<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 March 31, 1999
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 May 3, 1999, there were 27,183,000 shares of common stock outstanding.
Page 1 of 18 sequentially
numbered pages
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<PAGE>
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 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,014,800 $ 6,771,000
Investments 14,977,800 18,114,200
Accounts receivable, net of allowances of $727,000 in
both 1999 and 1998 3,870,100 1,729,600
Interest receivable 56,000 29,400
Inventories 2,266,300 2,873,200
Other 1,164,300 707,100
---------------- ----------------
Total current assets 41,349,300 30,224,500
Investments in long-term securities 23,373,400 17,063,700
Property, plant and equipment at cost, less accumulated depreciation 4,976,600 5,433,700
---------------- ----------------
Total assets $ 69,699,300 $ 52,721,900
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,401,700 $ 1,183,000
Accrued clinical grants payable 4,975,700 4,167,100
Accrued product manufacturing costs payable 768,200 795,400
Accrued marketing costs payable 495,400 390,300
Accrued professional fees payable 1,221,500 1,478,500
Line of credit 781,800 849,300
Current maturities of long-term debt 493,100 645,800
Accounts payable and other accrued liabilities 1,538,500 2,035,100
---------------- ----------------
Total current liabilities 11,675,900 11,544,500
Long-term liabilities:
Long-term debt, net of current maturities 452,800 522,600
Other long-term liabilities 1,883,800 1,921,600
---------------- ----------------
Total long-term liabilities 2,336,600 2,444,200
---------------- ----------------
Total liabilities 14,012,500 13,988,700
Stockholders' equity:
Preferred stock, $.005 par value-5,000,000 shares authorized;
none issued --- ---
Common stock, $.01 par value-50,000,000 shares authorized; 27,146,500
shares issued at March 31, 1999, and 24,363,200 shares
issued at December 31, 1998 271,500 243,600
Additional paid-in capital 191,073,800 170,645,100
Accumulated deficit (134,702,400) (131,580,200)
Accumulated other comprehensive loss (707,900) (430,700)
---------------- ----------------
55,935,000 38,877,800
Less cost of treasury stock - 23,900 and 13,600 shares respectively (248,200) (144,600)
---------------- ----------------
Total stockholders' equity 55,686,800 38,733,200
---------------- ----------------
Total liabilities and stockholders' equity $ 69,699,300 $ 52,721,900
================ ================
See accompanying notes
</TABLE>
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Revenues:
Net sales $ 6,452,600 $ 4,250,200
Net investment income 650,000 756,600
Licensing, royalty and other income 314,300 5,332,300
------------- --------------
7,416,900 10,339,100
Expenses:
Cost of sales 1,596,100 1,326,100
Selling, general and administrative costs 3,439,400 4,274,100
Research and development costs 5,474,200 4,833,100
Interest expense 29,400 42,500
------------- --------------
10,539,100 10,475,800
------------- --------------
Net loss $ (3,122,200) $ (136,700)
============= ==============
Basic and diluted loss per common share $ (0.12) $ (0.01)
Weighted average number of common shares outstanding 26,089,000 24,230,400
See accompanying notes
</TABLE>
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net (loss) income $ (3,122,200) $ (136,700)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 238,500 223,800
(Gain) loss on investments 6,300 37,600
Change in accounts receivable (2,140,500) 142,600
Change in interest receivable (26,600) 71,300
Change in inventories 569,500 (88,800)
Change in other current assets (449,500) (21,700)
Change in current liabilities 463,000 714,800
Change in other long-term liabilities (37,800) 102,000
-------------- --------------
Total adjustments (1,377,100) 1,181,600
-------------- --------------
Net cash provided by (used in) operating activities (4,499,300) 1,044,900
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 66,277,000 22,396,900
Purchase of investments (69,450,300) (22,828,600)
Purchase of property, plant and equipment (136,300) (225,400)
-------------- --------------
Net cash provided by (used in) investing activities (3,309,600) (657,100)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 19,974,100 63,300
Purchase of treasury stock (103,600) 0
Proceeds from exercise of stock options 482,500 98,100
Proceeds from line of credit 0 1,600
Repayment of long-term debt (185,700) (188,600)
-------------- --------------
Net cash provided by (used in) financing activities 20,167,300 (25,600)
Effect of exchange rate changes on cash (114,600) (36,700)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 12,243,800 325,500
Cash and cash equivalents-beginning of period 6,771,000 26,569,400
-------------- --------------
Cash and cash equivalents-end of period $ 19,014,800 $ 26,894,900
============= =============
Supplemental cash flow disclosure:
Interest paid $ 19,900 $ 32,800
See accompanying notes
</TABLE>
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
NUMBER OF PAID-IN ACCUMULATED TREASURY OTHER
SHARES AMOUNT CAPITAL DEFICIT STOCK COMPREHENSIVE(LOSS)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 22,879,900 $ 228,800 $151,244,400 $(114,617,200) $ --- $ 38,300
Proceeds from exercise of stock options 149,300 1,500 728,800 --- --- ---
Compensation related to stock options --- --- 40,000 --- --- ---
Issuance of shares ($18.256 per shares, less costs) 1,178,900 11,800 17,892,000 --- --- ---
Conversion of warrants --- --- 600 --- --- ---
Comprehensive loss:
Net loss for the year ended December 31, 1997 --- --- --- (7,909,100) --- ---
Foreign currency translation adjustment --- --- --- --- --- (663,100)
Unrealized gain (loss) on investments --- --- --- --- --- 27,000
Comprehensive loss
--------------------------------------------------------------------------
Balance at December 31, 1997 24,208,100 $ 242,100 $169,905,800 $(122,526,300) $ 0 $(597,800)
Proceeds from exercise of stock options 154,800 1,500 694,200 --- --- ---
Compensation related to stock options --- --- 40,000 --- --- ---
Treasury stock --- --- --- --- (144,600) ---
Conversion of warrants 300 --- 5,100 --- --- ---
Comprehensive loss:
Net loss for the year ended December 31, 1998 --- --- --- (9,053,900) --- ---
Foreign currency translation adjustment --- --- --- --- --- 185,100
Unrealized gain (loss) on investments --- --- --- --- --- (18,000)
Comprehensive loss
--------------------------------------------------------------------------
Balance at December 31, 1998 24,363,200 $ 243,600 $170,645,100 $(131,580,200) $(144,600) $(430,700)
Proceeds from exercise of stock options 96,600 1,000 481,500 --- --- ---
Issuance of shares ($7.44 per shares, less costs) 2,686,700 26,900 19,947,200 --- --- ---
Treasury stock --- --- --- --- (103,600) ---
Comprehensive loss:
Net loss for the three months ended March 31, 1999 --- --- --- (3,122,200) --- ---
Foreign currency translation adjustment --- --- --- --- --- (283,500)
Unrealized gain (loss) on investments --- --- --- --- --- 6,300
Comprehensive loss
--------------------------------------------------------------------------
Balance at March 31, 1999 (Unaudited) $ 27,146,500 $ 271,500 $191,073,800 $(134,702,400) $(248,200) $ (707,900)
============ ========= ============ ============= ========= ==========
TOTAL
STOCKHOLDERS'
EQUITY
---------------
<S> <C>
Balance at December 31, 1996 $ 36,894,300
Proceeds from exercise of stock options 730,300
Compensation related to stock options 40,000
Issuance of shares ($18.256 per shares, less costs) 17,903,800
Conversion of warrants 600
Comprehensive loss:
Net loss for the year ended December 31, 1997 (7,909,100)
Foreign currency translation adjustment (663,100)
Unrealized gain (loss) on investments 27,000
------------
Comprehensive loss (8,545,200)
------------
Balance at December 31, 1997 $ 47,023,800
Proceeds from exercise of stock options 695,700
Compensation related to stock options 40,000
Treasury stock (144,600)
Conversion of warrants 5,100
Comprehensive loss:
Net loss for the year ended December 31, 1998 (9,053,900)
Foreign currency translation adjustment 185,100
Unrealized gain (loss) on investments (18,000)
------------
Comprehensive loss (8,886,800)
------------
Balance at December 31, 1998 $ 38,733,200
Proceeds from exercise of stock options 482,500
Issuance of shares ($7.44 per shares, less costs) 19,974,100
Treasury stock (103,600)
Comprehensive loss:
Net loss for the three months ended March 31, 1999 (3,122,200)
Foreign currency translation adjustment (283,500)
Unrealized gain (loss) on investments 6,300
------------
Comprehensive loss (3,399,400)
------------
Balance at March 31, 1999 (Unaudited) $ 55,686,800
============
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 March 31, 1999, the company's revenues have been
derived principally from product sales of Ethyol(R), NeuTrexin(R), and
Hexalen(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 month
periods ended March 31, 1999 and 1998, included herein is 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>
March 31, December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Raw materials $ 616,400 $1,086,900
Work-in-process 1,227,500 1,014,700
Finished goods 422,400 771,600
-------------- ---------------
Total $2,266,300 $2,873,200
============== ===============
</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 consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Land, buildings, and leasehold improvements $ 1,909,700 $ 2,034,900
Equipment, furniture and fixtures 9,847,700 10,131,200
Accumulated depreciation (6,780,800) (6,732,400)
-------------- --------------
Property, plant and equipment, net $ 4,976,600 $ 5,433,700
-------------- --------------
LONG-TERM DEBT -- Long-term debt consists of:
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
MELF Equipment Loan $ 88,300 $ 106,900
Mortgage Loan 409,900 456,000
Term Loan 350,000 500,000
Capital Lease Obligations 97,700 105,500
-------------- --------------
$945,900 $1,168,400
Less Current Portion 493,100 645,800
-------------- --------------
Long-Term Debt $452,800 $ 522,600
============== ==============
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE LOSS -- The components of other
comprehensive loss consist of:
<TABLE>
<CAPTION>
Unrealized Gain /
Currency (Loss) on
Translation Available-for-Sale
Adjustment Securities Total
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 48,200 $ (9,900) $ 38,300
Currency translation adjustment (663,100) 0 (663,100)
Unrealized gain on investments 0 27,000 27,000
-------------------- ------------------- -----------------
Balance at December 31, 1997 $(614,900) $ 17,100 $(597,800)
Currency translation adjustment 185,100 0 185,100
Unrealized (loss) on investments 0 (18,000) (18,000)
-------------------- ------------------- -----------------
Balance at December 31, 1998 $(429,800) $ (900) $(430,700)
Currency translation adjustment (283,500) 0 (283,500)
Unrealized gain on investments 0 6,300 6,300
-------------------- ------------------- -----------------
Balance at March 31, 1999 $(713,300) $ 5,400 $(707,900)
==================== =================== =================
</TABLE>
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<PAGE>
SEGMENT DISCLOSURES -- The company operates in only one "dominant
segment," as substantially all of its consolidated revenues, losses and assets
are derived and utilized in the development and commercialization of
pharmaceutical products used in the treatment of cancer. The company had
revenue from two major customers which accounted for 54% and 20% in 1998 and 38%
and 22% in 1997, respectively of quarterly total net sales revenue.
A summary by geographic area of revenues from customers, net income/(loss)
for the periods ending March 31, and identifiable assets as of the dates
indicated, are as follows:
<TABLE>
<CAPTION>
Three Months ended March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues from customers:
United States $ 5,194,100 $ 8,278,100
International 1,572,800 1,304,400
----------- -----------
$ 6,766,900 $ 9,582,500
=========== ===========
Net income / (loss):
United States $(2,534,900) $ 588,600
International ( 587,300) ( 725,300)
----------- -----------
$(3,122,200) $ 136,700)
=========== ===========
March 31, December 31,
1999 1998
----------- -----------
Identifiable assets:
United States $64,050,200 $47,516,800
International 5,649,100 5,205,100
----------- -----------
$ 69,699,300 $52,721,900
=========== ===========
</TABLE>
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, 1998. Operating results for the three month period
ended March 31, 1999 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, 1998 (including, without limitation, in
the section of Item 1 entitled "Risk Factors"). 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 three months ended March 31, 1999, 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 and regulatory
activities for Ethyol, NeuTrexin and lodenosine (FddA), product development
activities for lodenosine, Ethyol and NeuTrexin, and business development
activities in the United States and Europe. The company also completed, during
the first quarter of 1999, a $20 million equity placement with three venture
capital funds (see "Liquidity and Capital Resources" below.)
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 further clinical trials aimed at label expansion
and regulatory approvals for Ethyol and NeuTrexin, the marketing of Hexalen,
NeuTrexin and Ethyol in the United States, the continuation of clinical and
preclinical testing of lodenosine, the furtherance of product development
activities and the enhancement of manufacturing and analytical capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
Product sales increased to $6,452,600 for the three months ended March 31,
1999 as compared to $4,250,200 in the prior year period. Sales of Ethyol, the
company's cytoprotective product, increased due to higher sales revenue received
from both ALZA, the company's distribution partner in the United States, and
Schering-Plough, the company's European distribution partner. Sales of
NeuTrexin, the company's anti-folate, and Hexalen, the company's ovarian cancer
therapy, also increased compared to the prior year first 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.
Licensing, royalty and other income declined to $314,300 in the three
month period ending March 31, 1999 as compared to $5,332,300 in the 1998 period
due principally to a $5 million payment received from ALZA in the first quarter
of 1998 related to the achievement of a clinical milestone for the development
of the use of Ethyol in conjunction with radiation therapy.
-10-
<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 three month period ended March 31,
1999, declined to 25% of product sales from 31% in the prior year period, due
principally to improved margins on Ethyol product revenues.
Selling, general and administrative costs for the first quarter of 1999
decreased to $3,439,400 from $4,274,100 in the corresponding 1998 period. The
$834,700 decrease is principally due to a $411,000 reduction in marketing
expenditures, a $250,000 reduction in investment banking and legal fees and a
$242,000 reduction in compensation related expenses resulting from a
reorganization undertaken in the first quarter of 1998.
Research and development costs for the three months ended March 31, 1999
increased to $5,474,200 from $4,833,100 in the first quarter of 1998. The
$641,100 increase principally resulted from a Phase II study of lodenosine
(FddA), a nucleoside reverse transcriptase inhibitor, which began in late 1998
and from higher drug product formulation expenses, also related to lodenosine,
totaling $1,163,400. In addition, the increase reflects approximately $336,700
in higher costs related to the continuation of several Phase III clinical trials
investigating the use of Ethyol in radiation therapy and other chemotherapeutic
regimens and the use of NeuTrexin as an additional agent in the treatment of
colorectal cancer. The 1998 first quarter included an approximate $1 million
provision for consulting and severance payments related to reorganization
activities.
The net loss for the three months ended March 31, 1999 was $3,122,200 or
$0.12 basic and diluted net loss per common share as compared to a loss of
$136,700 or $0.01 basic and diluted net loss per common share in the 1998
period. The smaller loss for the 1998 period is principally attributable to the
$5 million milestone payment from ALZA noted above. Excluding this milestone
payment, the 1998 first quarter loss would have been $0.21 basic and diluted net
loss per common share.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, the 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 March 31, 1999, the company's cash and investments totaled
$57,366,000. 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 quarter of 1999, net cash used in operations amounted to
$4,499,300 reflecting the net effect of the factors discussed above under
"Results of Operations" less non-cash charges of $244,800 and a net working
capital increase of $1,584,100, principally due to increased accounts receivable
reflective of the higher sales levels. Until such time as the company receives
significantly increased revenues, the company's cash position will continue to
be reduced due to expenditures in clinical research, product development,
marketing, selling and administrative activities. Failure to achieve
significant sales from the company's currently approved products and to obtain
additional regulatory approvals on products currently in development would 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 health care and reimbursement
systems existing in markets where the company's products are, or may become,
commercially available.
-11-
<PAGE>
In January 1999, the company entered into a $20,000,000 stock purchase
agreement with a group of private investors lead by Domain Partners IV L.P., a
leading health care venture capital fund, and Proquest Investments L.P., an
oncology focused venture capital fund. Pursuant to the agreement, the company
issued to the investors 2,686,728 shares of Common Stock at a price of $7.44
per share and warrants, exercisable for three years, to purchase 537,346
additional shares of Common Stock at an exercise price of $11.17 per share. The
shares were purchased at the average closing price of the company's Common Stock
for the 30-day period ending January 26, 1999. The warrant exercise price is a
50% premium over that 30-day average closing price. Except in certain change of
control situations, the agreement calls for the investors to hold the purchased
securities for at least one year.
The company invests its cash in a variety of financial instruments,
principally securities issued by the U.S. Government and its agencies,
investment grade corporate debt, and money market instruments. These
investments are denominated in U.S. dollars. Investments in both fixed rate and
floating rate interest-earning instruments carry a degree of interest rate risk.
Fixed rate securities may have their fair market value adversely impacted due to
rises in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. At March 31, 1999, a majority of the
company's investments were in floating rate instruments. The company does not
expect changes in interest rates to have a material impact on the results of
operations.
The company believes its current cash and investments coupled with
anticipated revenues generated from product sales and other sources, will be
sufficient to cover the company's anticipated level of cash requirements 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, new clinical development initiatives, manufacturing costs,
reimbursement policies, regulatory and intellectual property requirements,
capital expenditures and other factors as discussed herein. The company is
hopeful that its products will, in the near future, generate sufficient sales to
provide 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 $136,300 for the three month
period ended March 31, 1999. A majority of the company's plant, property and
equipment are located at the company's manufacturing facility located in
Nijmegen, The Netherlands. Further capital expenditures, estimated at
$1,500,000 are planned during the remainder 1999.
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
-12-
<PAGE>
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.
As the company sells Ethyol to its distribution partners, ALZA and
Schering-Plough, 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 and sales to the pharmaceutical trade as well as the levels of
inventory they stock and maintain. Sales of Ethyol are also affected by the
same factors noted elsewhere in this section on liquidity and capital resources.
The company is hopeful that the commercialization of Ethyol in the United States
and Europe will be successful. However, no assurances can be given that the
company will achieve meaningful revenues under its agreements with ALZA and
Schering-Plough or its other distribution arrangements.
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. As the company continues its
commercialization, research and development activities, losses are expected to
continue and may fluctuate from period to period. Although it is the company's
objective to become profitable, 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 microcontrollers 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 a readiness and remediation plan to address the
Year 2000 issue. The first part of this plan was 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 completed during the
first quarter of 1999. The second part of the plan was a detailed assessment of
the inventory results, which also was completed during the first quarter of
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 these last
two phases of the plan and expects that they will be completed during the latter
half of 1999.
The Year 2000 readiness and remediation plan is being conducted by the
company using internal resources. As of March 31, 1999, the company had spent
less than $100,000 fixing Year 2000 issues, including 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 $400,000 and expects to fund these costs from
currently available resources.
-13-
<PAGE>
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 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.
-14-
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings.
On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni & Co.
("Ichthyol Gesellschaft") 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 Ichthyol
Gesellschaft's complaint stating U.S. Bioscience's position that the trademark
"Ethyol" does not infringe plaintiff's trademark rights in the trademark
"Ichthyol" nor Ichthyol Gesellschaft's firm right in the slogan "Ichthyol." The
suit was dismissed on January 29, 1997, by the Regional Court of Hamburg at
which time Ichthyol Gesellschaft. was given leave to appeal against the judgment
rendered in favor of U.S. Bioscience, Inc. Ichthyol Gesellschaft. filed an
appeal, and a judgment was rendered in favor of U.S. Bioscience in the appellate
proceedings. In January 1999, Ichthyol Gesellschaft filed an appeal on points
of law with the Federal Court of Justice, which has extended until May 17, 1999
the deadline for Ichthyol Gesellschaft to file the grounds for the appeal on
points of law. It is not possible to predict the decision of the Federal Court
of Justice with respect to this appeal.
Item 2. Changes in Securities.
On January 27, 1999 the company entered into a Securities Purchase
Agreement with Domain Partners IV, L.P., DP IV Associates, L.P. and Proquest
Investments, L.P. (the "Purchasers") for the issuance and sale by the company to
the Purchasers of an aggregate of 2,686,728 shares of the company's Common Stock
at a price of $7.444 per share and warrants to purchase 537,346 shares of the
company's Common Stock, exercisable until February 2, 2002 at an exercise price
of $11.16. The purchase and sale of these securities were consummated in
accordance with the Securities Purchase Agreement on February 2, 1999. No
underwriters were involved in the sale and no underwriting discounts or
commissions were paid. The company claimed exemption from registration of these
securities pursuant to Section 4(6) of the Securities Act of 1933, as amended,
and Rule 506 thereunder, as set forth on its Form D filed with the Securities
and Exchange Commission on February 11, 1999. In determining that this
exemption was available, the company relied on the fact that there were only
three Purchasers, each of which had represented to the company that it was an
accredited investor. The foregoing description of this sale of unregistered
securities is qualified in its entirety by reference to the company's Current
Report on Form 8-K with respect thereto which was filed with the Securities and
Exchange Commission on February 3, 1999.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 22, 1999 the company held its annual meeting of stockholders.
At the meeting, the stockholders voted on the election of the eight members of
the company's Board of Directors. The votes "FOR" and "WITHHELD" for each
candidate for election were as follows:
-15-
<PAGE>
<TABLE>
<CAPTION>
Number of Votes Number of Votes
Name of Candidate FOR WITHHELD
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul Calabresi 23,364,546 756,629
C. Boyd Clarke 23,364,531 756,644
Brian H. Dovey 23,363,770 757,405
Robert I. Kriebel 23,364,535 756,640
Douglas J. MacMaster 23,363,758 757,417
Allen Misher 23,364,479 756,696
George H. Ohye 23,364,517 756,658
Betsey Wright 23,363,878 757,297
</TABLE>
Stockholders also voted at the April 22, 1999 annual meeting of
stockholders on a proposal to approve the "U.S. Bioscience, Inc. 1999 Incentive
Compensation Plan." Votes "FOR", "AGAINST" and "ABSTAIN" on this proposal were
as follows:
FOR AGAINST ABSTAIN
--- -------- -------
9,273,131 6,294,602 132,189
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27 Financial Data Schedule
b. The company filed the following report since the beginning of the
quarter ended March 31, 1999:
Date of Report Items Covered
------------------ -----------------
January 27, 1999 5 and 7
-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: May 7, 1999 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-
<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 U.S.
BIOSCIENCE, INC. FOR THE PERIOD INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,014,800
<SECURITIES> 14,977,800
<RECEIVABLES> 4,597,100
<ALLOWANCES> 727,000
<INVENTORY> 2,266,300
<CURRENT-ASSETS> 41,349,300
<PP&E> 11,757,400
<DEPRECIATION> 6,780,800
<TOTAL-ASSETS> 69,699,300
<CURRENT-LIABILITIES> 11,675,900
<BONDS> 2,336,600
0
0
<COMMON> 271,500
<OTHER-SE> 55,415,300
<TOTAL-LIABILITY-AND-EQUITY> 69,699,300
<SALES> 6,452,600
<TOTAL-REVENUES> 7,416,900
<CGS> 1,596,100
<TOTAL-COSTS> 10,509,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,400
<INCOME-PRETAX> (3,122,200)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,122,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,122,200)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
