<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10392
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U.S. BIOSCIENCE, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified on its charter)
Delaware 23-2460100
- --------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Bridge, One Hundred Front St., West Conshohocken, PA 19428
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(Address of principal executive offices) (Zip Code)
(610) 832-0570
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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 ____
----
As of July 28, 1998, there were 24,334,200 shares of common stock outstanding.
Page 1 of 17 sequentially
numbered pages
-1-
<PAGE>
U.S. BIOSCIENCE, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Changes in Stockholders' Equity 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,773,200 $ 26,569,400
Investments 25,030,100 24,081,400
Accounts receivable, net 2,786,200 2,577,400
Interest receivable 207,100 269,700
Inventories 2,507,500 2,434,500
Other 1,139,000 1,298,400
---------------- ----------------
Total current assets 54,443,100 57,230,800
Property, plant and equipment at cost, less accumulated depreciation 5,014,300 5,149,800
---------------- ----------------
Total assets $ 59,457,400 $ 62,380,600
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,421,800 $ 1,926,200
Accrued clinical grants payable 3,328,900 2,790,500
Accrued product manufacturing costs payable 476,900 798,700
Accrued marketing costs payable 761,800 437,400
Accrued professional fees payable 1,564,600 977,200
Line of credit 741,200 745,300
Current maturities of long-term debt 745,300 747,100
Accounts payable and other accrued liabilities 3,685,800 3,967,500
---------------- ----------------
Total current liabilities 12,726,300 12,389,900
Long-term liabilities:
Long-term debt, net of current maturities 760,200 1,135,000
Other long-term liabilities 1,882,900 1,831,900
---------------- ----------------
Total long-term liabilities 2,643,100 2,966,900
---------------- ----------------
Total liabilities 15,369,400 15,356,800
Stockholders' equity:
Preferred stock, $.005 par value-5,000,000 shares authorized;
none issued --- ---
Common stock, $.01 par value-50,000,000 shares authorized; 24,334,700
shares issued at June 30, 1998, and 24,208,100 shares
issued and outstanding at December 31, 1997 243,300 242,100
Additional paid-in capital 170,473,100 169,905,800
Accumulated deficit (125,798,800) (122,526,300)
Accumulated other comprehensive (loss) (685,000) (597,800)
---------------- ----------------
44,232,600 47,023,800
Less cost of treasury stock - 13,600 shares (144,600) ---
---------------- ----------------
Total stockholders' equity 44,088,000 47,023,800
================ ================
Total liabilities and stockholders' equity $ 59,457,400 $ 62,380,600
================ ================
</TABLE>
See accompanying notes.
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 4,171,900 $ 3,506,100 $ 8,422,100 $ 6,144,500
Net investment income 690,100 737,300 1,446,700 1,241,100
Licensing, royalty and other income 251,800 10,276,700 5,584,100 11,344,600
-------------- --------------- -------------- --------------
5,113,800 14,520,100 15,452,900 18,730,200
Expenses:
Cost of sales 1,255,600 1,073,900 2,581,700 1,901,800
Selling, general and administrative costs 2,755,700 4,472,700 7,029,800 7,827,500
Research and development costs 4,198,900 4,709,800 9,032,000 8,351,100
Interest expense 39,400 44,000 81,900 90,600
-------------- --------------- -------------- --------------
8,249,600 10,300,400 18,725,400 18,171,000
-------------- --------------- -------------- --------------
Net (loss) income $ (3,135,800) $ 4,219,700 $ (3,272,500) $ 559,200
============== =============== ============== ==============
Net (loss) income per common share
Basic $ (0.13) $ 0.18 $ (0.13) $ 0.02
Diluted $ (0.13) $ 0.17 $ (0.13) $ 0.02
Weighted average number of common shares outstanding
Basic 24,303,700 24,108,300 24,267,300 23,557,100
Diluted 24,303,700 25,215,400 24,267,300 24,664,300
</TABLE>
See accompanying notes.
-4-
<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------
1998 1997
---------------- ------------------
<S> <C> <C>
CHANGE IN CASH AND CASH EQUIVALENTS
Cash flows provided by (used in) operating activities:
Net (loss) income $ (3,272,500) $ 559,200
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 431,500 595,700
Loss on investments 8,400 34,600
Change in accounts receivable (208,700) (264,500)
Change in interest receivable 62,600 (91,400)
Change in inventories (60,800) 600
Change in other current assets 157,100 (13,334,000)
Change in current liabilities 260,600 4,243,900
Change in other long-term liabilities 51,000 217,200
-------------- --------------
Total adjustments 701,700 (8,597,900)
-------------- --------------
Net cash provided by (used in) operating activities (2,570,800) (8,038,700)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 25,368,100 60,494,900
Purchase of investments (26,316,900) (67,905,600)
Purchase of property, plant and equipment (314,900) (537,200)
-------------- --------------
Net cash provided by (used in) investing activities (1,263,700) (7,947,900)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 77,600 21,440,800
Proceeds from exercise of stock options 409,800 321,400
Proceeds from line of credit 1,600 23,800
Repayment of long-term debt (375,500) (286,300)
-------------- --------------
Net cash provided by (used in) financing activities 113,500 21,499,700
Effect of exchange rate changes on cash (75,200) (144,100)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (3,796,200) 5,369,000
Cash and cash equivalents-beginning of period 26,569,400 13,054,800
-------------- --------------
Cash and cash equivalents-end of period $ 22,773,200 $ 18,423,800
============== =============
Supplemental cash flow disclosure:
Interest paid $ 66,500 $ 84,600
</TABLE>
See accompanying notes.
-5-
<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------ ---------- ------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 24,208,100 $ 242,100 $ 169,905,800 $ (122,526,300)
Proceeds from exercise of stock options 126,600 1,200 567,300 ---
Treasury stock --- --- --- ---
Net loss for the six months ended June 30, 1998 --- --- --- (3,272,500)
Foreign currency translation adjustment --- --- --- ---
Unrealized gain (loss) on investments --- --- --- ---
------------ ---------- ------------- --------------
Balance at June 30, 1998 (Unaudited) 24,334,700 $ 243,300 $ 170,473,100 $ (125,798,800)
============ ========== ============= ==============
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDER'S
STOCK (LOSS) EQUITY
------------- ------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ --- $ (597,600) $ 47,023,800
Proceeds from exercise of stock options --- --- 568,500
Treasury stock (144,600) --- (144,600)
Net loss for the six months ended June 30, 1998 --- --- (3,272,500)
Foreign currency translation adjustment --- (95,600) (95,600)
Unrealized gain (loss) on investments --- 8,400 8,400
----------- ------------ -------------
Balance at June 30, 1998 (Unaudited) $ (144,600) $ (685,000) $ 44,06?,000
=========== ============ =============
</TABLE>
See Accompanying Notes.
<PAGE>
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS -- The company is a pharmaceutical company specializing in the
development and commercialization of products for patients with cancer and
allied diseases. Through June 30, 1998, the company's revenues have been derived
principally from product sales of Hexalen/(R)/, NeuTrexin/(R)/, and Ethyol/(R)/,
licensing fees for rights to develop and market certain products principally in
the United States, payments for achieving certain clinical development
milestones and investment income. Expenses incurred have been primarily for the
development of its drugs and related therapies, marketing and sales activities,
and corporate and administrative activities.
UNAUDITED INFORMATION -- The financial information for the three and six
month periods ended June 30, 1998 and 1997, included herein are unaudited. The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applicable to interim periods.
Such information includes all adjustments, consisting of adjustments of a normal
and recurring nature, which, in the opinion of the company, are necessary for a
fair presentation of the company's consolidated financial position and the
results of its operations and cash flows.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of U.S. Bioscience, Inc. and its wholly owned subsidiaries,
USB Pharma B.V., and USB Pharma Limited. All significant intercompany accounts
and transactions are eliminated in consolidation.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES -- Inventories are stated at the lower of cost (first in, first
out) or fair value. Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ---------------
<S> <C> <C>
Raw Materials $ 880,400 $ 752,000
Work-in-process 1,423,000 1,376,000
Finished goods 204,100 306,500
------------- ---------------
Total $2,507,500 $2,434,500
============= ===============
</TABLE>
PROPERTY, PLANT AND EQUIPMENT -- Buildings, equipment and furniture and
fixtures are depreciated by the straight-line method over their useful lives for
financial reporting purposes and under accelerated methods for federal income
tax purposes. Leasehold improvements are depreciated by the straight-line method
over the shorter of their useful lives or the life of the lease for financial
reporting purposes and under an accelerated method for federal income tax
purposes.
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<PAGE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- --------------
<S> <C> <C>
Land, buildings, and leasehold improvements $ 1,864,900 $ 1,871,800
Equipment, furniture and fixtures 9,266,300 8,965,700
Accumulated depreciation (6,116,900) (5,687,700)
----------- --------------
Property, plant and equipment, net $ 5,014,300 $ 5,149,800
=========== ==============
</TABLE>
LONG-TERM DEBT -- Long-term debt consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
MELF Equipment Loan $ 143,900 $ 180,600
Mortgage Loan 439,700 462,100
Term Loan 800,000 1,100,000
Capital Lease Obligations 121,900 139,400
------------ ------------
$1,505,500 $1,882,100
Less Current Portion 745,300 747,100
------------ ------------
Long-Term Debt $ 760,200 $1,135,000
============ ============
</TABLE>
COMPREHENSIVE INCOME -- As of January 1, 1998, the company adopted
Financial Accounting Standards Statement 130, "Reporting Comprehensive Income".
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the company's results of operations or stockholders' equity
during the quarter or semi-annual periods ended June 30, 1998. Statement 130
requires unrealized gains or losses on the company's "available-for-sale"
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement 130. The components of comprehensive
income (loss) for the three and six month periods ended June 30, 1998 and 1997,
consist of:
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ (3,135,800) $ 4,219,700 $(3,272,500) $ 559,200
Foreign currency translation 43,200 (169,800) (95,600) (511,300)
adjustment
Unrealized gain (loss) on (29,200) 56,300 8,400 34,600
investments
-------------- -------------- -------------- ---------------
Comprehensive income (loss) $ (3,121,800) $ 4,106,200 $(3,359,700) $ 82,500
============== ============== ============== ===============
</TABLE>
-8-
<PAGE>
Additionally, all information in this quarterly report should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Financial Statements and Notes to Consolidated
Financial Statements included in the company's Annual Report on Form 10-K for
the year ended December 31, 1997. Operating results for the three and six month
periods ended June 30, 1998 are not necessarily indicative of the results that
may be obtained in any other interim period or the entire year.
-9-
<PAGE>
U.S. BIOSCIENCE, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
This report on Form 10-Q contains forward-looking statements concerning the
business and financial conditions 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 statements. Factors that could
cause such differences include, but are not limited to, those discussed in this
quarterly report and those discussed in the company's annual report on Form 10-K
for the fiscal year ended December 31, 1997 (including, without limitation, in
the section of Item 1 entitled "Factors Affecting the Company's Prospects"). As
a result the reader is cautioned not to rely on these forward-looking
statements.
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages 3 to 9.
Operations for the six months ended June 30, 1998, consisted primarily of
activities relating to the promotion of Ethyol/(R)/ in the United States with
co-promotion partner ALZA Corporation ("ALZA"), the marketing of Hexalen/(R)/
and NeuTrexin/(R)/ in the United States, continuing clinical trials of Ethyol
and NeuTrexin and product development of Ethyol, NeuTrexin and lodenosine,
business development activities in the United States, Europe and Japan, and the
reorganization of certain executive responsibilities. During the second quarter
of 1998, the company terminated its development of AZQ (diaziquone) and the
preclinical development of Mitomycin-C analogues and third generation platinum
anticancer agents in order to focus its resources on the development of its
current and nearer term commercial products.
The company believes that its expenditures for research and development,
marketing and administration, capital equipment and facilities will continue to
exceed revenues as a result of (i) further clinical trials aimed at label
expansion and regulatory approvals for Ethyol and NeuTrexin, (ii) the marketing
of Hexalen, NeuTrexin and Ethyol in the United States, (iii) expansion of
clinical and preclinical testing of lodenosine and (iv) further product
development and enhancement of manufacturing and analytical capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
Product sales increased to $4,171,900 for the three months ended June 30,
1998 as compared to $3,506,100 in the prior year period. Sales of Ethyol, the
company's cytoprotective product, increased due to higher shipments to ALZA, the
company's co-promotion partner in the United States, and increased revenue
received from Schering-Plough, the company's European distribution partner,
resulting from higher European trade sales. Sales of NeuTrexin, the company's
novel anti-folate, increased and sales of Hexalen, the company's ovarian cancer
therapy, declined compared to the prior year quarter. The company believes that
the increase in NeuTrexin sales may be attributed to the use of the product by
oncologists for the treatment of colorectal cancer, a use currently under
investigation by the company.
Net investment income decreased to $690,100 in the second quarter of 1998
as compared to $737,300 in the corresponding 1997 period due to a smaller
average portfolio balance in the 1998 period.
-10-
<PAGE>
Licensing, royalty and other income decreased to $251,800 for the three
month period ended June 30, 1998 from $10,276,700 in the prior year period due
principally to a $10 million milestone payment from ALZA for achieving a
clinical development milestone in connection with the company's Phase III
randomized trial investigating Ethyol's protective properties in non-small cell
lung cancer patients being treated with Taxol and carboplatin.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased due to the increase in sales. As a
percentage of sales, cost of sales in the three month period ended June 30,
1998, remained constant at approximately 30%.
Selling, general and administrative costs for the second quarter of 1998
decreased to $2,755,700 from $4,472,700 in the corresponding 1997 period. The
$1,717,000 decrease is principally due to a $700,000 provision made in the
second quarter of 1997 for the reorganization of the company's European clinical
research organization. Lower marketing expenditures of $459,100 and reduced
personnel costs of $266,900 also contributed to the decrease in the current
period.
Research and development costs for the three months ended June 30, 1998
decreased to $4,198,900 from $4,709,800 in the second quarter of 1997. The
decrease is principally due to approximately $480,000 in savings realized by the
reorganization of the company's European clinical research organization and
lower preclinical research expenses of $340,200.
The net loss for the three months ended June 30, 1998 was $3,135,800 or
$0.13 basic and diluted net loss per common share as compared to earnings of
$4,219,700 or $0.18 basic and $0.17 diluted earnings per common share in the
1997 period. The major factor contributing to earnings in the 1997 period was
the $10 million milestone payment received from ALZA as noted above.
SIX MONTHS ENDED JUNE 30, 1998
Product sales increased to $8,422,100 for the six months ended June 30,
1998 as compared to $6,144,500 in the first six months of 1997. Sales of Ethyol
increased due to higher shipments to and revenues received from the company's
domestic and international distribution partners. Sales of NeuTrexin, the
company's novel anti-folate, increased and sales of Hexalen, the company's
ovarian cancer therapy, declined compared to the prior year period.
Net investment income increased to $1,446,700 in the first half of 1998 as
compared to $1,241,100 in the corresponding 1997 period due to higher interest
income provided from the larger average portfolio balance resulting from funds
raised in a $21.5 million stock purchase and amended marketing agreement with
ALZA, completed in late March 1997.
Licensing, royalty and other income decreased to $5,584,100 for the six
month period ended June 30, 1998 from $11,344,600 in the prior year period due
principally to the $10 million payment from ALZA for achieving a clinical
development milestone. The amount recorded in the 1997 period also includes a
milestone payment received from an affiliate of Schering-Plough Corporation for
additional regulatory approvals of Ethyol in Europe and a payment relating to
the development of Ethyol. The 1998 amount includes a $5 million payment from
ALZA received in February 1998 for achieving a clinical development milestone in
connection with the Phase III randomized trial of Ethyol's radiation protective
properties in patients with head and neck cancer.
-11-
<PAGE>
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased due to the increase in sales. As a
percentage of sales, cost of sales in the six month period ended June 30, 1998,
remained constant at 31%.
Selling, general and administrative costs for the first half of 1998
decreased to $7,029,800 from $7,827,500 in the corresponding 1997 period. The
$797,700 decrease is principally due to a $700,000 provision made in the second
quarter of 1997 for the reorganization of the company's European clinical
research organization.
Research and development costs for the six months ended June 30, 1998
increased to $9,032,000 from $8,351,100 in the first half of 1997. The $680,900
increase is principally due to the accrual of an approximately $1 million charge
related to a consulting arrangement, entered into in the first quarter of 1998,
upon the resignation of the company's former chairman and chief executive
officer and other reorganization activities and increased U.S. clinical research
costs of $821,800 principally related to on-going Phase III trials of Ethyol and
NeuTrexin. These increases are partly offset by savings of approximately $1.1
million in European clinical research expenses due to the reorganization
undertaken in 1997.
The net loss for the six months ended June 30, 1998 was $3,272,500 or $0.13
basic and diluted net loss per common share as compared to earnings of $559,200
or $0.02 basic and diluted earnings per common share in the 1997 period. The
major factor contributing to earnings in the 1997 period was the $10 million
milestone payment received from ALZA as noted above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, issuance of unsecured and
secured debt, investment income, sales of its drug products, Hexalen, NeuTrexin
and Ethyol, and revenues received through distribution and sublicense
agreements. As of June 30, 1998, the company's cash and investments totaled
$47,803,300. The company's investment portfolio consists of securities issued by
the U.S. Government or its agencies and investment grade corporate debt
instruments.
During the first half of 1998, net cash used in operations amounted to
$2,570,800 principally reflecting the net effect of the factors discussed above
under "Results of Operations," adjusted for non-cash expenses, and an increase
in current liabilities. Until such time as the company receives significantly
increased revenues, the company's cash position will continue to be reduced due
principally to expenditures in research, clinical development, product
development, marketing, and selling and administrative activities. Failure to
achieve significant sales from the company's currently approved products and to
obtain additional regulatory approvals for additional uses of these products and
for its new products currently in development will have a material adverse
effect on the company. The level of future product sales will depend on several
factors, including product acceptance, market penetration, competitive products,
the incidence and severity of diseases and side effects for which the company's
products are indicated, the performance of the company's licensees and
distributors, and the healthcare and reimbursement systems in markets where the
company's products are, or may become, commercially available.
The company believes its current cash and investments and anticipated
revenues generated from product sales and other sources, will be sufficient to
cover the company's level of cash requirements, at current levels, for a period
in excess of three years. However, the company's funding requirements may change
due to numerous factors, including but not limited to, sales of the company's
products, manufacturing costs, reimbursement policies, regulatory and
intellectual property requirements, capital expenditures and other factors
discussed herein
-12-
<PAGE>
and in the company's annual report on Form 10-K. The company is hopeful that its
revenue from product sales will continue to increase and will, in the near
future, generate meaningful cash resources, although no assurance can be given
that they will do so. The company is also hopeful that it will in the future
receive further regulatory approvals and that such approvals will increase
sales. However, no assurance can be given that further regulatory approvals will
be obtained in a timely manner, if ever, or that the return on product sales
will be sufficient to cover operating expenses or that the company will have
adequate financial resources to commercialize its products.
To meet its capital requirements, the company may from time to time seek to
access public or private financing markets by issuing debt, common or preferred
stock, warrants or other securities, either separately or in combination. The
company may also seek additional funding through corporate collaborations or
other financing vehicles, potentially including "off-balance sheet" financing
through partnerships or corporations. There can be no assurance that such
financings will be available at all or on terms acceptable to the company. In
addition, market reaction to any such financings may adversely affect the price
of the company's outstanding securities or debt.
The company's net capital expenditures were $314,900 for the six months
ended June 30, 1998 primarily related to capital improvements made to its
sterile products production facility in The Netherlands. Further capital
expenditures, estimated at $470,000, are planned for this facility during the
remainder of 1998.
The company's future liquidity and capital requirements are dependent upon
several factors, including, but not limited to, its success in generating
significant revenues from sales; the performance of its sublicensees and
distributors under sublicense and distribution arrangements for sales of its
products; the time and cost required to manufacture and market its products; the
time and cost required for clinical development of products to obtain regulatory
approvals, including expanded labeling for its products which are already
commercially available; obtaining the rights to additional commercially viable
compounds; competitive technological developments; additional government-imposed
regulation and control; and changes in healthcare systems which affect
reimbursement, pricing or availability of drugs and market acceptance of drugs.
The above factors may also affect realization of certain assets currently
held by the company, principally investments in plant, equipment and inventory.
In 1995, Scherico, an affiliate of Schering-Plough Corporation and the
company's European distributor for Ethyol, launched Ethyol in several European
markets and currently markets the product in all major European countries under
an exclusive marketing and distribution agreement. Under this agreement,
Scherico purchases Ethyol from the company at a price based on a percentage of
in-market net sales and its exclusive rights continue through 2003.
In April of 1996, ALZA and the company launched Ethyol in the United
States. ALZA has exclusive rights to market the product in the United States for
the first five years, with an option to extend for one additional year, and is
responsible for sales and marketing. The company's U.S. sales force co-promotes
the product with ALZA during its exclusive period. At the end of ALZA's
exclusive period, all U.S. marketing rights to Ethyol will revert to the
company, and ALZA will receive payments from the company for ten years (nine
years if ALZA exercises its option) based on in-market net sales of the product.
ALZA paid the company an up-front payment and initial distribution fee totaling
$20 million in late 1995 and early 1996 and additional clinical milestone
payments of $10 million in the second quarter of 1997 and $5 million in the
first quarter of 1998.
-13-
<PAGE>
As the company sells Ethyol to its partners, Scherico and ALZA, in
quantities, which may or may not correspond to the product's resale to the
pharmaceutical trade, the company's sales may fluctuate from period to period
dependent upon the timing of its partners' delivery requirements, sales to the
pharmaceutical trade and other factors that affect the levels of inventory they
stock and maintain.
The company has been unprofitable since its inception and expects to incur
additional operating losses until such time as substantial sales are realized
and further regulatory approvals are obtained, although distribution fees and
clinical milestone payments from ALZA did bring the company close to a break-
even position for calendar 1995 and in the first quarter of 1998. In addition,
the company reported net earnings in two recent periods: the third quarter of
1996 as a result of non-recurring items relating to a September 1996 amendment
to its European distribution agreement for Ethyol with Scherico and, the second
quarter and first half of 1997, due to the recording of a $10 million clinical
milestone payment made by ALZA. As the company continues its commercialization,
research and development activities, losses are expected to continue and may
fluctuate from period to period. There can be no assurance that the company will
achieve significant revenues or profitable operations.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.2.3.1 Amendment No.3, dated May 12, 1998, to Office
Lease Agreement between U.S. Bioscience, Inc.
and Tower Bridge Associates
27 Financial Data Schedule
b. There were no reports on Form 8-K filed during the quarter
for which this report is filed.
-15-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
U.S. BIOSCIENCE, INC.
Date: July 31, 1998 By: /s/ Robert I. Kriebel
------------------------
Robert I. Kriebel
Executive Vice President and
Chief Financial Officer
-16-
<PAGE>
U.S. BIOSCIENCE, INC.
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Page
----------- ----
<S> <C>
10.2.3.1 Amendment No.3, dated May 12, 1998, to Office
Lease Agreement between U.S. Bioscience, Inc.
and Tower Bridge Associates
27 Financial Data
</TABLE>
-17-
<PAGE>
EXHIBIT 10.2.3.1
AMENDMENT NO. 3 TO LEASE
------------------------
THIS AMENDMENT NO. 3 TO LEASE dated May 12, 1998 between TOWER BRIDGE
ASSOCIATES, a Pennsylvania limited partnership ("Landlord"), and U.S.
BIOSCIENCE, INC., a Pennsylvania corporation ("Tenant").
BACKGROUND
----------
Landlord and Tenant entered into a Lease dated September 19, 1990 as
amended by Amendments No. 1 and 2 to Lease dated August 31, 1991 and June 30,
1995, respectively (such Lease, as so amended, the "Lease"), for approximately
19,875 rentable square feet on the Fourth Floor (the "Fourth Floor Premises")
and 6,479 rentable square foot on the 3rd floor (the "Third Floor Premises") of
One Tower Bridge, 100 Front Street, West Conshohocken, PA (the "Building"),
which Lease term expires on October 31, 1998. Tenant has accepted an offer from
Landlord to extend the term of the Lease for the Fourth Floor Premises, and to
relocate from the Third Floor Premises to 6,985 rentable square feet on the
second floor (the "Second Floor Premises"). The area leased by Tenant from time
to time under the Lease, as amended hereby, is sometimes referred to herein and
in the Lease as the "Demised Premises." The commencement date for the extension
of the Lease as it applies to the Fourth Floor Premises and the relocation to
the Second Floor Premises is November 1, 1998. For the Second Floor Premises,
the commencement date may be extended as hereinafter set forth to a date not
later than thirty (30) days after the date Landlord gives Tenant prior written
notice of the vacation of the Second Floor Premises by the existing tenant,
Trinity Communications, Inc. ("Trinity"). Tenant acknowledges that the Third
Floor Premises is expansion space for Keane Tracers, Inc. Landlord is willing to
extend the term of the Lease and relocate Tenant to the Second Floor Premises
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Premises. Tenant hereby shall continue to hire from Landlord for an
--------
additional lease term of five (5) years (the "Extended Term"), the Fourth Floor
Premises and the Second Floor Premises upon and subject to all the provisions,
covenants and conditions set forth and in the Lease as amended hereby. If Tenant
cannot relocate from the Third Floor Premises to the Second Floor Premises as of
the expiration date of October 31, 1998 because Trinity has not vacated, Tenant
shall remain in the Third Floor Premises but not later than thirty (30) days
past the Landlord's notice of the vacation date of Trinity. Landlord shall
provide Tenant with thirty (30) days' prior written notice of the vacation date
of Trinity and, upon the actual vacation by Trinity, Landlord and Tenant will
enter into a memorandum setting forth such actual vacation date and the
commencement date of the Extended Term with respect to the Second Floor Premises
(such date, the "Second Floor Commencement Date").
2. Term. Commencing on November 1, 1998 for the fourth floor Premises,
----
and on the Second Floor Commencement Date for the Second Floor Premises, the
Extended Term shall continue until October 31, 2003, except if sooner terminated
in accordance with the provisions of this Amendment and the Lease, expiring
simultaneously on October 31, 2003.
<PAGE>
3. Rent. For the Fourth Floor Premises and Second Floor Premises the
----
Annual Base Rent shall be $25.00 per rentable square foot for each year of the
Extended Term, times the square footage leased on either the second or third
floors (whichever is applicable at such time) and the fourth floor. All such
Base Rent shall be paid, without deduction or offset, in advance on or before
the first day of each month and as otherwise provided in the Lease. If the
Second Floor Commencement Date is later than November 1, 1998, the Base Rent
shall be as follows:
<TABLE>
<CAPTION>
Portion of Premises Annual Base Rent Monthly Base Rent
- ------------------- ---------------- -----------------
<S> <C> <C>
Fourth Floor Premises $496,875 $41,406.25
Third Floor Premises $161,975 $13,497.91
Second Floor Premises $174,625 $14,552.08
</TABLE>
The Base Rent for the Fourth Floor Premises will commence at the above
rate on November 1, 1998. The Base Rent for the Second Floor Premises will
commence at the above rate on the Second Floor Commencement Date; if the Second
Floor Commencement Date is not the first day of the month, the Base Rent
attributable to any month in which the Second Floor Premises is demised to
Tenant for only part of the month shall be pro rated on a per diem basis. If
the Second Floor Commencement Date is after November 1, 1998, Tenant shall pay
Base Rent at the above rate for the Third Floor Premises from November 1, 1998
until the Second Floor Commencement Date; provided, however, that Tenant shall
-----------------
be a holdover subject to the holdover provisions of the Lease if Tenant fails to
vacate the Third Floor Premises as provided in Section 1, above.
4. Adjustment for Rent. Tenant shall pay all Additional Rent as provided
-------------------
in Section 7 of the Lease for Fourth Floor Premises and Second Floor Premises.
The Base Operating Cost per Square Foot with respect to the Fourth Floor
Premises and Second Floor Premises is agreed to be $3.20 per rentable square
foot, and the Base Tax per Square Foot is agreed to be $1.10 per rentable square
foot. On the Second Floor Commencement Date, Tenant's Share of Rentable Office
Area of the Building shall be increased to 10.01%.
5. Condition of the Demised Premises. Tenant shall accept the Fourth
---------------------------------
Floor Premises and Second Floor Premises in their condition "as is," except that
Landlord shall provide a moving allowance for the Second Floor Premises of
$13,970.00, payable by Landlord to Tenant upon the Second Floor Commencement
Date.
6. Other Terms and Conditions. All of the other terms and conditions of
--------------------------
the Lease not inconsistent with the provisions of this Amendment shall apply to
the Fourth Floor Premises and Second Floor Premises.
7. Early Termination. Landlord may terminate this Lease, effective as of
-----------------
October 31, 2000, upon notice provided to Tenant not later than March 31, 1999.
Upon the effective date of termination and surrender of the Demised Premises as
required by the terms of the Lease, as amended hereby, and provided no Event of
Default has occurred under the Lease which is then continuing, Landlord shall
pay to Tenant a termination payment of $200,000.00. Tenant may also terminate
this Lease as of October 31, 2000 provided Tenant gives Landlord written notice
of the election to terminate this Lease on or before February 28, 1999 and no
termination payment or penalty shall apply. If Landlord or Tenant terminates
this Lease as per the above, Tenant shall vacate each of the Premises as of
October 31, 2000, remove its personal property and restore any damaged area of
the Demised Premises caused during such removal.
2
<PAGE>
Landlord may terminate this Lease, effective as of October 31, 2001,
upon notice provided to Tenant not later than March 31, 2000. Upon the effective
date of termination and surrender of the Demised Premises as required by the
terms of the Lease, as amended hereby, and provided no Event of Default has
occurred under the Lease which is then continuing, Landlord shall pay to Tenant
a termination payment of $150,000.00. Tenant may also terminate this Lease as of
October 31, 2001 provided Tenant gives Landlord written notice of the election
to terminate this Lease on or before February 28, 2000 and no termination
payment or penalty shall apply. If Landlord or Tenant terminates this Lease as
per the above, Tenant shall vacate each of the Premises as of October 31, 2001,
remove its personal property and restore any damaged area of the Demised
Premises caused during such removal.
Any notice of early termination provided by Landlord or Tenant as set
forth above must be based upon the leasing of space now included in the Demised
Premises to the tenant under the Lease between Landlord and Miller, Anderson &
Sherrerd, as amended.
8. Lease Ratified. Except as amended hereby or inconsistent with the
--------------
provisions hereof, the Lease is hereby ratified and confirmed.
LANDLORD:
TOWER BRIDGE ASSOCIATES
By: /s/ Donald Pulver
-------------------------------
Authorized Officer of Oliver Tyrone Pulver
Corporation, General Partner of Oliver Tower
Associates, acting in its capacity as the
Managing General Partner of Tower Bridge
Partners I, the General Partner of Landlord
TENANT:
By: /s/ H. Charles Ford
-------------------------------
U.S. BIOSCIENCE, INC.
Authorized Officer
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF US.
BIOSCIENCE, INC FOR THE PERIODS INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,773,200
<SECURITIES> 25,030,100
<RECEIVABLES> 3,263,200
<ALLOWANCES> 477,000
<INVENTORY> 2,507,500
<CURRENT-ASSETS> 54,443,100
<PP&E> 11,131,200
<DEPRECIATION> 6,116,900
<TOTAL-ASSETS> 59,457,400
<CURRENT-LIABILITIES> 12,726,300
<BONDS> 2,643,100
0
0
<COMMON> 243,300
<OTHER-SE> 43,844,700
<TOTAL-LIABILITY-AND-EQUITY> 59,457,400
<SALES> 8,422,100
<TOTAL-REVENUES> 15,452,900
<CGS> 2,581,700
<TOTAL-COSTS> 18,643,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,900
<INCOME-PRETAX> (3,272,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,272,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,272,500)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
