<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
EXCHANGE ACT OF 1934 OF THE SECURITIES
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
EXCHANGE ACT OF 1934 OF THE SECURITIES
For the transition period from to
Commission file number 1-10392
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U.S. BIOSCIENCE, INC.
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(Exact name of Registrant as specified on its charter)
Delaware 23-2460100
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(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 November 6, 1998, there were 24,363,200 shares of common stock
outstanding.
Page 1 of 18 sequentially
numbered pages
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U.S. BIOSCIENCE, INC.
INDEX
Page
Part I - Financial Information ----
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
10
Part II - Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
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U.S. BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,185,700 $ 26,569,400
Investments 24,460,800 24,081,400
Accounts receivable, net 3,103,600 2,577,400
Interest receivable 179,400 269,700
Inventories 2,299,200 2,434,500
Other 972,000 1,298,400
--------------- ---------------
Total current assets 52,200,700 57,230,800
Property, plant and equipment at cost, less accumulated depreciation 5,316,500 5,149,800
--------------- ---------------
Total assets $ 57,517,200 $ 62,380,600
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,836,700 $ 1,926,200
Accrued clinical grants payable 3,732,500 2,790,500
Accrued product manufacturing costs payable 446,800 798,700
Accrued marketing costs payable 959,300 437,400
Accrued professional fees payable 1,136,400 977,200
Line of credit 803,200 745,300
Current maturities of long-term debt 750,100 747,100
Accounts payable and other accrued liabilities 3,398,500 3,967,500
--------------- ---------------
Total current liabilities 13,063,500 12,389,900
Long-term liabilities:
Long-term debt, net of current maturities 608,400 1,135,000
Other long-term liabilities 1,916,500 1,831,900
--------------- ---------------
Total long-term liabilities 2,524,900 2,966,900
--------------- ---------------
Total liabilities 15,588,400 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; 24,337,100
shares issued at September 30, 1998, and 24,208,100 shares
issued and outstanding at December 31, 1997 243,400 242,100
Additional paid-in capital 170,518,100 169,905,800
Accumulated deficit (128,254,800) (122,526,300)
Accumulated other comprehensive loss (433,300) (597,800)
--------------- ---------------
42,073,400 47,023,800
Less cost of treasury stock - 13,600 shares (144,600) ---
--------------- ---------------
Total stockholders' equity 41,928,800 47,023,800
--------------- ---------------
Total liabilities and stockholders' equity $ 57,517,200 $ 62,380,600
=============== ===============
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 5,890,800 $ 3,476,700 $ 14,312,900 $ 9,621,200
Net investment income 669,500 808,500 2,116,200 2,049,600
Licensing, royalty and other income 213,400 226,700 5,797,500 11,571,300
------------- ------------- -------------- --------------
6,773,700 4,511,900 22,226,600 23,242,100
Expenses:
Cost of sales 1,649,900 1,207,300 4,231,600 3,109,100
Selling, general and administrative costs 3,106,600 3,328,900 10,136,400 11,156,400
Research and development costs 4,435,200 3,741,000 13,467,200 12,092,100
Interest expense 38,000 40,700 119,900 131,300
------------- ------------- -------------- --------------
9,229,700 8,317,900 27,955,100 26,488,900
------------- ------------- -------------- --------------
Net loss $ (2,456,000) $ (3,806,000) $ (5,728,500) $ (3,246,800)
============= ============= ============== ==============
Net loss per common share
Basic and Diluted $ (0.10) $ (0.16) $ (0.24) $ (0.14)
Weighted average number of common shares outstanding
Basic and Diluted 24,335,200 24,157,800 24,290,200 23,759,600
See accompanying notes.
</TABLE>
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U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------------- --------------
<S> <C> <C>
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net (loss) income $ (5,728,500) $ (3,246,800)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 655,600 878,500
(Gain) / loss on investments (16,200) 24,600
Change in accounts receivable (526,200) (1,359,600)
Change in interest receivable 90,400 (193,300)
Change in inventories 246,400 (140,900)
Change in other current assets 337,700 503,600
Change in current liabilities 450,400 405,600
Change in other long-term liabilities 84,600 308,200
-------------- --------------
Total adjustments 1,322,700 426,700
-------------- --------------
Net cash provided by (used in) operating activities (4,405,800) (2,820,100)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 29,387,600 73,807,500
Purchase of investments (29,767,000) (82,675,700)
Purchase of property, plant and equipment (498,200) (823,200)
-------------- --------------
Net cash provided by (used in) investing activities (877,600) (9,691,400)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 5,000 21,441,100
Proceeds from exercise of stock options 527,300 704,900
Proceeds from line of credit 1,600 --
Repayment of long-term debt (560,100) (434,300)
-------------- --------------
Net cash provided by (used in) financing activities (26,200) 21,711,700
Effect of exchange rate changes on cash (74,100) (152,900)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (5,383,700) 9,047,300
Cash and cash equivalents-beginning of period 26,569,400 13,054,800
-------------- --------------
Cash and cash equivalents-end of period $ 21,185,700 $ 22,102,100
============== ==============
Supplemental cash flow disclosure:
Interest paid $ 84,100 $ 122,500
============== ==============
See accompanying notes.
</TABLE>
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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 129,000 1,300 612,300 ---
Treasury stock --- --- --- ---
Net loss for the nine months ended September 30, 1998 --- --- --- (5,728,500)
Foreign currency translation adjustment --- --- --- ---
Unrealized gain (loss) on investments --- --- --- ---
------------- ----------- ------------- ---------------
Balance at September 30, 1998 (Unaudited) 24,337,100 $ 243,400 $ 170,518,100 $ (128,254,800)
============= =========== ============= ===============
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK (LOSS) EQUITY
-------------- ---------------------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1997 --- $ (597,800) $ 47,023,800
Proceeds from exercise of stock options --- --- 613,600
Treasury stock (144,600) --- (144,600)
Net loss for the nine months ended September 30, 1998 --- --- (5,728,500)
Foreign currency translation adjustment --- 180,700 180,700
Unrealized gain (loss) on investments --- (16,200) (16,200)
-------------- ---------------------------- ----------------
Balance at September 30, 1998 (Unaudited) (144,600) $ (433,300) $ 41,928,800
============== ============================ ================
See accompanying notes.
</TABLE>
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<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 September 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 nine
month periods ended September 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>
September 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Raw Materials $ 673,700 $ 752,000
Work-in-process 1,298,000 1,376,000
Finished goods 327,500 306,500
Total $2,299,200 $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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Property, plant and equipment consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land, buildings, and leasehold improvements $ 1,986,200 $ 1,871,800
Equipment, furniture and fixtures 9,828,700 8,965,700
Accumulated depreciation (6,498,400) (5,687,700)
------------- ------------
Property, plant and equipment, net $ 5,316,500 $ 5,149,800
============= ============
</TABLE>
LONG-TERM DEBT -- Long-term debt consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
MELF Equipment Loan $ 125,500 $ 180,600
Mortgage Loan 465,700 462,100
Term Loan 650,000 1,100,000
Capital Lease Obligations 117,300 139,400
------------ ------------
$1,358,500 $1,882,100
Less Current Portion 750,100 747,100
------------ ------------
Long-Term Debt $ 608,400 $1,135,000
============ ============
</TABLE>
COMPREHENSIVE LOSS -- 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
/ loss 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 nine month period ended September 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
/ loss. Prior year financial statements have been reclassified to conform to
the requirements of Statement 130. The components of comprehensive loss for the
three and nine month periods ended September 30, 1998 and 1997, consist of:
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net loss $(2,456,000) $(3,806,000) $(5,728,500) $(3,246,800)
Foreign currency translation 276,300 (25,900) 180,700 (537,200)
adjustment
Unrealized gain (loss) on (24,600) (10,000) (16,200) 24,600
investments
----------------- ----------------- ---------------- -----------------
Comprehensive loss $(2,204,300) $(3,841,900) $(5,564,000) $(3,759,400)
================= ================= ================ =================
</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 nine
month periods ended September 30, 1998 are not necessarily indicative of the
results that may be obtained in any other interim period or the entire year.
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<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 prospects 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 nine months ended September 30, 1998, consisted
primarily of activities relating to the promotion of Ethyol/(R)/(amifostine) in
the United States with co-promotion partner ALZA Corporation ("ALZA"), the
promotion and marketing of Hexalen/(R)/(altretamine) and NeuTrexin/(R)/
(trimetrexate glucuronate) in the United States, continuing clinical trials of
Ethyol and NeuTrexin and product development of Ethyol, NeuTrexin and lodenosine
(FddA), business development activities in the United States, Europe and Japan,
and the reorganization of certain executive responsibilities.
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) marketing
Hexalen, NeuTrexin and Ethyol in the United States, (iii) expansion of clinical
and preclinical testing of lodenosine, (iv) further product development, and (v)
enhancement of manufacturing and analytical capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
Product sales increased to $5,890,800 for the three months ended September
30, 1998 as compared to $3,476,700 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
anti-folate, increased and sales of Hexalen, the company's ovarian cancer
therapy, declined compared to the prior year quarter. The company continues to
believe that NeuTrexin sales have been positively affected by the increased
utilization of the product by oncologists for the treatment of colorectal
cancer, a use currently under investigation by the company.
Net investment income decreased to $669,500 in the third quarter of 1998 as
compared to $808,500 in the corresponding 1997 period due to a smaller average
portfolio balance in the 1998 period.
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
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<PAGE>
September 30, 1998, declined to 28% of product sales from 35% in the prior year
period, with improved margins on all product lines.
Selling, general and administrative costs for the third quarter of 1998
decreased to $3,106,600 from $3,328,900 in the corresponding 1997 period. The
$222,300 decrease is principally due to a $184,100 decrease in personnel costs
related to the reorganization of the company's senior executive structure
undertaken in the first quarter of 1998 and a $149,000 decrease in marketing
expenditures.
Research and development costs for the three months ended September 30,
1998 increased to $4,435,200 from $3,741,000 in the third quarter of 1997. The
$694,200 increase is principally due to higher clinical research expenditures
related to the company's four ongoing Phase III clinical trials for Ethyol and
NeuTrexin and start-up expenses related to a Phase II clinical trial of the
company's anti-HIV product, lodenosine.
The net loss for the three months ended September 30, 1998 was $2,456,000
or $0.10 basic and diluted net loss per common share as compared to a loss of
$3,806,000 or $0.16 basic and diluted net loss per common share in the 1997
period.
NINE MONTHS ENDED SEPTEMBER 30, 1998
Product sales increased to $14,312,900 for the nine months ended September
30, 1998 as compared to $9,621,200 in the first nine 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
rose, the company believes, due to increased utilization of the product by
oncologists for the treatment of colorectal cancer, while sales of Hexalen
declined compared to the prior year period.
Net investment income increased to $2,116,200 in the first nine months of
1998 as compared to $2,049,600 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 the first quarter of 1997.
Licensing, royalty and other income decreased to $5,797,500 for the nine
month period ended September 30, 1998 from $11,571,300 in the prior year period
due principally to the receipt in 1997 of a $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.
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 nine month period ended September 30,
1998, declined to 30% of product sales from 32% in the prior year period, with
improved margins on NeuTrexin and Ethyol.
Selling, general and administrative costs for the first nine months of 1998
decreased to $10,136,400 from $11,156,400 in the corresponding 1997 period. The
$1,020,000 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
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<PAGE>
organization and reduced personnel costs resulting from the reorganization of
the company's senior executive structure undertaken in the first quarter of
1998.
Research and development costs for the nine months ended September 30, 1998
increased to $13,467,200 from $12,092,100 in the first nine months of 1997. The
$1,375,100 increase is principally due to the accrual of an approximately $1
million charge related to a research 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, increased U.S.
clinical research costs of $671,200 principally related to ongoing Phase III
trials of Ethyol and NeuTrexin and $716,200 in increased clinical and regulatory
consulting costs. 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 nine months ended September 30, 1998 was $5,728,500 or
$0.24 basic and diluted net loss per common share as compared to a net loss of
$3,246,800 or $0.14 basic and diluted net loss per common share in the 1997
period. The major factor contributing to the reduced loss 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 September 30, 1998, the company's cash and investments
totaled $45,646,500. The company's investment portfolio consists of investment
grade corporate debt instruments and securities issued by the U.S. Government or
its agencies.
During the first nine months of 1998, net cash used in operations amounted
to $4,405,800 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, to obtain additional regulatory approvals for additional uses of these
products and efficiently develop new products will have a material adverse
effect on the company. The level of future product sales will depend on several
factors, including cost, product acceptance, market penetration, competitive
products, research results, regulatory approvals, 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 and research and development costs,
reimbursement policies, the results obtained from clinical studies, the strategy
selected for developing and commercializing lodenosine and other products,
regulatory and intellectual property requirements, capital expenditures and
other factors discussed herein 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
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<PAGE>
also hopeful that it will in the future receive further regulatory approvals and
that such approvals will increase sales. The company is engaged in the initial
clinical studies of lodenosine and is pursuing alternative strategies for the
further development and commercialization of this product. However, no assurance
can be given that the results of clinical studies will be positive, 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 further develop and
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 $498,200 for the nine months
ended September 30, 1998 primarily related to capital improvements made to its
sterile products production facility in The Netherlands. Further capital
expenditures, estimated at $350,000, 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 distribution, co-
promotion and product development partners; 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; obtaining patents and
other intellectual property protection; 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.
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.
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
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<PAGE>
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.
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.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs and embedded
technology (such as micro controllers in telephones or laboratory equipment)
that use two digits rather than four to define the applicable year. These
computer programs and equipment with this type of embedded technology may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of normal
business activities, including, among others, a temporary inability to process
transactions and information, send invoices or engage in similar business
activities.
The company is implementing an audit and remediation plan to address the
Year 2000 issue. The first part of this plan is an inventory of the critical
software systems and embedded technology at each of the company's facilities,
which the company started in the second quarter of 1998 and expects to complete
in mid 1999. The second part of the plan is a detailed assessment of the
inventory results, which is also ongoing and expected to be completed in mid
1999. The third part of the plan involves correcting or replacing the company's
software systems and equipment that cannot accurately identify the year 2000.
The last part of the plan is an analysis to determine the extent to which the
systems of the company's major vendors, customers and commercial partners will
be affected by the Year 2000 issue. The company has started work on all phases
of the plan and expects that it will be completed during the latter half of
1999.
The Year 2000 audit and remediation plan is being conducted by the company
using internal resources. As of September 30, 1998, the company has spent less
than $50,000 fixing Year 2000 issues, such as modifying software systems and
replacing equipment, and these expenditures have been expensed or capitalized by
the affected departments within the company in the normal course of business.
The company estimates that the costs of completing its Year 2000 remediation
plan will be less than $500,000 and expects to fund these costs from currently
available resources.
The company does not anticipate that addressing the Year 2000 issue for its
internal software systems and equipment will delay the implementation of the
company's other planned information technology projects or have a material
impact on its operations or financial results. However, there can be no
assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The company is currently unable to predict the extent to which it
would be vulnerable to a failure by one or more other companies, such as its
vendors, customers and commercial partners, to remediate Year 2000 issues on a
timely basis. Any such failures could have a material adverse effect on the
company. To date the company has not made any contingency plans to address Year
2000 risks. Contingency plans will be
-14-
<PAGE>
developed if it appears that the company or its key vendors, customers or
commercial partners will not be Year 2000 compliant and that such noncompliance
can be expected to have a material adverse impact on the company's operations.
The Audit Committee of the Board of Directors maintains an ongoing appraisal of
the scope, estimated costs and implementation of the company's Year 2000
remediation plan.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni & Co. filed a
complaint for refrain, information and damages with the Regional Court of
Hamburg against U.S. Bioscience, Inc. on the grounds of trademark infringement
in respect of the use of the trademark "Ethyol" in Germany. On April 29, 1996,
U.S. Bioscience filed a reply to plaintiff's complaint stating U.S. Bioscience's
position that the trademark "Ethyol" does not infringe plaintiff's trademark
rights in the trademark "Ichthyol" nor the plaintiff's firm right in the slogan
"Ichthyol." The suit was dismissed on January 29, 1997, by the Regional Court
of Hamburg at which time the plaintiff was given leave to appeal against the
judgment rendered in favor of U.S. Bioscience, Inc. The plaintiff has filed an
appeal, and a hearing has been scheduled for November 19, 1998. It is not
possible to evaluate how the case will be decided on appeal.
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
27 Financial Data Schedule
b. There were no reports on Form 8-K filed during the quarter
for which this report is filed.
-16-
<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: November 9, 1998 By: /s/ Robert I. Kriebel
-------------------------------
Robert I. Kriebel
Executive Vice President and
Chief Financial Officer
-17-
<PAGE>
U.S. BIOSCIENCE, INC.
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
-------------
Exhibit No. Page
----------- ----
27 Financial Data
-18-
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF U.S.
BIOSCIENCE, INC. FOR THE PERIOD(S) INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,185,700
<SECURITIES> 24,460,800
<RECEIVABLES> 3,455,600
<ALLOWANCES> 352,000
<INVENTORY> 2,299,200
<CURRENT-ASSETS> 52,200,700
<PP&E> 11,814,900
<DEPRECIATION> 6,498,400
<TOTAL-ASSETS> 57,517,200
<CURRENT-LIABILITIES> 13,063,500
<BONDS> 2,524,900
0
0
<COMMON> 243,400
<OTHER-SE> 41,685,400
<TOTAL-LIABILITY-AND-EQUITY> 57,517,200
<SALES> 14,312,900
<TOTAL-REVENUES> 22,226,600
<CGS> 4,231,600
<TOTAL-COSTS> 27,835,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,900
<INCOME-PRETAX> (5,728,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,728,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,728,500)
<EPS-PRIMARY> (0.24)
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