<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission file number 0-17254
NOVEN PHARMACEUTICALS, INC.
STATE OF DELAWARE 59-2767632
- ------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11960 S.W. 144TH STREET, MIAMI, FL 33186
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 253-5099
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
CLASS OUTSTANDING AT APRIL 30, 1999
- ------------------------------ -----------------------------
Common stock, $.0001 par value 21,447,272
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NOVEN PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Unaudited Statements of Operations
for the Three Months Ended March 31, 1999 and 1998 3
Balance Sheets as of March 31, 1999 and
December 31, 1998 4
Unaudited Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 5
Notes to Unaudited Financial Statements 6 - 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOVEN PHARMACEUTICALS, INC.
Unaudited Statements of Operations
Three Months Ended March 31,
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Revenues:
Product sales $ 7,421 $ 2,489
License revenue 56 59
-------- --------
Total revenues 7,477 2,548
Expenses:
Cost of products sold 3,244 1,033
Research and development 1,657 2,000
Marketing, general and administrative 1,903 2,981
-------- --------
Total operating costs and expenses 6,804 6,014
Income (loss) from operations 673 (3,466)
Interest income, net 52 190
-------- --------
Net income (loss) before income taxes 725 (3,276)
Income taxes 9 --
-------- --------
Net income (loss) $ 716 $ (3,276)
======== ========
Basic and diluted income (loss) per share $ 0.03 $ (0.16)
======== ========
Basic weighted average of common stock
21,531 20,476
======== ========
Diluted weighted average of common stock
21,730 20,476
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</TABLE>
The accompanying notes are an integral part of these statements
3
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NOVEN PHARMACEUTICALS, INC.
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,511 $ 5,573
Accounts receivable (less allowance for doubtful accounts
of $162 in 1999 and $268 in 1998) 4,330 3,044
Due from Vivelle Ventures LLC 3,403 3,489
Inventories 2,732 2,733
Prepaid and other current assets 204 421
-------- --------
16,180 15,260
Property, Plant and Equipment:
Property, plant and equipment, at cost 20,517 20,376
Less: accumulated depreciation and amortization 5,202 4,859
-------- --------
15,315 15,517
Other Assets:
Investment in Vivelle Ventures LLC 7,451 7,500
Patent development costs, net 1,803 1,765
Deposits and other assets 113 114
-------- --------
9,367 9,379
-------- --------
$ 40,862 $ 40,156
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,849 $ 4,954
Note payable 113 179
Accrued compensation and related liabilities 641 913
Other accrued liabilities 301 141
-------- --------
5,904 6,187
Deferred License Revenue 5,588 5,644
Commitments and Contingencies -- --
-------- --------
11,492 11,831
Stockholders' Equity:
Preferred stock - authorized 100,000 shares of $.01 par
value; no shares issued or outstanding -- --
Common stock - authorized 40,000,000 shares,
par value $.0001 per share; issued and
outstanding 21,544,372 shares at March 31, 1999 and
21,482,423 at December 31, 1998 2 2
Additional paid-in capital 66,998 66,669
Accumulated deficit (36,967) (37,683)
Treasury stock, 97,100 shares, at cost (663) (663)
-------- --------
29,370 28,325
-------- --------
$ 40,862 $ 40,156
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
4
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NOVEN PHARMACEUTICALS, INC.
Unaudited Statements of Cash Flows
Three Months Ended March 31,
(in thousands, except share date)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 716 $ (3,276)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 392 247
Amortization of patent costs 52 52
Decrease (increase) in inventories 1 (705)
Decrease (increase) in prepaid and other current assets 217 (155)
(Increase) decrease in accounts receivable (1,286) 235
Decrease in due from Vivelle Ventures LLC 86 --
(Decrease) increase in accounts payable (105) 290
Increase in compensation and other accrued liabilities 217 14
Decrease in deferred license revenue (56) (56)
-------- --------
Cash flows provided by (used in) operating
activities 234 (3,354)
Cash flows from investing activities:
Maturity of securities, net -- 4,901
Purchase of fixed assets (141) (203)
Payments for patent development costs (90) (73)
Refund of deposits 1 6
-------- --------
Cash flows (used in) provided by investing activities (230) 4,631
Cash flows from financing activities:
Note payable (66) --
-------- --------
Net (decrease) increase in cash and cash equivalents (62) 1,277
Cash and cash equivalents - beginning of period 5,573 11,268
-------- --------
Cash and cash equivalents - end of period $ 5,511 $ 12,545
======== ========
</TABLE>
The accrued 1998 bonuses for employees and officers of $329 were settled by
issuance of 62,000 shares of common stock during the quarter ended March 31,
1999.
Cash payments for interest were $2.1 in 1999; no interest payments were made in
prior year.
The accompanying notes are an integral part of these statements
5
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NOVEN PHARMACEUTICALS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of presentation
In management's opinion, the accompanying unaudited financial
statements of Noven Pharmaceuticals, Inc. ("Noven") contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Noven as of March 31, 1999, and
the results of its operations for the three months ended March 31, 1999
and 1998. The results of operations and cash flows for the three months
ended March 31, 1999 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1999.
The accompanying financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. Pursuant to such rules and regulations, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The financial statements should
be read in conjunction with the financial statements and the notes to the
financial statements included in Noven's Annual Report on Form 10-K for
the year ended December 31, 1998.
The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 1 of the notes to the financial
statements included in Noven's Annual Report on Form 10-K for the year
ended December 31, 1998.
Certain amounts presented in the financial statements for prior
periods have been reclassified to the current period's presentation.
2. Inventories:
The following are the major classes of inventory (in thousands):
March 31, December 31,
1999 1998
--------- ------------
Finished goods $ 549 $ 685
Work in process 376 337
Raw materials 1,807 1,711
------ ------
Total $2,732 $2,733
====== ======
3. Income Taxes:
Income taxes for the three months ended March 31, 1999 represent the
provision for the alternative minimum tax.
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4. Investment in Vivelle Ventures LLC:
Noven shares in the income of Vivelle Ventures LLC d/b/a Novogyne
Pharmaceuticals (the "Joint Venture") according to an established formula
after an annual preferred return of $6.1 million to Novartis
Pharmaceuticals Corporation ("Novartis"). Noven's share of income
increases as product sales increase, subject to a cap of 50%. The Joint
Venture did not produce sufficient income in the three months ended March
31, 1999 under the established formula for Noven to recognize income from
the operations of the Joint Venture.
During the quarter ended March 31, 1999, Noven sold $2.0 million of
products to, and earned $300,000 in royalties from, the Joint Venture and
was reimbursed for $2.7 million of sales and marketing expenses incurred
on behalf of the Joint Venture. As of March 31, 1999, Noven has a
receivable from the Joint Venture of $3.4 million, representing products
sold to and marketing expenses reimbursable from the Joint Venture. All
intercompany balances are generally paid by the 15th day of the following
month.
Subject to the approval of the Joint Venture's management committee,
cash may be distributed quarterly to Novartis and Noven based upon a
contractual formula. In April 1999, Noven received a cash distribution of
$622,000 from the Joint Venture based upon the results of operations for
the year ended December 31, 1998. This distribution will be recorded as a
return of capital in the second quarter of 1999.
5. Stockholders' Equity:
In January 1999, Noven issued approximately 62,000 shares of its
common stock to certain officers and employees as a bonus for their
performance during 1998. The value of the shares issued was based upon
market price at the time of grant. The bonus amount was recognized as
compensation expense in 1998.
In April 1999, Noven retired 97,100 shares of treasury stock valued
at $663,000.
6. Subsequent Events:
In May 1999, Noven entered into a Master Finance Lease Agreement
(the "Master Lease") with a major bank for a maximum principal amount of
$1 million with a base lease term of three or four years depending upon
the equipment type. The Master Lease contains certain financial covenants.
Any transactions under the Master Lease will be accounted for as financial
arrangements. Under the Master Lease, Noven has entered into one lease in
the amount of $624,000 with an expiration date of May 2003.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements, the related notes and management's discussion and
analysis of financial condition and results of operations included in Noven's
Annual Report on Form 10-K for the year ended December 31, 1998 and the
financial statements and related notes included in Item 1 of this Quarterly
Report on Form 10-Q. Except for historical information contained herein, the
matters discussed below are forward looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting Noven's
operations, markets, products and prices, and other factors. These factors,
which are discussed elsewhere in this report and in the documents filed by Noven
with the Securities and Exchange Commission ("SEC"), may cause Noven's results
to differ materially from the forward looking statements made in this report or
otherwise made by or on behalf of Noven.
RESULTS OF OPERATIONS - Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998.
Total revenues for the three months ended March 31, 1999 were $7.5
million, an increase of approximately $4.9 million, or 193%, over the same
period in the prior year. This increase in revenues was primarily attributable
to sales of CombiPatch(TM), which was launched by Rhone Poulenc Rorer Inc.
("RPR") in September 1998, and to a lesser extent, increased sales of Vivelle(R)
and initial sales of Vivelle-Dot(TM) to Vivelle Ventures LLC (the "Joint
Venture"). Royalties are included in product sales.
Cost of products sold increased approximately $2.2 million, or 214%, for
the three months ended March 31, 1999 compared to the same period in the prior
year. Gross profit was $4.2 million (56% of product sales), compared to $1.5
million (58% of product sales) for the same period in the prior year. The
decrease in gross margin resulted (i) primarily from the elimination of 49% of
Noven's profit from sales to the Joint Venture of products held in the Joint
Venture's inventory at March 31, 1999, and (ii) to a lesser extent, from the
decrease in manufacturing efficiency caused by initial manufacturing costs
associated with Vivelle-Dot(TM), and (iii) from a shift in product mix.
Research and development expenses decreased approximately $343,000, or
17%, for the three months ended March 31, 1999, compared to the same period in
the prior year. This decrease was attributable to fewer clinical studies in
1999, as a result of completion of studies relating to, and FDA approval of,
Vivelle-Dot(TM). The future level of research and development expenditures will
depend on, among other things, the status of products under development and the
outcome of clinical trails, strategic decisions by management, the consummation
of new license agreements and Noven's liquidity.
Marketing, general and administrative expenses decreased approximately
$1.1 million, or 36%, for the three months ended March 31, 1999 from the same
period in the prior year. This decrease was primarily due to lower sales and
marketing expenses associated with Dentipatch(R), offset by an increase in
administrative staffing and associated office expenses.
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Interest income decreased approximately $138,000, or 73%, for the three
months ended March 31, 1999, compared to the same period in 1998, primarily due
to lower average balances in cash and cash equivalents.
Income taxes for the three months ended March 31, 1999 represent the
provision for the alternative minimum tax.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 and December 31, 1998, Noven had $5.5 million and
$5.6 million, respectively, in cash and cash equivalents.
Net cash of approximately $234,000 was provided by operating activities
during the first quarter of 1999, compared to approximately $3.4 million used
for operating activities during the first quarter of 1998. The increase in cash
provided by operating activities, as compared to the first quarter of 1998, was
primarily the result of improved operating income, partially offset by an
increase in accounts receivable and a reduction in accounts payable. The higher
accounts receivable is a direct result of higher sales of Vivelle(R) and
Vivelle-Dot(TM) for the three months ended March 31, 1999.
Net cash of approximately $230,000 was used for investing activities
during the first quarter of 1999, compared to approximately $4.6 million
provided by investing activities during the same period of the prior year. The
difference in cash flows was primarily attributable to the maturity of
securities in the 1998 period. Net cash used during 1999 in investing activities
resulted primarily from the purchase of fixed assets and payment of patent
development costs.
In April 1999, Noven received a cash distribution of $622,000 from the
Joint Venture based upon the results of operations ended December 31, 1998. This
distribution will be recorded as a return of capital in the second quarter of
1999.
Noven's principal sources of short term liquidity are existing cash and
cash generated from product sales, royalties under license agreements and
distributions from the Joint Venture, which Noven believes will be sufficient to
meet its operating needs and anticipated capital requirements over the short
term. For the long term, Noven intends to utilize funds derived from these
sources, as well as funds generated through sales of products under development.
Noven expects that such funds will be comprised of payments received pursuant to
future licensing arrangements, as well as Noven's direct sales of its own
products. There can be no assurance that Noven will successfully complete the
development of products under development, that Noven will obtain regulatory
approval for any such products, or that any approved product may be produced in
commercial quantities, at reasonable costs, and be successfully marketed. To the
extent that capital requirements exceed available capital, Noven will need to
seek alternative sources of financing to fund its operations. As of March 31,
1999, Noven had no existing credit facility and no assurance can be given that
alternative financing will be available, if at all, in a timely manner, on
favorable terms. If Noven is unable to obtain satisfactory alternative
financing, Noven may be required to delay or reduce its proposed expenditures,
including expenditures for research and development, or sell assets
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in order to meet its future obligations. In May 1999, Noven entered into a
Master Lease with a major bank for a maximum principal amount of $1 million with
a base lease term of three or four years depending upon the equipment type. The
Master Lease contains certain financial covenants. Any transactions under the
Master Lease will be accounted for as financial arrangements. Under the Master
Lease, Noven has entered into one lease in the amount of $624,000 with an
expiration date of May 2003.
YEAR 2000 COMPLIANCE
Noven believes that its Year 2000 project is proceeding on schedule. The
project is addressing potential problems in certain computer programs and
embedded chips, which represent the calendar year with only the last two digits.
There is a risk that, with respect to the change in calendar year from 1999 to
2000, some programs or chips could interpret "00" as "2000", "1900", or some
other input. The project addresses issues in critical business areas related to
information technology ("IT") systems, such as computer equipment and software,
as well as non-IT systems, such as communication systems, alarm and security
systems, manufacturing and distribution equipment and control systems, and
laboratory testing and environmental control equipment and systems.
STATUS
Noven initiated its Year 2000 project in early 1998 and engaged an
independent consulting company to assist in coordinating its Year 2000 project.
The initial inventory, assessment and prioritization and planning phases were
completed by May 1998. Noven has completed the testing and remediation of its IT
systems and anticipates that the remediation and testing of internal non-IT
systems will be completed by mid-1999. None of Noven's other IT projects have
been materially delayed or impacted by the Year 2000 Project. The book value of
computers, software and equipment that will need to be written off as a result
of not being Year 2000 compliant is immaterial.
Noven has commenced efforts to determine the extent to which it may be
affected by Year 2000 issues of third parties, including suppliers, customers,
service providers and certain agencies and regulatory organizations. Noven has
been reviewing and continues to review with its critical suppliers and major
customers the status of their Year 2000 readiness. Some third parties have
either declined to provide the requested information or have limited the scope
of their assurances. Noven has established a plan for the continued monitoring
of critical business partners during 1999.
COSTS
The estimated total cost of the Year 2000 project is $250,000. As of March
31, 1999, Noven had incurred costs of approximately $160,000 related to this
project. The project is being funded by cash on hand and from internally
generated funds, which Noven expects to be adequate to complete the project.
RISKS
Noven believes that failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business activities
or operations. Noven is unable to
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determine at this time whether the results of any Year 2000 readiness issues
will have an impact on Noven's results of operations, liquidity or financial
condition. The Year 2000 project is expected to significantly reduce Noven's
level of uncertainty about Year 2000 problems, including the Year 2000
compliance and readiness of its material third parties. Noven believes that its
programs for Year 2000 readiness will significantly improve its ability to deal
with its own Year 2000 readiness issues and those of material third parties. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. Noven currently plans to complete such analysis and develop and
implement any necessary contingency plans by December 31, 1999. Such plans will
not, however, guarantee that no material adverse effects will occur.
The costs of Noven's Year 2000 project and the dates on which Noven
believes it will complete the various phases of this project are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events, including the continued availability of certain
resources, third-party remediation plans and other factors. There can be no
assurance that these estimates will prove to be accurate, and actual results
could differ materially from those currently anticipated. Specific factors that
could cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues, the ability to
identify, assess, remediate and test all relevant computer code and embedded
technology, the performance of new systems and equipment, the reduction of
productivity pending completion of employee training and similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Noven does not believe that it has material exposure to market rate risk.
Noven has no material debt obligations. Noven may, however, require additional
financing to fund future obligations and no assurance can be given that the
terms of future sources of financing will not expose Noven to material market
rate risk.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule, filed herewith
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant
during the three months ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVEN PHARMACEUTICALS, INC.
Date: May 14, 1999 By: /s/ James B. Messiry
----------- --------------------------------
James B. Messiry
Vice President and
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY UNAUDITED FINANCIAL INFORMATION EXTRACTED FROM
NOVEN PHARMACEUTICALS, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,511
<SECURITIES> 0
<RECEIVABLES> 4,492
<ALLOWANCES> 162
<INVENTORY> 2,732
<CURRENT-ASSETS> 16,180
<PP&E> 20,517
<DEPRECIATION> 5,202
<TOTAL-ASSETS> 40,862
<CURRENT-LIABILITIES> 5,904
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 29,368
<TOTAL-LIABILITY-AND-EQUITY> 40,862
<SALES> 7,421
<TOTAL-REVENUES> 7,477
<CGS> 3,244
<TOTAL-COSTS> 6,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 725
<INCOME-TAX> 9
<INCOME-CONTINUING> 716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 716
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
