-----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, D7MFnikb9RUTVzBZPpfPZmWVnHS/zTrZT7gaYbrB5ZWty3U1YT/ntCaQKPhWM+/8 vCn1Y7cNJZlKFRFrdAf0dA== 0000786557-99-000007.txt : 19990331 0000786557-99-000007.hdr.sgml : 19990331 ACCESSION NUMBER: 0000786557-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990330 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: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14887 FILM NUMBER: 99577184 BUSINESS ADDRESS: STREET 1: ONE RESEARCH WAY STREET 2: PRINCETON FORRESTAL CTR CITY: PRINCETON STATE: NJ ZIP: 08540-6619 BUSINESS PHONE: 6094527060 MAIL ADDRESS: STREET 1: ONE RESEARCH WAY CITY: PRINCETON STATE: NJ ZIP: 08540 10-K 1 20 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 3, 1999 Commission file number 0-14887 T H E L I P O S O M E C O M P A N Y, I N C. (Exact name of registrant as specified in its charter) Delaware 22-2370691 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Research Way, Princeton Forrestal Center, Princeton, 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; 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 26, 1999, was approximately $375,806,108 based upon the last reported sales price of the registrant's Common Stock on the NASDAQ National Market. At February 26, 1999 there were 38,362,021 shares of the Registrant's Common Stock outstanding. The Exhibit Index appears on page 64. DOCUMENTS INCORPORATED BY REFERENCE Document Form l0-K Part Proxy Statement for l999 Annual Meeting Part III THE LIPOSOME COMPANY, INC. 1998 ANNUAL REPORT - FORM 10-K TABLE OF CONTENTS ITEM NO. PAGE Part I 4 1. Business 4 Overview/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 14 Executive Officers 17 2. Properties 19 3. Legal Proceedings 19 4. Submission of Matters to a Vote of Security Holders 19 Part II 20 5. Market for Registrant's Common Equity and Related Stockholder Matters 20 6. Selected Financial Data 21 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 7a. Quantitative and Qualitative Disclosures About Market Risk 32 8. Financial Statements and Supplementary Data 32 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32 Part III 33 10. Directors and Executive Officers of the Registrant 33 11. Executive Compensation 33 12. Security Ownership of Certain Beneficial Owners and Management 33 13. Certain Relationships and Related Transactions 33 Part IV 34 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34 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. PART I Item l. Business OVERVIEW/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. ABELCET (Amphotericin B Lipid Complex Injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States and 22 foreign markets and is the subject of marketing application filings in several other countries. In the United States, 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 1998, the Company marketed ABELCET in the U.S., Canada and the United Kingdom with its own sales force. For other countries, the Company's general 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. Three Phase III clinical studies of EVACET have been completed by the Company. The Company filed an NDA in the U.S. in December 1998, and plans to file in 1999 for approval to market EVACET in Europe. 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: bromotaxol (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 study, 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") 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 NeXstar's worldwide sales of AmBisome beginning in 1998. PRODUCT DEVELOPMENT The following table summarizes the principal product development activities of the Company: Product/Prog Use Status(1) Marketing ram 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) EVACETTM Metastatic breast New Drug The Company (Formerly cancer Application filed TLC D-99) with the U.S. FDA in December 1998. TLC ELL-12 Various cancers Phase I clinical The Company studies initiated in February 1999. Bromotaxol 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." 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 extremely 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. ABELCET has received regulatory marketing approval in the United States and twenty-two 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. The Company believes it may receive marketing approvals in additional countries during 1999 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. The Company expects the FDA to complete its review by the latter part of 1999. There can be no assurance that the Company will receive marketing clearance from the FDA to market EVACET in the United States. 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 EVACETTM 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 1998. 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 any 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. Research Programs Bromotaxol Bromotaxol (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 bromotaxol have remained tumor free for extended periods of time. If initial research data is confirmed, the Company expects to enter a hydrophobic taxane derivative, into a formal development program in 1999, leading to the possible commencement of human clinical studies in 2000. 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 1998, 1997 and 1996, the Company's research and development costs were approximately $26.4 million, $28.9 million and $29.4 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 EVACETTM 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 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, 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 USA. The Company expects to record revenues related to the Astra agreement in the first quarter of 1999. 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. In the fourth quarter of 1998, the Company entered into an agreement with Amgen Australia Pty. Ltd., a division of Amgen (NASDAQ: AMGN), to market ABELCET in Australia. 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 1998, the Company had 301 full-time employees, 25 of whom hold Ph.D. degrees and 3 of whom hold M.D. degrees or the foreign equivalent. Of these employees, 193 are engaged in research, development, clinical development and manufacturing activities, 66 in sales and marketing and 42 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 1998, the Company had 88 United States patents as well as 597 foreign counterpart patents, and 33 United States patent applications and 440 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 ABELCETr 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 ABELCETr. The Company also pays royalties to the University of Texas on ABELCETr 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. "ABELCETr" 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. EVACETT 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 NeXstar Pharmaceuticals Inc. (NASDAQ:NXTR) and SEQUUS Pharmaceuticals Inc. which was acquired by ALZA Corporation (NYSE:AZA)at the end of 1998. NeXstar Pharmaceuticals and Gilead Sciences (NASDAQ:GILD) recently announced a stock-for-stock merger agreement. Each of these companies' products have 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. No approvals have been granted by the FDA for these products as treatment for solid tumors, although they are believed to be in development for certain types of cancer. 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: 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. No assurance can be given with respect to the NDA submitted to the FDA by the Company for commercial sale of EVACET or for any of its products under development. 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 principle ingredient in ABELCETr, 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. In Europe, several of the Company's granted patents are being opposed by other companies. Loss of some of these oppositions may result in decreased patent protection for the Company's products. 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 ABELCETr was approved, which may confer a competitive advantage for their products. In the United States, although ABELCETr 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. Although it cannot be predicted how the existence of competing lipid-based products may affect the U.S. antifungal market, it is possible that the Company's share of this market will 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 EVACETTM, two of which have been cleared by the FDA for treatment of Kaposi's Sarcoma. The Company is also competing with respect to manufacturing efficiency and marketing capabilities, areas in which the Company has limited experience. Dependence on ABELCETr Revenues The Company currently derives a substantial portion of its revenues from the sale of ABELCETr, it's only approved product. The Company's annual operating results depend upon a variety of factors including the price, volume and timing of ABELCETr sales. If demand for ABELCETr 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 ABELCETr 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 ABELCETr 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 ABELCETr and EVACETT, 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 ever achieve profitability. 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. Year 2000 Issues May Not Be Addressed Successfully The Company is implementing a Year 2000 project designed to address the issue of computer software and hardware correctly processing dates through and beyond the Year 2000. Due to the uncertainty inherent in the Year 2000 problem, however, there can be no assurance that Year 2000 failures will not have a material impact on the Company's operations, financial results or financial condition. In addition, the Company cannot predict whether its critical third-party suppliers and business partners will achieve Year 2000 compliance, or whether the failure of any third party to do so would have a material effect on the Company's business. EXECUTIVE OFFICERS The executive officers of the Company are as follows: Name Age Position Charles A. Baker 66 Chairman of the Board, President, Chief Executive Officer and Director James A. Boyle, M.D., Ph.D. 62 Senior Vice President, Medical and Regulatory Affairs Ralph del Campo 47 Vice President, Manufacturing Operations Lawrence H. Hoffman 44 Vice President and Chief Financial Officer Andrew S. Janoff, Ph.D. 50 Vice President, Research and Development Michael McGrane 49 Vice President, General Counsel and Secretary George G. Renton 47 Vice President, Human Resources Donald D. Yarson 45 Vice President, Sales, Marketing and Business Development 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 previously 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 also held various senior 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 also a member of the Council of Visitors of the Marine Biology Laboratory, Woods Hole, Massachusetts, a not-for-profit research organization. James A. 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 Inc. 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. Ralph del Campo joined the Company in March 1994 as Vice President, Manufacturing Operations. 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 Fairleigh 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 finance, information systems and investor relations departments. He was previously 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. in July 1997, 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 School of Law and an LLM in Taxation from Villanova University School of Law. Mr. Hoffman is also a certified public accountant. Andrew S. Janoff, Ph.D., joined the Company in 1981 and has been Vice President, Research from January 1993 to July 1997, at which time he became Vice President, Research and Development. He holds an adjunct Professorship, Anatomy and Cell Biology at Thomas Jefferson University and is a visiting Research Scholar in the Department of Physics at Princeton University. Dr. Janoff serves on the editorial board of The Journal of Liposome Research and on The Committee on Science and the Arts at the Franklin Institute, Philadelphia, Pennsylvania. Dr. Janoff is author of over one hundred (100) scientific articles, reviews and awarded US 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 was Vice President, General Counsel and Secretary of Novartis Consumer Health, Inc. From 1984 to 1996, Mr. McGrane held various positions with Sandoz Pharmaceuticals Corporation, the most recent being Associate General Counsel. 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 B.A. degree from Cornell College, Mt. Vernon, Iowa. 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 an M.S. degree in Industrial/Labor Relations from Cornell University and Baruch College (1985). Donald D. Yarson joined the Company as Vice President, Sales and Marketing in February 1995 and was appointed Vice President Sales, Marketing and Business Development in July 1997. 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. 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 3, 1999 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 3, 1999 totaled approximately $792,000. 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 $88,000 for 1998. The Company also leases office space in London, England and Paris, France. 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. 547 and 550 from the Company in the amount of $2.3 million. The Company believes it has meritorious defenses regarding this claim. The Company is currently a party to various other legal actions arising out of the normal course of business, none of which are expected to have a material effect on the Company's financial position or results of operations. Item 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 1998 4th Quarter $16.875 $5.125 3rd Quarter 6.250 3.375 2nd Quarter 8.625 4.687 1st Quarter 6.437 4.687 High Low 1997 4th Quarter $7.375 $4.000 3rd Quarter 9.125 6.375 2nd Quarter 28.250 7.625 1st Quarter 29.500 17.875 (b) Holders At February 26, 1999, there were approximately 1,055 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 3, 1999. 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______________________ 1/3/99 12/28/97 12/29/96 12/31/95 12/31/94 (In thousands, except per share data) Product sales $73,495 $58,452 $52,840 $ 6,164 $ -- Collaborative research and development revenues -- 2,331 3,228 6,589 5,881 Interest, investment and other income 4,373 4,313 3,864 2,964 4,559 Total revenues 77,868 65,096 59,932 15,717 10,440 Cost of goods sold 20,805 22,029 16,559 2,304 -- Research and development expense 26,441 28,894 29,371 30,149 31,713 Selling, general and administrative expense 34,535 39,914 31,541 18,631 12,072 Interest expense 773 705 339 294 308 Total expenses 82,554 91,542 77,810 51,378 44,093 Net loss (4,686) (26,446) (17,878) (35,661)(33,653) Preferred Stock dividends -- -- (1,235) (5,348) (5,348) Net loss applicable to Common Stock $(4,686)$(26,446)$(19,113) $(41,009)$(39,001) Net loss per share applicable to Common Stock (basic and diluted) $ (0.12) $ (0.71) $ (0.57)$ (1.50)$ (1.64) Weighted average number of common shares outstanding (basic and diluted) 38,172 37,083 33,292 27,293 23,850 CONSOLIDATED BALANCE SHEETS DATA: Year Ended______________________ 1/3/99 12/28/97 12/29/96 12/31/95 12/31/94 (In thousands) Cash and marketable securities(1) $54,343 $45,525 $47,180 $72,333 $72,157 Working capital 41,401 41,566 46,781 64,422 61,167 Total assets 90,574 91,500 94,555 105,926 93,196 Total long-term liabilities 5,089 6,879 7,555 4,104 5,917 Accumulated deficit (193,530)(188,844)(162,398)(144,520)(108,859) Total stockholders' equity $71,741 $73,662 $74,861 $89,832 $78,353 (1)Includes restricted cash of $11,930, $11,930 and $6,930 in 1998, 1997 and 1996, respectively. See Note 1 of Notes to Consolidated Financial Statements. 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. Overview The Liposome Company, Inc. (the "Company") is a biopharmaceutical company engaged in the discovery, development, manufacturing and marketing of proprietary lipid- and liposome-based pharmaceuticals, primarily for the treatment of cancer and other related life- threatening illnesses. ABELCETr (Amphotericin B Lipid Complex Injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States and 22 foreign markets and is the subject of marketing application filings in several other countries. In the United States, ABELCETr has been approved for the treatment of invasive fungal infections in patients who are refractory to or intolerant of conventional amphotericin B therapy. International approvals have been received for primary and/or refractory treatment of these infections. Currently all product sales are derived from ABELCETr. During 1998, the Company marketed ABELCETr in the U.S., Canada and the United Kingdom, with its own sales force. For other countries, the Company's general strategy is to market ABELCETr through marketing partners. Specific marketing partnerships are determined on a country- by-country basis. In addition, sales are realized on a "named patient" basis in certain countries where marketing approvals have not yet been received. The Company is developing EVACETTM (formerly TLC D-99), liposomal doxorubicin, as a treatment for metastatic breast cancer and potentially other cancers. Three Phase III clinical studies of EVACETTM have been completed by the Company. Results of these clinical trial studies indicate that EVACETTM is significantly less cardiotoxic than conventional doxorubicin while maintaining equivalent efficacy. The Company filed a New Drug Application ("NDA") for EVACETTM with the U.S. Food and Drug Administration ("FDA") in December 1998. There can be no assurance that the FDA, having accepted the NDA for EVACETTM, will grant the Company marketing clearance for this product. The Company completed preclinical toxicology studies of TLC ELL-12 (liposomal ether lipid), a new anticancer drug that may have applications for the treatment of many different cancers. On October 27, 1998 the Company announced that the FDA has cleared the Investigational New Drug application for this product. A Phase I clinical trial has been designed to enroll adult patients with advanced solid tumors. This trial commenced in February 1999. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company has a continuing discovery research program concentrating on oncology treatment and has a number of products in research. These products include: the bromotaxols (hydrophobic derivatives of paclitaxel), some of which have shown anticancer activity in several experimental models; ceramides and sphingosines (molecules widely 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 strategy, the Company restructured its operations 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 EVACETTM from Pfizer Inc ("Pfizer"), which had previously been co- developing EVACETTM 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 EVACETTM. 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. 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 ABELCETr 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 in 1998 quarterly minimum payments (classified as interest, investment and other income) based on AmBisome worldwide sales. On April 22, 1998 the Company announced it had entered into a three year contract manufacturing agreement with Astra USA, Inc. ("Astra"). The Company will process and package 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 will be processed and packaged at the Company's Indianapolis facility, taking advantage of its modern, large-scale capabilities. Under the terms of the agreement, Astra will supply bulk quantities of the vitamin product and the Company will sterilize, fill, package and perform quality control on M.V.I.r-12 Unit Vial. The Company expects to record revenues related to Astra commencing in the first quarter of 1999. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations Revenues Total revenues for the year ended January 3, 1999 were $77,868,000, an increase of $12,772,000 or 19.6% compared to $65,096,000 for the year ended December 28, 1997. The primary components of revenues for the Company are product sales of ABELCETr, which commenced in 1995, and interest, investment and other income. Collaborative research and development revenue was also included in the 1997 and 1996 periods, primarily due to the co-development agreement with Pfizer. The revenue growth in 1998 is attributable to product sales of ABELCETr both in the U.S. and internationally. Partially offsetting the sales increase was the cessation of the collaborative research and development revenue during the second half of 1997 as a result of the reacquisition of EVACETTM from Pfizer. Revenues in 1997 were $65,096,000, an increase of $5,164,000 or 8.6% over the 1996 revenues of $59,932,000. The primary reason for the growth in 1997 was also due to increased market penetration of ABELCETr worldwide, partially offset by the effect of the termination of the collaborative research and development agreement with Pfizer in mid-1997. Domestic and international net sales for the past three years were: Fiscal Year Ended U.S. International January 3, 1999 $58,936,000 $14,559,000 December 28, 1997 $49,273,000 $ 9,179,000 December 29, 1996 $44,784,000 $ 8,056,000 Domestic dollar sales in 1998 grew by 19.6% over 1997, while unit shipments increased by 36.5% during the same period. In the second quarter of 1997, the Company instituted a targeted pricing program in response to a competitor, by offering discounts to high volume purchasers. The price reduction is effected by chargebacks paid to wholesalers based on their sales at contract prices to targeted hospitals. The Company believes that the reduced prices to large customers stimulated the demand for ABELCETr and resulted in increased market penetration. During the third quarter of 1998, the Company instituted a price increase to its domestic customers effective July 1, 1998. U.S. sales are also subject to rebates pursuant to government mandated price protection programs. 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 in order to make necessary adjustments. The provision for the year ended January 3, 1999 was approximately $28,684,000. The increase in U.S. sales in 1997 from 1996 of $4,489,000 or 10.0% was also attributable to the factors previously discussed regarding the institution of the targeted pricing program and increased market penetration. The rebate and chargeback provision for the year ended December 28, 1997 was approximately $12,450,000. Internationally, the Company has been approved to market ABELCETr in 22 markets. In addition, sales are realized on a "named patient" basis in certain countries where marketing approval has not yet been received. During 1998, the Company marketed ABELCETr 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 ABELCETr through marketing partners, with specific marketing distribution alliances being determined on a country-by-country basis as future market approvals are received. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International product sales were $14,559,000 for the year ended January 3, 1999, $5,380,000 higher than the comparable prior year. The majority of the growth is due to the impact of the launch of ABELCETr 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. International sales were $9,179,000 and $8,056,000 for 1997 and 1996, respectively. The majority of the increase was the result of growth throughout international markets including fourth quarter launches of ABELCET in France, Italy and Canada, partially offset by lower sales in Spain. The Company's international performance was also adversely impacted by unfavorable foreign exchange rates due to the strong U.S. dollar during 1997. Collaborative research and development revenues were $0, $2,331,000 and $3,228,000 for the years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively. The revenue decline of $2,331,000 in 1998 from 1997 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 EVACETTM from Pfizer. The revenue decline of $897,000 or 27.8% in 1997 from 1996 was due to the mid-year termination of the Pfizer agreement as previously discussed. 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. This minimal increase 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. Interest, investment and other income for the year ended December 28, 1997 was $4,313,000 compared to $3,864,000 for the year ended December 29, 1996. The increase of $449,000 is primarily due to the receipt of $1,750,000 from NeXstar Pharmaceuticals, Inc. as part of the settlement of patent litigation, partially offset by lower interest and investment income due to lower average cash balances available for investment in the Company's portfolio during 1997 compared to 1996. Due to the Company's reacquisition of rights to EVACETTM from Pfizer, the Company anticipates there will be no collaborative research and development revenues in the future, as it currently has no other agreements in place. In the future, the Company anticipates recognition of income related to the manufacturing agreement with Astra. The anticipated revenues from interest and investment income will be related to the level of cash balances available for investment and the rate of interest earned. Expenses The components of total expenses were cost of goods sold, research and development, selling, general and administrative and interest expenses. Total expenses for the year ended January 3, 1999 were $82,554,000, a decrease of $8,988,000 or 9.8% below the prior year. Total expenses for the year ended December 28, 1997 were $91,542,000 an increase of $13,732,000, or 17.6% over 1996. Included in the 1997 expenses were $3,900,000 of unusual charges incurred by the Company following the unfavorable results of the VENTUST clinical study. See specific categories for detail of changes. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Cost of goods sold for the year ended January 3, 1999, was $20,805,000 versus $22,029,000 in the 1997 period. The decrease of $1,224,000 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 ABELCETr 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. Cost of goods sold for the year ended December 28, 1997, was $22,029,000 versus $16,559,000 in the 1996 period. The $5,470,000 or 33.0% increase from 1996 to 1997 was a result of the increased unit volume of ABELCET sold during 1997 and an unusual charge of $768,000 for royalties on past sales pursuant to the settlement of patent litigation with the University of Texas. During 1997, the Company implemented a planned shift in manufacturing sites from Princeton to its high volume facility in Indianapolis. As a result of this transition, the Company incurred certain costs as it adjusted inventory levels throughout the year. The Indianapolis facility was approved by the FDA in August 1997, and the Company has reoriented the Princeton facility to the production of clinical supplies. Gross margin was 62.3% in 1997 and 68.7% in 1996, a decline of 6.4 percentage points. The 1997 decline was primarily due to the lower average price of ABELCET during 1997 as a result of the targeted pricing program, coupled with costs related to the shift of manufacturing from Princeton to the Company's Indianapolis facility and the unusual charge for royalties on past sales of ABELCET pursuant to the litigation settlement. Research and development expenses, which also include clinical and regulatory activities, were $26,441,000 for the year ended January 3, 1999, compared to $28,894,000 for 1997 and $29,371,000 for 1996. The decrease of $2,453,000 from 1997 to 1998, is primarily due to the completion of the pivotal Phase III studies of EVACETT for which the Company filed a NDA in December 1998, and 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. The decrease in spending of $477,000 from 1996 to 1997 is due to the absence in 1997 of pre- production costs for the start-up of the Indianapolis manufacturing facility incurred in 1996. Partially offsetting this decrease was the unusual charge of $570,000 of certain manufacturing overhead costs following the unfavorable results of the VENTUSTM Phase III clinical study, combined with higher expenditures related to the development of EVACETTM and TLC ELL-12. In the second half of 1997, the Company assumed all the costs related to the clinical studies of EVACETTM pursuant to its reacquisition of the product from Pfizer. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Selling, general and administrative expenses for 1998 were $34,535,000, a decrease of $5,379,000 versus 1997. The principal reasons for the decrease were the absence in 1998 of the restructuring charge of $2,550,000 recorded in the second quarter of 1997, and the elimination of litigation costs relating to the University of Texas and NeXstar patent lawsuits and reduced international sales and marketing expenditures due to the utilization of marketing partners internationally. Selling, general and administrative expenses for the years ended December 28, 1997 and December 29, 1996 were $39,914,000 and $31,541,000, respectively. The increase of $8,373,000 is partially due to the restructuring charge of $2,550,000 following the unfavorable results of the VENTUSTM Phase III study, increased legal expenses incurred in connection with intellectual property litigation, and higher sales and marketing expenses. The increase in U.S. sales and marketing expense is due to the sales force expansion that began in late 1996 and the growth of related sales and marketing efforts to defend market share from competition. International sales and marketing costs also increased as ABELCET was launched in France, Italy and Canada during the fourth quarter of 1997. Interest expense was $773,000, $705,000 and $339,000 for 1998, 1997 and 1996, respectively. 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 exercised it's option to purchase 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 expense in the 1998 period. In December 1996, the Company expanded its equipment lease and received cash of $6,101,000 for Indianapolis manufacturing assets, which caused higher interest expense in 1997 and 1998. Preferred Stock Dividends In 1996, the Company had outstanding an issue of 2,760,000 Depositary Shares, each of which represented one-tenth of a share of Series A Cumulative Convertible Exchangeable Preferred Stock ("Preferred Stock") carrying a 7.75% dividend rate. On March 25, 1996, the Company called for the redemption of 50% of the Preferred Stock, with the remainder being called on October 14, 1996. Virtually all of the outstanding Preferred Stock was converted into Common Stock, thus eliminating the Preferred Stock dividend requirement in 1997. Dividends of $1,235,000 were paid on the Preferred Stock in 1996. Net Loss, Net Loss Applicable to Common Stock and Net Loss Per Share of Common Stock As a result of the factors discussed above, the Company's net loss was $4,686,000, $26,446,000 and $19,113,000 for the 1998, 1997 and 1996 fiscal years, respectively. The net loss per share for these years were $0.12, $0.71 and $0.57, respectively. The fourth quarter of 1998, was the first quarter that the Company had an operating income of $1,546,000 or $0.04 per share. Weighted average shares used in the per share calculations were 38,172,000, 37,083,000 and 33,292,000, respectively. The increase of 1,089,000 shares from 1997 to 1998 was attributable to the issuance of restricted stock and the 401(k) match. The increase in average shares outstanding in 1997 compared to 1996 was due to the full-years impact of shares issued pursuant to conversions of Preferred Stock and shares issued for cash in a private placement. 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 in all the twelve- month periods and the inclusion of contingently issuable shares would have been anti-dilutive. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources The Company had $54,343,000 in cash and marketable securities as of January 3, 1999. Included in this amount were cash and cash equivalents of $8,074,000, short-term investments of $34,339,000 and restricted cash of $11,930,000. The Company invests its cash reserves in a diversified portfolio of high-grade corporate marketable and United States Government-backed securities. The market value of certain securities in the Company's investment portfolio at January 3, 1999 was below their acquisition cost. This unrealized loss is recorded as a reduction of shareholders' equity. Cash and marketable securities (both short-term and restricted cash) increased $8,818,000 from December 28, 1997 to January 3, 1999. The primary components of the favorable impact on cash flow were the lower inventories of $4,964,000, the higher accounts payable and accrued liabilities of $2,723,000, the lower accounts receivable of $1,810,000 and cash flow from operations (net loss less depreciation, amortization and other non-cash charges) of $3,130,000. The major uses of funds were the principal repayments on the capital lease and note payable totaling $2,223,000 and capital spending of $1,790,000. Inventories at January 3, 1999 decreased $4,964,000 from December 28, 1997. During 1997, the Company completed its plan to shift manufacturing of ABELCETr 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 ABELCETr 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. As planned, the Company has reduced inventories to levels consistent with demand for ABELCETr. Accounts payable at January 3, 1999 was $3,991,000 or $1,375,000 higher than December 28, 1997 and accrued expenses and other current liabilities were $7,357,000 or $1,348,000 higher than the prior year. The variance in accounts payable is primarily due to the timing of payments to vendors. The increase in accrued expense is primarily due to increased bonuses as well as royalty payments relating to ABELCETr sales. 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 $4,310,000 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. All borrowings must be secured by approved accounts receivable and finished goods inventories. The Company has a pledge of $5,000,000 to support this agreement, which has been classified as restricted cash. There have been no advances made against this line through the date of this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) As part of the agreement to repurchase the development, manufacturing and marketing rights to EVACETTM, the Company obtained from Pfizer a credit line of up to $10,000,000 to continue the development of EVACETTM. 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 1998, there were no borrowings under this facility. The Company has a mortgage-backed note to partially fund the purchase of the Indianapolis manufacturing facility. The principal balance outstanding at January 3, 1999 is $883,000. 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 26, 1999, this investor has reported total holdings of approximately 24.38% of the Company's outstanding shares of Common Stock. At January 3, 1999, the Company had approximately $196,616,000 of net operating loss carryforwards and $5,885,000 of research and development credit carryforwards for U.S. Federal income tax purposes. These carryforwards expire in the years 1999 through 2018. The timing and manner in which these losses are used may be limited as provided by IRS Regulations under Section 382 of the Internal Revenue Code. In January 1993, the Company completed an offering of 2,760,000 Depositary Shares, each of which represented one-tenth of a share of Preferred Stock carrying a 7.75% dividend rate. On March 25, 1996, the Company called for the redemption of 50% of the Preferred Stock with the remainder being called on October 14, 1996. Virtually all of the outstanding Preferred Stock was converted into Common Stock. Combined net issuance costs including financial advisory, professional, registration and filing fees of $544,000 were incurred in connection with both calls and were charged to equity. As a result of these conversions, the Company's annual Preferred Stock dividend requirements have been eliminated. The Company expects to finance its operations and capital spending requirements from, among other things, the proceeds received from product sales, interest earned on investments and the proceeds from maturity or sale of certain investments. Cash may also be provided to the Company by leasing arrangements for capital expenditures, financing of receivables and inventory under its line of credit, a line of credit from a former licensing partner, the licensing of its products and technology and the sale of equity or debt securities. The Company believes that its product revenues and revenues from other sources, coupled with its available cash and marketable securities reserves, will be sufficient to meet its expected operating and capital cash flow requirements for the intermediate term. 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. In order to address this situation, the Company has conducted a Year 2000 assessment of its core business information systems including a wide variety of other information systems and related business processes (hereinafter, collectively referred to as the "Systems") used in its operations. The goal of the assessment was to identify and determine the Y2K readiness of the Company's Systems. The task of assessing the Systems from a Y2K readiness perspective has been accomplished. Accordingly, the Company has developed a comprehensive remediation plan and scheduled the necessary hardware, software, and sub-component upgrades to remediate non-Y2K compliant systems. The Systems investigated were categorized into the following three areas: The first category involves the traditional management information systems that include computers, telecommunication devices, application software, operating system software, and related peripherals. Due to the fact that the majority of the Systems installed and in use at the Company are new and utilize current technologies the effort and expense to bring these Systems into Y2K compliance will not be material. Overall estimated costs for Systems remediation is expected to be less than $100,000. A portion of this estimate, $50,000, is for the replacement or upgrade of components that are, or would have been, included in 1999 and 2000 capital budgets but have been accelerated due to the Y2K issue. Roughly one third of the estimated $100,000 expense has already been expended to make the required hardware and software upgrades. The remaining Systems will be brought into compliance by mid-year. The second category involves manufacturing and facility systems including machines and devices used to manufacture, store, and test the Company's product. It also includes the systems that control and monitor the Company's facilities such as HVAC, fire suppression, and elevators. Equipment used in the manufacture and storage of product has been reviewed with regard to Y2K readiness. Again, because of the absence of older legacy systems, a minimal amount of effort is required to make these systems compliant. Of the systems reviewed, 98% were found to be compliant with no remedial actions required. The estimated cost to bring the non-compliant equipment up to standard will be less than $30,000. These upgrades will be completed by the middle of 1999. The third category involves research systems including computer- controlled devices, calibration equipment, and similar instruments. Review of Research & Development equipment found the majority of the computers and laboratory equipment to be Y2K compliant. Cost of replacing non-Y2K ready equipment was $30,000 and has been completed. In addition to the assessment of the Systems, key suppliers and customers have been identified. A survey form was developed and has been sent to each of these business entities in order to determine if their systems are Y2K compliant. This is significant since delays in the shipment and receipt of critical supplies can impact the Company's production. Problems would also exist if customers become unable to pay for the Company's product (e.g., their accounts payable system fails) or if they cannot electronically order, store, or track product in compliance with FDA requirements. The Company is proactively addressing the Y2K issue with these vendors and suppliers in order to minimize risk from these external factors. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Based on the assessment of its Systems, the Company believes that the costs of addressing the Y2K issue will be less than $200,000. Also based on the assessment of its Systems, the Company believes that it has minimized the potential for disruption of its business because of the Y2K event. However, if key third parties such as suppliers and customers are not Y2K ready, such problems could have a material adverse impact on the Company's business. To minimize the impact of supplier product shortages that may result the Company plans to have sufficient supplies on hand to meet its production requirements. The Company will also encourage its customers to have an adequate supply of ABELCETr on hand to meet their anticipated needs. 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 EVACETT, TLC ELL-12 and other oncology products in the Company's research pipeline, (ii) the ability of ABELCETr 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 EVACETT or any other product in the research pipeline, (iv) the expansion of sales efforts regarding ABELCETr, (v) possible new licensing or contract manufacturing agreements, (vi) future product revenues from ABELCETr, EVACETT or any other product in the research pipeline, (vii) the future uses of capital, and financial needs of the Company, (viii) manufacturing efficiencies and other benefits to be realized from use of the Indianapolis facility, (ix) the recording of revenues relating to the Astra contract, and (x) resolution of Year 2000 computer issues. While these statements are made by the Company based on management's current beliefs and judgment, they are subject to risks and uncertainties that could cause actual results to vary. In evaluating such statements, stockholders and investors should specifically consider a number of factors and assumptions, including those discussed in the text and 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 is still ongoing and the ultimate rate of sales of ABELCET is uncertain; (b) the Company's other products are in development and have not yet received regulatory approvals for sale, and it is difficult to predict when such approvals will be received and, if approved, whether the products can be successfully commercialized; (c) competitors of the Company have developed and are developing products that are competitive with the Company's products; (d) the rate of sales of the Company's products could be affected by regulatory actions, decisions by government health administration authorities or private health coverage insurers as to the level of reimbursement for the Company's products; (e) risks associated with international sales, such as currency exchange rates, currency controls, tariffs, duties, taxes, export license requirements and foreign regulations; (f) uncertainty that key customers, vendors and suppliers of the Company will be Y2K compliant; (g) the levels of protection afforded by the Company's patents and other proprietary rights is uncertain and may be challenged; and (h) the Company has incurred losses in each year since its inception 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 Information required under this Item relating to executive officers of the Company is included in a separate item captioned "Executive Officers" contained in Part I of this report. Information required under this Item relating to the directors of the Company will be contained in the Company's Proxy Statement for the l999 Annual Meeting, the relevant portions of which are incorporated herein by reference. Item ll. Executive Compensation Information required under this Item will be contained in the Company's Proxy Statement for the l999 Annual Meeting, the relevant portions of which are incorporated herein by reference. Item l2. Security Ownership of Certain Beneficial Owners and Management Information required under this Item will be contained in the Company's Proxy Statement for the l999 Annual Meeting, the relevant portions of which are incorporated herein by reference. Item l3. Certain Relationships and Related Transactions Information required under this Item will be contained in the Company's Proxy Statement for the l999 Annual Meeting, the relevant portions of which are incorporated herein by reference. 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 No reports on Form 8-K have been filed during the last quarter of the period covered by this report. Index to Financial Statements (Item l4(a)1 and 14(a)2) Page Consolidated Financial Statements Report of Independent Accountants 36 Consolidated Balance Sheets at January 3, 1999 and December 28, 1997 37 Consolidated Statements of Operations for each of the three years in the period ended January 3, 1999 38 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 3, 1999 39 Consolidated Statements of Cash Flows for each of the three years in the period ended January 3, 1999 40 Notes to Consolidated Financial Statements 41-58 Report of Independent Accountants on financial statement schedule 59 Financial statement schedule 60 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 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 Princeton, New Jersey February 5, 1999 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS 1/3/99 12/28/97 Current assets: Cash and cash equivalents $ 8,074 $ 15,236 Short-term investments 34,339 18,359 Accounts receivable, net of allowance for doubtful accounts ($579 for 1998, $1,285 for 1997) 5,340 7,150 Inventories 5,566 10,530 Prepaid expenses 1,266 1,034 Other current assets 560 216 Total current assets 55,145 52,525 Property, plant and equipment, net 23,165 26,652 Restricted cash 11,930 11,930 Intangibles, net 334 393 Total assets $ 90,574 $ 91,500 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,991 $ 2,616 Accrued expenses and other current liabilities 7,357 6,009 Current obligations under capital leases 2,093 2,031 Current obligations under note payable 303 303 Total current liabilities 13,744 10,959 Long-term obligations under capital leases 4,509 5,996 Long-term obligations under note payable 580 883 Total liabilities 18,833 17,838 Commitments and contingencies Stockholders' equity: Capital stock: Common Stock, par value $.01; 60,000 shares authorized; 38,327 and 37,663 shares issued and outstanding 383 377 Additional paid-in capital 265,254 262,637 Accumulated other comprehensive loss (366) (508) Accumulated deficit (193,530)(188,844) Total stockholders' equity 71,741 73,662 Total liabilities and stockholders' equity $ 90,574 $ 91,500 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) Year Ended 1/3/99 12/28/97 12/29/96 Product sales $73,495 $58,452 $52,840 Collaborative research and development revenues -- 2,331 3,228 Interest, investment and other income 4,373 4,313 3,864 Total revenues 77,868 65,096 59,932 Cost of goods sold 20,805 22,029 16,559 Research and development expense 26,441 28,894 29,371 Selling, general and administrative expense 34,535 39,914 31,541 Interest expense 773 705 339 Total expenses 82,554 91,542 77,810 Net loss (4,686) (26,446) (17,878) Preferred Stock dividends -- -- (1,235) Net loss applicable to Common Stock $(4,686) $(26,446) $(19,113) Net loss per share applicable to Common Stock (basic and diluted) $ (.12) $ (.71) $ (.57) Weighted average number of common shares outstanding (basic and diluted) 38,172 37,083 33,292 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Shares Accumulated Total of Additional Other Stock Common Par Paid-in Accumulated Comprehensive Holders Stock Value Capital Deficit Loss Equity Balance, December 31, 1995 29,950 $302 $234,545 $(144,520) $(495) $89,832 Net Loss for 1996 -- -- -- (17,878) -- (17,878) Other Comprehensive Income: Net unrealized investment gain -- -- -- -- 62 62 Foreign currency translation adjustment -- -- -- -- (478) (478) Comprehensive Loss (18,294) Issuance of stock: To 401K plan 43 1 798 -- -- 799 Exercise of stock options 704 7 4,245 -- -- 4,252 Conversion of Preferred Stock 5,364 51 (544) -- -- (493) Dividends on Preferred Stock -- -- (1,235) -- -- (1,235) 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 Payment 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 See accompanying notes. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) _________Year Ended 1/3/99 12/28/97 12/29/96 Cash flows from operating activities: Net loss $(4,686) $(26,446)$(17,878) Adjustments to reconcile net loss to net cash provided/(used) by operating activities: Depreciation and amortization 5,672 5,135 3,769 Provision for bad debt 373 206 879 Issuance of Common Stock and warrants 105 421 -- Other 2,144 1,304 798 Changes in assets and liabilities: Accounts receivable 1,437 528 (1,964) Inventory 4,964 (626) (6,361) Prepaid expenses (232) (199) (502) Other current assets (344) (169) (1) Accounts payable 1,375 810 (33) Accrued expenses and other current liabilities 1,348 (1,673) 680 Net cash provided/ (used) by operating activities 12,156 (20,709) (20,613) Cash flows from investing activities: Purchases of short- and long-term investments(29,595) (30,375) (38,771) Sales of short- and long-term investments 13,711 50,798 62,178 Restricted cash -- (5,000) (288) Purchases of property, plant and equipment (1,790) (1,892) (9,602) Net cash (used)/provided by investing activities (17,674) 13,531 13,517 Cash flows from financing activities: Proceeds from issuance of Common Stock -- 20,875 -- Conversion of Preferred Stock -- -- 52 Expenses related to conversion of Preferred Stock -- -- (544) Exercises of stock options 533 2,402 4,252 Expenses related to registration of Common Stock -- (158) -- Principal payments under note payable (303) (303) (302) Receipt of proceeds from capital lease obligations. -- -- 6,101 Principal payments under capital lease obligations(1,920)(2,273)(1,509) Preferred Stock dividend payments -- -- (2,572) Net cash (used)/ provided by financing activities (1,690) 20,543 5,478 Effects of exchange rate changes on cash 46 30 (478) Net (decrease)/increase in cash and cash equivalents(7,162) 13,395 (2,096) Cash and cash equivalents at beginning of year 15,236 1,841 3,937 Cash and cash equivalents at end of year $ 8,074 $15,236 $ 1,841 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 liposome-based pharmaceuticals, primarily for the treatment of cancer and other related life- threatening illnesses. ABELCETr (Amphotericin B Lipid Complex Injection), the Company's first commercialized product, has been approved for marketing for certain indications in the United States and 22 foreign markets and is the subject of marketing application filings in several other countries. In the United States, ABELCETr has been approved for the treatment of invasive fungal infections in patients who are refractory to or intolerant of conventional amphotericin B therapy. International approvals have been received for primary and/or refractory treatment of these infections. Currently all product sales are derived from ABELCETr. During 1998, the Company marketed ABELCETr in the U.S., Canada and the United Kingdom, with its own sales force. For other countries, the Company's general strategy is to market ABELCETr through marketing partners. Specific marketing partnerships are determined on a country- by-country basis. In addition, sales are realized on a "named patient" basis in certain countries where marketing approvals have not yet been received. The Company is developing EVACETTM (formerly TLC D-99), liposomal doxorubicin, as a treatment for metastatic breast cancer and potentially other cancers. Three Phase III clinical studies of EVACETTM have been completed by the Company. Results of these clinical trial studies indicate that EVACETTM is significantly less cardiotoxic than conventional doxorubicin while maintaining equivalent efficacy. The Company filed a New Drug Application ("NDA") for EVACETTM with the U.S. Food and Drug Administration ("FDA") in December 1998. There can be no assurance that the FDA, having accepted the NDA for EVACETTM, will grant the Company marketing clearance for this product. The Company completed preclinical toxicology studies of TLC ELL-12 (liposomal ether lipid), a new anticancer drug that may have applications for the treatment of many different cancers. On October 27, 1998 the Company announced that the FDA has cleared the Investigational New Drug application for this product. A Phase I clinical trial has been designed to enroll adult patients with advanced solid tumors. This trial commenced in February 1999. The Company has a continuing discovery research program concentrating on oncology treatment and has a number of products in research. These products include: the bromotaxols (hydrophobic derivatives of paclitaxel), some of which have shown anticancer activity in several experimental models; ceramides and sphingosines (molecules widely 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 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 strategy, the Company restructured its operations 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 third 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 EVACETTM from Pfizer Inc ("Pfizer"), which had previously been co- developing EVACETTM 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 EVACETTM. 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. 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 ABELCETr 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 in 1998 quarterly minimum payments (classified as interest, investment and other income) based on AmBisome worldwide sales. On April 22, 1998 the Company announced it had entered into a three year contract manufacturing agreement with Astra USA, Inc. ("Astra"). The Company will process and package 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 will be processed and packaged at the Company's Indianapolis facility, taking advantage of its modern, large-scale capabilities. Under the terms of the agreement, Astra will supply bulk quantities of the vitamin product and the Company will sterilize, fill, package and perform quality control on M.V.I.r-12 Unit Vial. The Company expects to record revenues related to Astra commencing in the first quarter of 1999. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 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. Comprehensive Income: The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in June 1997. Comprehensive Income represents the change in net assets of a business enterprise as a result of non- owner transactions. The Company has adopted SFAS No. 130 for the year ending January 3, 1999 by reflecting Comprehensive Income in the Consolidated Statements of Stockholders' Equity. Segment Reporting: In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that a business enterprise report certain information about operating segments, products and services, geographic areas of operation and major customers in complete sets of financial statements and in condensed financial statements for interim periods. The Company has adopted SFAS No. 131 for the year ending January 3, 1999, the applicable geographic segment and major customer revenue data is disclosed in Footnote 10 "Geographic Segment Data" and Footnote 12 "Major Customer and Research and Development Revenue Data". 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Advertising: Advertising costs are expensed in the period incurred. Total advertising costs were approximately $190,000 in 1998, $800,000 in 1997 and $1,400,000 in 1996. 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 3, 1999. Fair values may not be representative of actual values of financial investments that could be realized in the future. For the years ended January 3, 1999, December 28, 1997 and December 29, 1996, investment income included gross realized gains of $0, $2,800 and $3,600 and realized losses of $0, $9,100 and $28,700, respectively. At January 3, 1999 December 28, 1997 and December 29, 1996, investments included gross unrealized losses of $12,000, $108,000 and $481,000, respectively, and no gross unrealized gains for the periods. In computing realized gains 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 $45,491,000. Investment amounts are recorded at approximate amortized cost. Restricted Cash: The Company has entered into certain financing arrangements that require the issuance of letters of credit that are partially collateralized by certain 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 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 Loss Per Share: The Company has adopted SFAS No. 128, "Earnings per Share" which requires the presentation of basic earnings per share (EPS), and diluted earnings per share. Basic 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. The Company has not included potential Common Shares in the diluted per share computation as the result is anti-dilutive. The numerator and denominator of the basic and diluted per share computations were as follows: In Thousands Except Per Share Amounts Average Per Share Net Loss Shares Amount Year Ended January 3, 1999 Basic and diluted loss per share available to Common Stockholders $ (4,686) 38,172 $(.12) Year Ended December 28, 1997 Basic and diluted loss per share available to Common Stockholders $(26,446) 37,083 $(.71) Year Ended December 29, 1996 Basic and diluted loss per share available to Common Stockholders $(19,113) 33,292 $(.57) Basic and diluted net loss per share is calculated using the weighted average number of common shares for all periods presented. Options and warrants to purchase 5,849,837 shares of Common Stock at a range of $1.03 - $24.38 per share were outstanding during 1998 but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive to the net loss. The options and warrants expire on various dates from January 25, 1999 to December 28, 2008. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Reclassification: Certain reclassifications have been made to the prior year financial statement amounts to conform with 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 1998, the Company realized $122,000 in foreign currency transaction losses, $65,000 in losses in 1997 and $374,000 in gains in 1996. 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: Pursuant to calls for redemption of the Company's Preferred Stock (7.75% dividend rate) on March 25, 1996 and October 14, 1996, the Company issued an aggregate of 5,364,000 shares of Common Stock to holders of Preferred Stock who converted before the respective redemption dates. 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 26, 1999, this investor has reported total holdings of 24.38% 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 LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) 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 vesting schedule will resume after the one-year waiting period. Nearly 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) The table below summarizes the stock option activity under all of the Company's plans for the years 1996, 1997, and 1998: Weighted Weighted Average Number Average Exercise Fair Options of Options Exercise Price Value at exercisable Outstanding Price PerShare Grant Date Outstanding 12/31/95 1,790,439 4,139,921 $ 8.10 $ 1.03-20.88 Granted 1,096,379 17.86 12.44-25.13 $13.07 Exercised (708,064) 5.66 1.03-15.88 Forfeited (175,713) 11.82 2.63-25.13 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 $ 7.37 $ 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 $ 6.03 $ 1.03-24.38 The weighted average remaining contractual lives of outstanding options at January 3, 1999 was approximately 7.0 years. 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 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 No. 123 "Accounting for Stock Based Compensation", the Company's net loss and net loss per share applicable to Common Stock would have been increased to the pro forma amounts below: 1998 1997 1996 Pro Forma net loss applicable to Common Stock $(12,571,000) $(35,197,000) $(25,427,000) Pro Forma net loss per share applicable to Common Stock (basic and diluted) $ (0.33) $ (0.95) $ (0.76) 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 $7,885,000, $8,751,000 and $6,314,000 for 1998, 1997 and 1996, 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: 1998 1997 1996 Dividend Yield 0.0% 0.0% 0.0% Expected Volatility 84.0% 84.0% 89.0% Risk Free Interest Rate 4.6% 5.7% 6.0% Expected Option Lives (years) 7.6 7.5 7.5 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 4. Property, Plant and Equipment: Property, plant and equipment consists of the following: 1998 1997 Building and building improvements $6,504,000 $6,477,000 Land and land improvements 614,000 619,000 Furniture and fixtures 1,971,000 1,946,000 Machinery and equipment 19,882,000 18,059,000 Leasehold improvements and other 6,023,000 5,970,000 Construction in process 811,000 1,202,000 Machinery and equipment and leasehold improvements under capital lease 15,675,000 15,082,000 Total property, plant and equipment 51,480,000 49,355,000 Less: Accumulated depreciation and amortization (28,315,000) (22,703,000) Net property, plant and equipment $23,165,000 $26,652,000 5. Inventories: The components of inventory are as follows: 1998 1997 Finished goods $ 2,710,000 $ 1,849,000 Work in process 1,271,000 4,715,000 Raw materials 1,374,000 3,378,000 Supplies 211,000 588,000 Total $5,566,000 $10,530,000 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 secured by an investment letter of credit of $1,200,000. Rent expense was approximately $568,000, $627,000 and $568,000 for the years 1998, 1997 and 1996, 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 $88,000, $77,000 and $91,000 for the years 1998, 1997 and 1996, 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 $792,000 for 1998, $818,000 for 1997 and $761,000 for 1996. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Total rental expense under all operating leases (including those above) was approximately $2,184,000, $2,180,000 and $1,884,000 for 1998, 1997 and 1996, respectively. The Company's future minimum lease payments under noncancelable operating leases at January 3, 1999 are as follows: 1999 $1,422,000 2000 1,353,000 2001 1,279,000 2002 1,403,000 2003 1,403,000 2004 and thereafter 2,076,000 Total $8,936,000 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 $4,310,000 in standby letters of credit which are in turn collateralized by AAA rated securities owned by the Company. Pursuant to the December 1996 lease amendment, the Company is required to maintain a minimum balance of $25,000,000 in cash and marketable securities, including those securities collateralizing the letters of credit. 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 3, 1999. 1999 $2,598,000 2000 2,442,000 2001 1,333,000 2002 1,220,000 Total minimum lease payments 7,593,000 Less: Amount representing interest (991,000) Present value of minimum lease payments $6,602,000 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 (9,674,000) Net machinery and equipment and leasehold improvements $6,001,000 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 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. The Company has a pledge of $5,000,000 to support this line of credit, which has been classified as restricted cash. There have been no advances made against this line through the end of 1998. As part of the agreement to repurchase the development, manufacturing and marketing rights to EVACETTM, the Company has obtained from Pfizer, a credit line of up to $10,000,000 to continue the development of EVACETTM. 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. There have been no advances made against this line through the end of 1998. Legal Proceedings: The Company is a party in an adversarial proceeding filed in the United States Bankruptcy Court in Delaware by a chapter 7 bankruptcy trustee for the estate of the FoxMeyer Corporation, et al. The complaint seeks to avoid and recover purported preferential transfers pursuant to 11 U.S.C. 547 and 550 from the Company in the amount of $2.3 million. The Company believes it has meritorious defenses regarding this claim. The Company is currently a party to various other legal actions arising out of the normal course of business, none of which are expected to have a material effect on the Company's financial position or results of operations. 7. Long-term Debt: On July 24, 1992, The Liposome Manufacturing Company, Inc., a wholly-owned subsidiary of the Company, entered into a mortgage-backed note to partially fund the purchase of a pharmaceutical manufacturing facility in Indianapolis, Indiana. Principal payments of $25,225 plus accrued interest are payable monthly through November 2001. The interest rate, based on the prime rate plus 1/2%, has a floor and ceiling of 6% and 10%, and was 8.25% at January 3, 1999. The note is guaranteed by the Company and is collateralized by a $1,120,000 AAA rated security owned by the Company. The Company is required to maintain a minimum balance of $10,000,000 in cash and marketable securities, including those securities collateralizing the letter of credit, in connection with the financing. The fair value of the Company's long term debt approximates book value. The Liposome Manufacturing Company's principal repayment obligations as of January 3, 1999 are as follows: 1999 $ 303,000 2000 303,000 2001 277,000 Subtotal 883,000 Less: Current portion (303,000) Total $ 580,000 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: 1998 1997 Accrued expenses for preclinical and clinical programs $1,681,000 $3,241,000 Accrued bonus 1,396,000 630,000 Accrued royalty/licensing payments 1,110,000 743,000 Accrued sales & marketing and administrative 851,000 394,000 Accrued wages and vacation 774,000 470,000 Other 1,545,000 531,000 Total $7,357,000 $6,009,000 Statement of Cash Flows: 1998 1997 1996 Supplemental disclosure of cash flow information: Cash paid during the year for interest $823,000 $786,000 $339,000 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 Statement of Financial Accounting Standards 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 Company provides a valuation allowance against the net deferred tax debits due to the uncertainty of realization. The increase in the valuation allowance for the year ended January 3, 1999 and December 28, 1997 was $11,295,000 and $10,966,000, respectively. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) Temporary differences and carryforwards that gave rise to the deferred tax assets and liabilities at January 3, 1999 and December 28, 1997 are as follows: Deferred Tax Assets/(Liabilities) 1998 1997 Depreciation $ (443,000) $ 403,000 Net unrealized investment loss -- -- State taxes (net of Federal benefit)11,051,000 8,300,000 Amortization 1,579,000 2,032,000 Net operating losses - Federal 66,850,000 58,481,000 Net operating losses - Foreign 1,030,000 819,000 Reserves and allowances 1,135,000 1,729,000 Tax credits 5,885,000 4,531,000 Other 926,000 423,000 Subtotal 88,013,000 76,718,000 Valuation allowance - Federal (75,932,000) (67,599,000) Valuation allowance - State (11,051,000) (8,300,000) Valuation allowance - Foreign ( 1,030,000) (819,000) Subtotal (88,013,000) (76,718,000) Total deferred taxes $ -- $ -- At January 3, 1999, the Company had approximately $196,616,000 net operating loss carryforwards and $5,885,000 of research and development credit carryforwards for U. S. Federal income tax purposes. These carryforwards expire in the periods 1999 through 2018. The timing and manner in which these losses are used may be limited as a result of certain ownership changes that occurred as provided by IRS Regulations under Section 382. 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 1998, 1997 and 1996 is as follows: 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 Year Ended December 29, 1996 Domestic International Total Sales to unaffiliated customers $ 44,784 $ 8,056 $ 52,840 Collaborative research and development revenues 3,228 -- 3,228 Interest, investment and other income 3,449 415 3,864 Total revenue $ 51,461 $ 8,471 $ 59,932 Net loss $(16,765) $(1,113) $(17,878) Identifiable assets at December 29, 1996 $ 91,085 $ 3,470 $ 94,555 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 3, 1999, December 28, 1997 and December 29, 1996, the Company's discretionary matching was based on a percentage of salary reduction elections in the form of the Company's Common Stock. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 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. For the years ended January 3, 1999, December 28, 1997 and December 29, 1996 sales to wholesalers or other customers in excess of 10% of the Company's product revenues in any year were as follows: 1998 1997 1996 Customer A 23% 25% 24% Customer B 21% 20% 24% Customer C 14% 16% 20% Customer D 13% 14% 10% 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 and 1996. The absence of collaborative research and development revenue in 1998 and late 1997 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, in any year were as follows: 1998 1997 1996 Pfizer -- $2,331,000 $3,180,000 THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 13. Summary of Quarterly Financial Data (Unaudited): Summarized quarterly financial data (in thousands, except for per share data) for the years ended January 3, 1999 and December 28, 1997 are as follows: 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) applicable to Common Stock $(5,077) $ (847) $ (308) $ 1,546 Net income/(loss) per share applicable to Common Stock (basic) $ (.13) $ (.02) $ (.01) $ .04 Net income/(loss) per share applicable to Common Stock (diluted) $ (.13) $ (.02) $ (.01) $ .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 Quarter 1997 First Second Third Fourth Total revenues $15,854 $16,654 $16,050 $16,538 Total expenses 20,323 25,204 22,253 23,762 Net loss applicable to Common Stock $(4,469) $(8,550) $(6,203) $(7,224) Net loss per share applicable to Common Stock (basic and diluted) $ (.12) $ (.23) $ (.17) $ (.19) Weighted average shares outstanding (basic and diluted) 36,132 36,988 37,430 37,565 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. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements-(Continued) 14. Unusual Charges and Credits: The Company recorded approximately $3,900,000 of unusual charges for the second quarter of 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 Pharmaceuticals, Inc. 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, included in other income, as well as the right to receive future royalty payments based on all AmBisome sales beginning in 1998. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of The Liposome Company, Inc.: Our report on the consolidated financial statements of The Liposome Company, Inc. and Subsidiaries is included in Item 14 of this Annual Report on Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial schedule listed in the index in Item 14 of this Annual Report on Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included herein. PricewaterhouseCoopers LLP Princeton, New Jersey February 5, 1999 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 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 $76,718,000 $11,295,000 $ -- $88,013,000 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 Year Ended December 29,1996 Valuation Allowance for Sales Rebates and Discounts -- $1,635,000 $(1,026,000) $ 609,000 Allowance for Doubtful Accounts................. $ 200,000 $ 879,000 -- $1,079,000 Valuation Allowance for Income Taxes $58,220,000 $7,532,000 $ -- $65,752,000 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. (Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference thereto.) 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.) 10-06 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. 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 attached hereto as Exhibit 10-16. 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.) 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 29th day of March, 1999. 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 29th day of March, 1999 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/ 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. EXHIBIT INDEX EXHIBIT NO. PAGE 21. Subsidiaries 65 23. Consent of Independent Accountants 66 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 consent to the incorporation by reference in the registration statements of The Liposome Company, Inc. on Forms S-8 (File Nos. 333- 20339 and 333-20341) of our reports dated February 5, 1999 on our audits of the consolidated financial statements and financial statement schedule of The Liposome Company, Inc. as of January 3, 1999 and December 28, 1997 and for the years ended January 3, 1999, December 28, 1997 and December 29, 1996, which reports are included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Princeton, New Jersey March 29, 1999 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 29th day of March, 1999. THE LIPOSOME COMPANY, INC. AND SUBSIDIARIES By: 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 29th day of March, 1999 on behalf of the Registrant and in the capacities indicated. Chairman of the Board, President Chief Executive Charles A. Baker Officer and Director (Principal Executive Officer) Vice President and Chief Financial Officer Lawrence R. Hoffman (Principal Accounting Officer) Director James G. Andress Director Morton Collins, Ph.D. Director Stuart F. Feiner Director Robert F. Hendrickson Director Bengt Samuelsson, Dr. Director Joseph T. Stewart, Jr. Director Gerald Weissmann, M.D. Director Horst Witzel, Dr.-Ing. EX-10 2 5 EXECUTIVE SEVERANCE AGREEMENT BETWEEN EXECUTIVE NAME AND THE LIPOSOME COMPANY, INC. CONTENTS PAGE Article 1. Definitions 1 Article 2. Severance Benefits 6 Article 3. Form and Timing of Severance Benefits 9 Article 4. Excise Tax Gross-Up 10 Article 5. The Company's Payment Obligations 11 Article 6. Term of Agreement 12 Article 7. Legal Remedies 12 Article 8. Successors 12 Article 9. Indemnification 13 Article 10. Miscellaneous 13 THE LIPOSOME COMPANY, INC. EXECUTIVE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of this 22nd day of January, 1998, by and between The Liposome Company, Inc., a Delaware corporation (hereinafter referred to as the "Company") and ____________ (hereinafter referred to as the "Executive"). WITNESSETH: WHEREAS, the Board of Directors of the Company has approved the Company entering into severance agreements with certain key executives of the Company and its subsidiaries; and WHEREAS, the Executive is a key executive of the Company or of its subsidiary; and WHEREAS, should the possibility of a Change in Control of the Company arise, the Board believes it imperative that the Company and the Board should be able to rely upon the Executive to continue in his or her position, and that the Company should be able to receive and rely upon the Executive's advice, if requested, as to the best interests of the Company and its shareholders without concern that the Executive might be distracted by the personal uncertainties and risks created by the possibility of a Change in Control; and WHEREAS, should the possibility of a Change in Control arise, in addition to his or her regular duties, the Executive may be called upon to assist in the assessment of such possible Change in Control, advise management and the Board as to whether such Change in Control would be in the best interests of the Company and its shareholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his or her advice and counsel notwithstanding the possibility, threat, or occurrence of a Change in Control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive agree as follows: ARTICLE 1. DEFINITIONS Whenever used in this Agreement, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Agreement" means this Executive Severance Agreement. (b)"Base Salary" means the salary of record paid to the Executive as annual salary, excluding amounts received under incentive or other bonus plans, whether or not deferred. (c)"Beneficial Owner" has the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (d)"Beneficiary" means the persons or entities designated or deemed designated by the Executive pursuant to Section 9.2 hereof. (e)"Board" means the Board of Directors of the Company. (f)"Cause" shall be determined by the Chairman of the Board and the Executive's direct supervisor, in exercise of his or their good faith and reasonable judgment, and shall mean the occurrence of any one or more of the following: (i)The willful and continued failure by the Executive to substantially perform his or her duties (other than any such failure resulting from the Executive's Disability), after a written demand for substantial performance is delivered by the Chairman of the Board to the Executive that specifically identifies the manner in which the Company believes that the Executive has not substantially performed his duties, and the Executive has failed to remedy the situation within thirty (30) calendar days of receiving such notice; or (ii) The Executive's conviction for committing an act of fraud, embezzlement, theft, or other act constituting a felony; or (iii) The willful engaging by the Executive in gross misconduct materially and demonstrably injurious to the Company, as determined by the Chairman of the Board. However, no act or failure to act on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (g)` "Chairman of the Board" shall mean the member of the Board duly elected by the Board to serve as its chairman, as prescribed in the Company's By-Laws. (h)"Change in Control" of the Company 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 Company representing (A) more than thirty-five percent (35%) of the combined voting power of the Company'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 Company'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 (B) one hundred percent (100%) of the combined voting power of the Company's then outstanding securities regardless of any contractual restrictions. For purposes of this provision, "person" shall not include the Company, any subsidiary of the Company, any employee benefit plan or employee stock plan of the Company, or any person holding the Company'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 Section (h)(i)(A) and (h)(iii)(B) 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 Company's business". Whether other voting rights may be granted to a beneficial owner without enabling it to influence or control the management of the Company's business will depend on the totality of rights granted in each case. (ii) When, as a result of a vote of stockholders for which proxies are solicited by or on behalf of any person other than the Company 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). (iii) When the stockholders of the Company approve a merger, consolidation, or reorganization, whether or not the Company is the surviving entity in such transaction, (A) other than a merger, consolidation, or reorganization that would result in the voting securities of the Company 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 Company (or such surviving entity) outstanding immediately after the merger, consolidation, or reorganization; and (B) other than a merger, consolidation or reorganization that would result in the voting securities of the Company 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 Company (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 Company 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 Company'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. (iv) When the stockholders of the Company approve (A) the sale or other disposition of all or substantially all of the assets the company or (B) a complete liquidation or dissolution of the Company. (v)When the Board adopts a resolution to the effect that any person has acquired effective control of the business and affairs of the Company. 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 company or group (except for: (x) passive ownership of less than three percent (3%) of the stock of the purchasing company; or (y) ownership of equity participation in the purchasing company 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). (i)"Code" means the United States Internal Revenue Code of 1986, as amended. (j)"Company" means The Liposome Company, Inc., a Delaware corporation (including any and all subsidiaries), or any successor thereto as provided in Article 8 hereof. (k)"Disability" means permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Chairman of the Board in the exercise of good faith and reasonable judgment, upon receipt of and in reliance on sufficient competent medical advice from one or more individuals, selected by the Company, who are qualified to give professional medical advice. (l)"Effective Date" is January 22, 1998. (m)"Effective Date of Termination" means the date on which a Qualifying Termination occurs that triggers the payment of Severance Benefits hereunder. (n)"Exchange Act" means the United States Securities Exchange Act of 1934, as amended. (o)"Executive" means the individual named in the opening paragraph of this Agreement. (p)"Good Reason" means, without the Executive's express written consent, the occurrence after a Change in Control of the Company of any one or more of the following: (i)The assignment of the Executive to duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including titles and reporting requirements) as an officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety (90) days prior to the Change in Control, other than an insubstantial and inadvertent act that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) The Company's requiring the Executive to be based at a location in excess of thirty-five (35) miles from the location of the Executive's principal job location or office immediately prior to the Change in Control; except for required travel on the Company's business to an extent substantially consistent with the Executive's present business obligations; (iii) A reduction by the Company of the Executive's Base Salary as in effect on the Effective Date, or as the same shall be increased from time to time; (iv) Any failure by the Company to pay a bonus at least equal to the average of the bonuses paid to the Executive during the three years prior to his/her Effective Date of Termination; (v)The failure of the Company to maintain the Executive's relative level of coverage under the Company's employee benefit or retirement plans, policies, practices, or arrangements in which the Executive participates as of the Effective Date, both in terms of the amount of benefits provided and the relative level of the Executive's participation. For this purpose, the Company may eliminate and/or modify existing programs and coverage levels; provided, however, that the Executive's level of coverage under all such programs must be at least as great as is such coverage provided to executives who have the same or lesser levels of reporting responsibilities within the Company's organization; (vi) The failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform the Company's obligations under this Agreement, as contemplated in Article 8 hereof; and (vii) Any purported termination by the Company of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 2.10 hereof, and for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. (q)"Person" has the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (r)"Qualifying Termination" means any of the events described in Section 2.2 hereof, the occurrence of which triggers the payment of Severance Benefits hereunder. (s)"Severance Benefits" means the payment of severance compensation as provided in Section 2.3 hereof. (t)"Total Payments" means the sum of the Executive's Severance Benefits and all other payments and benefits provided to the Executive by the Company that constitute "excess parachute payments" within the meaning of Code Section 280G(b)(1). Without limiting the generality of the foregoing, Total Payments shall include any and all excess parachute payments associated with outstanding long-term incentive grants (to include, but not be limited to, early vesting of stock options or restricted stock). (u)"Window Period" means the time period commencing ninety (90) days prior to a Change in Control, as defined in Section (g) of this Article 1, and ending eighteen months after the latter to occur of: (i) any of the events defined as a Change in Control in Section 1(h); or (ii) final consummation of the liquidation, sale or disposition of assets, or the merger, consolidation or reorganization of the Company as described in Section 1(h)(iii) and (iv). ARTICLE 2. SEVERANCE BENEFITS 2.1. Right to Severance Benefits. The Executive shall be entitled to receive from the Company Severance Benefits as described in Section 2.3 hereof, if there has been a Change in Control of the Company and if, within the Window Period, the Executive's employment with the Company ends for any reason specified in Section 2.2 hereof. The Executive shall not be entitled to receive Severance Benefits if he/she is terminated for Cause, or if his/her employment with the Company ends due to death, Disability, retirement on or after early retirement age (as defined under the then established rules of the Company's tax-qualified retirement plan applicable to the Executive), or due to a voluntary termination of employment by the Executive without Good Reason, or if he/she fails to comply with the conditions set forth in Section 2.7 hereof. 2.2. Qualifying Termination. The occurrence of any one or more of the following events within the Window Period shall constitute a Qualifying Termination and shall trigger the payment of Severance Benefits to the Executive under this Agreement: (a)An involuntary termination of the Executive's employment by the Company for reasons other than Cause; (b)A voluntary termination of employment by the Executive for Good Reason; (c)A successor company's failure or refusal to assume the Company's obligations under this Agreement, as required by Article 8 hereof; or (d)The breach by the Company or any successor company of any of the provisions of this Agreement. 2.3. Description of Severance Benefits. In the event that the Executive becomes entitled to receive Severance Benefits, as provided in this Article 2, the Company shall pay to the Executive and provide him or her with the following: (a)An amount equal to twelve (12) months' of the Executive's annual Base Salary at the rate in effect at the commencement of the Window Period or any higher rate that may be in effect from that date until the Effective Date of Termination; (b)An amount equal to the Executive's average annual bonus earned during the three (3) full fiscal years prior to the Effective Date of Termination, or during such shorter period as the Executive has received an annual bonus. For a year in which any portion of the Executive's annual bonus was paid in stock or other non-cash consideration, the value of such stock or other non-cash consideration will be included in calculating his/her average annual bonus; (c)A pro rata portion of the Executive's expected bonus for the bonus plan year in which termination occurs (which expected bonus will be at least equal to the Executive's average annual bonus for the three prior bonus plan years, determined as set forth in Subsection 2.3(b), or such greater amount as the Board may determine is due), and accrued salary and vacation pay through the Effective Date of Termination; (d)A continuation of all benefits pursuant to any and all welfare benefit plans under which the Executive and/or the Executive's family is eligible to receive benefits and/or coverage, including, but not limited to, group life insurance, hospitalization, disability, medical and dental plans, at the same premium cost, and at the same coverage level, as in effect as of the Executive's Effective Date of Termination or as of the effective date of the Change in Control, whichever the Executive may elect. The welfare benefits described in this Subsection 2.3(d) shall continue following the Effective Date of Termination for twelve months; provided, however, that such benefits shall be discontinued prior to the end of such period in the event the Executive receives substantially similar benefits from a subsequent employer; (e)Reasonable Company-paid outplacement assistance, commensurate with assistance normally provided to executive-level personnel, for a period of up to twelve (12) months following the Effective Date of Termination, or for such longer period as the Company may agree; (f)The immediate vesting and exercisability of all stock options, restricted stock and other equity incentives granted to the Executive that are not otherwise vested or exercisable; and (g)Any other accrued rights of the Executive. 2.4. Termination for Total and Permanent Disability. Following a Change in Control of the Company, if the Executive's employment is terminated due to Disability, the Executive shall receive his or her Base Salary through the Effective Date of Termination, at which point in time the Executive's benefits shall be determined in accordance with the Company's retirement, insurance, and other applicable plans and programs then in effect. 2.5. Termination for Retirement or Death. Following a Change in Control of the Company, if the Executive's employment is terminated by reason of his or her retirement (as defined under the then-established rules of the Company's tax- qualified retirement plan), or death, the Executive's benefits shall be determined in accordance with the Company's retirement, survivor's benefits, insurance, and other applicable programs of the Company then in effect. 2.6. Termination for Cause or by the Executive Other Than for Good Reason. Following a Change in Control of the Company, if the Executive's employment is terminated either: (i) by the Company for Cause; or (ii) by the Executive other than for Good Reason, the Company shall pay the Executive his or her full Base Salary and accrued vacation through the Effective Date of Termination, at the rate then in effect, plus any other amounts to which the Executive is entitled under any compensation or benefit plans of the Company at the time such payments are due, and the Company shall have no further obligations to the Executive under this Agreement. 2.7. Conditions to Severance Benefits. As conditions of the Executive's entitlement and continued entitlement to the Severance Benefits provided in Section 2.3, the Executive is required to (i) honor in accordance with their terms the provisions of Section 2.8 and 2.9 hereof and the provisions of the confidential information agreement signed by the Executive at the beginning of his/her employment (the "Employee Confidentiality Agreement"), and (ii) execute and honor the terms of a waiver and release of claims against the Company substantially in the form attached hereto as Exhibit A (and as may be modified consistent with the purposes of such waiver and release to reflect changes in the law following the Effective Date). In the event that the Executive fails to abide by the foregoing, all payments and benefits to which the Executive may otherwise have been entitled under Section 2.3 shall immediately terminate and be forfeited, and the Executive shall be entitled to no severance benefits in excess of those provided in the Company's standard severance policy in effect as of the Executive's Effective Date of Termination, and the Executive shall repay to the Company any payment received that is in excess of such amount. For purposes of this Section, the Executive shall be treated as having failed to honor the provisions of Sections 2.8 or 2.9 hereof or the provisions of the Employee Confidentiality Agreement only following written notice by the Company or its successor of the alleged failure and an opportunity for the Executive to cure the alleged failure for a period of thirty (30) days from the date of such notice. 2.8. Services During Certain Events. In the event a Person begins a tender or exchange offer, circulates a proxy to shareholders of the Company, or takes other steps seeking to effect a Change in Control, the Executive agrees that he or she will not voluntarily leave the employ of the Company and will render services until such Person has abandoned or terminated his or its efforts to effect a Change in Control, or until six (6) months after a Change in Control has occurred; provided, however, that the Company may terminate the Executive's employment for Cause at any time, and the Executive may terminate his or her employment any time after the Change in Control for Good Reason. 2.9. Non-Competition. The Executive shall not, either during the term of his/her employment with the Company or for a period of twelve months after a Qualifying Termination, become affiliated with or conduct, directly or indirectly, 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 drug product (a "Competitor"); provided, however, that, after his/her Effective Date of Termination, the Executive may become affiliated with a non-competing subsidiary, division or other business unit of a Competitor if the Executive's services are provided only to such separate business unit, and the Executive may become affiliated with an entity that provides goods or services to a Competitor if the Executive does not personally participate in the provision of goods or services to the Competitor. 2.10. Notices. In the event of a transaction that would constitute a Change of Control but for the provisions of Section 1(h)(i)(A) or 1(h)(iii)(B) regarding contractual restrictions on the acquiror, the Company will give written notice to the Executive that no Change of Control has occurred. Likewise, in the event that such contractual restrictions are subsequently removed, the Company will give written notice to the Executive that a Change of Control has occurred or will occur as of the effective date of the removal of such restrictions. Any termination by the Company for Cause or by the Executive for Good Reason following a Change of Control shall be communicated by Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. ARTICLE 3. FORM AND TIMING OF SEVERANCE BENEFITS 3.1. Form and Timing of Severance Benefits. The Severance Benefits described in Sections 2.3(a), 2.3(b), 2.3(c), 2.3(e), and 2.3(f) hereof shall be paid in cash to the Executive in a single lump sum as soon as practicable following the Effective Date of Termination, but in no event beyond thirty (30) days from such date. Any payment required under this Section 3.1, or any other provision of this Agreement, that is not made in a timely manner will bear interest at a rate equal to one hundred twenty percent (120%) of the applicable federal rate, as in effect under Section 1274(d) of the Code for the month in which the payment is required to be made. 3.2. Withholding of Taxes. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required (including, without limitation, any United States Federal taxes, and any other state, city, or local taxes). ARTICLE 4. EXCISE TAX GROSS-UP 4.1Equalization Payment. In the event that the Executive becomes entitled to Severance Benefits, if any of the Executive's Total Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to the Executive in cash an additional amount (the "Gross- up Payment") such that the net amount retained by the Executive after deduction of any Excise Tax on the Total Payments and any federal, state, and local income tax and Excise Tax upon the Gross-up Payment provided for by this Section 4.1, shall be equal to the Total Payments. Such payment shall be made by the Company to the Executive as soon as practicable following the Effective Date of Termination, but in no event beyond thirty (30) days from such date. 4.2Tax 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: (a)Any other payments or benefits received or to be received by the Executive in connection with a Change in Control of the Company or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company, or with any Person whose actions result in a Change in Control of the Company or any Person affiliated with the Company or such Persons) shall be treated as "parachute payments" within in the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the excise tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to the Executive, 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; (b)The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of: (i) the total amount of the Total Payments; or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (a) above); and (c)The value of any noncash benefits or any deferred payment or benefit shall be determined by the Company'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 Executive 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 Executive'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. 4.3Subsequent Recalculation. In the event the Internal Revenue Service adjusts the computation of the Company under Section 4.2 hereof, so that the Executive did not receive the greatest net benefit, the Company shall reimburse the Executive for the full amount necessary to make the Executive whole, plus an appropriate market rate of interest, as determined by the Company's independent auditors. ARTICLE 5. THE COMPANY'S PAYMENT OBLIGATION 5.1Payment Obligations Absolute. The Company's obligation to make the payments and the arrangements provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against the Executive or anyone else, except those arising under this Agreement. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reasons whatsoever, except as provided in Section 2.7. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments and arrangements required to be made under this Agreement, except to the extent provided in Sections 2.3(d) and 2.9 hereof. 5.2Contractual Rights to Benefits. This Agreement establishes and vests in the Executive a contractual right to the benefits to which he or she is entitled hereunder. However, nothing herein contained shall require or be deemed to require, or prohibit or be deemed to prohibit, the Company to segregate, earmark, or otherwise set aside any funds or other assets, in trust or otherwise, to provide for any payments to be made or required hereunder. ARTICLE 6. TERM OF AGREEMENT This Agreement will commence on the Effective Date and will terminate on January 22, 2003; provided however that this Agreement will be extended automatically for one (1) additional year at the end of this initial term and at the end of each additional year thereafter, unless the Chairman of the Board delivers written notice twelve (12) months prior to the end of such term, or extended term, to the Executive, that the Agreement will not be extended. In such case, the Agreement will terminate at the end of the term, or extended term, then in progress. However, in the event a Change in Control occurs during the original or any extended term, this Agreement will remain in effect for the longer of: (i) the duration of the Window Period; or (ii) until all obligations of the Company hereunder have been fulfilled, and until all benefits required hereunder have been paid to the Executive. ARTICLE 7. LEGAL REMEDIES 7.1Payment of Legal Fees. To the extent permitted by law, the Company shall pay all legal fees, costs, including costs of litigation, prejudgment interest, and other expenses, incurred in good faith by the Executive as a result of the Company's wrongful refusal to provide the Severance Benefits to which the Executive becomes entitled under this Agreement, or as a result of the Company's unsuccessfully contesting the validity, enforceability, or interpretation of this Agreement, or as a result of any conflict between the parties pertaining to this Agreement in which the Executive is the prevailing party, or which is settled prior to the entry of a final judgment from which no appeal can be taken. 7.2Arbitration. The Executive shall have the right and option to elect (in lieu of litigation) to have any dispute or controversy arising under or in connection with this Agreement settled by final and binding arbitration, conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of his or her job with the Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. All expenses of any such arbitration in which the Executive is the prevailing party, as determined by the arbitrators, including the fees and expenses of the counsel for the Executive, shall be borne by the Company. ARTICLE 8. SUCCESSORS 8.1Assumption of Company's Obligations. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he or she would be entitled to hereunder if he or she had terminated his or her employment with the Company voluntarily for Good Reason. The date on which any such succession becomes effective shall be deemed the Effective Date of Termination. 8.2Payment to Beneficiary. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Executive should die while any amount would still be payable to him or her hereunder had he or she continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to the Executive's Beneficiary. If the Executive has not named a Beneficiary, then such amounts shall be paid to the Executive's devisee, legatee, or other designee, or if there is no such designee, to the Executive's estate. ARTICLE 9. INDEMNIFICATION 9.1Prior Agreement. The Indemnification Agreement previously entered into between the Executive and the Company is hereby reaffirmed and is not in any way canceled, superseded, modified, or amended by this Agreement, and such Indemnification Agreement shall remain in effect after a Change in Control and after the Executive's Effective Date of Termination and shall be binding on the Company and any of its successors according to its terms. 9.2Additional Commitments. Without limiting the parties' rights and obligations set forth in the above-referenced Indemnification Agreement, and in addition thereto, the Company shall indemnify the Executive to the fullest extent permitted by applicable law, and the Company (or its successor) shall maintain in full force and effect, for the duration of all applicable statute of limitation periods, insurance policies at least as favorable to the Executive as those maintained by the Company for the benefit of its directors and officers at the time of the Change in Control, with respect to all costs, charges and expenses whatsoever (including payment of expenses in advance of final disposition of a proceeding) incurred or sustained by the Executive in connection with any action, suit or proceeding to which he/she may be made a party by reason of being or having been a director, officer or employee of the Company. ARTICLE 10. MISCELLANEOUS 10.1 Employment Status. The Executive and the Company acknowledge that, except as may be provided under any other agreement between the Executive and the Company, the employment of the Executive by the Company is "at will," and, prior to the effective date of a Change in Control, may be terminated by either the Executive or the Company at any time, subject to applicable law. Upon a termination of the Executive's employment prior to the effective date of a Change in Control, there shall be no further rights under this Agreement; provided, however, that if such an employment termination shall occur within ninety (90) days prior to a Change in Control, then the Executive's rights shall be the same as if the termination had occurred within eighteen (18) months following a Change in Control. 10.2 Designation of Beneficiaries. The Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits owing to the Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Chairman of the Board. The Executive may make or change such designation at any time. 10.3 Confidentiality of this Agreement. The Executive shall treat the terms and conditions of this Agreement as confidential information subject to the provisions of his/her Employee Confidentiality Agreement, except that the Executive may disclose them on a privileged and confidential basis to his/her legal counsel. 10.4 Entire Agreement. This Agreement, together with the Indemnification Agreement referred to in Section 9.1, contain the entire understanding of the Company and the Executive with respect to the subject matter hereof. 10.5 Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included. Further, the captions of this Agreement are not part of the provisions hereof and shall have no force and effect. 10.6 Modification. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and by an authorized representative of the Company, or by the respective parties' legal representatives and successors. 10.7 Applicable Law. To the extent not preempted by the laws of the United States, the laws of the state of New Jersey shall be the controlling law in all matters relating to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of this 22nd day of January, 1998. THE LIPOSOME COMPANY, INC. EXECUTIVE By: Charles A. Baker Chairman of the Board, President and Chief Executive Officer EXHIBIT A GENERAL RELEASE AND COVENANT NOT TO SUE THIS AGREEMENT AFFECTS IMPORTANT LEGAL RIGHTS. TAKE IT HOME AND READ IT CAREFULLY BEFORE YOU SIGN IT. YOU ARE ENCOURAGED TO CONSULT AN ATTORNEY OF YOUR CHOICE TO REVIEW THE DOCUMENT. This is an Agreement between The Liposome Company, Inc., and First_Name Last_Name. In the remainder of this document, First_Name Last_Name will be called the "Executive" and The Liposome Company, Inc., will be called the "Company". IN CONSIDERATION OF the severance benefits to be provided by the Company under the Executive Severance Agreement dated January 22, 1998 (the "Severance Agreement"), the Executive hereby agrees as follows: 1. The General Release Provided by the Executive The Executive agrees to release the Company, its officers, employees and directors, from all claims or demands the Executive may have based on the Executive's employment with the Company. This General Release includes a release of claims of which the Executive is unaware and of claims that are not specifically identified below. The claims released by the Executive include, but are not limited to, claims arising under: (1) The Constitution of the United States; (2) The Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. 621 et seq., which prohibits age discrimination in employment; (3) Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 2000(e) et seq., which prohibits discrimination in employment based on race, color, national origin, religion or sex; (4) The Civil Rights Act of 1866, 42 U.S.C. 1981 et seq.; (5) The Equal Pay Act, which prohibits paying men and women unequal pay for equal work; (6) Any other federal, state or local law or regulation prohibiting employment discrimination; (7) The Employee Retirement Income Security Act, 29 U.S.C. 10001 et seq.; (8) Executive Orders 11246 and 11141; (9) The Americans with Disabilities Act of 1990, 42 U.S.C. 12101 et seq.; (10) The Family and Medical Leave Act., 29 U.S.C. 2601 et seq.; (11) The New Jersey Family Leave Act, N.J.S.A. 34:11B-1 et seq.; (12) The Constitution of the State of New Jersey (13) The New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 et seq.; (14) The Conscientious Employee Protection Act., N.J.S.A. 34:19-2 et seq.; (15) Any express or implied contracts with the Company; (16) Any federal or state Common Law and any federal, state or local statutes, ordinances and regulations. This General Release also includes a release by the Executive of any claims for wrongful discharge and/or defamation arising out of employment or otherwise. By signing this Agreement, the Executive waives any right the Executive has or ever had to bring or maintain any claim or action in law or in equity against the Company involving any matter arising prior to the signing of this Agreement. This General Release does not include, however, a release of (a) the Executive's right, if any, to pension, retiree, health or similar benefits under the Company's existing plans; (b) the Executive's rights under the Severance Agreement; (c) the Executive's rights under his/her indemnification agreement with the Company, or (d) the Executive's right to claim COBRA benefits, if any, under applicable law. 2. The Executive Does Not Release Future Claims This Agreement does not require the Executive to waive or release any rights or claims arising out of events that take place after the Effective Date of this Agreement. 3. The Executive Retains Certain Administrative Rights This Agreement does not require the Executive to waive or release the right to file a charge or participate in a proceeding before the Equal Employment Opportunity Commission; provided, however, that the Executive does give up the right to recover damages from such a proceeding. 4. Consequences of Initiating an Action Released by this Agreement In the event the Executive initiates any legal action inconsistent with the General Release provided in this Agreement, the Company shall be released from further obligation under the Severance Agreement. The Executive agrees that, prior to proceeding with any claim or legal action released by this Agreement, the Executive shall return all additional severance benefits received under the Severance Agreement. The Executive further agrees that the repayment of those benefits shall not revoke the General Release, but is rather a condition the Executive must satisfy before seeking its revocation. The Executive agrees that if the legal action is withdrawn, dismissed, or otherwise unsuccessful, the Executive shall reimburse the Company, and any of its officers, directors or employees, for all costs, including attorneys' fees, incurred as a consequence of the Executive's legal action. 5. The Company Admits No Liability to the Executive The use of this Agreement by the Company does not signify any admission of wrongdoing by the Company. 6. The Date on Which this Agreement Becomes Effective This Agreement will not become effective or enforceable until the later of (a) the eighth day following the date the Executive signs it or (b) the day it is signed by the Company. In this Agreement, the date on which this Agreement becomes effective is called the "Effective Date". 7. The Executive Has 21 Days to Review this Agreement The Executive acknowledges that he or she has twenty-one (21) days after receiving this Agreement to review and consider it. The Executive may accept the terms of this Agreement at any time during the review period by signing, notarizing and returning it to The Liposome Company, Inc., One Research Way, Princeton, New Jersey 08540. The period in which the Company is required to make payment of severance benefits under Section 3.1 of the Severance Agreement will not begin until the Company receives a signed copy of this Agreement, but the Executive's Effective Date of Termination for purposes of the Severance Agreement will not be postponed during such review period. 8. The Executive Is Encouraged to Consult an Attorney The Executive is encouraged to consult with an attorney before signing this Agreement. The Executive understands that whether or not to do so is the Executive's decision. 9. The Executive Has the Right to Revoke this Agreement The Executive may revoke this Agreement within seven (7) days after signing it. If this Agreement is not revoked within such seven (7) days, it becomes effective on the eight (8th) day. If the Executive wishes to revoke this Agreement, the Executive must deliver a written Notice of Revocation to The Liposome Company, Inc., One Research Way, Princeton, NJ 08540. The Notice of Revocation will not be effective unless it is received by the Company no later than 5:00 P.M. on the seventh (7th) day after the Executive signs this Agreement. If the Executive fails to sign this Agreement or revokes this Agreement, it shall not be effective or enforceable, and the Executive will not receive the additional severance benefits provided by the Severance Agreement. 10. New Jersey Law Applies to this Agreement The Executive and the Company agree that this Agreement and any interpretation of it shall be governed by the laws of the State of New Jersey to the extent not inconsistent with the Employee Retirement Income Security Act of 1974, and that this Agreement shall be enforceable in the Superior Court of New Jersey. THE EXECUTIVE ACKNOWLEDGES THAT HE/SHE HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND IS VOLUNTARILY ENTERING INTO IT. THE EXECUTIVE FURTHER ACKNOWLEDGES THAT THE COMPANY HAS PROVIDED THE EXECUTIVE A PERIOD OF TWENTY-ONE (21) DAYS TO REVIEW THIS AGREEMENT WITH THE ADVICE OF COUNSEL SHOULD THE EXECUTIVE SO CHOOSE. ____________________________ Signed and sworn before me this ______ day of ____________________, ____ __________________________________ NOTARY PUBLIC Received and Accepted by The Liposome Company, Inc. By: ___________________________________________ Title: ___________________________________________ Date: ___________________________________________ EX-27 3
5 12-MOS JAN-03-1999 JAN-03-1999 8,074 34,339 5,919 (579) 5,566 55,145 51,480 (28,315) 90,574 13,744 0 0 0 383 71,358 90,574 73,495 77,868 20,805 82,554 0 0 773 (4,686) 0 (4,686) 0 0 0 (4,686) (0.12) (0.12)
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