preferred Stock, except the right to receive the Debentures issuable upon such exchange and the right to accumulated and unpaid dividends, without interest thereon, upon surrender (and endorsement, if required by the Company) of their certificates, and the shares evidenced thereby shall no longer be deemed outstanding for any purpose. The Company will cause the Debentures to be authenticated on or before the Exchange Date. (d) Notwithstanding the foregoing, if notice of exchange has been given pursuant to this Section 11 and any holder of shares of Series A Preferred Stock shall, prior to the close of business on the Exchange Date, give written notice to the Company pursuant to Section 7 above of the conversion of any or all of the shares held by the holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Company), then the exchange shall not become effective as to the shares to be converted and the conversion shall become effective as provided in Section 11 above. (e) The Debentures will be delivered to the persons entitled thereto upon surrender to the Company or its agent appointed for that purpose of the certificates for the shares of Series A Preferred Stock being exchanged therefor. (f) Notwithstanding the other provisions of this Section 11, if on the Exchange Date the Company has not paid full cumulative dividends on the Series A Preferred Stock (or set aside a sum therefor) the Company may not exchange the Series A Preferred Stock for the Debentures and any notice previously given pursuant to this Section 11 shall be of no effect. (g) The Company will endeavor to list the Debentures, prior to delivery, upon each national securities exchange or the NASDAQ National Market System or any similar system of automated dissemination of securities prices, if any, upon which the Series A Preferred Stock is listed at the time of delivery. In addition, prior to the effective date of the exchange, the Company will arrange for the qualification of the Debentures under the applicable securities and blue sky laws. 12. Record Holders. The Company and the Transfer Agent may deem and treat the record holder of any shares of Series A Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Company nor the Transfer Agent shall be affected by any notice to the contrary. 13. Notice. Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon receipt, in the case of a notice of conversion given to the Company as contemplated in Section 7(b) hereof, or, in all other cases, upon the earlier of receipt of such notice or three Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Certificate) with postage prepaid, addressed: if to the Company, to its offices at One Research Way, Princeton Forrestal Center, Princeton, New Jersey 08540 (Attention: Allen Bloom, Vice President and General Counsel) or other agent of the Company designated as permitted by this Certificate, or, if to any holder of the Series A Preferred Stock, to such holder at the address of such holder of the Series A Preferred Stock as listed in the stock record books of the Company (which may include the records of any transfer agent for the Series A Preferred Stock); or to such other address as the Company or holder, as the case may be, shall have designated by notice similarly given. IN WITNESS WHEREOF, this Certificate has been signed by Charles A. Baker and attested to by Allen Bloom, of the Company, all as of the 8th day of January, 1993 THE LIPOSOME COMPANY, INC. By: /s/ Charles A. Baker Name: Charles A. Baker Title: Chairman of the Board Attest: /s/ Allen Bloom Name: Allen Bloom Title: VP, General Counsel and Secretary EX-10.5.1 4 5 July 8, 1999 Mr. Charles A. Baker Chairman and Chief Executive Officer The Liposome Employer, Inc. One Research Way Princeton, NJ 08540-6619 Dear Chuck: This letter agreement (the "Letter Agreement") will serve to amend and modify the agreement (the "Agreement"), dated as of June 1, 1995, by and between you and The Liposome Employer, Inc., a Delaware corporation (the "Employer"), by the addition of the following terms and conditions thereto: 1. The Agreement is hereby amended by the addition of a new Section 20 to read as follows: "20. Excise Tax Gross-Up. "(a) Equalization Payment. In the event that the Employee becomes subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed), with regard to any amounts received in connection with Employee's termination of employment with the Employer or any other payments and benefits provided by the Employer that constitute "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (including, but not limited to, any and all excess parachute payments associated with outstanding long-term incentive grants (including, but not limited to, early vesting of stock options or restricted stock)) (the "Total Payments"), the Employer shall pay to the Employee in cash an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee after deduction of any Excise Tax or compensation on the Total Payments and any federal, state, and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. Such payment shall be made by the Employer to the Employee as soon as practicable following the event triggering the Excise Tax, but in no event beyond 30 days from such date. "(b) Tax Computation. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amounts of such Excise Tax: "(i) Any other payments or benefits received or to be received by the Employee in connection with a Change in Control of the Employer or the Employee's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Employer, or with any Person whose actions result in a Change in Control of the Employer or any Person affiliated with the Employer or such Persons) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the excise tax, unless in the opinion of tax counsel selected by the Employer's independent auditors and acceptable to the Employee, such other payments or benefits (in whole or in part) do not constitute parachute payments, or unless such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; "(ii) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of: (1) the total amount of the Total Payments; or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (i) above); and "(iii) The value of any noncash benefits or any deferred payment or benefit shall be determined by the Employer's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. "For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross- Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Employee's residence on the Effective Date of Termination, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. "(c) Subsequent Recalculation. In the event the Internal Revenue Service adjusts the computation of the Employer under Section 20(b) hereof, so that the Employee did not receive the greatest net benefit, the Employer shall reimburse the Employee for the full amount necessary to make the Employee whole, plus an appropriate market rate of interest, as determined by the Employer's independent auditors." 2. Section 9(a) of the Agreement is hereby amended by the addition of subsection (v) to read as follows: "(v) Termination After Age 65. For purposes of any stock options, restricted stock or other equity grants and for purposes of any benefit plans in which the Employee participates, any termination of the Employee's employment (other than by death or, to the extent that the Employee would receive greater benefits than upon a retirement under a specific plan or grant, a disability under such plan or grant) after the Employee has attained age 65, whether by the Employer or the Employee and notwithstanding the reason for such termination, shall constitute a retirement, within the meaning of such equity and benefit plans and grants." 3. The Agreement is hereby amended by the deletion of subsection 9(a)(iv) and the substitution therefor of the language annexed hereto as Exhibit A. The Agreement, as amended herein, shall remain in full force and effect. Very truly yours, THE LIPOSOME EMPLOYER, INC. By: _________________________ Title: ________________________ Agreed: _____________________ Charles A. Baker L:\LEGALDPT\LEGAL\AGREEMEN\CAB Letter Agreement.doc EXHIBIT A (iv) "Change in Control" of the Employer shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (i)When a "person," as defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act, becomes the beneficial owner, directly or indirectly, of securities of the Employer representing (I) more than thirty-five percent (35%) of the combined voting power of the Employer's then outstanding securities, unless such person is subject to contractual restrictions that would preclude him or her from voting such shares in a manner to influence or control the management of the Employer's business, provided that in the event such contractual restrictions are removed, a Change of Control will be deemed to have occurred on the effective date of such removal or on such later date as the Executive receives actual notice of such removal, or (II) one hundred percent (100%) of the combined voting power of the Employer's then outstanding securities regardless of any contractual restrictions. For purposes of this provision, "person" shall not include the Employer, any subsidiary of the Employer, any employee benefit plan or employee stock plan of the Employer, or any person holding the Employer's Common Stock by, for or pursuant to the terms of such a plan; and "voting power" shall mean the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors. For the purpose of subsections 9(a)(iv)(A)(I) and 9(a)(iv)(A)(II) of this Agreement, the right to vote shares in a transaction for which stockholder approval is required under Sections 251 through 258 (mergers), 271 (sale of assets), or 275 (dissolution) of the Delaware General Corporation Law, as the same may be amended from time to time, will not, in themselves, be deemed, to constitute the right to vote such shares "in a manner to influence or control the management of the Employer's business". Whether other voting rights may be granted to a beneficial owner without enabling it to influence or control the management of the Employer's business will depend on the totality of rights granted in each case. (B)When, as a result of a vote of stockholders for which proxies are solicited by or on behalf of any person other than the Employer in accordance with the SEC rules issued under Section 14 of the Exchange Act, or which is exempt from the SEC proxy rules by reason of Rule 14a-2 under the Exchange Act, or as a result of an action by written consent of stockholders without a meeting, the "incumbent directors" cease to constitute at least a majority of the authorized number of members of the Board. For purposes of this provision, "incumbent directors" shall mean the persons who were members of the Board on January 22, 1998, and the persons who were elected or nominated as their successors or pursuant to increases in the size of the Board by a vote of at least an absolute majority (and not just the majority of a quorum) of the Board members who were then Board members (or successors or additional members so elected or nominated). (C)When the stockholders of the Employer approve a merger, consolidation, or reorganization, whether or not the Employer is the surviving entity in such transaction, (I) other than a merger, consolidation, or reorganization that would result in the voting securities of the Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty-five percent (65%) of the combined voting power of the voting securities of the Employer (or such surviving entity) outstanding immediately after the merger, consolidation, or reorganization; and (II) other than a merger, consolidation or reorganization that would result in the voting securities of the Employer outstanding immediately prior thereto continuing to represent less than sixty-five percent (65%) but more than one percent (1%) of the combined voting power of the voting securities of the Employer (or such surviving entity) outstanding immediately after the merger, consolidation or reorganization if the holder or holders of the shares in the surviving entity that do not represent the securities of the Employer outstanding prior to the merger, consolidation or reorganization is or are subject to contractual restrictions that would preclude such holder or holders from voting such shares in a manner to influence or control the management of the Employer's (or such surviving entity's) business, provided that in the event such contractual restrictions are removed, a Change of Control will be deemed to have occurred on the effective date of such removal or on such later date as the Executive receives actual notice of such removal. (D)When the stockholders of the Employer approve (I) the sale or other disposition of all or substantially all of the assets the Employer or (II) a complete liquidation or dissolution of the Employer. (E)When the Board adopts a resolution to the effect that any person has acquired effective control of the business and affairs of the Employer. However, in no event shall a Change in Control be deemed to have occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change-in-Control transaction. The Executive shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Executive is an equity participant in the purchasing Employer or group (except for: (x) passive ownership of less than three percent (3%) of the stock of the purchasing Employer; or (y) ownership of equity participation in the purchasing Employer or group which is otherwise not significant, as determined prior to the Change in Control by an absolute majority of the non-employee Directors who were Directors prior to the transaction, and who continue as Directors following the transaction). EX-10.17 5 INDEMNIFICATION AGREEMENT This Agreement is made and entered into as of the ____ day of _______, _____, ("Agreement") by and between The Liposome Company, Inc., a Delaware corporation ("Corporation") and _____________ ("Indemnitee"). WHEREAS, recently highly competent persons have become more reluctant to serve publicly-held corporations as directors, or in other capacities, unless they are provided with better protection from the risk of claims and actions against them arising out of their service to and activities on behalf of such corporations; and WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties related to indemnification have increased the difficulty of attracting and retaining such persons; and WHEREAS, the Board of Directors of the Corporation (the "Board") has determined that the inability to attract and retain such persons is detrimental to the best interests of the Corporation's stockholders and that such persons should be assured that they will have better protection in the future; and WHEREAS, it is reasonable, prudent and necessary for the Corporation to obligate itself contractually to indemnify such persons to the fullest extent permitted by applicable law, so that such persons will serve or continue to serve the Corporation free from undue concern that they will not be adequately indemnified; and WHEREAS, this Agreement is a supplement to and in furtherance of Article VI, Section 4 of the by-laws of the Corporation, any rights granted under the Certificate of Incorporation of the Corporation and any resolutions adopted pursuant thereto and shall not be deemed to be a substitute therefor nor to diminish or abrogate any rights of the Indemnitee thereunder; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Corporation on the condition that Indemnitee be indemnified according to the terms of this Agreement; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Corporation and Indemnitee do hereby covenant and agree as follows: Section l. Definitions. For purposes of this Agreement: (a) "Change in Control" means a change in control of the Corporation occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(a) of Schedule l4A of Regulation l4A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of l934 (the "Act"), whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date (i) any "person" (as such term is used in Sections l3(d) and l4(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule l3d-3 under the Act), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board. (b) "Corporate Status" means the status of a person who is or was a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation. (c) "Disinterested Director" means a director of the Corporation who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Effective Date" means ____________. (e) "Expenses" means all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Corporation or Indemnitee in any other matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (g) "Proceeding" means any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 11 of this Agreement to enforce an Indemnitee's rights under this Agreement. Section 2. Services by Indemnitee. Indemnitee agrees to serve as an officer and/or director of the Corporation, and, at its request, as a director, officer, employee, agent or fiduciary of certain other corporations and entities. Indemnitee may at any time and for any reason resign from any such position (subject to any other contractual obligation or any obligation imposed by operation of law). Section 3. Indemnification - General. The Corporation shall indemnify, and advance Expenses to, Indemnitee as provided in this Agreement to the fullest extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement. Section 4. Proceedings Other Than Proceedings by or in the Right of the Corporation. Indemnitee shall be entitled to the rights of indemnification provided in this Section if, by reason of Indemnitee's Corporate Status, Indemnitee is, or is threatened to be made, a party to any threatened, pending or completed Proceeding, other than a Proceeding by or in the right of the Corporation. Pursuant to this Section, Indemnitee shall be indemnified against Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with any such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. Section 5. Proceedings by or in the Right of the Corporation. Indemnitee shall be entitled to the rights of indemnification provided in this Section if, by reason of Indemnitee's Corporate Status, Indemnitee is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Corporation to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against Expenses, judgments, penalties, fines and amounts paid in settlement, actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with any such Proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in any such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Corporation if applicable law prohibits such indemnification unless the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine that indemnification against Expenses may nevertheless be made by the Corporation. Section 6. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee's Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with each successfully resolved claim, issue or matter. For the purposes of this Section and without limiting the foregoing, the termination of any claim, issue or matter in any such Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. Section 7. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee's Corporate Status, a witness in any Proceeding, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection therewith. Section 8. Advancement of Expenses. The Corporation shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within twenty (20) days after the receipt by the Corporation of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Section 9. Procedure for Determination of Entitlement to Indemnification. (a) To obtain indemnification under this Agreement in connection with any Proceeding, and for the duration thereof, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Corporation shall, promptly upon receipt of any such request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to Section 9(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in such case: (i) if a Change in Control shall have occurred, by Independent Counsel (unless Indemnitee shall request that such determination be made by the Board or the stockholders, in which case in the manner provided for in clauses (ii) or (iii) or this Section 9(b)) in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; (ii) if a Change of Control shall not have occurred, (A) by the Board by a majority vote of a quorum consisting of Disinterested Directors, or (B) if a quorum of the Board consisting of Disinterested Directors is not obtainable, or even if such quorum is obtainable, if such quorum of Disinterested Directors so directs, either (x) by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, or (y) by the stockholders of the Corporation, as determined by such quorum of Disinterested Directors, or a quorum of the Board, as the case may be; or (iii) as provided in Section l0(b) of this Agreement. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (l0) days after such determination. Indemnitee shall cooperate with the person, persons, or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Corporation (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Corporation hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) If required, Independent Counsel shall be selected as follows: (i) if a Change of Control shall not have occurred, Independent Counsel shall be selected by the Board by a majority vote of a quorum consisting of Disinterested Directors, and the Corporation shall give written notice to Indemnitee advising Indemnitee of the identity of Independent Counsel so selected; or (ii) if a Change of Control shall have occurred, Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event (i) shall apply), and Indemnitee shall give written notice to the Corporation advising it of the identity of Independent Counsel so selected. In either event, Indemnitee or the Corporation, as the case may be, may, within seven (7) days after such written notice of selection shall have been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section l of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 9(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Corporation or Indemnitee may petition the Court of Chancery of the State of Delaware, or other court of competent jurisdiction, for resolution of any objection which shall have been made by the Corporation or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court or by such other person as such court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 9(b) hereof. The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with its actions pursuant to this Agreement, and the Corporation shall pay all reasonable fees and expenses incident to the procedures of this Section 9(c) regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement date of any judicial proceeding or arbitration pursuant to Section 11(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 10. Presumptions and Effects of Certain Proceedings. (a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 9(a) of this Agreement, and the Corporation shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) If the person, persons or entity empowered or selected under Section 9 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) prohibition of such indemnification under applicable law; provided, however, that such sixty (60) day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith require(s) such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section l0(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 9(b) of this Agreement and if (A) within fifteen (l5) days after receipt by the Corporation of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (l5) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 9(b) of this Agreement. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. Section 11. Remedies of Indemnitee. (a) In the event that (i) a determination is made pursuant to Section 9 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 of this Agreement, (iii) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 9(b) of this Agreement and such determination shall not have been made and delivered in a written opinion within ninety (90) days after receipt by the Corporation of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 7 of this Agreement within ten (l0) days after receipt by the Corporation of a written request therefor, or (v) payment of indemnification is not made within ten (l0) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 9 or l0 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of Indemnitee's entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at Indemnitee's option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award or arbitration within one hundred eighty (l80) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 11(a). The Corporation shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 9 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section shall be conducted in all respects as a de novo trial or arbitration on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made or deemed to have been made pursuant to Section 9 or l0 of this Agreement that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section, absent (i) a misstatement by Indemnitee of a material fact, or an omission of any material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) prohibition of such indemnification under applicable law. (d) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. (e) In the event that Indemnitee, pursuant to this Section, seeks a judicial adjudication of, or an award in arbitration to enforce, Indemnitee's rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses (of the kinds described in the definition of Expenses) actually and reasonably incurred by Indemnitee in such judicial adjudication or arbitration, but only if Indemnitee prevails therein. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. Section 12. Non-Exclusivity; Survival of Rights; Insurance Subrogation. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation or by-laws of the Corporation, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or any provision hereof shall be effective as to any Indemnitee with respect to any action taken or omitted by such Indemnitee in Indemnitee's Corporate Status prior to such amendment, alteration or repeal. (b) To the extent that the Corporation maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee, agent or fiduciary under such policy or policies. (c) In the event of any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (d) The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. Section 13. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Corporation; or (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 11 of this Agreement. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee's heirs, executors and administrators. Section 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 15. Exception to Right of Indemnification or Advancement of Expenses. Except as provided in Section 11(e), Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any claim therein, brought or made by Indemnitee against the Corporation. For the purposes of this Section 15, a Proceeding in the right of the Corporation shall not be deemed to constitute a Proceeding brought or made by the Corporation. Section 16. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. Section 17. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 18. Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. INDEMNITEE THE LIPOSOME COMPANY, INC. By: Charles A. Baker Chairman of the Board of Directors and Chief Executive Officer I, Michael McGrane, Secretary, certify that the Board of Directors has authorized the Corporation to enter into this Agreement by a resolution unanimously passed at its _____________meeting. Michael McGrane Secretary EX-10.18 6 8 AGREEMENT THIS AGREEMENT is made as of March 1, 1999 (the "Effective Date"), at Princeton, New Jersey, USA BETWEEN (1) THE LIPOSOME COMPANY, INC., a corporation duly organised and validly existing under the laws of the State of Delaware, USA, and having an address at One Research Way, Princeton Forrestal Center, Princeton, NJ 08540, USA (hereinafter called "TLC"); and (2) WYETH-AYERST INTERNATIONAL INC., a corporation duly organised and validly existing under the laws of the State of New York, USA, with its principal place of business at 150 Radnor-Chester Road, St. Davids, PA 19087, USA (hereinafter called "W-A"). WHEREBY IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement and in the Schedules to this Agreement the following words and phrases shall have the following meanings unless the context requires otherwise: 1.1.1 "Affiliate" shall mean any company, partnership or other entity which directly or indirectly Controls, is Controlled by or is under common Control with any Party to this Agreement including as a Subsidiary or Holding Company; 1.1.2 "Agreed Minimum Sales Targets" shall mean the Net Sales targets set out in Schedule 1 as these may be amended from time to time in accordance with Section 16, and such sales targets as may be agreed on for Renewal Terms in accordance with Section 19.1; 1.1.3 "Business Day" shall mean any day excluding Saturdays, Sundays and public holidays in the Territory or the United States, as the case may be; 1.1.4 "Competent Authority" shall mean any local or national agency, authority, department, inspectorate, minister, ministry official or public or statutory person (whether autonomous or not) of, or of any government of, any country having jurisdiction over the Agreement or any of the Parties including the European Commission and the European Court of Justice; 1.1.5 "Confidential Information" shall mean all trade secrets, know-how and other confidential information relating to the Product; the data, know- how and other information generated by any clinical trials or other studies carried out under this Agreement or arising in connection with the marketing and promotion of the Product in the Territory or relating to the business affairs or finances of a Party or its Affiliates coming into the possession of the other Party pursuant to this Agreement; 1.1.6 "Contract Year" shall mean each successive twelve-month period beginning on the Effective Date during the term of this Agreement; 1.1.7 "Control" shall mean the ownership of fifty percent (50%) or more of the issued share capital or the legal power to direct or cause the direction of the general management and policies of the entity in question; 1.1.8 "DCM" shall mean the director of clinical marketing to be appointed by TLC pursuant to Section 7.3; 1.1.9 "Directive" shall mean any present or future directive, requirement, instruction, direction or rule of any Competent Authority (but only, if not having the force of law, if compliance with the directive is in accordance with the general practice of persons to whom the directive is addressed) and includes any modification, extension or replacement thereof then in force; 1.1.10 "Force Majeure" in relation to any Party means any event or circumstance which is beyond the reasonable control of such Party which results in or causes the failure of that Party to perform any or all of its obligations under this Agreement including an act of God, lightning, fire, storm, flood, earthquake, accumulation of snow or ice, lack of water arising from weather or environmental problems, strike, lockout or other industrial disturbance, act of the public enemy, war declared or undeclared, threat of war, terrorist act, blockage, revolution, riot, insurrection, civil commotion, public demonstration, sabotage, act of vandalism, prevention from or hindrance in obtaining in any way materials, energy or other supplies, explosion, fault or failure of plant or machinery (which could not have been prevented by good industry practice), governmental restraint, act of legislature, or directive or requirement of a Competent Authority governing any Party, provided that lack of funds shall not be interpreted as a cause beyond the reasonable control of that Party; 1.1.11 "List Price" shall mean the price at which the Product is approved for sale and reimbursement to hospitals in the Territory, which price is set forth on Schedule 4 annexed hereto; 1.1.12 "MAA" shall mean a marketing authorisation approval; 1.1.13 "Net Sales" shall mean the net amount invoiced for the Product to customers by TLC or its distributor; 1.1.14 "Parties" shall mean TLC and/or W-A; 1.1.15 "Product" shall mean ABELCETr (amphotericin B lipid complex injection) in finished form packaged and ready for use by users, including developments or improvements of the same; 1.1.16 "Quarter Days" shall mean each January 1, April 1, July 1, and October 1; 1.1.17 "Specifications" shall mean the specifications of the Product set out in Schedule 2, as the same may be modified by TLC from time to time; 1.1.18 "Territory" shall mean the United Kingdom, Northern Ireland, and such other countries as shall be added by the mutual agreement of the Parties; 1.1.19 "TLC Patents" shall mean the patents listed on Schedule 6 hereto; and 1.1.20 "TLC Trade Marks" shall mean the registered trade marks owned by TLC or its Affiliate which cover the Product, such as ABELCETr or other applicable trade mark. 1.2 In this Agreement: 1.2.1 Unless the context requires otherwise, all references to a particular Section, Schedule or paragraph shall be a reference to that Section, Schedule or paragraph in or to this Agreement as the same may be amended from time to time pursuant to this Agreement; 1.2.2 Unless the contrary intention appears, words importing the masculine gender shall include the feminine and vice versa, and words in the singular shall include the plural and vice versa; 1.2.3 Unless the contrary intention appears, words denoting persons shall include any individual partnership, company, corporation, joint venture, trust, association, organisation or other entity, in each case whether or not having separate legal personality; and 1.2.4 Reference to the words "include" or "including" is to be construed without limiting the generality of the preceding words. 2. CLINICAL TRIALS 2.1 TLC, or its Affiliate, has obtained an MAA authorising the sale of the Product in the Territory. TLC shall sponsor and carry out, or shall procure that one of its Affiliates sponsors and carries out, any additional clinical trials or studies under TLC protocols that may be required to be carried out in the Territory in order to maintain the MAA or support a revised, supplemental or additional MAA or other application for regulatory approval required to market and sell the Product in the Territory and shall co-ordinate any such clinical activity in the Territory within their world- wide clinical development program for the Product. W-A shall provide at its own cost logistical support consisting of assisting TLC staff with scheduling appointments, selecting and visiting investigators, and assisting with follow-up matters in order to further the timely completion of these studies. TLC shall be responsible for all other costs. 2.2 In addition to the clinical studies provided for in Section 2.1, the Operating Committee provided for in Section 7 may also propose additional local clinical trials and/or studies to advance jointly agreed marketing goals and to aid in positioning the Product in the Territory. If TLC approves the plans and protocols for such studies, they shall be jointly sponsored by W-A and TLC, and TLC will provide an adequate supply of Product required for such clinical trials and studies. The cost of such Product and other study costs will be shared equally between the Parties. 2.3 W-A may from time to time propose to TLC any additional trials or studies initiated by W-A or investigators that might be carried out in the Territory, but whether or not such trials or studies are carried out shall be in the sole discretion of TLC which approval shall not be unreasonably withheld. W-A will sponsor and be fully responsible financially for all clinical studies other than those mentioned in Sections 2.1 and 2.2. Such additional trials or studies shall be at the cost and expense of W-A. 2.4 W-A undertakes to assist TLC at TLC's expense in obtaining any necessary authorisations and approvals required to carry out any such additional clinical trials or studies including arranging meetings with the relevant Competent Authorities which will be attended by representatives of TLC and W-A. 2.5 W-A undertakes in relation to any additional clinical trials or studies conducted in the Territory to recommend, at TLC's request, investigators to be appointed by TLC to carry out the trials or studies and to monitor the activities of those investigators in accordance with the instructions of TLC from time to time. If requested by TLC, W-A shall collect and maintain all relevant data including at least case histories, treatments, outcomes, adverse events and protocol deviations. W-A shall prepare, maintain and deliver to TLC complete and accurate written records and reports (progress, safety and final), including manuscripts intended to be submitted for publication, of all clinical trials or studies that it monitors. 2.6 W-A shall inform TLC of any request made to it by a local physician for supplies of the Product to enable such physician to carry out his own trial and shall provide TLC with sufficient information to enable TLC to decide in its absolute discretion whether or not to supply such physician. W-A shall be responsible for paying any relevant charges due to be paid to such local physician and for ensuring that such local physicians comply with all necessary regulatory requirements when conducting the trial. 3. RIGHTS IN THE CLINICAL TRIALS DATA 3.1 All data, know-how and other information generated as a result of the additional clinical trials or studies carried out in or in relation to the Territory pursuant to Section 2 shall be owned by TLC or its Affiliate; however, during the term of this Agreement (and any renewal term thereof), W-A shall have a semi-exclusive right, title and interest in or to such data. W-A undertakes to notify TLC of any impending publication referring to the Product and obtain TLC's written approval prior to releasing such publication for submission to scientific journals or conferences. 4. MARKETING AUTHORISATION 4.1 TLC, or its Affiliate, has obtained an MAA for the Product and shall be solely responsible at its own cost and expense for the maintenance of such MAA and for the preparation and filing and maintenance of all amended or supplemental MAAs for the Product in the Territory from the relevant Competent Authority and any other approvals, clearances and requisite registrations required to market the Product in the Territory. All such approvals and registrations shall be in the name of TLC or its Affiliate. 4.2 W-A undertakes to assist TLC in obtaining any additional necessary authorisations and approvals required to market the Product in the Territory, including arranging meetings with the relevant Competent Authorities which will be attended by representatives of TLC and W-A. 4.3 In order to enable W-A to fulfil its obligations under this Agreement, TLC shall supply W-A, as soon as reasonably possible, with one copy of all MAAs for the Product and any other documents related to the MAA filed by TLC with the Competent Authorities in the Territory during the term of this Agreement. 5. PRICING AND REIMBURSEMENT 5.1 In the event that the List Price shall fall below the British pound equivalent of seventy U.S. dollars ($70 U.S.) per 100mg vial, or a proportionate price reduction occurs for other marketed units, TLC may terminate this Agreement in accordance with Section 20.1.6. 6. PRODUCT SUPPLY, TRAINING AND SUPPORT SERVICES 6.1 With effect from the Effective Date, TLC shall supply the Product to its appointed distributor for resale in the Territory following the promotional activities of W-A, subject to the terms and conditions of this Agreement. Subject to the provisions of Section 10.7 and 10.8, TLC will not be obligated to supply its distributor if the List Price is reduced at the discretion of a relevant Competent Authority in the Territory to an amount that is lower than the British pound equivalent of seventy U.S. dollars ($70 U.S.) per 100mg vial, or a proportionate price reduction occurs for other marketed units. TLC will promptly notify W- A in writing of its decision not to supply its distributor pursuant to the foregoing; provided however, that TLC will consult W-A prior to giving any notice under this Section. 6.2 TLC shall make available to W-A such technical, training and support services as W-A may request in connection with its obligations under this Agreement and as TLC shall consider reasonable. Specifically, TLC shall keep W-A reasonably informed of all relevant developments and experience gained by TLC and its Affiliates in the exploitation of the Product internationally, except if such disclosure would breach TLC's undertaking of confidentiality to a third party. TLC shall provide W-A with such technical, scientific, medical and commercial information, documentation and data developed or acquired by TLC and its Affiliates which may in TLC's judgement be useful to W-A for the purposes of this Agreement. 6.3 Each Party agrees that in performing its rights and obligations under this Agreement it will comply with its obligations as set out in the Medical Information Procedures set forth in Schedule 7 attached hereto. 7. OPERATING COMMITTEE 7.1 Forthwith following the Effective Date the Parties shall establish a joint Operating Committee whose responsibilities shall include: 7.1.1 approving a two (2) year marketing plan for the Territory submitted by W-A; 7.1.2 discussing and approving marketing plan updates proposed by W-A on an annual basis; 7.1.3 reviewing implementation of the marketing plan on a quarterly basis; 7.1.4 determining the manner in which both Parties or their Affiliates are to be identified on the labelling of the Product for sale in the Territory; 7.1.5 reviewing progress toward achievement of Agreed Minimum Sales Targets; 7.1.6 meeting from time to time, but at least two (2) times per year; and 7.1.7 any other responsibilities determined by the Parties. 7.2 The Operating Committee shall comprise four (4) persons ("Members"), and TLC and W-A respectively shall be entitled to appoint two (2) Members, to remove any Member appointed by it and to appoint any person to fill a vacancy arising from the removal or retirement of such Member. TLC and W-A respectively shall each notify the other in writing of the identities of their Members from time to time. 7.3 TLC shall be entitled to appoint one of its Members to preside at any meeting of the Operating Committee as Chairman. TLC may at its discretion and at its own cost and expense appoint a technical director and/or DCM to act as liaison between TLC and W-A's management and who shall be based at the premises of W-A in the Territory. If so appointed, the technical director and/or DCM will act as the Secretary of the Operating Committee and keep appropriate minutes. The technical director and/or DCM may or may not, at TLC's discretion, be designated as TLC's Committee members, but as an alternate member and not as an additional TLC committee member. 7.4 The quorum for meetings of the Operating Committee shall be all four (4) Members. Decisions of the Operating Committee shall be made by unanimous agreement of the Members present. Should it prove impossible to obtain such agreement or to arrange a quorate meeting within fourteen (14) days of a Party calling a meeting, then the Parties shall discuss the position in good faith in an effort to resolve their differences and if it still does not prove possible to obtain agreement then the outstanding matters requiring resolution shall be referred to the Senior Managers of TLC and W-A or their nominees for resolution who together shall use reasonable efforts to resolve such matters within fourteen (14) days of the date such matters are referred to them for resolution. If those Senior Managers fail to reach agreement within that period, the decision of TLC shall apply. 7.5 The venue for meetings of the Operating Committee shall be the United Kingdom. Both Parties shall be responsible for their own expenses including travel and accommodation costs incurred in connection with Operating Committee meetings. 7.6 The Operating Committee may establish a discount range, not to exceed ten percent (10%) per order of the List Price, being the basis on which W-A promotes the product to its customers. W-A will obtain the approval in writing of TLC if, as a result of negotiations with a customer, W-A proposes to promote the Product at a discount outside the approved range. In the event that W-A promotes the Product at a price different than the List Price, W-A shall indicate such promotional price rates in its reports to TLC pursuant to Section 11.2 of the Agreement. 7.7 W-A undertakes to assist TLC in obtaining any necessary pricing authorisations, reimbursement approvals and other approvals required to market or continue to market the Product in the Territory, including arranging meetings with the relevant Competent Authorities, which may be attended by representatives of TLC and W-A. Any pricing authorisation and reimbursement approval for the Product in the Territory granted from the relevant Competent Authority shall be in the name of TLC or its Affiliate. 7.8 If the condition stipulated in Section 6.1 of the Agreement occurs, the Parties agree jointly to explore means to remedy such condition in good faith, including but not limited to, renegotiating an amended price level, if applicable, with the relevant Competent Authorities in the Territory. In the event that no such remedy becomes available, ether party may terminate this Agreement by giving to the other not less than three (3) months written notice served at any time after the date of TLC's notice to W-A in Section 6.1. Within such notice period W-A shall be entitled to earn its promotional allowance on Product sold at the prevailing price. 8. FORECAST FOR PRODUCT NEEDS TO THE MARKET 8.1 Beginning no later than 15 days from the signature of this Agreement, TLC shall deliver in writing to W-A's UK Affiliate at such address as may from time to time be designated by it, the quarterly level of inventory for the Product stored at the warehouse of TLC's distributor. Beginning no later than 30 days from the signature of this Agreement, W-A shall deliver in writing to TLC on or before the first day of each month, at such address as may from time to time be designated by TLC, an indicative forecast of the quantity of the Product which W-A reasonably believes will be required in the Territory as a consequence of the promotion activity implemented by W-A, during each month of the twelve month period commencing six (6) weeks after the date such estimate is delivered to TLC. Following the second anniversary of the Effective Date such forecast will be due every three (3) months. 8.2 The forecast by W-A shall be a rolling system. Each such forecast by W-A shall constitute for the first three months the quantity of Product for which TLC shall use all reasonable commercial endeavours to make available to the market the quantities in accordance with such forecasts. In particular, but without prejudice to the generality of the foregoing, TLC shall not be obliged to make available to the market quantities of the Product against any such forecast where such forecast exceeds by more than twenty percent (20%) the previous monthly forecast for that month. 9. PACKAGING AND LABELLING 9.1 W-A shall consult with TLC on the requirements of all relevant Competent Authorities concerning the packaging and labelling of Product for sale in the Territory, including translation of the text of the packaging and any inserts as well as W-A's identification on the packaging (if any), and TLC shall approve all packaging and labelling. W-A shall be liable at its own cost and expense for all and any changes required to such packaging to meet such requirements from time to time, which cost and expense shall be reimbursed to TLC forthwith upon demand. TLC shall endeavour to keep reasonable quantities of packaging materials in stock in order to service W-A's forecast set in Section 8.1 herein. 10. PROMOTIONAL ALLOWANCE 10.1TLC shall procure that all orders for the Product placed with its distributor are converted to sales and that its distributor shall on a weekly basis issue a copy of its sales report by account showing orders received and sales completed, in such format as may be agreed between TLC and W- A. During each Contract Year TLC shall pay to W-A a promotional allowance equal to thirty-one and one-half percent (31.5%) of Net Sales with respect to the first one million three hundred thousand British pounds (1,300,000) of in-the-market sales, and then forty-one and one-half percent (41.5%) of Net Sales for the remaining sales. Such promotional allowance shall be paid quarterly, no later than thirty-five (35) days after each Quarter Day irrespective of whether TLC has received payment from its distributor in respects of sales made in the Territory to its customers. 10.2TLC shall keep accurate records and books of account for the purpose of showing all amounts to be calculated under this Agreement, including Net Sales in local currency. Such records and books of account shall, as between W-A and TLC, be kept for one (1) year following the end of the calendar year to which they relate and shall, solely for the purposes of any governmental audit, be kept for three (3) years following the end of the calendar year to which they relate and certified extracts of such records and books of account shall be open to inspection by W-A or its representatives once each calendar quarter with notice of at least five business days during normal business hours for the purpose of verifying any matter relevant to this Agreement. 10.3In addition, during each Contract Year, TLC will calculate the average selling price per Pack (ten (10) vials sold together) in the Territory. In the first Contract Year, TLC will pay W-A an additional promotional allowance equivalent to ten percent (10%) of the number of Packs sold times sixty- five percent (65%) of the average selling price per Pack during the first six (6) months after the Effective Date (the "Initial Six Months Additional Allowance"). In each Contract Year, TLC will pay W-A an additional promotional allowance equivalent to five percent (5%) of the number of Packs sold times sixty-five percent (65%) of the average selling price per Pack on the first one million three hundred thousand British pounds (1,300,000) (except that in the first Contract Year this allowance will not be paid on the Packs for which the Initial Six Months Additional Allowance was paid). In addition, if the Net Sales exceed one million three hundred thousand British pounds (1,300,000) in one single Contract Year, TLC will pay W-A a promotional allowance equivalent to five percent (5%) of the number of Packs sold times fifty-five percent (55%) of the average hospital selling price per Pack for Packs exceeding that level (except that in the first Contract Year this allowance will not be paid on the Packs for which the Initial Six Months Additional Allowance was paid). All such promotional allowances shall be paid quarterly, no later than thirty-five (35) days after each Quarter Day. 10.4Within thirty (30) days of any inspection under Section 10.2 or of any promotional allowance payment, W-A may give notice to TLC that it does not accept the same, following which the records or statement shall be audited and certified by an independent accountant appointed by agreement between the Parties or, in default of agreement within fourteen (14) days, by the office of TLC's regular independent accountants in the United Kingdom. TLC shall make available all books and records required for the purpose of such audit and certification and the determination of such independent accountants so certified shall be final and binding between the Parties. The cost of such audit and certification shall be the responsibility of TLC if the audit discloses an error benefiting TLC by more than five percent (5%) in respect of monies due to W-A, and the responsibility of W-A if the report is shown to have been accurate within such financial parameters. Forthwith upon any such certification, the Parties shall make any adjustments necessary in respect of the sums already paid to W-A in relation to the calendar quarter in question. Adjustments in favour of either Party shall be paid in cash. 10.5All sums due to W-A pursuant to this Agreement shall be paid in British pounds and shall be made to the designated account of W-A by telegraphic transfer. If European Currency Units should be subsequently created, the amount due W-A shall be converted in accordance with the British pound rate of exchange published in The Wall Street Journal on the last business day of the week preceding the date of payment. 10.6If TLC fails to make any payment to W-A hereunder within thirty (30) days of the due date for payment, without prejudice to any other right or remedy available to W-A, W-A shall be entitled to charge TLC late charge penalties (both before and after judgement) on the amount unpaid at the rate of LIBOR plus five percent (5%) until payment in full is made without prejudice to W-A's right to receive payment on the due date. 10.7 For the avoidance of doubt in the event that either Party shall terminate this Agreement in circumstances defined in Section 20.1.6 then TLC shall be obliged to pay to W-A its promotional allowance entitlement on sales effected by TLC's distributor during such termination notice period. 10.8 Payment of the promotional allowance shall be due and payable notwithstanding the failure by TLC to perform its obligations hereunder or its obligations to TLC's distributor (including without prejudice to the generality of the foregoing, failure to ensure the provision and delivery to TLC's distributor of adequate levels of stock of the Product in accordance with the relevant forecast) or the failure of TLC's distributor to effect the sale of the Product or otherwise to perform its distribution obligations to TLC under its distributorship agreement (including without prejudice to the generality of the foregoing, the processing and fulfilment of orders generated from the detailing of the Product by W-A to potential customers of TLC and its distributor) provided that W-A shall have complied with the contract procedures set out in the Marketing Plan and its obligations hereunder. 11. MARKETING AND PROMOTION BY W-A 11.1W-A shall use its reasonable efforts to promote and extend sales of the Product in the Territory and shall provide all sales detailing, and promotion activities for the Product in the Territory. W-A shall co-ordinate its marketing and sales activity with TLC's European-wide marketing campaign. TLC will provide to W-A free of charge camera-ready artwork for promotional materials in the English language. In the event that W-A wishes to develop customised promotional materials for use in the Territory, it may do so at its own cost, provided that it first submits the proposed materials to TLC and TLC gives its written approval, which it will use reasonable efforts to provide within thirty (30) days of receiving the materials. 11.2TLC shall promptly report to W-A sales, in such form and content as may be agreed between the Parties, on a weekly basis during the term of the Agreement. W-A will have the right to access marketing and sales information at any time within the term on request. 11.3W-A shall promptly report to TLC detailing and promotion activities in the Territory on a monthly basis during the first Contract Year and on a quarterly basis during the subsequent years of the Agreement. TLC will have the right to access marketing information at any time within the term on request. 11.4W-A shall use all reasonable endeavours to visit all of the haematology, transplantation and infectious disease centres in the Territory and to promote the Product to such extent as to enable TLC's distributor to satisfy the Agreed Minimum Sales Targets. 11.5Subject to the provisions of Section 10.8, in the event that TLC's distributor does not receive sufficient orders to satisfy the Agreed Minimum Sales Targets during the term of the Agreement, the provisions of Sections 16.1 through 16.8 shall apply. 11.6Unless otherwise agreed in writing with TLC, W-A shall concentrate its detailing and promotion of the Product within the Territory, shall not seek any customers for the Product outside the Territory and shall not establish any branch or maintain any facility in relation to the Product outside the Territory. 11.7W-A undertakes during the term of this Agreement that W-A or its Affiliate will not promote, market, distribute or sell in the Territory products which compete with the Product in the hospital or home intravenous therapy setting. Without limiting the generality of the foregoing, a product used to treat systemic fungal infections will be considered as a competitive product for purposes of this Section. W-A shall promptly notify TLC of all inquiries related to the sale or distribution of the Product outside of the Territory, except for territories which may be the subject of other agreements between the Parties. 11.8W-A will not detail or promote the Product as part of a basket of products with other products without TLC's prior written approval. 11.9In relation to the promotion of the Product W-A undertakes to comply with the requirements of the Contract Procedure more particularly set out in the Marketing Plan and TLC undertakes to procure the agreement of its distributor to the same. 12. GENERAL OBLIGATIONS OF W-A 12.1W-A shall during the period of this Agreement: 12.1.1 comply at all times with all applicable Directives, laws and regulations pertaining to the marketing and promotion of the Product in the Territory; 12.1.2 employ or otherwise engage at its own expense sufficient trained and qualified personnel and maintain adequate facilities for the efficient promotion and sale of the Product throughout the Territory; 12.1.3 in marketing the Product, not make any statement, representations, warranties or guarantees concerning the Product except as are expressly authorised pursuant to the marketing authorisation for the Product; 12.1.4 submit through the Operating Committee all advertising and promotional schemes and material (including copy and artwork) relating to the promotion of the Product for the approval of TLC prior to publication or distribution; 12.1.5 keep the Operating Committee regularly informed of full details concerning the marketing of the Product in the Territory, including but not limited to prospects, competitive activity etc., which information shall be recorded in Operating Committee meeting minutes. W-A will also promptly inform the Operating Committee of any other information which it now has or which it may receive in the future which is likely to be of interest, benefit or use to TLC in relation to its sale of the Products in the Territory and elsewhere and in particular, but without limitation, full details of new and prospective customers and will supply TLC with any other information requested by TLC, relevant to the performance by W-A of its obligations under this Agreement; 12.1.6 keep TLC fully informed of any change in Control of W-A in accordance with Section 20.2; 12.1.7 in all correspondence and other dealings relating directly or indirectly to the promotion of the Product clearly indicate that it is acting on its own account as principal and will not represent itself impliedly or expressly to be the agent of TLC nor incur any contractual or other liability on behalf of TLC nor in any way purport to pledge TLC's credit; and 12.1.8 In this clause, "Employee" means an employee employed by TLC immediately prior to the Effective Date: 12.1.8.1TLC shall indemnify W-A against all costs, expenses, damages, compensation, fines and other liabilities arising out of or in connection with: 12.1.8.1.1 any claim by an Employee arising from his/her employment with TLC or the termination of that employment; and 12.1.8.1.2 any claim by an Employee arising from the termination of his/her employment with W-A (howsoever arising) and which is calculated by reference to the length of his/her continuous employment (as defined in and determined in accordance with the Employment Rights Act 1996 (the "ERA")), provided that this indemnity shall only apply in relation to any termination which takes effect within five (5) years of the Effective Date and so that TLC's liability shall be limited to the amount of any such claim calculated by reference to the period of the Employee's continuous employment with TLC or any Associated Employer (as defined in the ERA) of TLC. 12.1.8.2Subject to the provisions of Section 12.1.8.1, W-A hereby agrees to pay to TLC by way of contribution towards the costs, including costs to cancel auto leases, mobile telphone contracts, and all other such peripheral costs of termination, incurred by TLC in terminating the contracts of employment of the Director, Clinical Marketing, Sales Co-ordinator, and five (5) Clinical Marketing Managers, up to the sum of one hundred forty-eight thousand British pounds (148,000) within thirty (30) days of receipt of invoices from TLC for any such costs. 12.2W-A shall notify TLC, in writing, within twenty-four (24) hours following receipt of any notice from any governmental agency or public authority of any action to be taken by such agency or authority which may affect the Product. 12.3W-A shall during the period of this Agreement carry out its obligations hereunder in the following manner: 12.3.1 in a manner which shows the skill, diligence, prudence and foresight which would reasonably and ordinarily be expected from a skilled and experienced person engaged in the same type of undertaking under the same or similar circumstances; 12.3.2 in a manner which meets the highest professional and ethical standards; 12.3.3 in a manner free from dishonesty and corruption; and 12.3.4 in a manner which shall enhance the image and reputation of TLC and its Affiliates, but for the avoidance of doubt it is declared and agreed that this Agreement confers no right on W-A to use the name or logo of TLC, except as otherwise stipulated in this Agreement. 12.4 W-A affirms that it is familiar with the Foreign Corrupt Practices Act of 1977 of the United States of America, as amended by the Foreign Corrupt Practices Act Amendments of 1988 and as may be further amended and supplemented from time to time ("FCPA"). W-A further warrants, covenants, represents and agrees with TLC that, in connection with the performance of this Agreement or with the sale of any Product, neither W-A nor any of its principals, employees or agents will perform, to the best of its knowledge and belief, any act which would constitute a violation of the FCPA or which would cause TLC to be in violation of the FCPA. W-A shall certify the accuracy and veracity of the foregoing representation and warranty from time to time as TLC shall request. W-A will enforce the foregoing obligation in accordance with the extract from its Code of Conduct, attached as Schedule 5 and made a part hereof. 13. ADVERSE REACTION REPORTING 13.1During the term of this Agreement each Party will report adverse reactions reported to it in respect of the Product to the other Party and to the appropriate regulatory authorities in accordance with all relevant laws and regulations. 13.2During the term of this Agreement, W-A will report all serious adverse reactions from any source to TLC's Affiliate in the United Kingdom for regulatory reporting to the Medicines Control Agency (the "MCA") and W-A Global Safety Group within 24 hours of receipt. TLC will duly copy W-A's Affiliate in the United Kingdom on any reports made to the MCA marked "reported." All other non-serious reactions will be reported by W-A's Affiliate in the United Kingdom to TLC and W-A Global Safety Group on a monthly basis. TLC will provide W-A with the MCA drug analysis and product analysis prints upon request and will provide copies of any anonymised reports received from the MCA. 13.3The central safety department of each Party will report to the central safety department of the other Party all adverse reactions reported to it in respect of the Product as follows: 13.3.1 fatal unexpected and life-threatening unexpected adverse reactions by telephone or facsimile within three (3) working days of receipt by the central safety department; 13.3.2 all other serious adverse reactions in writing within fifteen (15) working days of receipt by the central safety department; and 13.3.3 a summary of all adverse reactions, serious and non-serious, in writing on a six-month basis for the first two years and thereafter on a yearly basis, indicating those cases which have previously been reported to the other Party. Further information received on any serious adverse reaction (or any information which changes an adverse reaction from non-serious to serious) will also be reported to the other Party within three (3) or fifteen (15) working days of receipt by the central safety department, according to the above criteria. 13.4An adverse reaction will be considered "serious" if it is any one or more of the following; namely, fatal, life threatening, disabling or incapacitating, results in hospitalisation or prolongation of hospitalisation, a congenital abnormality, a carcinoma, or an overdose. In addition, any adverse reaction which suggests a significant hazard, contraindication, side effect or precaution that may be associated with the use of the Product will be considered a serious adverse reaction. 14. GRANT OF RIGHTS 14.1TLC hereby grants W-A the exclusive right to promote the Product in the Territory under the TLC Trade Marks, subject to Section 15 herein. 15. INTELLECTUAL PROPERTY 15.1TLC represents, warrants and undertakes that to the best of its knowledge and belief at the Effective Date: 15.1.1 TLC or a TLC Affiliate owns the TLC Trade Marks within the Territory; 15.1.2 the TLC Trade Marks are duly registered and subsisting in the Territory and all renewal fees have been duly paid; 15.1.3 nothing has been done within the Territory to diminish or otherwise adversely affect the reputation of the TLC Trade Marks; 15.1.4 TLC is not aware of any infringement by any third party in the Territory of the TLC Trade Marks; 15.1.5 TLC or a TLC Affiliate owns the TLC Patents within the Territory; 15.1.6 the TLC Patents are duly issued and subsisting in the Territory, and all annuities have been duly paid and shall when due be duly paid; 15.1.7 there is no pending or threatened claim, proceeding or litigation relating to the TLC Trade Marks or the TLC Patents that could adversely affect the ability of W-A to market and sell the Product in the Territory; and 15.1.8 there is no pending or threatened claim, proceeding or litigation alleging that the sale or use of the Product in the Territory would infringe a patent, trademark or other intellectual property right of a third party. 15.2During the period of this Agreement TLC shall carry out at its own expense and with sole discretion any and all activities required in the Territory in relation to TLC Trade Marks or any TLC Patents, including prosecution, maintenance, enforcement and defence of any of the same. 15.3Except as otherwise stipulated in this Agreement W-A acknowledges that it has no right, title or interest in or to the Product nor in the TLC Patents, the TLC Trade Marks, or in any trade secrets, copyrights, design rights, database rights, moral rights or other intellectual property rights applicable to the Product. To the extent and in the manner requested by TLC, W-A shall place patent, trade mark and copyright notices and similar proprietary legends on all Product and packaging materials in order to preserve the proprietary rights of TLC or its Affiliates. 15.4W-A shall give TLC notice of any infringement within the Territory of the TLC Trade Marks or the TLC Patents coming to its attention. TLC shall have the right to have sole conduct of any proceedings necessary, including full authority to settle such proceedings. Prior to any such settlement TLC shall consult with W-A on the impact of any such settlement on W-A's interests. In the case of any proceedings within the Territory, TLC shall be entitled to join W-A as a co-plaintiff who shall provide all reasonable assistance in relation to such proceedings at its own cost and expense. If in any such proceedings, whether at trial or by way of settlement, TLC is successful, it shall be entitled to retain any award of costs and damages made in such proceedings or settlement, but TLC shall remit to W-A only to the extent of such recovery by TLC the reasonable out-of-pocket costs, legal fees and expenses expended by W-A in providing such assistance to TLC. In the case that TLC informs W-A in writing that TLC has elected not to pursue such infringement proceedings, W-A may initiate and pursue such proceedings either on its own or as a joint plaintiff with TLC, if TLC so desires, provided that W-A has obtained TLC's written consent, which shall not be unreasonably withheld. In the event that W-A shall bring proceedings on its own, W-A shall be entitled to retain 100% of any award of costs and damages awarded in such proceedings or settlement monies paid in connection therewith, but W-A shall remit to TLC only to the extent of such recovery by W- A the reasonable out-of-pocket costs, legal fees and expenses expended by TLC in providing assistance to W-A. 15.5If during the period of this Agreement either Party shall receive any notice, claim or proceedings from any third party alleging infringement of such third party's intellectual property rights by reason of W-A's marketing or sale of the Product in the Territory, such Party shall forthwith notify the other Party of any such notice, claims or proceedings and: 15.5.1 TLC shall be responsible at its own cost and expense for dealing with any such notice, claim or proceedings, and W-A shall co-operate in TLC's handling and defence thereof; and 15.5.2 TLC shall have conduct of and sole authority to defend or settle such claims or proceedings. In order to resolve any such claims or proceedings, TLC may agree to take a license from the owner of the patent, trademark or other intellectual property right in question, but if such license cannot be obtained on terms that are acceptable to TLC, it may, following consultation with W-A, elect to discontinue marketing of the Product in the Territory, in which case this Agreement shall be terminated, unless W-A agrees to pay all or a portion of the license fees or royalties necessary to obtain a license therefor. The foregoing is without prejudice to any rights or claims that W-A may have by reason of any breach by TLC of the representations, warranties and/or undertakings contained in Sections 15.1.1 through 15.1.8 hereof, except that the termination of this Agreement by TLC in accordance with the terms of this Section only shall not in itself constitute any breach of TLC's obligations hereunder. 15.5.3 TLC shall indemnify and hold W-A free and harmless from any payment of royalties or damages to third parties as a consequence of any judgement, award or settlement arising from a claim of patent or trademark infringement, or infringement of other intellectual property rights, based on W-A's use or sale of the Product in the Territory under the TLC Trade Marks and TLC Patents in accordance with the terms of this Agreement, except as provided in Section 15.5.2, and except for any claim based on marketing or promotional materials created by, packaging or labelling produced by, Product modifications made by, or other acts done by, W-A, its agents, employees or customers. 16. SALES TARGETS 16.1In the event that in any one year of the term of this Agreement the Agreed Minimum Sales Targets are not achieved, notwithstanding the provision and delivery of adequate levels of stock of the Product to the market by TLC and by TLC's distributor, then, subject to the saving clause provided hereunder, TLC shall have the following options: 16.1.1 to terminate this Agreement or 16.1.2 to co-operate in improving the marketing of the Product. 16.2For the purposes of Section 16.1.1, W-A may, at its option, aggregate the Agreed Minimum Sales Targets in any two (2) years of the term of this Agreement and take the average thereof in order to meet such targets. If TLC wishes to exercise the option set out in Section 16.1.1, it shall notify W-A to this effect in writing within thirty (30) days of receiving notice that any particular Agreed Minimum Sales Target has not been met and thereupon the relevant provisions of Sections 19 and 20 shall apply. However, the Parties will agree on revised targets if the Agreed Minimum Sales Targets are not achieved due to unforeseeable events beyond W-A's reasonable control, such as actions of governmental or regulatory authorities or any failure on the part of TLC or its distributor to effect the sale of the Product in circumstances envisaged in Section 10.8 of this Agreement. Any failure by TLC to give notice of termination within the thirty-day period will not constitute a waiver of its right to terminate under Section 16.1.1 if additional time is needed to enable TLC to determine the cause of such failure to meet targets, to allow the Parties to negotiate revised targets, or to calculate two-year averaged targets. 16.3TLC's failure to terminate this Agreement pursuant to the provisions of Section 16.1.1 in any one year shall not prejudice TLC's right to exercise this option in any of the following years. 16.4If in any one year TLC wishes to exercise the option set out in Section 16.1.2, TLC will convene a meeting of the Operating Committee to determine a new plan for the marketing and sale of the Product in the Territory (the "New Marketing Plan"). 16.5Upon being so convened, the Operating Committee shall prepare the first year of the New Marketing Plan, and such New Marketing Plan will contain: 16.5.1 an estimate of marketing/promotional budget and selling expenses required for the Product in the Territory during such year; 16.5.2 the target audiences for the Product in the Territory; and 16.5.3 the marketing/promotional budget and selling expenses and the projected number of details to be shared by TLC or its Affiliate and W-A in the Territory to all target audiences during such Year. Such determination of budget and the number of details shall be made considering factors including the number of physicians in each target audience, their geographic distribution, the elapsed time since product launch, and the frequency of detailing visits to each target audience which is customary in pharmaceutical sales practice in the Territory for products of similar nature to the Product, provided always that W-A shall be required to perform a guaranteed number of the projected details, such number to be defined by the Operating Committee. In no event shall such number of projected details by W- A or TLC be less than thirty percent (30%) of total projected details. 16.6In the event of a New Marketing Plan, and not later than three (3) months prior to the beginning of any year, a New Marketing Plan for the following year shall be prepared by the Operating Committee covering the same issues as set out in Section 16.5. 16.7During any year of the New Marketing Plan TLC or its Affiliate and W-A shall supply each other on a regular, monthly basis with copies of sales call reports in order to ascertain the actual number of details undertaken by both Parties. Such call reports will be treated as Confidential Information under Section 17 and will be provided only to employees of the Parties who are members of the Operating Committee or who are responsible for calculating payments hereunder. 16.8In the event that TLC or its Affiliate co-operates in the marketing of the Product, it shall be entitled to a credit against amounts owed to W-A calculated as the sum of A and B, where (I) For the first one million three hundred thousand British pounds (1,300,000) of in-the-market sales during each Contract Year: DTLC A = NS x 40% x ____________ DTLC + DE DE B = ET x ____________ DTLC + DE and (II) For all subsequent in-the-market sales during any Contract Year: DTLC A = NS x 50% x ____________ DTLC + DE DE B = ET x ____________ DTLC + DE and NS = Net Sales for the three (3) months ending on the day before each Quarter Day; DTLC = The number of sales calls undertaken by TLC and its Affiliates for the Product in the three (3) months ending on the day before each Quarter Day; DE = The number of sales calls undertaken by W-A and its Affiliates for the Product in the three (3) months ending on the day before each Quarter Day; and ET = The expenses incurred by TLC and its Affiliates in support of the Product in the Territory, other than personnel-related expenses, in the three (3) months ending on the day before each Quarter Day. Such credits shall be taken against payments due to W-A in accordance with Section 10.1 herein. For the purpose of making the foregoing calculation, W-A undertakes to inform TLC of the applicable number of sales calls within five (5) days after each of the Quarter Days. 17. CONFIDENTIALITY 17.1The Parties each undertake and agree to: 17.1.1 keep the Confidential Information secret and confidential and not directly or indirectly to disclose or permit to be disclosed the same to any third party, other than its Affiliates, consultants or other advisors, for any reason without the prior written consent of the other Party; 17.1.2 ensure that only those of its officers and employees and those of its Affiliates who are directly concerned with the carrying out of this Agreement have access to the Confidential Information on a strictly applied "need to know" basis and are informed of the secret and confidential nature of it; 17.1.3 ensure that the Confidential Information is not covered by any fixed or floating charge entered into at any time by it and not otherwise to establish a lien over or in any other way encumber, the same; and 17.1.4 not copy, reproduce or otherwise replicate for any purpose or in any manner whatsoever any documents, discs, CD-ROM or any other media upon which Confidential Information can be permanently stored containing the Confidential Information. 17.2The obligations of confidence referred to in this Section 17 shall not extend to any Confidential Information which: 17.2.1 is or shall be generally available to the public otherwise than by reason of breach by the recipient or its Affiliate of the provisions of this Section; 17.2.2 in the case of Confidential Information disclosed or made available to a Party ("Recipient Party") or its Affiliate directly or indirectly by the other Party: (a) is known to the Recipient Party and is at its free disposal (having been generated independently by the Recipient Party or a third party in circumstances where it has not been derived directly or indirectly from the other Party's Confidential Information) prior to its receipt from the other provided that evidence of such knowledge is furnished by the Recipient Party within twenty-eight (28) days of receipt of that Confidential Information; or (b) is subsequently disclosed to the Recipient Party without obligations of confidence by a third party owing no such obligations in respect of that Confidential Information; 17.2.3 is required by law to be disclosed (including as part of any regulatory submission or approval process) and then only when prompt written notice of this requirement has been given to the other Party so that the other Party may, if so advised, seek appropriate relief to prevent such disclosure, provided always that in such circumstances such disclosure shall be only to the extent so required and shall be subject to prior consultation with the other Party with a view to agreeing on the timing and content of such disclosure. 17.3Subject to the provisions of Section 17.2.3, all Confidential Information disclosed by one Party to the other shall remain the intellectual property or property of the disclosing Party. In the event of a court, nominee or supervisor for composition in satisfaction of debts, liquidator, trustee, receiver, administrative receiver, receiver and manager, interim receiver, custodian sequestrator or similar officer ("Officer") assumes partial or complete Control over the assets of a Party based on the insolvency or bankruptcy of that Party, that Party shall: 17.3.1 promptly notify the court or Officer: (a) that Confidential Information received from the other Party under this Agreement remains the property of the other Party unless expressly assigned; (b) of the confidentiality and security obligations under this Agreement; and 17.3.2 to the extent permitted by law, take all steps necessary or desirable to maintain the confidentiality and security of the other Party's Confidential Information and to ensure that the court or Officer maintains that Confidential Information in confidence and that Confidential Material is kept secure in accordance with this Agreement. 17.4The terms and conditions of this Agreement shall be treated as Confidential Information by both Parties. If either Party desires to issue a press release regarding this Agreement, it shall submit the proposed text of such press release to the other Party and shall thereafter issue it only if the other Party does not object to the proposed text within forty-eight hours after receiving it. The Party proposing to issue the press release will make reasonable efforts to incorporate the other Party's comments and will not issue any press release regarding this Agreement over the other Party's objection except as provided in Section 17.2.3. 17.5The obligations of the Parties under Sections 17.1 to 17.4 shall survive the expiration or termination of this Agreement for whatever reason and continue for a period of five (5) years. 17.6The Parties understand and agree that remedies at law may be inadequate to protect against any breach of any of the provisions of this Section 17 by either Party or their employees, agents, officers or directors or any other person acting in concert with it or on its behalf. Accordingly, each Party shall be entitled to seek the granting of injunctive relief by a court of competent jurisdiction against any action that constitutes any breach of this Section 17. It is understood that injunctive relief is intended solely as provisional relief pending resolution of the dispute. 18. LIABILITY/INDEMNITY 18.1Subject to the provisions of Section 18.3, TLC shall indemnify, defend and hold harmless W-A, its officers, agents, employees and Affiliates from any and all liability, loss, damage, cost and expense (including court costs and reasonable attorney's fees) incurred or sustained by W-A or its Affiliates as a result of any claim or demand of any party arising out of or connected with the negligence of TLC in the preparation of a clinical trial protocol and/or with any defect which may arise from failure to meet product specifications as approved by the Competent Authorities of the Territory, including for such purposes manufacturing defects arising out of the Product not complying with the Specifications; provided however that TLC and its Affiliates shall have no liability for any loss, damage, cost or expense which directly results from: 18.1.1 failure of W-A, its officers, agents, employees or Affiliates to adhere to the term of a clinical trial protocol, TLC's instructions relative to the use of the relevant Product or any term or provision of this Agreement; 18.1.2 failure of W-A, its officers, agents, employees or Affiliates to comply with any applicable governmental or regulatory requirements; or 18.1.3 negligence or wilful malfeasance by W-A, its officers, agents, employees and/or Affiliates, but only to the extent that such loss, damage, cost or expense are due to the negligence or wilful malfeasance of W-A, its officers, agents, employees and/or Affiliates. 18.2W-A shall indemnify, defend and hold harmless TLC, its Affiliates, and their respective officers, agents and employees from any and all liability, loss, damage, cost and expense (including court costs and reasonable attorney fees) incurred or sustained by any of them as a result of any claim or demand of any party arising out of or connected with: 18.2.1 failure of W-A, its officers, agents, employees or Affiliates to adhere to the term of a clinical trial protocol, TLC's written instructions relative to the use of the relevant products or any term or provision of this Agreement; 18.2.2 failure of W-A, its officers, agents, employees or Affiliates to comply with any applicable governmental or regulatory requirements; or 18.2.3 negligence or wilful malfeasance by W-A, its officers, agents, employees and/or Affiliates. 18.3Neither Party shall be liable in an action for breach of contract or in tort brought by one against the other whether under the indemnity set out in Section 18.1 or 18.2 or otherwise for special, indirect or consequential damages resulting from such action or claim arising out of this Agreement including without limitation loss of turnover, profits, goodwill or business interruption however the same may be caused. 18.4Each Party's agreement to indemnify and hold the other harmless pursuant to this Section 18 is conditional upon the indemnified party: 18.4.1 providing written notice to the indemnifying party of any claim or demand arising out of the indemnified activities within thirty (30) days after the indemnified party has knowledge of such claim or demand; 18.4.2 permitting the indemnifying party to assume full responsibility to investigate, prepare for and defend against any such claim or demand including the right to compromise or settle the same; and 18.4.3 not compromising or settling such claim or demand without the indemnifying party's written consent. Each Party agrees that any settlement made by an indemnifying party shall not impose an obligation or restriction on any indemnified party without such indemnified party's written consent. 19. TERM 19.1Subject to the provisions for early termination contained herein, this Agreement shall take effect from the Effective Date and shall continue until the fifth anniversary thereof (the "Initial Term"). Provided that the Agreed Minimum Sales Targets are achieved, as modified by Section 16.2, during the Initial Term or during any subsequent period of five (5) Contract Years (a "Renewal Term"), W-A shall have the right to market the Product for an additional Renewal Term, subject to good faith agreement between the Parties regarding the Agreed Minimum Sales Targets for the Renewal Term. In the event that the Parties are unable to agree, then TLC agrees that it shall market the Product to the exclusion of any other third party. 19.2In the event that the Parties are unable to agree on renewal terms after the Initial Term or any Renewal Term, TLC will make payments to W-A in the amount of fifteen percent (15%) of the Net Sales of Product sold in the Territory by TLC or its Affiliate in the first year following termination of this Agreement, or, if the Product is marketed by an independent distributor, fifteen percent (15%) of the revenue received by TLC or its Affiliate from such distributor on account of Product shipped to the distributor during the first year following termination of this Agreement; and seven and one-half percent (7.5%) of the Net Sales of Product sold in the Territory by TLC or its Affiliate in the second year following termination of this Agreement, or, if the Product is marketed by an independent distributor, seven and one-half percent (7.5%) of the revenue received by TLC or its Affiliate from such distributor on account of Product shipped to the distributor during the second year following termination of this Agreement. No such payments will be required if the reason for nonrenewal is a failure to meet Agreed Minimum Sales Targets during the Initial Term or any Renewal Term. 19.3In the event that the Agreement is terminated prior to the expiration of the Initial Term due to TLC's material breach, then TLC agrees to make payments to W-A representing compensation to W-A equal to seven and one-half percent (7.5%) of Net Sales for each year which W-A would otherwise have had marketing rights but for the termination, based on the Net Sales for the immediately preceding twelve (12) months prior to the effective date of termination. 20. TERMINATION 20.1Each Party shall have the right to terminate this Agreement upon giving ninety (90) days written notice thereof to the other Party upon the occurrence of the following events at any time during the term of this Agreement: 20.1.1 if the other Party commits a material breach of this Agreement, which in the case of a breach capable of remedy shall not have been remedied within thirty (30) days of the receipt by it of a notice identifying the breach and requiring its remedy; 20.1.2 any Party shall suspend payment of its debts or cease or threaten to cease to carry on its business or become bankrupt or insolvent; 20.1.3 a proposal is made or a nominee or supervisor is appointed for a composition in satisfaction of the debts of any Party or a scheme or arrangement of its affairs in relation thereto or any Party commences negotiations with one or more of its bankers with a view to the general readjustment or rescheduling of all or part of its indebtedness or enters into any composition or arrangement for the benefit of its creditors or proceedings are commenced in relation to any Party under any law, regulation or procedure relating to the re-construction or re- adjustment of debts (including where a petition is filed or proceedings commenced seeking any reorganisation, arrangement, composition or readjustment under any applicable bankruptcy, insolvency, moratorium, reorganisation or other similar law affecting creditor's rights or where a Party consents to, or acquiesces in, the filing of such a petition); 20.1.4 an application is made to the courts for an administrative order under the bankruptcy laws or any statutory modification or re-enactment thereof with respect to any Party; 20.1.5 any Party takes, without the consent of the other Party (such consent not to be unreasonably withheld), any action, or any legal proceedings are started or other steps taken by a third party, with a view to: (a) the winding up or dissolution of such Party (other than for the re-construction of a solvent company); or (b) the appointment of a liquidator, trustee, receiver, administrative receiver, receiver and manager, interim receiver custodian, sequestrator or similar officer of such Party against the Party or a substantial part of the assets of the Party; or 20.1.6 the pricing authorisation imposed by the Competent Authority is below the minimum price provided under Section 5.1. 20.2TLC shall have the right to terminate this Agreement upon giving thirty (30) days written notice thereof to W-A in the event that a third party unrelated to W-A's current shareholders acquires Control of W-A and such party is engaged directly or indirectly in the manufacture or sale of lipid products. 20.3Upon termination of this Agreement for any reason W-A shall forthwith: 20.3.1 discontinue making any representations regarding its status as a provider of promotion services for TLC; 20.3.2 cease conducting any activities with respect to the marketing or sale of the Product in the Territory; 20.3.3 return to TLC technical sales or promotional and sales training material and any other material of TLC then in its possession including without limitation all Confidential Information and all clinical data concerning the Product; 20.3.4 refrain from using the TLC Trade Marks; and 20.3.5 if so requested by TLC and at TLC's expense take all actions reasonably requested by TLC to transfer to TLC or its designee any registration, approval or other regulatory licence or permission granted to W-A by a Competent Authority in the Territory for the Product. 20.4Except for sums otherwise owing upon termination of this Agreement or thereafter becoming due and payable neither Party should be required to pay the other Party any termination damages or special, incidental or consequential damages of any kind arising out of the termination (including without limitation labour claims and loss of profits, investments or goodwill), and W-A hereby waives and disclaims any such claims whether arising under local law or otherwise. 20.5Upon termination of this Agreement howsoever arising the rights of each Party against the other which have accrued at the date of termination shall not be affected. 21. ASSIGNMENT 21.1Except as provided in Section 21.2, the obligations and rights provided in this Agreement shall not be assigned, transferred or sub-contracted by any Party unless agreed upon in writing by the other. Subject to the foregoing, the rights and obligations of the Parties hereunder shall inure to the benefit of and bind their respective successors and assignees. 21.2Subject to the prior written consent of TLC, which consent shall not be unreasonably withheld, W-A shall be entitled to assign its rights and obligations under this Agreement to any wholly or majority owned Affiliate of W-A. TLC may assign in whole or in part its obligations and rights in this Agreement to a TLC Affiliate at any time at its discretion. 22. FORCE MAJEURE 22.1If a Party ("the Non-Performing Party") shall be unable to carry out any of its obligations under this Agreement due to Force Majeure, this Agreement shall remain in effect but for: 22.1.1 the Non-Performing Party's relevant obligations; and 22.1.2 the relevant obligations of the other Party ("the Innocent Party") owed to the Non-Performing Party under this Agreement shall be suspended for a period equal to the circumstance of Force Majeure or three (3) months, whichever is the shorter, provided that: 22.1.2.1 the suspension of performance is of no greater scope than is required by the Force Majeure; 22.1.2.2 the Non-Performing Party gives the Innocent Party prompt notice describing the circumstance of Force Majeure, including the nature of the occurrence and its expected duration, and continues to furnish regular reports with respect thereto during the period of Force Majeure; 22.1.2.3 the Non-Performing Party uses all reasonable efforts to remedy its inability to perform and to mitigate the effects of the circumstance of Force Majeure; and 22.1.2.4 as soon as practicable after the event which constitutes Force Majeure, the Parties shall discuss how best to continue their operations as far as possible in accordance with this Agreement. 22.2If Force Majeure is continuing at the expiry of the said period of three (3) months the Innocent Party shall have the right to terminate this Agreement forthwith upon notice in writing to the Non-Performing Party. 23. WAIVER 23.1No Party shall be deemed to have waived any of its rights or remedies whatsoever unless such waiver is made in writing and signed by a duly authorised representative of that Party. In particular, no delay or failure of either Party in exercising or enforcing any of its rights or remedies whatsoever shall operate as a waiver thereof or so as to preclude or impair the exercise or enforcement thereof nor shall any partial exercise or enforcement of any such right or remedy by a Party preclude or impair any other exercise or enforcement thereof by such Party. 24. SEVERANCE OF TERMS 24.1If the whole or any part of this Agreement is or shall become or be declared illegal, invalid or unenforceable in any jurisdiction for any reason whatsoever (including both by reason of the provisions of any legislation or by reason of any decision of any court or Competent Authority either having jurisdiction over this Agreement or having jurisdiction over either of the Parties to this Agreement) then: 24.1.1 in the case of the illegality, invalidity or unenforceability of the whole of this Agreement, it shall terminate in relation to the jurisdiction in question; or 24.1.2 in the case of the illegality, invalidity or unenforceability of part of this Agreement, such part shall be severed from this Agreement in the jurisdiction in question and such illegality, invalidity or unenforceability shall not in any way whatsoever prejudice or affect the remaining parts of this Agreement which shall continue in full force and effect provided always that if in the reasonable opinion of any Party any such severance materially affects the commercial basis of this Agreement, such Party shall have the right to terminate this Agreement with immediate effect upon giving ninety (90) days written notice to the other Party containing the reason(s) why the commercial basis of this Agreement has been materially affected by such severance. 25. ENTIRE AGREEMENT/VARIATIONS 25.1 This Agreement constitutes the entire agreement and understanding between the Parties and supersedes all prior oral or written understandings, arrangements, representations or agreements between them relating to the subject matter of this Agreement. No director, employee or agent of either Party is authorised to make any representation or warranty to the other Party not contained in this Agreement, and each Party acknowledges that it has not relied on any such oral or written representations or warranties. 25.2No variation, amendments, modification or supplement to this Agreement shall be valid unless made in writing in the English language and signed by a duly authorised representative of each Party. 26. NOTICES 26.1Save as otherwise expressly provided in this Agreement, any notice or other communication to be given by any person to any other person pursuant to this Agreement shall be in writing and in the English language and shall be given by letter delivered by hand or sent by courier or facsimile and shall be addressed to the recipient and sent to the address or facsimile number of the recipient set out in Schedule 3 hereto marked for the attention of the representative set out in Schedule 3 or to such other address and/or facsimile number or marked for such other attention as such recipient may from time to time specify by notice given in accordance with this Section 26.1 to the Party giving the relevant notice or other communication to it and shall be deemed to have been received: 26.1.1 in the case of delivery by hand or by courier, when delivered; or 26.1.2 in the case of facsimile, on acknowledgement by the recipient facsimile receiving equipment on a Business Day provided that such acknowledgement occurs before 1700 hours local time of the recipient on the Business Day of acknowledgement and in any other case on the Business Day next following the Business Day of acknowledgement. 26.2In the case of notices other than orders for goods given by fax written confirmation should be sent by recorded mail within 48 hours. 27. COSTS 27.1Each Party shall bear its own legal fees and expenses and any other expenses incurred in the preparation and execution of this Agreement. 28. GOVERNING LAW 28.1The interpretation, validity, construction and performance of this Agreement shall be governed by the laws of the State of New York, as the same may be in effect at the time of any legal proceeding pursuant to Section 29. 29. JURISDICTION 29.1Any dispute between the Parties regarding the interpretation, construction or performance of this Agreement that cannot be resolved through amicable negotiations shall be finally resolved by submission to the exclusive jurisdiction of the United States Federal Courts for the Southern District of New York. Solely for the purposes of this Agreement, each of the Parties hereto does hereby irrevocably submit to the exclusive jurisdiction of the United States Federal Courts sitting in the Southern District of New York. 30. NO PARTNERSHIP OR AGENCY CREATED 30.1Nothing in this Agreement shall constitute or be deemed to constitute a partnership between TLC or its Affiliates and W- A or constitute or be deemed to constitute W-A as agent of TLC or its Affiliates or to contract in the name of or to create a liability against TLC or its affiliates in any way or for any purpose. AS WITNESS whereto the respective signatures have been given on behalf of the Parties hereto on the day and year first above written. Wyeth-Ayerst International Inc. The Liposome Company, Inc. By: By: Name: Beat H. Leber Name: Michael McGrane Title: Vice President, Title: Vice President, General Business Development Counsel & Secretary Date: Date: L:\LEGALDPT\LEGAL\DISTRIB\WYAY_UK6.DOC SCHEDULE 1 AGREED MINIMUM SALES TARGETS Year 1 817,410 British pounds (100mg vials) 156,293 British pounds (50mg vials) * Year 2 1,022,420 British pounds Year 3 1,073,540 British pounds Year 4 1,073,540 British pounds Year 5 1,073,540 British pounds _______________ * Assuming April 1, 1999 launch of 50mg vials: 525 packs of 50mg vials (This number can be amended on a pro rata basis if the launch date goes beyond April 1, 1999) SCHEDULE 2 SPECIFICATIONS ABELCET (Amphotericin B Lipid Complex or ABLC) Supplied as suspension in vials containing 20ml (100mg of amphotericin B) or 10ml (50mg of amphotericin B). Each ml contains: Amphotericin B USP 5.0mg L-a-Dimyristoylphosphatidylcholine (DMPC) 3.4mg L-a-Dimyristoylphosphatidylglycerol (DMPG) 1.5mg (as sodium and ammonium salts) Sodium Chloride 9.0mg Water for injection, q.s. ad 1.0ml SCHEDULE 3 NOTICES To TLC: The Liposome Company, Inc. One Research Way Princeton Forrestal Center Princeton, NJ 08540 Facsimile: 609-734-0882 Attention: Chief Executive Officer To W-A: Wyeth-Ayerst International Inc. 150 Radnor-Chester Road St. Davids, PA 19087 Facsimile: 610-254-9528 Attention: Mr. Beat H. Leber SCHEDULE 4 LIST PRICE The List Price is as follows: ABELCET (100mg X 10 vials) 860 British pounds ABELCET (50mg X 10 vials) 500 British pounds SCHEDULE 5 EXTRACT FROM WYETH-AYERST CODE OF CONDUCT SCHEDULE 6 TLC PATENTS (EP) 0282405 (EP) 0394265 (EP) 0270460 SCHEDULE 7 MEDICAL INFORMATION PROCEDURES Schedule 7 Provision of Medical Information & Handling of Customer Complaints. 1. Provision of Medical Information 1.1 Date of Handover of Inquiries W-A shall have responsibility for the provision of Medical Information from the Effective Date. 1.2 Stability Inquiries W-A will handle stability inquiries as per the guidelines below TLC will provide guidelines (for consideration and agreement by W-A) as to which stability inquiries W-A will handle and where these would need to be answered in conjunction with TLC. 1.3 Medical Information Enquiries Answering of all Medical Information inquiries is the responsibility of W-A. TLC to provide copies of the following to enable W-A to handle the above: Abelcet Database Copies of all Clinical Papers Copies of all Standard Letter / Texts Breakdown of changes to SmPC TLC to provide back-up should W-A be unable to answer any questions. 1.4 MIMS & BNF Entries W-A's responsibility. 2.0 Customer Complaints These remain the responsibility of TLC, and any complaints will be directed care of Karen Jones @ TLC -----END PRIVACY-ENHANCED MESSAGE-----