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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
U.S. Bioscience, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2460100
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Tower Bridge
100 Front Street
West Conshohocken, PA 19428
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 832-0570
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock ($.01 par value) American Stock Exchange
Preferred Stock Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes. |x| No.|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |x|
As of March 1, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $226,515,960.*
As of March 1, 1999, the number of outstanding shares of the registrant's
Common Stock was 27,101,696.
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of the registrant's definitive Proxy Statement with
respect to the registrant's 1999 Annual Meeting of Stockholders, to
be filed not later than 120 days after the close of the Registrant's
fiscal year.
* Calculated by excluding all shares held by executive officers, directors
and five percent shareholders of the registrant without conceding that all
such persons are "affiliates" of the registrant for purposes of the
federal securities laws.
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This report on Form 10-K 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 Form 10-K, 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
Part II of this Form 10-K and the Consolidated Financial Statements and notes to
the Consolidated Financial Statements on pages F-1 to F-20.
PART I
Item 1. Business.
General
U.S. Bioscience, Inc., a Delaware corporation (the "company"), is a
pharmaceutical company specializing in the development and commercialization of
products for patients with cancer and acquired immune deficiency syndrome
("AIDS"). The company has, through licensing agreements, rights to several drugs
for the treatment of these diseases. Three of these drugs have received approval
for marketing in the United States by the United States Food and Drug
Administration ("FDA"), namely Hexalen(R) (altretamine), NeuTrexin(R)
(trimetrexate glucuronate for injection, and Ethyol(R) (amifostine). One of
these drugs, lodenosine (FddA), is in Phase II clinical trials. During 1998 the
company decided to focus its resources on the commercialization of these and
nearer term commercial products and discontinued its development of AZQ
(diaziquone), Mitomycin-C analogues, PALA and third generation platinum
anticancer agents.
The company's drug development strategy has been to acquire
exclusive licenses in the United States and certain other markets for
therapeutic agents that the company believes have potentially significant
commercial and clinical value in the treatment of cancer, AIDS and allied
diseases. The company's primary emphasis has been on "late-stage" drugs, which
are drugs having an established preclinical or clinical database and for which
development by the company consists largely of further preclinical testing,
clinical trials and the preparation of applications for regulatory approval. By
acquiring rights to drugs that have undergone some degree of development, the
company has endeavored to reduce the costs, risks and time involved in bringing
products to market.
The three most common methods of treating patients with cancer are
surgery, radiation therapy and systemic therapy. Systemic therapy consists
principally of chemotherapy and hormonal therapy. Chemotherapy involves the
administration of cytotoxic drugs designed to kill cancer cells. In addition to
seeking to develop these types of cancer-killing drugs, the company, like some
of its competitors, is seeking to develop drugs that augment the efficacy or
reduce the toxicity of other chemotherapeutic agents and of radiation therapy.
Anticancer drugs can be toxic to normal cells as well as cancer
cells, causing unwanted side effects. For many cancer drugs, therapeutic dosage
for cancerous tissue is close to the toxic dose. Thus, drugs that can
selectively protect normal cells should be of significant medical benefit.
Development of systemic therapeutic products for treating cancer or used in
connection with treatment of cancer requires laborious preclinical and
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clinical testing to satisfy government regulation and medical ethics. As a
consequence, the development of successful drugs for these purposes often takes
many years. See "Government Regulation."
During the last two decades, significant advances in molecular
biology, immunology and other related fields of biotechnology have led to an
improved understanding of how malfunctioning genes lead to the development of
certain tumors, and to an appreciation of how the body's own regulatory systems
control this process. It is hoped that these advances will lead to better ways
to diagnose cancer, to identify those predisposed to develop the disease and to
prevent tumors from forming or becoming malignant. The company believes,
however, that systemic therapy will continue to make an important contribution
to the treatment of cancer.
The Human Immunodeficiency Virus ("HIV")/AIDS treatment market can
be divided into two segments. The antiretroviral segment includes those
therapies which specifically target the HIV virus, such as nucleoside analogues
like zidovudine (AZT), didanosine (ddI), zalcitabine (ddC) and lamivudine (3TC),
and protease inhibitors, such as saquinavir, nelfinavir, ritonavir and
indinavir. The second segment of the HIV/AIDS treatment market includes those
agents which prevent or treat AIDS-related opportunistic infections, including
PCP, tuberculosis and candidiasis. The HIV/AIDS treatment market has been
rapidly changing due, in part, to significant advances in the treatment of AIDS
and AIDS-related infections.
Principal Products
The company's products reflect its strategy of building a diverse
portfolio of drugs for the treatment of patients with cancer. This portfolio
includes cancer-attacking cytotoxics (Hexalen and NeuTrexin), cytoprotectors
(Ethyol and WR-151327) and modulators (NeuTrexin). The company's products also
reflect its strategy of building a portfolio of drugs for the treatment of AIDS
and AIDS-related diseases or infections. The company's drug NeuTrexin is
commercially available for treatment of PCP, an infection primarily associated
with AIDS, and it is also under investigation as an additional agent for the
treatment of patients with advanced colorectal cancer. The company has licensed
lodenosine, and its active metabolite FddI, which are reverse transcription
inhibitors now being evaluated in clinical trials for use in the treatment of
HIV and AIDS. See "Principal Products - Lodenosine (FddA)."
Hexalen(R) (altretamine/hexamethylmelamine)
General Description. Hexalen is an orally administered
cytotoxic drug that was cleared for marketing by the FDA in December
1990 for use as a single agent in the palliative treatment of
patients with persistent or recurrent ovarian cancer following
first-line therapy with cisplatin and/or alkylating agent-based
combination chemotherapy.
Marketing. The company has been co-promoting Hexalen in the
U.S. market with ALZA Corporation under an agreement that will
terminate in mid-1999. Since 1996, the company has been directing
the U.S. marketing program for Hexalen, and the sales forces of both
companies have been promoting Hexalen to health care providers who
treat ovarian cancer. In mid-1999, the company will have sole
responsibility for the distribution, marketing and promotion of
Hexalen in the U.S. market and is planning to expand its field force
in anticipation of this change. The marketing program consists of
direct mail, symposia and promotion to prescribing physicians.
Hexalen is distributed through pharmaceutical wholesalers. The
company's revenues from Hexalen sales in 1998 were slightly lower
than those in 1997.
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The company has obtained a registered U.S. trademark for
Hexalen, the company's brand of altretamine. The company is also
pursuing trademark registrations for Hexalen in a number of foreign
countries.
As of March 1, 1999, Hexalen has been approved for the
treatment of ovarian cancer in 20 countries outside the United
States, including Canada, the United Kingdom, Australia, Israel,
Sweden, Norway, China, South Korea, Egypt and Hong Kong. Commercial
sales of Hexalen outside the United States are made through
distribution or license arrangements. To date, commercial sales of
Hexalen outside the United States have not been material.
For information regarding the company's major customers and
geographic area data, see "Notes to the Consolidated Financial
Statements - Note 10."
License of Hexalen to the Company. The company's rights to
Hexalen are derived from an assignment of rights regarding Wyeth
Laboratories, Inc.'s ("Wyeth") New Drug Application ("NDA"). In
return, the company is required to pay royalties to Wyeth on
worldwide sales by the company or its licensees of any product
containing altretamine. The company also has a licensing agreement
with Rhone-Poulenc Rorer for rights to applications, registrations
and approvals relating to their brand of altretamine (Hexastat(R))
in Canada, Germany, Italy, The Netherlands, Israel and the Czech
Republic. The licenses expire in 2001 with respect to Canada and
2002 with respect to the other countries. In commercializing Hexalen
in these markets, if and when regulatory approvals are obtained, the
company will be required to pay royalties to Rhone-Poulenc Rorer on
sales of Hexalen by the company or its licensees or distributors in
countries covered by the licensing or distribution agreements.
Orphan Drug Status. Under the orphan drug provisions of the
Federal Food, Drug, and Cosmetic Act (the "FFDCA"), Hexalen had
received orphan drug marketing exclusivity for its FDA approved
indication, which expired in December 1997. See "Orphan Drug
Status," "Government Regulation," and "Patents, Trademarks, and
Trade Secrets."
Distribution and Marketing Agreements. Under the terms of the
company's co-promotion agreement with ALZA, the company pays ALZA a
commission, which is based upon a percentage of net sales of Hexalen
and NeuTrexin in the United States above a base level of sales. At
the end of the co-promotion term, in mid-1999, ALZA will be paid
residual commissions for a term of three years based on a percentage
of net sales during the residual period, subject to a maximum
payment of a decreasing percentage of actual commission payments
made to ALZA under the agreement during the final contract year of
the co-promotion period.
The company has entered into distribution or licensing
agreements for Hexalen with a number of pharmaceutical companies for
several territories outside of the United States. The licensees are
required to pay the company royalties based on their net sales of
the product. Under the terms of the distribution agreements, the
company sells Hexalen to its distribution partner at an agreed upon
supply price.
Manufacturing. The company is dependent on third party
suppliers for the manufacture of Hexalen. The company uses one
approved source of altretamine drug substance and two approved
sources for the finished dosage form of Hexalen. See "Government
Regulation" and "Risk Factors - Reliance on Collaboration,
Marketing, Manufacturing and Selling Arrangements."
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NeuTrexin(R) (trimetrexate glucuronate for injection)
General Description. NeuTrexin is a lipid-soluble
intravenously administrable analogue of methotrexate, a
commonly-used anticancer agent. In December 1993, the FDA approved
the company's NDA and the Canadian regulatory authority, the Health
Protection Branch, granted commercial clearance for NeuTrexin with
concurrent leucovorin administration (leucovorin protection) as an
alternative therapy for the treatment of moderate-to-severe
Pneumocystis carinii pneumonia ("PCP") in immunocompromised
patients, including patients with AIDS, who are intolerant of, or
are refractory to, trimethoprim-sulfamethoxazole therapy or for whom
trimethoprim-sulfamethoxazole is contraindicated. In September 1994,
the European Union's ("EU") Committee for Proprietary Medicinal
Products ("CPMP") recommended approval for NeuTrexin with concurrent
leucovorin administration (leucovorin protection) as an alternative
therapy for the treatment of moderate-to-severe PCP in patients with
AIDS who are intolerant of or refractory to standard therapy or for
whom standard therapy is contraindicated. NeuTrexin was designated a
"high tech" drug under the CPMP's Concertation Procedure which
provided for concurrent review of the dossier by the then twelve
members of the EU and provides up to 10 years of regulatory
exclusivity in the EU markets upon approval. Following the positive
CPMP recommendation, the company received local regulatory approvals
in 11 of the 12 original EU member countries. As of March 1, 1999,
local health regulatory approvals for NeuTrexin have been received
in 26 countries outside the United States, including Canada,
Denmark, France, Germany, Ireland, Luxembourg, the United Kingdom,
Spain, Greece, Sweden, Norway, Portugal, The Netherlands, Italy and
Argentina.
Marketing. The company has been co-promoting NeuTrexin in the
U.S. market with ALZA Corporation under an agreement that will
terminate in mid-1999. Since 1996, the company has been directing
the marketing program for NeuTrexin and the sales forces of both
companies have been promoting NeuTrexin to health care providers who
treat PCP. In mid-1999, the company will have sole responsibility
for the distribution, marketing and promotion of NeuTrexin in the
U.S. market and is planning to expand its field force in
anticipation of this change. The marketing program consists of
direct mail, symposia and promotion to prescribing physicians.
NeuTrexin is distributed through pharmaceutical wholesalers. Sales
of NeuTrexin increased in 1998 as compared to 1997. The company
believes that this increase may be attributed to the use of
NeuTrexin by oncologists for the treatment of patients with
colorectal cancer, a use currently under investigation by the
company. See "NeuTrexin Clinical Trials."
The company has obtained a registered U.S. trademark for
NeuTrexin, the company's brand of trimetrexate glucuronate. The
company is also pursuing trademark registrations for NeuTrexin in a
number of foreign countries.
For information regarding the company's major customers and
geographic area data, see "Notes to the Consolidated Financial
Statements - Note 10."
Clinical Trials. The company is continuing to investigate
NeuTrexin as an anticancer agent. In response to data from Phase II
studies of NeuTrexin in combination with 5-fluorouracil ("5-FU") and
leucovorin in patients with metastatic colorectal cancer, the
company sponsored two randomized Phase III clinical trials of 5-FU
and leucovorin with and without NeuTrexin. Both of these studies are
closed to accrual of new patients, and the company expects to begin
data analysis during 1999. Research into topical and oral
formulations of NeuTrexin also is underway. The development of these
dosage forms
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will facilitate clinical research not only in patients with diseases
such as AIDS and cancer but, potentially, in patients with benign
diseases (such as psoriasis and rheumatoid arthritis).
Licenses of NeuTrexin to the Company. The company has obtained
an exclusive license to the United States Government's U. S. patent
claiming a method of treating PCP with trimetrexate. The term of
exclusivity is seven years from the first commercial use of the
product. After this period of exclusivity, the company also has a
non-exclusive license until the last of the licensed patents
expires. Under the terms of its agreement with the United States
Government, the company is required to pay royalties based on net
sales of NeuTrexin. Pursuant to an agreement with Warner-Lambert
Company ("Warner-Lambert"), the company has obtained an exclusive
worldwide license to manufacture and market NeuTrexin for use in
cancer or PCP under the patent rights and know-how held by
Warner-Lambert, including a composition of matter patent on the form
of NeuTrexin approved for commercial sale. Under the agreement, the
company is required to pay to Warner-Lambert royalties based on net
sales of NeuTrexin. The agreement may be terminated by
Warner-Lambert in a country outside the United States if commercial
sales are not commenced in such country by the first anniversary of
the date on which NeuTrexin could legally be sold in such country.
Patents and Orphan Drug Status. As noted above, the company
has licensed, on an exclusive basis, Warner-Lambert's NeuTrexin
patents. One of those patents, a U.S. composition of matter patent
on the form of NeuTrexin approved for commercial sale, was issued
March 15, 1983 and, pursuant to recent legislation, will be entitled
to a term of 20 years from the date of the first U.S. filed
application for that patent, October 31, 1980. Pursuant to the Drug
Price Competition and Patent Term Restoration Act of 1984, an
application has been filed and a certificate granted which extends
the term of the patent for 1,286 days, a period relating to the time
NeuTrexin was under review by the FDA. Therefore, the extended
expiration date for this patent is May 9, 2004. The company has
rights to the foreign counterparts of this U.S. Patent in many
European markets. These foreign counterpart patents were filed in
1981 and are due to expire in 2001. The company is applying for
supplementary patent protection in the EU countries where health
regulatory approvals for NeuTrexin have been received and where
there is a foreign counterpart patent. Such supplementary protection
may be granted for a period of up to five additional years. As of
March 1, 1999, supplementary protection has been granted in France,
Germany, Luxembourg, the United Kingdom and Sweden, each for a five
year term.
The company also has an exclusive license in the United States
for a U.S. Government patent claiming a method of treating PCP
infection with trimetrexate. See "Principal Products - NeuTrexin
Licenses of NeuTrexin to the Company."
Upon approval of the NDA for NeuTrexin in December 1993, the
product received seven years of orphan drug marketing exclusivity
under the orphan drug provisions of the FFDCA for the approved PCP
indication. NeuTrexin is also designated as an orphan drug for the
treatment of metastatic colorectal adenocarcinoma, metastatic
carcinoma of the head and neck, pancreatic adenocarcinoma and
advanced non-small cell carcinoma of the lung. If the company
obtains the first NDA approval for the product for any of these
indications, NeuTrexin would be eligible for seven years of orphan
drug marketing exclusivity for such approved indications. See
"Government Regulation," "Patents, Trademarks, and Trade Secrets,"
and "Orphan Drug Status."
Distribution and Marketing Agreements. The company's
co-promotion agreement with ALZA for NeuTrexin and Hexalen will
terminate in mid-1999, when the company will have sole
responsibility
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for the distribution, marketing and promotion of both products in
the U.S. See "Principal Products - Hexalen - Marketing" and
"Principal Products - Hexalen - Distribution and Marketing
Agreements."
The company has entered into distribution or licensing
agreements for NeuTrexin with a number of pharmaceutical companies
for several territories outside of the United States. The licensees
are required to pay the company royalties based on their net sales
of the product, and the company sells NeuTrexin to its distribution
partners at an agreed upon supply price. For example, the company
has licensed its rights for NeuTrexin in over 35 countries in Latin
America and Asia (the "Latin America/Asia Territories") to an
affiliate of Schering-Plough Corporation ("Schering"), Schering
Overseas Ltd. ("Schering Overseas"). The company has also licensed
its rights for NeuTrexin to another affiliate of Schering, Scherico,
Ltd. ("Scherico"), under two agreements, one covering territories
comprising Korea, Taiwan, Peru, Paraguay and six countries in the
Middle East (the "Korea/Taiwan/Peru/Paraguay/Middle East
Territories) and the other covering territories comprising
Australia, Iran, Iraq, New Zealand and over 30 countries in Eastern
Europe and Africa (the "Eastern Europe/Africa/ Australia/New Zealand
Territories"). Under these agreements, which also grant rights to
Ethyol, Scherico is required to pay the company royalties and
consulting fees, on a country-by-country basis, for 15 years
following the date of first commercial sale of NeuTrexin or Ethyol
in that country, subject to a one-year extension in certain
circumstances. The license for the East Europe/Africa/Australia/New
Zealand Territories provides Scherico with the right to negotiate
for additional products the company wishes to introduce into those
territories. The license for the Korea/Taiwan/Peru/Paraguay/Middle
East Territories provides Scherico with the right to expand the
territory to include three additional countries in the Middle East
if they become available. See "Ethyol Distribution and Marketing
Agreements."
Manufacturing. The company relies, in part, on third party
manufacturers to supply NeuTrexin. The company has contracted with
an approved source of drug substance as well as an approved source
of finished product for NeuTrexin. In addition, the company's
manufacturing plant located in Nijmegen, The Netherlands has
received Dutch regulatory approval to manufacture the finished
dosage form of NeuTrexin. The company supplies the EU markets with
NeuTrexin manufactured at its Nijmegen manufacturing plant. The
company has received FDA approval of its Nijmegen facility as a drug
manufacturer for NeuTrexin for commercial sale in the United States.
The company supplies the United States market with NeuTrexin
manufactured primarily at its Nijmegen manufacturing plant and
continues to purchase NeuTrexin for the United States market from
its approved third party manufacturer.
Ethyol(R) (Amifostine/WR-2721)
Description. Ethyol is an injectable agent for which the
company's NDA was approved by the FDA in December 1995 as a
selective cytoprotective agent to reduce the cumulative renal
(kidney) toxicity associated with repeated administration of
cisplatin in patients with advanced ovarian cancer.
On March 15, 1996, the company's supplemental NDA was approved
by the FDA under the Accelerated Approval Regulations as a
modification of the Ethyol indication to include treatment of
patients with non-small cell lung cancer for the reduction of
cumulative renal toxicity associated with repeated administration of
cisplatin. Products approved under the Accelerated Approval
Regulations require further adequate and well-controlled studies to
verify and describe clinical benefit. The company has a clinical
trial ongoing which the company anticipates may fulfill this
requirement. In the event the
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clinical trial fails to verify the clinical benefit of Ethyol for
this indication, the FDA may, under certain circumstances, withdraw
approval of this indication. See "Government Regulation."
The CPMP originally recommended the company's drug Ethyol for
approval at the CPMP meeting held on September 14, 1994. Ethyol was
recommended to reduce the neutropenia related risk of infection
(e.g. neutropenic fever) due to the combination regimen
cyclophosphamide and cisplatin in patients with advanced (FIGO State
III or IV) ovarian cancer. On July 26, 1996, the CPMP approved an
expanded indication to include protection of patients with advanced
solid tumors of non-germ cell origin from cumulative nephrotoxicity
of cisplatin and cisplatin-containing regimens, where unit doses of
cisplatin range from 60-120 mg/m2, in conjunction with adequate
hydration measures. As of March 1, 1999, Ethyol has received
approvals from the following EU member countries: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, The
Netherlands, Portugal, Spain, the United Kingdom and Sweden. The
company, either directly or through its overseas marketing partners,
has been seeking additional regulatory approvals for Ethyol.
Ethyol was approved for commercial sale in Canada in April,
1996 and launched by an affiliate of Eli Lilly and Company in
August, 1996. In addition to approvals in the United States, Canada
and the EU countries listed above, Ethyol has received approvals
from 34 countries throughout the world. See "Ethyol - Distribution
and Marketing Agreements."
In December 1996, after reviewing a chemistry and
manufacturing supplement to the Ethyol NDA, the FDA cleared for
marketing a room temperature crystalline form of Ethyol. This
crystalline form of Ethyol is claimed in issued United States
patents. See "Ethyol - Patents, Orphan Drug Status and NDA
Exclusivity." The company made crystalline Ethyol commercially
available in the United States in 1997 through ALZA, the company's
exclusive distributor in the United States.
In September 1998, the company submitted a registration
dossier with the regulatory agencies of the EU requesting marketing
authorization to expand the use of Ethyol to include protection
against acute and late toxicities associated with radiation therapy.
In December 1998, the company submitted a supplemental NDA to the
FDA covering the use of Ethyol to reduce the incidence and severity
of radiation-induced xerostomia (dry mouth), an indication which has
been granted orphan drug designation by the FDA.
Marketing. Through an agreement with ALZA, Ethyol was launched
in the United States in April 1996. Under the terms of this
agreement, ALZA has exclusive marketing rights to Ethyol in the
United States. ALZA's marketing program consists of direct mail,
journal advertising, symposia and promotion to prescribing
physicians by ALZA's oncology sales force with co-promotion by the
company's sales force. Ethyol is sold by the company to ALZA, and
ALZA then sells Ethyol to the distributors and wholesalers that
supply Ethyol for prescription sales. These rights expire on April
1, 2001, or on April 1, 2002 if ALZA chooses to exercise a one-time
option to extend the agreement. Thereafter, U.S. Bioscience will
market Ethyol, subject to a declining reverse royalty. See "Ethyol
Distribution and Marketing Agreements."
The company has obtained a registered U.S. trademark for
Ethyol, the company's brand of amifostine. The company is also
pursuing trademark registrations for Ethyol in a number of foreign
countries.
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For information regarding the company's major customers and
geographic area data, see "Notes to the Consolidated Financial
Statements - Note 10."
Clinical Trials. The company has an ongoing clinical trial
which the company anticipates may fulfill the FDA's requirement that
products approved under the Accelerated Approval Regulations undergo
further adequate and well-controlled studies to verify and describe
clinical benefit. See "Principal Products - Ethyol - General
Description" and "Government Regulation." The company is also
continuing to investigate the use of Ethyol to protect normal
tissues from the toxic effects of certain forms of chemotherapy,
radiation therapy and radio-chemotherapy (or combined modality
therapy) in a number of tumor types, without reducing the antitumor
effects of these modalities. During 1998, the company has been
managing four Phase III trials of Ethyol, two of which have been
closed to accrual of new patients and two of which are expected to
be closed to accrual in the first half of 1999. The company is also
investigating Ethyol's potential role as a bone marrow stimulant in
myelodysplastic bone marrow syndromes ("MDS"). MDS is a condition in
which the bone marrow is typically ineffective in its production of
the major blood elements: red blood cells, neutrophils and
platelets.
License of Ethyol to the Company. The company's exclusive
rights to develop and market Ethyol on a worldwide basis were
derived from an agreement with the Southern Research Institute
("Southern Research"), a not-for-profit research institution.
Effective May 1, 1993, the agreement was amended and restated (the
"Restated and Amended Ethyol Agreement"). Pursuant to the Restated
and Amended Ethyol Agreement, the company is required to pay
Southern Research a royalty on net sales of Ethyol or any
pharmaceutical composition containing Ethyol for a period of 10
years following the first commercial sale in a given country. Under
certain circumstances, the company is required to pay Southern
Research a reduced royalty rate on net sales of Ethyol for an
additional five years. The agreement is for a term of 15 years from
the date of first commercial sale on a country-by-country basis.
Patents, Orphan Drug Status and NDA Exclusivity. The original
United States composition of matter patent on Ethyol expired in July
1992. The company has developed novel proprietary dosage forms of
crystalline amifostine and a novel method for manufacturing
crystalline amifostine dosage forms. The company was granted a U.S.
Patent covering methods of manufacturing crystalline amifostine
dosage forms and the resulting dosage forms utilizing such method of
manufacture. The company also was granted a U.S. patent on
crystalline amifostine dosage forms which patent claims are
independent of the method of manufacture. Both patents expire in
July 2012. The company has foreign counterpart patent applications
pending, some of which have recently been allowed.
Upon approval of the NDA for Ethyol in December 1995, the
product received seven years of orphan drug marketing exclusivity
under the orphan drug provisions of the FFDCA for the approved
indication, as a chemoprotective agent for use with cisplatin in the
treatment of advanced ovarian cancer. During this seven-year period,
the FDA may not approve another company's NDA for the same drug with
the same indication provided that the subsequent drug is not deemed
clinically superior, there is not insufficient supply of the drug
and the exclusive approval is not otherwise withdrawn. Ethyol has
also been designated as an orphan drug for use as a chemoprotective
agent for use with cyclophosphamide in the treatment of advanced
ovarian carcinoma, as a chemoprotective agent for use with cisplatin
in the treatment of metastatic melanoma, for the prevention or
reduction of radiation-induced xerostomia, and for the prevention or
reduction of cisplatin induced toxicities. If the company obtains
the first NDA approval for the product for any of these indications,
Ethyol would be eligible for seven years of orphan drug marketing
exclusivity for such approved indication.
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In addition, upon approval of the NDA for Ethyol, the product
became entitled to a five year period of marketing exclusivity under
the FFDCA, which runs concurrently with the seven year orphan
exclusivity. Under the relevant provision of that Act, if an NDA is
approved for a drug that has not been the subject of any prior NDA
approval, no Abbreviated New Drug Application ("ANDA") referring to
that drug may be submitted for five years from the date of the NDA
approval (or four years if the ANDA applicant certifies that the
patent is invalid or certifies to noninfringement). Because Ethyol
is the first amifostine product to receive an NDA approval, it is
entitled to protection against FDA approval of an ANDA for a period
of five years. This five year marketing exclusivity does not,
however, prohibit the submission or FDA approval of subsequent full
NDAs filed by other sponsors based on such sponsors' separate
clinical investigations or paper NDAs supported by published
studies. See "Government Regulation," "Patents, Trademarks and Trade
Secrets," and "Orphan Drug Status."
Distribution and Marketing Agreements. The company has entered
into an exclusive marketing and distribution agreement with ALZA for
Ethyol in the United States. Under the terms of the Agreement, ALZA
has exclusive rights to market Ethyol in the United States for five
years and is responsible for sales and marketing; the company's
sales force co-promotes the product with ALZA. Under the terms of
this agreement, the company sells Ethyol to ALZA at a price based on
a percentage of the net sales price of Ethyol in the United States.
After the five-year period ending in 2001, which ALZA has an option
to extend for one year upon payment of a significant milestone,
marketing rights to Ethyol revert to the company, and ALZA will
receive payments from the company for 10 years (9 years if ALZA
exercises the option) based on sales of Ethyol in the United States.
Outside of the U.S. market, the company's primary marketing
partners are affiliates of Schering. For example, the company has
entered into an exclusive marketing and distribution agreement with
Scherico, an affiliate of Schering, for Ethyol in the countries
comprising the EU and European Free Trade Association (the "European
Territories"). Under this agreement, Scherico purchases Ethyol from
the company at a price based on a percentage of the net sales of
Ethyol in Germany, United Kingdom, Spain, Italy and France, and
Scherico's exclusive rights to market the product will continue for
seven years from January 1, 1997. The company may co-promote Ethyol
with Scherico for the two years following such seven year period.
Thereafter, the company will reacquire sole marketing rights. Under
certain circumstances Scherico is required to pay the company
milestone payments as regulatory approvals, if any, are obtained.
After reacquiring sole marketing rights, the company will pay
Scherico a percentage of net sales, if any, from the European
Territory for a period of three years. Under the terms of the
agreement, the company supplies Ethyol to Scherico. The contract
provides that Scherico may terminate the agreement at any time by
providing 180 days written notice to the company of its desire to
terminate the agreement. Sales of Ethyol to Scherico for the
European Territory have been gradually increasing.
In two separate agreements, the company has licensed Ethyol to
Scherico in Eastern Europe/Africa/Australia/New Zealand Territories
and the Korea/Taiwan/Peru/Paraguay/Middle East Territories. Under
these agreements, which also grant rights to NeuTrexin, Scherico is
required to pay the company royalties and consulting fees, on a
country-by-country basis, for 15 years following the date of first
commercial sale of Ethyol or NeuTrexin in that country, subject to a
one-year extension in certain circumstances. Scherico also paid
milestone payments to the company upon approval of Ethyol in
Australia and South Africa. The license for the East
Europe/Africa/Australia/New Zealand Territories provides Scherico
with the right to negotiate for additional products the company
wishes to introduce into those territories. The license for the
Korea/Taiwan/Peru/Paraguay/Middle East Territories provides
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Scherico with the right to expand the territory to include three
additional countries in the Middle East if they become available.
The company has licensed Ethyol to Schering Overseas in the
Latin America/Asia Territories. Schering Overseas purchases Ethyol
from the company and is required to pay the company royalties and
consulting fees for 10 years following the first commercial sale of
the product. Schering Overseas may incur certain payment obligations
for an additional five years under certain circumstances.
The company is seeking a marketing partner for Ethyol for
Japan.
Manufacturing. The company relies on an approved third party
source for supply of drug substance for Ethyol. The company's
facility located in Nijmegen, The Netherlands has been approved by
the FDA to manufacture Ethyol for the United States market. The
company's Nijmegen facility has also been approved by the Dutch
regulatory authorities to manufacture Ethyol for commercial sale in
Europe. In addition, the company has an agreement with an approved
contract manufacturer to produce the finished dosage form of Ethyol
for the United States and international markets.
Lodenosine (FddA)
General Description. Under the terms of an agreement with the
National Institutes of Health of the United States Public Health
Service, the company received a worldwide exclusive license to the
United States government's patent rights for use of the compounds
known as FddA and its active metabolite, FddI, for the treatment of
HIV infection, HIV-related infection or HIV-related disease in
humans. The company has also entered into a Cooperative Research and
Development Agreement ("CRADA") with the National Cancer Institute
("NCI") for clinical development of lodenosine.
Lodenosine is an acid stable, purine-based nucleoside reverse
transcriptase inhibitor that was discovered, patented and developed
preclinically by researchers at the NCI. In a SCID (immune-deprived)
mouse model, lodenosine demonstrated potent antiviral activity
against HIV and was superior to AZT. In other laboratory studies,
lodenosine has shown synergistic activity with AZT, d4T and 3TC in
addition to being active against HIV clinical isolates that were
resistant to these drugs.
Clinical Trials. The company has been collaborating with the
NCI on the clinical development of lodenosine under the CRADA. The
collaborative Phase I/II clinical trials of lodenosine in adult and
pediatric patients are being conducted at the NIH Clinical Center.
The first clinical trial results from the Phase I dose escalation
study conducted under the CRADA demonstrated that lodenosine had
anti-HIV activity, defined as a reduction in HIV viral load, even in
patients who had failed other AIDS antiretroviral therapies
including AZT, 3TC and d4T. In the Fall of 1998, the company 's
multi-center Phase II clinical trial of lodenosine cleared
regulatory agencies in the United States, Great Britain and Brazil
and patients are being accrued to this study. Lodenosine is still in
the early stages of clinical development. For a description of the
steps required before a drug may be marketed in the United States
see "Government Regulation."
License of Lodenosine to the Company. The company obtained a
worldwide exclusive license from the United States Government for
lodenosine for the field of use for treatment of HIV infection,
HIV-related infection or HIV-related disease in humans using FddA or
FddI. The license extends until
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the expiration of the last to expire of the Licensed Patents under
the agreement. Under the terms of the agreement, the company is
required to pay the Government royalties on sales of FddA and FddI.
Patents. The United States Government has filed patent
applications covering, inter alia, FddA and FddI in the United
States Patent and Trademark Office and in certain foreign
jurisdictions. A United States Patent issued to the United States
Government on February 27, 1996 covering, inter alia, FddA and FddI.
A United States Patent issued to the United States Government on
October 15, 1996 covering methods of using either FddA or FddI to
treat a human infected with HIV and/or AIDS. A United States Patent
issued to the United States Government on August 9, 1994 covering a
synthesis of FddA. The company has an exclusive license to these
patents. See "License of Lodenosine to the Company."
Manufacturing and Further Development. The company has had
lodenosine manufactured in limited quantities to supply this
investigational drug for laboratory studies and early clinical
trials, and intends to rely on one or more third parties for
supplies of lodenosine that may be required for further clinical
studies. There can be no assurance that the company or any third
party will be able to scale up a manufacturing process for
lodenosine that will produce sufficient quantities of lodenosine at
a commercially reasonable cost. The company is seeking a commercial
partner for the further development of lodenosine. See "Risk Factors
- Limited Manufacturing Experience."
Research and Development
Research. The company does not currently have proprietary research
and preclinical development facilities, since its strategy has emphasized the
acquisition of drugs and related therapies that have demonstrated some potential
value in preclinical testing or clinical trials. The company does have
facilities where the company conducts analytical chemistry in support of its
regulatory applications and product development and performs some analytical
services on a contract basis. The company's clinical studies, designed to
provide the rigorous clinical testing required before a new drug can be approved
by the FDA, are conducted by physicians, generally under clinical study
agreements with the company. The company is dependent upon its ability to
attract and recruit qualified investigating physicians and upon their ability to
accrue patients to the company's sponsored clinical studies.
Development. The company has established relationships with numerous
preclinical programs in the United States and Europe for the purpose of
conducting its preclinical research and development programs.
Research and development costs were $19,041,900 for 1998.
Marketing
The market for chemotherapeutic drugs is highly concentrated and
comprised principally of oncologists practicing in cancer treatment centers,
large hospitals and private medical practices. The decision to use such drugs is
primarily an individual physician's decision, and marketing efforts are focused
on individual oncologists who prescribe such drugs. The market for intravenous
therapies for PCP is concentrated in about 120 hospitals which are found
primarily in major metropolitan areas, as well as private medical practices that
treat patients at risk for PCP. The use of such drugs may require acceptance
onto an individual hospital's formulary. The company's marketing efforts are
directed at prescribing physicians, pharmacists and members of the formulary
committees at these hospitals.
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In the United States, the company's marketing efforts are focused on
approximately 5,500 physicians. This audience is comprised of oncologists,
infectious disease specialists and other physicians who treat patients with
cancer or PCP. With respect to Hexalen, the company has directed most of its
marketing efforts to approximately 4,000 physicians who have prescribed Hexalen
at some point since its introduction or have reasonable potential to prescribe
Hexalen. With respect to NeuTrexin, the company has directed its marketing
efforts to approximately 1,500 specialists who treat PCP. Under the terms of its
agreement with ALZA for Ethyol, ALZA has exclusive marketing rights to Ethyol.
Thus, ALZA directs the marketing program in the United States for Ethyol. See
"Principal Products - Ethyol - Marketing."
Hexalen and NeuTrexin are supplied through pharmaceutical
wholesalers in the United States. Representatives of the company have contacted
wholesalers by mail and have visited major wholesalers personally to establish
account relationships and distribution channels.
It is normal and customary in the pharmaceutical business in the
United States for wholesalers and distributors to be able to return
pharmaceutical products that remain unsold at their expiration date. It is
generally the company's policy to accept return of out-of-date pharmaceutical
products which the company has sold to the wholesalers and distributors for
direct end-market sales. These returns are accepted under terms and conditions
set by the company.
To commercialize its products outside the United States, the company
has entered into agreements with other companies. See "Principal Products -
Hexalen" "Principal Products - NeuTrexin," and "Principal Products - Ethyol."
For information regarding the company's major customers and
geographic area data, see "Notes to the Consolidated Financial Statements - Note
10."
Competition
The sales potential of a pharmaceutical product is dependent upon
numerous variables, including efficacy, toxicity, trends in current treatment
regimens, established treatment algorithms, ease of incorporation into
combination regimens, reimbursement, pharmacoeconomic impact, clinical data,
price, acceptance by physicians, marketing, distribution and competitive
products. The availability of patent protection or marketing exclusivity
afforded by orphan drug status or regulatory exclusivity afforded by the Food,
Drug and Cosmetic Act, and the ability to obtain expanded labeling are also
critical. See "Government Regulation."
The company is engaged in an industry that is highly competitive.
Many companies, including well known pharmaceutical companies, are marketing
anticancer drugs, drugs to ameliorate or treat the side effects of cancer
therapies, and drugs for the treatment of AIDS and allied diseases, and are
seeking to develop new products and technologies for these applications. Many of
these drugs, products and technologies are, or may be, in the future,
competitive with the company's drugs. Many of these companies have substantially
greater financial, technical, manufacturing, marketing and other resources than
the company and may be better equipped than the company to develop, market and
manufacture these therapies. In addition, many such companies have had
significantly greater experience both in undertaking preclinical testing and
human clinical trials of new or improved pharmaceutical products and in
obtaining the approval of the FDA or other regulatory authorities to market
products for health care. Accordingly, the company's competitors may succeed in
obtaining regulatory approval of such products before the company obtains
approval of its own products. The company is also competing with respect to
marketing capabilities and manufacturing efficiency. No assurance can be given
that
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drugs developed by the company will be able to compete successfully against
therapies already established in the marketplace or against therapies which may
result from advances in biotechnology or other forms of therapy that may render
the company's drugs less competitive or obsolete. In addition, the company's
drugs may become subject to generic competition at such times as generic
applications for drug approvals may be filed and approved by the FDA.
In the United States, the company believes that Bristol-Myers Squibb
Company holds the largest share of the chemotherapy market both in terms of
approved products and annual sales, and therefore dominates the market place.
Other companies maintaining an active oncology marketing and sales presence
include Schering-Plough Corporation, Pharmacia & Upjohn, Zeneca (a subsidiary of
Imperial Chemical Industries PLC), Hoffmann-La Roche, Johnson & Johnson, Immunex
Inc. (a subsidiary of American Home Products), Amgen, Inc., Chiron Corporation,
Rhone-Poulenc Rorer S.A., Eli Lilly and Company and SmithKline Beecham p.l.c.
In the United States, Glaxo Wellcome, Inc., Hoffmann-LaRoche, Inc.,
Pharmacia & Upjohn, Inc., Gensia, Inc. and Fujisawa Pharmaceutical Co., Ltd.
participate in the PCP market.
Other groups active in anticancer and AIDS research include
universities and public and private research institutes. These institutions are
becoming increasingly competitive in recruiting personnel from the limited
supply of highly qualified clinical physicians, academic scientists and other
professionals. However, the company believes that such institutions represent an
important source of novel compounds for in-licensing, since often their mission
does not include bringing compounds to market and they generally lack the
capabilities to do so.
Manufacturing
The company has a small volume parenteral products manufacturing
facility in Nijmegen, The Netherlands, to manufacture the company's injectable
drug supplies. The plant has undergone an intense validation and qualification
program aimed at regulatory approval for commercial manufacturing and testing.
The Nijmegen manufacturing facility received approval of the Dutch regulatory
authorities and is now able to manufacture Ethyol and NeuTrexin for commercial
sale in Europe. The Nijmegen manufacturing facility has also been inspected by
the FDA and approved as a manufacturing site for NeuTrexin and Ethyol for
commercial sale in the United States. The company relies on third parties to
manufacture drug substance for all of its products and to a decreasing, but
still important extent, on third parties to manufacture its finished drug
products under contract. There can be no assurance that third party
manufacturers will give the company's orders highest priority, or that the
company would be able to readily find a substitute manufacturer if one were
needed on short notice. See "Principal Products" for information regarding
manufacturing of the company's products.
Patents, Trademarks and Trade Secrets
Proprietary protection for the company's products is important for
the company's business. The patents obtained by the company's licensors and
those obtained by the company are expected to provide some degree of protection
for the company's products, although the scope and validity of patent protection
is uncertain.
The company actively seeks patent protection both in the United
States and abroad for its proprietary technology. In addition to seeking its own
patents, the company has entered into license agreements with various
pharmaceutical companies and research, educational and governmental institutions
to obtain certain patent rights from them for the purpose of developing,
manufacturing and selling potential products using the compounds and
technologies protected by these patents. See discussions of the patent rights
under "Principal Products." Under
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these agreements, the company is obligated to pay royalties at varying rates
based upon, among other things, levels of revenues from the licensed products.
Generally, the agreements continue for a specified number of years or as long as
any licensed patents remain in force, absent breach of the terms of the
agreements or termination of the agreements. See discussions of the various
license agreements under "Principal Products."
Under the Drug Price Competition and Patent Term Restoration Act of
1984, a United States product patent or use patent may be extended for up to
five years under certain circumstances to compensate the patent holder for the
time required for FDA regulatory review of the product. The benefits of the Act
are available only to the first approved use of the active ingredient in the
drug product and may be applied only to one patent per drug product. See
"Principal Products - NeuTrexin - Patents and Orphan Drug Status." This law also
establishes a period of time following FDA approval of certain new drug
applications during which other sponsors may not submit an ANDA for the drug.
There can be no assurance that the company will be able to take advantage of
either the patent term extension or market exclusivity provisions of this law.
In addition to seeking the protection of patents and licenses, the
company also relies on trade secrets to maintain its competitive position. It is
the practice of the company to enter into confidentiality agreements with
employees, consultants and licensees. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the employee shall be the exclusive property of the
company. No assurance can be given, however, that these measures will prevent
the unauthorized disclosure or use of such information.
Hexalen, Ethyol and NeuTrexin are registered United States
trademarks of the company.
Orphan Drug Status
Pursuant to the orphan drug provisions of the FFDCA, the FDA may
designate a drug intended to treat a "rare disease or condition" as an "orphan
drug". "Rare disease or condition" is one which affects less than 200,000 people
in the United States, or which affects more than 200,000 people but for which
the cost of development and making available the drug will not be recovered from
sales of the drug in the United States. Upon approval of an NDA for an orphan
drug, such drug may be eligible for exclusive marketing rights in the United
States for designated and approved indications for seven years. Orphan drugs may
also be eligible for federal income tax credits for certain clinical trial
expenses. FDA may withdraw orphan exclusivity if it determines there are
insufficient quantities of the product available to the public. FDA may also
approve another drug for the same indication if it is characterized as not the
same drug because it is clinically superior. The company holds orphan drug
designations for Ethyol for use as a chemoprotective agent for use with
cisplatin and cyclophosphamide in the treatment of ovarian cancer and for use as
a chemoprotective agent for cisplatin in the treatment of metastatic melanoma,
and for NeuTrexin for PCP, metastatic colorectal cancer, metastatic head and
neck cancer, non-small cell lung cancer and pancreatic cancer. The company's
seven year regulatory exclusivity associated with the orphan drug designation
for Hexalen for advanced ovarian cancer expired in December 1997. See "Principal
Products."
Orphan drug marketing exclusivity is only available to the sponsor
of the first approved NDA for a product that has been designated as an orphan
drug by the FDA. Following the first such approved orphan drug NDA, the FDA
would be prohibited from approving another company's NDA for the same drug for
the same indication for a period of seven years. However, prior to the approval
of the first such orphan drug NDA, it is
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possible that more than one product may be designated by the FDA as an orphan
drug for the same indication. Therefore, because only the first sponsor to
obtain NDA approval of an orphan designated drug is entitled to the benefits of
market exclusivity, there is a risk that not all sponsors who receive an orphan
drug designation for a particular indication will gain the benefits of such
exclusivity or will not themselves be excluded from the market.
The company has received several orphan drug designations for
additional uses of NeuTrexin and Ethyol. In addition, the company believes that
several of its other products and indications may also qualify for designations
as orphan drugs. There can be no assurance, however, that such orphan designated
products, or any products that may be designated as orphan drugs in the future,
will be the first such drug to receive FDA approval, or will not themselves be
excluded from the market if FDA first approves a competing orphan drug NDA or
will not have competition from a clinically superior version of a drug. There
also can be no assurance that the orphan drug provisions of the FFDCA will not
be amended, or that the benefits of the existing statute will remain in effect.
Government Regulation
The production and marketing of the company's products and its
research and development activities are subject to comprehensive regulation by
various federal, state and local authorities in the United States and
governmental authorities of other countries. In particular, the FDA exercises
regulatory authority over the development, testing, formulation, manufacture,
marketing, labeling, storage, record keeping, quality control, advertising and
promotion of the company's products. Failure to comply with applicable FDA
requirements can, among other things, result in Warning Letters, fines,
suspensions of regulatory approvals, product recalls or seizures, operating
restrictions, injunctions and criminal prosecution.
A new drug may not be marketed in the United States until it has
undergone rigorous testing and has been approved by the FDA. The drug may then
be marketed only for the specific indications, uses, formulation, dosage forms
and strengths approved by the FDA. Similar requirements are imposed by foreign
regulators upon the marketing of a new drug in their respective countries.
The steps required before a drug may be marketed in the United
States include (a) preclinical laboratory and animal tests, (b) submission to
the FDA of an Investigational New Drug application (an "IND"), which must become
effective before human clinical trials may commence, (c) human clinical trials
to establish the safety and efficacy of the drug, (d) the submission of a
detailed NDA to the FDA, and (e) FDA approval of the NDA. In addition to
obtaining FDA approval for each product, each establishment where the drug is to
be manufactured for sale in the United States must be registered with the FDA.
Domestic manufacturing establishments must comply with current good
manufacturing practices ("GMP") and are subject to periodic inspections by the
FDA. Foreign manufacturing establishments also must comply with GMPs and are
subject to periodic inspection by the FDA and/or by local authorities under
agreement with the FDA.
Preclinical tests include laboratory evaluations and animal studies
to assess the potential safety and efficacy of the product. Products must be
formulated according to GMP, and preclinical tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of preclinical tests are submitted to the FDA as part of
an IND, which must become effective before the sponsor may conduct clinical
trials in human subjects. Unless the FDA objects to an IND, the IND becomes
effective 30 days following its receipt by the FDA. There is no certainty that
an IND applicant will be allowed to commence clinical trials following
submission of an IND.
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Clinical trials involve the administration of the investigational
drug to patients. Clinical trials typically are conducted in three phases which
generally are conducted sequentially. Drugs are first tested in Phase I for
safety, side effects, dosage tolerance, metabolism and clinical pharmacology.
With respect to anticancer agents, testing typically is done with a small group
of patients with advanced cancers that have proved unresponsive to other forms
of therapy. Phase I testing typically takes one year to complete. Phase II
involves tests in a larger but still limited patient population to determine the
efficacy of the drug for specific indications, to determine optimal dosage and
to identify possible side effects and safety risks. Phase II testing for an
indication typically takes from one and one-half to two and one-half years to
complete. When a drug shows efficacy in Phase II evaluations, expanded Phase III
trials are generally undertaken to evaluate the overall risks and benefits of
the drug in relationship to the treated disease in light of other available
therapies. Phase III studies generally take from two and one-half to five years
to complete. There can be no assurance that Phase I, Phase II or Phase III
testing will be completed successfully within any specified time period, if at
all. Furthermore, the company and/or the FDA may suspend clinical trials at any
time if it decides that patients are being exposed to a significant health risk
or there are other concern about the validity of the trial.
The results of the preclinical studies and clinical trials are
submitted to the FDA as part of an NDA for approval of the marketing and
commercial shipment of the drug. The NDA also includes information pertaining to
the chemistry, formulation, activity and manufacture of the drug and each
component of the final product, as well as details relating to the sponsoring
company. The NDA review process takes from six months to one year on average to
complete, although reviews of treatments for cancer and other life-threatening
diseases may be accelerated. However, the process may take substantially longer
if the FDA has questions or concerns about a product. In general, the FDA
requires at least two adequate and well-controlled clinical studies
demonstrating efficacy in order to approve an NDA. Under the Food and Drug
Modernization Act of 1997 ("FDAMA"), the FDA may determine that data from one
such clinical trial may be sufficient. The FDA may request additional
information, such as long term toxicity studies or other long-term studies
relating to product safety or efficacy. Notwithstanding the submission of such
data, the FDA ultimately may decide that the application does not satisfy its
regulatory criteria for approval. Finally, the FDA may require additional
clinical tests following NDA approval.
Under FDAMA, the FDA is statutorily authorized to expedite (or "fast
track") the approval of certain drugs and biological products that are intended
to treat serious or life-threatening illnesses and may address unmet medical
needs. The "fast tract" provisions of FDAMA are intended to codify existing FDA
Accelerated Approval Regulations. Fast track approval is available when a
product has been shown to have an effect on a clinical or surrogate endpoint
that is reasonably likely to predict clinical benefit. Drugs that receive fast
tract approval may be subject to certain requirements, including that the
sponsor conduct the necessary and appropriate post-approval studies, and that
the sponsor submit copies of all promotional materials for FDA review during the
pre-approval review period and for a period of time following approval as
specified by the FDA. Under FDAMA, the FDA may withdraw the approval of a fast
track product if: (1) the sponsor fails to conduct any of the required
post-approval studies of the product with due diligence; (2) a post-approval
study of the fast track product fails to verify the product's clinical benefit;
(3) other evidence demonstrates that the fast track product is not safe or
effective under the conditions of use; or (4) the sponsor disseminates false or
misleading promotional materials regarding the product.
Under existing Accelerated Approval Regulations promulgated prior to
enactment of FDAMA, which still are effective, the agency will accelerate
approval of certain drugs and biological products for serious or
life-threatening illnesses, with provisions for any necessary continued study of
the drugs' clinical benefit, after approval or with restrictions on use, if
necessary. Accelerated approval is considered when approval can be
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reliably based on evidence from adequate and well-controlled studies of the
drug's effect on a surrogate endpoint that reasonably suggests clinical benefit
or on evidence of the drug's effect on a clinical endpoint other than survival
or irreversible morbidity, pending completion of studies to establish and define
the degree of clinical benefits to patients. Additionally, the FDA may determine
that a drug shown to be effective for the treatment of a serious or life
threatening disease can be used safely only if distribution or use is modified
or restricted. Drugs approved under the Accelerated Approval Regulations are
subject to the requirement that the drug be studied further, after approval,
where there is uncertainty regarding the clinical benefit or ultimate outcome.
The FDA has the authority to withdraw approval, following a hearing, if: (1) a
postmarketing clinical study fails to verify clinical benefit; (2) the applicant
fails to perform the required postmarketing study with due diligence; (3) use
after marketing demonstrates that postmarketing restrictions are inadequate to
assure safe use of the drug product; (4) the applicant fails to adhere to the
postmarketing conditions agreed upon; (5) promotional materials are false or
misleading; or (6) other evidence demonstrates that the drug product is not
shown to be safe or effective under its conditions of use.
Under the regulations governing accelerated approvals, promotional
materials must be submitted to the FDA at least 30 days prior to the intended
time of initial dissemination of such materials. This is in contrast to the
FDA's requirement for drugs approved by the FDA not under the Accelerated
Approval Regulations, where promotional materials must be provided to FDA upon
first use.
Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's current GMP standards, which also
must be observed at all times following approval. Accordingly, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to ensure compliance with GMP standards. Failure to so comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing or seizure of the product. The FDA may also request a voluntary
recall of a product.
The product testing and approval process is likely to take a
substantial number of years and involves the expenditure of substantial
resources. The FDA also may require post-marketing testing and surveillance to
monitor the product and its continued compliance with regulatory requirements.
Upon approval, a drug may only be marketed for the approved indications in the
approved dosage forms and at the approved levels. In addition, for commercial
sales in the United States, the drug must be manufactured at manufacturing sites
approved by the FDA for the manufacture of the particular drug. Therefore, the
company is highly dependent on the ability of the approved facility or
facilities to manufacture the particular drug. A fire or other disaster
affecting an approved manufacturing site could have a materially adverse effect
on the ability of the company to supply a particular drug product. In addition,
foreign regulatory authorities may also require that manufacturing sites for
drugs be approved to manufacture the particular drug.
Adverse experiences with the product must be reported to the FDA and
other regulatory authorities. The FDA also may require the submission of any lot
of the product for inspection and may restrict the release of any lot that does
not comply with FDA standards, or may otherwise order the suspension of
manufacture, recall or seizure if non-compliant product is discovered. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems concerning safety or efficacy of the product are
discovered following approval.
Under FDAMA, the FDA has been reauthorized to impose user fees on
manufacturers of prescription drugs. User fees were initially authorized under
the Prescription Drug User Fee Act of 1992, which was enacted to expedite FDA
review and approval of new drugs by providing the FDA with additional funding.
There are
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three kinds of user fees that can be imposed: (1) a one-time fee for each single
source prescription NDA or supplemental NDA that incorporates new clinical data
submitted on or after September 1, 1992; (2) an annual fee for each
establishment named in an NDA that manufactures the product in the NDA; and (3)
an annual fee for each single source prescription drug product marketed. Under
FDAMA, no user fees are assessed on NDAs for products designated as orphan
drugs, unless such application also includes a non-orphan indication.
The company also is subject to foreign regulatory requirements
governing clinical trials, manufacturing of products, marketing of products,
product approvals, marketing authorization, and pricing approvals. Whether or
not FDA approval has been obtained, approvals and/or authorizations by the
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing of the product in those countries. The approval
process varies from country to country and the time required may be longer or
shorter than that required for FDA approval. Under its agreement with licensees
and distributors in foreign countries, the company may require the licensee or
the distributor to be responsible for obtaining regulatory approvals and/or
authorizations in their respective territories.
Scientific Advisory Board and Consultants
The company's Scientific Advisory Board consists of prominent
physicians and preclinical scientists who are experts in various areas of
research and who the company believes will make a contribution to the
development of the company's business. The Scientific Advisory Board advises
management of advances in relevant science, assists in identifying specific
product opportunities and aids in recruiting personnel and procuring research
contracts.
In addition to the individuals serving on the Scientific Advisory
Board, the company has retained the services of physicians and preclinical
scientists (the "Scientific Consultants") representing a broad spectrum of
scientific disciplines in medicine, as well as consultants in such areas as
preclinical drug development and marketing. These consultants are paid
principally on a per diem fee basis and in some cases have been granted options
to purchase the company's common stock under the company's stock option plans.
The company also pays for preclinical studies and for human clinical trials in
the academic laboratories of several of the Scientific Consultants. Certain of
the company's agreements with Scientific Consultants require them to disclose
and assign to the company all ideas, discoveries and inventions developed by
them in the course of providing consulting services to the company.
Employees
As of December 31, 1998, the company employed 153 persons, including
five part-time employees.
None of the company's employees is covered by a collective
bargaining agreement. Management considers the company's relations with its
employees to be good.
18
<PAGE> 20
Executive Officers of the Registrant
The executive officers of the company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Boyd Clarke 50 President, Chief Executive Officer and
Director
Robert I. Kriebel 56 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Martha E. Manning 44 Executive Vice President, General Counsel
and Secretary
Wolfgang Oster, M.D. 41 Executive Vice President, Worldwide Clinical
Research
</TABLE>
Mr. Clarke was elected to the Board of Directors in September 1996
when he joined the company as President and Chief Operating Officer. In March
1998, he was promoted to the position of President and Chief Executive Officer.
From 1977 until Mr. Clarke joined the company, Mr. Clarke held various positions
with Merck & Co. and its affiliates, including Vice President, Strategy,
Alliance Management and Development of Merck Vaccines from 1995 to 1996;
President of Pasteur-Merieux MSD, from 1993 to 1994; General Manager,
Pasteur-Merieux - Merck Affairs of Merck & Co., Inc., from 1992 to 1993; and
Executive Director, Corporate Planning of Merck & Co., Inc., from 1988 to 1992.
Mr. Kriebel joined the company in April 1991 as Senior Vice
President - Finance and Administration and Treasurer and was elected Director in
May 1991. On September 26, 1996, Mr. Kriebel was promoted to the position of
Executive Vice President, Chief Financial Officer and Treasurer. He held various
positions with Rhone-Poulenc Rorer Inc. (formerly Rorer Group Inc.) from 1974
until November 1990. From 1987 to November 1990 he was Vice President and
Controller of Rorer Group Inc.'s Armour Pharmaceutical Company. In 1986, Mr.
Kriebel was Vice President - Investor Relations of Rorer Group Inc. and from
1979 to 1985 he was Treasurer of Rorer Group Inc.
Ms. Manning joined U.S. Bioscience as Vice President, General
Counsel and Secretary in May 1993. In December 1996, Ms. Manning was promoted to
Senior Vice President, General Counsel and Secretary, and in December 1998, she
was promoted to Executive Vice President, General Counsel and Secretary. From
July 1988 until joining U.S. Bioscience, Ms. Manning served as General Counsel
for The Wistar Institute of Anatomy and Biology, the nation's oldest independent
basic biomedical research institute. From 1983 until joining Wistar, Ms. Manning
was an associate with the law firm Morgan, Lewis & Bockius.
Dr. Oster joined the company on December 10, 1992 and early in 1993
became Vice President, Clinical Research, located in the company's Watford,
United Kingdom office. Effective December 11, 1996, Dr. Oster was promoted to
the position of Senior Vice President, Worldwide Clinical Research and relocated
to the company's United States offices in West Conshohocken, Pennsylvania. In
December 1998, he was promoted to
19
<PAGE> 21
the position of Executive Vice President, Worldwide Clinical Research. Prior to
joining U.S. Bioscience, he served as director of clinical research and
development for oncology at Behringwerke/Hoechst in Marburg, Germany from 1989
to 1992. He continues as adjunct professor and member of the faculty of the
Albert-Ludwig University, Freiburg, Germany. He is a graduate of the University
of Mainz, Germany, where he earned the degree of Bachelor of Science and a
graduate of the University of Mainz Medical School as well. He did post-doctoral
training at the University of Mainz and the Memorial Sloan-Kettering Cancer
Center in New York.
Risk Factors
The prospects of the company may be affected by a number of risk
factors, including the matters discussed below:
Reliance on Collaborative Marketing, Manufacturing and Selling
Arrangements
The company commercializes all three of its marketed products
through various contractual arrangements with other companies and, therefore,
the company is highly dependent on its contractual partners for marketing,
manufacture and sale of its drug products. If any of the company's major
commercial partners (such as ALZA for Ethyol in the U.S. market) fails to
successfully commercialize the company's product(s), the company's business
would suffer. In addition, the company could have disagreements or disputes with
its commercial partners which could result in decreased sales of the company's
products. There is also the risk that the company may not be able to negotiate
acceptable contractual arrangements with the commercial partners that the
company desires in the future.
Future Capital Needs; Availability of Adequate Funds
The company believes that its current cash and investments and
anticipated revenues from product sales and other sources will be sufficient to
cover the company's anticipated level of cash requirements for at least three
years. However, the company cannot be sure that it will achieve significant
revenues or profitable operations. The company's future capital requirements
will depend on many factors, including the costs of research and development,
marketing and administration, capital equipment and facilities; the time and
costs involved in obtaining regulatory approvals; the costs involved in filing,
prosecuting and enforcing patent claims; competing technological and market
developments; changes in commercial partners and the ability of the company to
establish and maintain good collaborative relationships; and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. If the company's existing resources are insufficient to fund its
activities, additional funds may be raised, including through public or private
financings. Additional funds may not be available when needed, or, if available,
they may not be available on acceptable terms. If addition, if funds are raised
by issuing Common Stock (or securities convertible into Common Stock), the
interests of existing stockholders may be diluted. If adequate funds are not
available, the company may have to significantly curtail one or more of its
research or development programs or obtain funds through arrangements with
collaborative partners or others that could require the company to give up
rights to certain of its technologies, product candidates or products.
Uncertainty Associated with Clinical Trials
The company is engaged in an extensive program of clinical trials
which hopefully will demonstrate the efficacy, safety and benefit to patients of
its marketed products and its products in clinical development. There are
significant risks involved in each stage of clinical drug development. The
company or a regulatory agency
20
<PAGE> 22
(the FDA in the U.S.) may suspend clinical trials at any time if the patients
participating in such trials are being exposed to unacceptable health risks.
Further, there is always a risk that a clinical trial will not demonstrate that
a product or product candidate is safe or effective, or that regulatory agencies
will not approve a product for the indication(s) the company seeks.
The completion of each clinical trial depends on the rate of patient
enrollment and the quality of the data, among other things. Patient enrollment
depends on several factors, including the size of the patient population, the
nature of the protocol, eligibility criteria for the study, whether the patient
population can complete the protocol, the proximity of patients to clinical
sites and the ability of investigators to continue follow up on patients with
life threatening diseases. Data quality also depends on many factors, including
the skill and diligence of participating investigators, research staff and
clinical monitors. The company could have increased expenses and delayed
revenues if it cannot achieve timely patient enrollment and retrieve quality
data from its clinical trials.
No Assurance of Regulatory Approvals
The development, production and marketing of the company's products
are subject to regulation by numerous federal, state and local governmental
authorities in the United States and other countries where the company intends
to test and market its products. Prior to marketing, each drug product developed
by the company must undergo an extensive regulatory approval process. In
addition, before beginning a clinical study, it must be approved by an
independent Institutional Review Board ("IRB") that considers ethical factors,
the safety of patients, the possible liability of the host institution and other
factors.
The regulatory process, which includes preclinical and clinical
testing of each drug candidate to establish its safety and efficacy, normally
takes many years and requires the expenditure of substantial resources. At any
time during the regulatory review, it is possible that the company and the
regulatory agencies may have different interpretations of data obtained from
preclinical and clinical activities, and those differences could delay, limit or
prevent regulatory approvals. In addition, the company may encounter delays or
rejections resulting from regulatory policies for drug approval that may occur
during the period of product development and regulatory review. For a variety of
reasons, the company may not obtain regulatory approval of one or more of the
new drugs or indications it seeks. Even if the company does receive regulatory
approval of a drug, the approval may be limited in terms of the indicated uses
for which the drug is approved for marketing. After a product is approved and on
the market, if regulatory agencies identify previously unknown problems with the
product, manufacturer or facility, they may place restrictions on the product or
the manufacturer, and may require withdrawal of the product from the market. If
the company fails to comply with applicable regulatory requirements, the results
could include fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. Since the regulatory
environment is subject to change, the company may be subject to additional
regulation which could prevent or delay regulatory approval of the company's
products.
Accelerated Approval Regulations
The company's product Ethyol is approved for reduction of renal
toxicity associated with repeated administration of cisplatin in patients with
non-small cell lung cancer under the Accelerated Approval Regulations. In
December of 1992, the FDA issued regulations (Accelerated Approval Regulations)
under which the agency will accelerate approval of certain drugs and biological
products for serious or life-threatening illnesses, with provisions for any
necessary continued study of the drugs' clinical benefit, after approval or with
restrictions on use, if necessary. Accelerated approval is considered when
approval can be reliably based on
21
<PAGE> 23
evidence from adequate and well-controlled studies of the drug's effect on a
surrogate endpoint that reasonably suggests clinical benefit or on evidence of
the drug's effect on a clinical endpoint other than survival or irreversible
morbidity, pending completion of studies to establish and define the degree of
clinical benefits to patients. The FDA may determine that a drug, effective for
the treatment of a disease, can be used safely only if distribution or use is
modified or restricted. Drugs approved under the Accelerated Approval
Regulations are subject to the requirement that the drug be studied further
after approval where there is uncertainty regarding the clinical benefit or
ultimate outcome. FDA has the authority to withdraw approval, following a
hearing, if: (1) a postmarketing clinical study fails to verify clinical
benefit; (2) the applicant fails to perform the required postmarketing study
with due diligence; (3) use after marketing demonstrates that postmarketing
restrictions are inadequate to assure safe use of the drug product; (4) the
applicant fails to adhere to the postmarketing conditions agreed upon; (5)
promotional materials are false or misleading; or (6) other evidence
demonstrates that the drug product is not shown to be safe or effective under
its conditions of use. Therefore, the company cannot be certain that FDA, having
granted accelerated approval of Ethyol for non-small cell lung cancer, will not
later withdraw that approval.
Uncertainty Associated with Health Care Delivery and Third-Party
Reimbursement
There continue to be significant changes in health care and the way
health care is delivered. For example, in the Balanced Budget Act of 1997,
Congress established reimbursement for prescription drugs under Medicare at 95%
of the drug's average wholesale price and additional reductions have been
recommended by the Health Care Financing Administration. The company is unable
to predict the effect of future changes to health care and its delivery on the
future operation of the company's business. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for therapeutic products. If adequate
coverage and reimbursement levels are not provided by government and third-party
payors for uses of the company's products, the market acceptance of these
products would be adversely affected. Other changes affecting drug pricing, drug
reimbursement, prescription benefits and levels of reimbursement for drugs could
have a significant negative effect on the company's business.
Technological Change and Competition
The company is engaged in a business that is highly competitive.
Many companies, including well known pharmaceutical companies, are marketing
anticancer drugs, drugs to reduce or treat the side effects of cancer therapies
and drugs for the treatment of AIDS and allied diseases, and many are also
seeking to develop new products and technologies for these applications. Many of
these drugs, products and technologies are, or in the future may be, competitive
with the company's drugs.
The company's Phase III clinical studies for Ethyol and NeuTrexin,
and its Phase II study of lodenosine, are conducted in conjunction with the
administration of specific treatment regimens which the company selected because
when the studies were planned the selected regimens were standard treatment for
the patient population under study. It is possible that one or more of these
treatment regimens will not remain a standard treatment for the study patient
population throughout the study. If that happens, the company might not be able
to enroll or treat enough patients to complete one or more of its studies as
planned, and could decide to discontinue any of its studies altogether.
Many competing companies have substantially greater financial,
technical, manufacturing, marketing and other resources than the company and may
be better equipped than the company to develop, market and manufacture these
therapies. Many of these companies are better equipped to penetrate the
commercial market
22
<PAGE> 24
with significantly more sales representatives than the company. In addition,
many of these companies have had more experience in undertaking preclinical
testing and human clinical trials and in obtaining regulatory approvals to
market products for health care. It is possible that the drugs developed by the
company will not be able to compete successfully against therapies already
established in the marketplace or against therapies which may result from
advances in the field that make the company's drugs less competitive or
obsolete. In addition, generic competition may threaten the success or
profitability of any of the company's drugs when generic applications for the
drug are approved by regulatory agencies.
Dependence on Patents and Proprietary Rights
The company's success depends, in part, on the ability of the
company and its licensors to obtain protection for its products and technologies
under United States and foreign patent laws, on their ability to preserve trade
secrets and on their ability to operate without infringing the proprietary
rights of third parties. It is possible that patent applications relating to the
company's products or technologies (whether now or in the future licensed by the
company from others) will not result in patents being issued, that any issued
patents may not afford adequate protection to the company and that the company
will not gain any competitive advantage by having rights under issued patents.
It is also possible that others may have independently developed, or may
independently develop, products or technologies that are similar to (or the same
as) those of the company or that others may design around patents that are
issued to the company.
It is also a risk that others may challenge the validity of any of
the patents owned or licensed by the company. If that happened, a court could
decide that the challenged patents are not valid or that the company's
activities infringe patents owned by others. The company could incur substantial
costs in defending itself in suits brought against it or any of its licensors,
or in pursuing suits against others to protect patent rights. If a court
determines that the company's products or technologies infringe patents issued
to third parties, the court could forbid the manufacture, use and sale of the
company's infringing products and could require the company to pay substantial
damages. In addition, the company may need to obtain licenses to patents or
other proprietary rights of third parties, in order to develop and commercialize
its own products and technologies. It is possible that the company may not be
able to obtain the rights it needs under terms that are acceptable to the
company, if at all.
The company also relies on trade secrets and proprietary know-how
which it tries to protect, in part, by entering into confidentiality agreements
with its employees, consultants, advisors and others. If any of these people
fail to maintain the confidentiality of the company's trade secrets or
proprietary information, the company could lose some competitive advantage or
suffer other damage. Even if these people maintain the confidentiality of the
company's trade secrets and proprietary information, there is a risk that the
company's trade secrets or proprietary know-how may become known or may be
independently developed by others in a way that will leave the company no
practical remedy.
Limited Manufacturing Experience
The company's ability to operate profitably depends in part on its
ability to manufacture its products at a competitive cost. The manufacture of
sufficient quantities of new drugs is typically a time-consuming and complex
process. It is possible that the company and its third-party suppliers may not
be able to manufacture one or more of the company's product candidates at a cost
or in amounts that are necessary to make the product commercially viable.
23
<PAGE> 25
The company and its drug product suppliers must comply with all
applicable regulatory requirements relating to their manufacturing facilities,
including Good Manufacturing Practices, and governmental agencies may inspect
their facilities to determine whether they are in compliance with those
requirements. If regulatory agencies identify previously unknown problems with a
product, manufacturer or facility, they may place restrictions on the product or
the manufacturer, and may require withdrawal of the product from the market. If
the company fails to comply with applicable regulatory requirements, the results
could include fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution.
Dependence on Key Personnel and Consultants
The company is dependent on its key personnel and consultants. The
company's loss of their services could slow down the achievement of its
research, development, regulatory, manufacturing and/or marketing and sales
objectives. Recruiting and retaining qualified and experienced personnel to
perform research and development work in the future is critical to the company's
success. However, the company experiences substantial competition in attracting
and retaining qualified personnel, in many cases from businesses and
institutions with significantly greater resources.
Potential Product Liability and Adequacy of Insurance
The company conducts research using chemicals that may be
carcinogenic or toxic. The company also develops and sells human health care
products. These activities entail an inherent risk that employees, patients and
others may make product liability claims against the company. The company
currently carries product liability coverage on a claims made and reported basis
in the aggregate amount of $20,000,000 per policy year. The company believes
such coverage is commercially reasonable in light of its current operations, but
there is a risk that this coverage may not be adequate. As the company expands
the scope of its clinical testing and marketing of its products, the company
will be exposed to far greater potential liabilities.
In the past, the pharmaceutical industry has had difficulty
obtaining and maintaining product liability insurance coverage at reasonable
levels, and it is possible that future increases in the cost of this coverage
may make it economically impractical. Although the company will try to carry
reasonable levels of product liability insurance, it is not certain that such
coverage will be available on reasonable terms or that the amount of coverage
obtained will prove adequate for any period. The company could suffer serious
damage as a result of any product liability claims against it.
Use of Hazardous Materials
The company's research and development activities and manufacturing
activities involve the use of hazardous materials and chemicals. The company
cannot eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, the company could be liable for any
resulting damages, which could exceed the resources of the company.
Volatility of Stock Price
The market price of the company's Common Stock, like that of the
securities of many other high technology companies, is highly volatile. Several
factors may have a significant effect on the price of the Common Stock, such as
fluctuations in the company's operating results, technological innovations, new
product announcements, merger and acquisition announcements or rumors,
regulatory approvals, regulatory changes,
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<PAGE> 26
changes in patents and other proprietary rights, public concerns as to drug
safety and general market conditions. In addition, market forces, such as
program trading and day trading may increase the risk of volatility.
Anti-Takeover Effects of Certain Charter Provisions
The Board of Directors of the company has the authority to issue up
to 5,000,000 shares of preferred stock and to determine the designations,
powers, preferences, rights, qualifications, limitations, restrictions and the
relative, participating, optional or other special rights of those shares,
without any further action by the stockholders. The rights of holders of the
company's Common Stock could be negatively affected by the rights of holders of
any shares of preferred stock that the company may issue in the future. The
company could issue preferred stock, or rights to purchase preferred stock, in a
way that could be used to discourage an unsolicited acquisition proposal or to
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the company.
Item 2. Properties.
The company's principal offices comprise approximately 26,860 square
feet of space in West Conshohocken, Pennsylvania. The space is rented pursuant
to a lease which expires on October 31, 2003, but which may be terminated early
by either the company or the landlord, effective October 31, 2000, in accordance
with the notice and other conditions for early termination set forth in the
lease. The company also leases 10,000 square feet of laboratory space in Exton,
Pennsylvania which is used as an analytical laboratory to conduct small scale
product analysis, testing and development. This laboratory space is leased
pursuant to a lease that expires June 30, 2000.
The company's United Kingdom operations are conducted through its
subsidiary, USB Pharma Limited, which was reorganized during 1997. These
operations are presently housed in a 1,362 square foot office in an office
building in Watford, Hertfordshire, England. This space is rented pursuant to a
three-year lease which began December 15, 1997. Before the reorganization, these
operations were housed in an 8,689 square foot office in an office building,
also in Watford, Hertfordshire, England, which space has been assigned to a new
tenant for the remainder of the ten-year lease term that began March 25, 1997.
The assigned lease can be terminated at the end of five years subject to an
early termination fee of (pound)50,000. The company has guaranteed the
obligations of the new tenant under the assigned lease.
The company's manufacturing facilities are held in its Dutch
subsidiary, USB Pharma B.V., and are located in The Netherlands in an 18,000
square foot facility designed to manufacture sterile products. The facility was
purchased in March 1993 for $2,250,000. The company has invested approximately
$4 million in renovations to the facility. The facility became subject to a
mortgage of approximately $680,000 in March 1994. The company leases warehouse
space in Nijmegen, The Netherlands of approximately 9,000 sq. feet. This space
is subject to a lease that may be terminated effective in 2003.
The company believes that its present facilities are satisfactory
for its current operations.
Item 3. 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
25
<PAGE> 27
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 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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<PAGE> 28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The company's Common Stock is traded on the American Stock Exchange
(the "AMEX") under the symbol "UBS." The following table sets forth the high and
low sale prices for the Common Stock reported by the AMEX for the periods
indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1998
First Quarter 12 1/4 7 13/16
Second Quarter 11 3/16 8 1/16
Third Quarter 8 5/8 4 7/8
Fourth Quarter 9 1/4 4 1/2
Year ended December 31, 1997
First Quarter 17 3/8 11 3/8
Second Quarter 11 3/4 8 11/16
Third Quarter 12 1/16 9 1/4
Fourth Quarter 13 1/2 8 3/8
</TABLE>
On March 1, 1999, there were 4,367 holders of record of Common
Stock.
The company has not paid any dividends on the Common Stock since its
inception and does not intend to pay any dividends in the foreseeable future. It
is the present policy of the Board of Directors to retain all earnings, if any,
to finance the development of the company's business.
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.
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<PAGE> 29
Item 6. Selected Financial Data.
The selected financial data presented below for each of the five years
in the period ended December 31, 1998 is derived from the company's audited
financial statements. The selected financial information presented below should
be read in conjunction with the consolidated financial statements, including the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER, 31
--------------------------------------------------------------
Statement of Operations Data:(1) 1998 1997 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales $ 20,730 $ 12,986 $ 10,785 $ 8,724 $ 7,210
Net investment income 2,736 2,824 2,335 1,223 1,234
Licensing, royalty and other income 6,005 11,913 7,344 21,398 102
--------------------------------------------------------------
Total revenues 29,471 27,723 20,464 31,345 8,546
Expenses:
Cost of sales 5,788 4,158 2,956 2,559 1,694
Selling, general and administrative costs 13,546 14,387 12,275 16,583 13,233
Research and development costs 19,042 16,904 14,383 12,186 17,608
Interest expense 149 183 537 255 52
-------------------------------------------------------------
Total expenses 38,525 35,632 30,151 31,583 32,587
-------------------------------------------------------------
Net loss ($ 9,054) ($ 7,909) ($ 9,687) ($ 238) ($ 24,041)
==============================================================
Basic and diluted net loss per common share ($ 0.37) ($ 0.33) ($ 0.43) ($ 0.01) ($ 1.19)
==============================================================
Weighted average number of common shares outstanding(2) 24,307 23,872 22,396 20,436 20,127
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
Balance Sheet Data:(1) 1998 1997 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and investments $ 41,949 $ 50,651 $ 36,677 $ 45,596 $ 24,428
Working capital 18,680 32,835 34,126 42,577 21,536
Total assets 52,722 62,381 49,111 61,880 34,464
Long-term debt 523 1,135 1,845 19,088 997
Provision for litigation -- -- -- -- 2,301
Other long-term liabilities 1,922 1,832 1,462 1,036 788
Accumulated deficit (131,580) (122,526) (114,617) (104,930) (104,692)
Stockholders' equity 38,733 47,024 36,894 28,788 23,939
</TABLE>
(1) In Thousands, except per share amounts
(2) After giving effect to the 1 for 2 reverse stock split effected April 23,
1996.
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<PAGE> 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
This report on Form 10-K 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 on this form 10-K including, without limitation in the Section of Item
1 entitled "Risk Factors."
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages F-1 to F-20.
From its inception in 1987 until March 1998, the company was a
development stage enterprise devoted primarily to raising capital, recruiting
personnel, identifying and acquiring drugs for further research and development,
clinical development of such drugs and, since 1991, selling and marketing its
drugs in the United States and commercializing its products in foreign markets
through distribution agreements with established pharmaceutical companies.
During the quarter ended March 31, 1998, the company completed a planned change
in senior management and the transition from a development stage enterprise to
one focusing on commercial operations and marketing.
The company currently sells and markets three compounds in the
United States: Hexalen, introduced in January 1991, NeuTrexin, introduced in
January 1994, and Ethyol, which was made commercially available by the company's
U.S. distribution partner ALZA Corporation ("ALZA") in April 1996. The company's
marketing partner for European territories, Scherico Ltd. ("Scherico"), an
affiliate of Schering-Plough Corporation, has launched Ethyol in all major
European countries including, Germany, the United Kingdom, France, Spain and
Italy.
The company believes that its expenditures for research and
development, marketing, 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 in the United States and Europe,
(ii) marketing of Hexalen, NeuTrexin and Ethyol in the United States, (iii)
clinical and preclinical testing of lodenosine, (iv) further product
development, and (v) enhancement of manufacturing and analytical capabilities.
Commercial activities in 1998 focused on the promotion and sale, in
the United States, of the company's three commercially available products,
Ethyol, NeuTrexin and Hexalen. The company also managed six major Phase III
clinical trials during 1998. Four of these trials have the potential to expand
our understanding of how Ethyol may be used to reduce the toxicity of certain
radiation therapies and other chemotherapeutic agents. In September 1998, the
company submitted a supplemental filing for a radiation indication with the CPMP
in Europe. Similarly, in December 1998, the company submitted a supplemental new
drug application to the United States Food and Drug Administration ("FDA") for
the use of Ethyol to reduce the incidence of xerostomia (or severe dry mouth), a
common effect of radiation therapy for head and neck cancer. In early 1998, the
company received a $5 million payment from ALZA Corporation related to achieving
a milestone in the clinical development of Ethyol as a radiation protector in
the treatment of head and neck cancers.
During 1998, the company continued to develop the use of NeuTrexin
in colorectal cancer in two on-going Phase III trials. The company, in
cooperation with the National Cancer Institute, also pursued preclinical
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<PAGE> 31
and product development activities for the development of lodenosine (FddA)
which has shown encouraging results in preclinical and early clinical studies as
a potential component of multi-drug regimens for the treatment of HIV infection.
In late 1998, the company began its own Phase II trial of lodenosine in
combination with indinavir and stavudine.
In 1997, the company completed the sale of 1,178,882 shares of
Common Stock to ALZA Corporation and also received a $10 million clinical
milestone from ALZA in connection with the company's Phase III trial of the use
of Ethyol with Taxol and carboplatin in advanced non-small cell lung cancer. The
company signed agreements for the commercialization of NeuTrexin in over 40
additional countries. The company was awarded a three year contract by the
National Cancer Institute to provide analytical services with estimated revenues
of $2 million. The company also reorganized its European clinical organization.
Commercial activities during 1996 centered around the launch of
Ethyol in the United States with the company's distribution partner ALZA, the
continued promotion and sale of Hexalen and NeuTrexin in the United States,
support of Ethyol marketing in Europe with Scherico and the conclusion of an
amendment in September 1996 to the marketing and distribution agreement for
Ethyol in Europe with Scherico. The company also pursued clinical programs to
expand the approved indications for Ethyol and NeuTrexin, principally in cancer
treatment regimens, achieved regulatory approvals for the use of Ethyol in
non-small cell lung cancer in the United States and several European countries,
and obtained the initial regulatory approvals for Ethyol in Canada, Australia
and other foreign markets. Additionally, third party contract manufacturing was
conducted at the company's manufacturing plant in The Netherlands and product
development activities were continued on drug products Ethyol, NeuTrexin and
lodenosine.
Results of Operations
1998 Compared with 1997
Product sales increased to $20,729,700 for the year ended December
31, 1998 as compared to $12,985,800 in the prior year. The 60% increase in
product sales revenue is due to higher sales of Ethyol resulting from higher
shipments to and revenues received from the company's domestic and international
distribution partners and increased sales of NeuTrexin, the company's
anti-folate. 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 in
two company sponsored Phase III clinical trials. Sales of Hexalen declined
slightly compared to the prior year due to lower international sales and higher
U.S. product returns and rebates.
Net investment income decreased to $2,736,300 in the year ended
December 31, 1998 as compared to $2,824,000 in the corresponding 1997 period due
to lower interest income provided from the smaller average portfolio balance
which resulted from the utilization of cash for operating activities during
1998.
Licensing, royalty and other income decreased to $6,004,900 for the
year ended December 31, 1998 from $11,913,500 in the prior year 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.
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<PAGE> 32
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 for the year ended December 31, 1998,
declined to 28% of product sales from 32% in the prior year, with improved
margins on NeuTrexin and Ethyol reflecting increased trade prices and higher
production levels at the company's manufacturing plant in The Netherlands.
Selling, general and administrative costs for the year 1998
decreased to $13,546,200 from $14,386,700 in 1997. The $840,500 decrease is
principally due to a $700,000 provision made in the second quarter of 1997 for
the reorganization of the company's European organization, reduced personnel
costs of $210,800 principally resulting from the reorganization of the company's
senior executive structure undertaken in the first quarter of 1998 and lower
personnel relocation costs, reduced insurance costs of $97,600 and a $74,300
reduction in marketing expenditures.
Research and development costs for the year ended December 31, 1998
increased to $19,041,900 from $16,904,500 in 1997. The $2,137,400 increase is
principally due to the accrual of an approximately $1 million charge related to
a research consulting arrangement, increased U.S. clinical research costs of
$1,112,200 principally related to ongoing Phase III trials of Ethyol and
NeuTrexin and the start-up of a Phase II study of lodenosine, and $925,300 in
increased clinical and regulatory consulting costs. These increases are partly
offset by savings of approximately $1,200,000 in European clinical research
expenses due to the reorganization undertaken in 1997.
The net loss for the year ended December 31, 1998 was $9,053,900 or
$0.37 basic and diluted net loss per common share as compared to a net loss of
$7,909,100 or $0.33 basic and diluted net loss per common share in 1997. The
major factor contributing to the reduced loss in 1997 was the $10 million
milestone payment received from ALZA as noted above.
1997 Compared with 1996
Product sales increased to $12,985,800 for the year ended December
31,1997 from $10,785,200 in the prior year. The 20% increase was due to higher
Ethyol revenues from the company's major distribution partners, ALZA and
Scherico, which were partly offset by lower trade sales of NeuTrexin and Hexalen
in the United States. Ethyol revenue growth is attributable to the increasing
trade sales levels in the United States and Europe and the effects of an
amendment to the agreement with Scherico undertaken in September 1996. In the
United States, end-market sales, which were recorded by ALZA, increased to $20.6
million for the full year 1997 as compared to $9.4 million in 1996. The company
believes that sales of NeuTrexin were adversely affected by a decline in the
incidence and severity of Pneumocystis carinii pneumonia ("PCP") due to
improvements in treatment for human immunodeficiency virus (HIV) and the
prophylactic treatment of patients at risk for PCP. Despite the annual decline
in NeuTrexin sales, sales of the product increased markedly in the fourth
quarter of 1997 to levels not achieved since the second quarter of 1996. The
company attributes the reduction in Hexalen sales to increased competitive
pressures during 1997.
Net investment income increased to $2,824,000 in the year ended
December 31, 1997 as compared to $2,335,300 in the full year 1996 due to higher
interest income resulting from the larger average portfolio balance resulting
from the funds raised in the sale of Common Stock to ALZA completed in the first
quarter of 1997.
Licensing, royalty and other income increased to $11,913,500 for the
twelve month period ended December 31, 1997 from $7,343,500 in the prior year
due principally to the receipt of a $10 million milestone payment from ALZA for
meeting a clinical development milestone in connection with the company's Phase
III randomized trial of Taxol, carboplatin and Ethyol, the company's
cytoprotective agent, in patients with advanced
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<PAGE> 33
non-small cell lung cancer. The company also received, a payment from Scherico
relating to Ethyol product development.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased as a percentage of sales in the
year ended December 31, 1997, due principally to product mix, notably increased
sales of Ethyol to the company's distribution partners.
Selling, general and administrative costs for 1997 increased to
$14,386,700 from $12,274,800 in 1996. The $2,111,900 increase was principally
due to a $700,000 provision for the reorganization of the company's European
clinical research program and a $1,009,400 increase in promotional spending. The
remaining $402,500 increase was principally the net result of increased
personnel costs of $812,000 being partly offset by a decrease in corporate and
insurance expenses of $359,000 and lower travel related expenditures of $65,900.
Research and development costs for the twelve month period ended
December 31, 1997 increased to $16,904,500 from $14,383,300 in 1996. The
$2,521,200 increase was principally due to increased payments for clinical
studies and related supplies of $1,575,900, higher personnel related costs of
$1,125,600 and travel expenses of $232,900, reflecting primarily the company's
Phase III clinical trials of Ethyol for use in radiation therapy and
chemotherapy, and for clinical trials of NeuTrexin for use in colorectal cancer.
Interest expense decreased to $183,400 for the full year 1997 from
$537,600 in 1996 due principally to the conversion to equity, in early 1996, of
the company's entire $16.5 million convertible debenture issue.
The basic and diluted net loss for the year ended December 31, 1997
was $7,909,100 or $0.33 loss per common share as compared to a basic and diluted
loss of $9,687,400 or $0.43 loss per common share in 1996.
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 December 31, 1998, the company's cash and investments totaled
$41,948,900. The company's investment portfolio consists of securities issued by
the U.S. Government or its agencies and investment grade corporate debt
instruments.
During 1998, net cash used in operations amounted to $7,596,100
principally reflecting the net effect of the factors discussed above under
"Results of Operations" less non-cash charges of $912,300 and a net working
capital reduction of $455,800. 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, 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
system existing in each market where the company's products are, or may become,
commercially available.
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
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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.
Following the closing of this transaction, the company had cash and marketable
securities of approximately $60 million.
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 December 31, 1998, 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. See Note 3 to the consolidated financial statements for additional
information with respect to the investment portfolio.
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 $843,800 for the year
ended December 31, 1998. These expenditures principally relate to the company's
sterile products production facility in The Netherlands. This facility was
purchased in April 1993 and received regulatory approval for product manufacture
and distribution from the Dutch regulatory authority in June 1994 to manufacture
the company's products for distribution in the European Community. The facility
was also approved by the FDA to manufacture NeuTrexin for the U.S. market in May
1995 and to manufacture Ethyol for the U.S. market in December 1996. The
manufacturing facilities of the company and its third party suppliers used to
produce its products are required to continually comply with all applicable FDA
requirements and those of regulatory authorities in other countries including
Good Manufacturing Practices, and are subject to inspection by governmental
agencies to determine compliance with those requirements. There can be no
assurance that the manufacturing facilities for the company's products will
comply with applicable requirements. A mortgage loan of approximately $456,000
relating to the company's facility in The Netherlands is currently outstanding.
The purchase price for this facility was $2,250,000 and
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approximately $4,000,000 in capital improvements have been made since its
purchase to make the facility operational and expand its production capacity.
Further capital expenditures, estimated at $900,000 are planned during 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 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, the company's European distributor for Ethyol,
launched Ethyol in several European markets where regulatory approvals had been
received. In September 1996, an amendment to the company's distribution
agreement with Scherico was executed pursuant to which, retroactive to January
1, 1996, Scherico began to purchase Ethyol from the company at a price based on
a percentage of in-market net sales.
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
five years and is responsible for sales and marketing. After the initial
five-year period, in April 2001, ALZA will have the option to extend its
exclusive rights for one year. 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 the
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 and an
additional milestone payment of $10 million in the second quarter of 1997. The
final milestone payment of $5 million was paid in the first quarter of 1998.
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 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 Scherico 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 as soon as reasonably possible, there
can be no assurance that the company will achieve significant revenues or
profitable operations.
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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 December 31, 1998, the company had
spent less than $50,000 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 $300,000 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 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.
Item 7a. Quantative and Qualitative Disclosure about Market Risk
Information required for this Item is contained on page 33 of Item 7
of this Form 10-K under the heading "Liquidity and Capital Resources."
Item 8. Financial Statements and Supplementary Data.
Financial statements are set forth in this report beginning at page
F-1.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is contained in the company's
definitive Proxy Statement with respect to the company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the company's fiscal year, and is incorporated herein
by reference thereto.
Item 11. Executive Compensation.
The information required by Item 11 is contained in the company's
definitive Proxy Statement with respect to the company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the company's fiscal year, and is incorporated herein
by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is contained in the company's
definitive Proxy Statement with respect to the company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the company's fiscal year, and is incorporated herein
by reference thereto.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is contained in the company's
definitive Proxy Statement with respect to the company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the company's fiscal year, and is incorporated herein
by reference thereto.
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PART IV
Item 14. Exhibits and Financial Statement Schedules.
Financial Statements
The following is a list of the consolidated financial
statements of the company and its subsidiaries and
supplementary data included in the report under Item 8.
Report of independent auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Schedules
All financial schedules required to be filed in Part IV, Item
14(a) have been omitted because they are not applicable, not
required or because the required information is included in
the financial statements or notes thereto.
Reports on Form 8-K
The company filed no reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1998.
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Exhibits
The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3(a) to the Registrant's Registration Statement on Form S-1
(File No. 33-39576) filed with the Securities and Exchange
Commission on March 22, 1991)
3.1.1 Certificate of Amendment to Certificate of Incorporation
(incorporated by reference to Exhibit 3.1.1 to the Registrant's
Registration Statement on Form S-3 (File No. 33-00077) filed with
the Securities and Exchange Commission on January 5, 1996)
3.1.2 Certificate of Designations of Series A Junior Preferred Stock
(incorporated by reference to Exhibit 1 to the Registrant's Current
Report on Form 8-K dated June 7, 1995)
3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 28, 1994)
4.1 Rights Agreement dated as of May 19, 1995 by and between Registrant
and Chemical Melon Shareholder Services L.L.C. (incorporated by
reference to Exhibit 1 to Registrant's Current Report on Form 8-K
dated June 7, 1995)
4.2 Securities Purchase Agreement dated as of January 27, 1999 by and
among the Registrant and Domain Partners IV, L.P, DP IV Associates,
L.P., and Proquest Investments, L.P. (including form of Warrant)
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated January 27, 1999)
10.1* Agreement dated August 9, 1991, between the Registrant and
Warner-Lambert Company, as amended by Amendment No. 1 dated December
12, 1991, Amendment No. 2 dated March 10, 1994 and Amendment No. 3
dated March 11, 1994 (incorporated by reference to Exhibit 10.1 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1994)
10.2 Office Lease Agreement, dated September 1990, between U.S.
Bioscience, Inc. and Tower Bridge Associates (incorporated by
reference to Exhibit 10(k) to the Registrant's Registration
Statement on Form S-1 (File No. 33-39576) filed with the Securities
and Exchange Commission on March 22, 1991)
10.2.1 Amendment No. 1, dated August 31, 1991, to Office Lease Agreement
between U.S. Bioscience, Inc. and Tower Bridge Associates
(incorporated by reference to Exhibit 10(I)(ii) to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 1992)
10.2.2 Addendum, dated April 8, 1992, to Amendment No. 1 of Office Lease
Agreement between U.S. Bioscience and Tower Bridge Associates
(incorporated by reference to Exhibit 10.2.2 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 31, 1993)
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10.2.3 Amendment No. 2, dated June 30, 1995, to Office Lease Agreement
between U.S. Bioscience, Inc. and Tower Bridge Associates
(incorporated by reference to Exhibit 10.2.3 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 20, 1996)
10.2.4 Amendment No. 3, dated May 12, 1998, to Office Lease Agreement
between U.S. Bioscience and Tower Bridge Associates (incorporated by
reference to Exhibit 10.2.3.1 to Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on July
31, 1998)
10.3 Lease Agreement, dated June 15, 1992, between U.S. Bioscience, Inc.
and Pickering Acquisition Associates (incorporated by reference to
Exhibit 10.3 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1993)
10.3.1 Amendment No. 1, dated March 17, 1993, to Lease Agreement between
the Registrant and Pickering Acquisition Associates (incorporated by
reference to Exhibit 10.3.1 to the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
31, 1993)
10.3.2 Second Amendment to Lease Agreement between the Registrant and
Pickering Acquisition Associates dated February 8, 1995
(incorporated by reference to Exhibit 10.3.2 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1995)
10.3.3 Third Amendment to Lease Agreement between the Registrant and
Pickering Associates dated October 12, 1995 (incorporated by
reference to Exhibit 10.3.3 to the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
20, 1998)
10.3.4 Fourth Amendment to Lease Agreement between the Registrant and
Pickering Acquisition Associates dated January 20, 1998
(incorporated by reference to Exhibit 10.3.4 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 20, 1998)
10.4 Research Agreement, dated May 14, 1987, between the Registrant and
Georgetown University, as amended May 27, 1988 (incorporated by
reference to Exhibit 10.13 to the Registrant's Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on September 21, 1989)
10.4.1 Amendment No. 2, dated as of January 23, 1990, to Research
Agreement, dated May 14, 1987, between the Registrant and Georgetown
University (incorporated by reference to Exhibit 10.13.1 to the
Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on February 5, 1990)
10.5 Letter agreement, dated January 22, 1992, between the Registrant and
Chemsyn Science Laboratories (incorporated by reference to Exhibit
10(k) to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 27, 1992)
10.6 License Agreement dated January 30, 1995 between Registrant and
National Institutes of Health (incorporated by reference to Exhibit
10.6 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1995)
40
<PAGE> 42
10.7 Agreement for Assignment of Rights, dated January 8, 1988, between
the Registrant and Wyeth Laboratories, Inc. (incorporated by
reference to Exhibit 10.18 to the Registrant's Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on September 21, 1989)
10.8* Amended and Restated License Agreement, effective as of May 1, 1993,
between the Registrant and Southern Research Institute (incorporated
by reference to Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
28, 1994)
10.9 Agreement, dated as of November 25, 1988, between the Registrant and
Warner-Lambert Company (incorporated by reference to Exhibit 10.23
to the Registrant's Registration Statement on Form 10 filed with the
Securities and Exchange Commission on September 21, 1989)
10.9.1 Amendment No. 1, dated March 13, 1992 to Agreement dated as of
November 25, 1988, between the Registrant and Warner-Lambert Company
(incorporated by reference to Exhibit 10(o)(ii) to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 1992)
10.10 License Agreement, dated as of December 6, 1990, between the
National Technical Information Service and the Registrant
(incorporated by reference to Exhibit 10(t) to the Registrant's
Registration Statement on Form S-1 (File No. 33-39576) filed with
the Securities and Exchange Commission on March 25, 1991)
10.11 Agreement, dated as of January 1, 1995, between Registrant and
Applied Analytical Industries, Inc. (incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 28, 1995)
10.11.1 Amendment, dated April 12, 1995, to Agreement dated January 1995
between Registrant and Applied Analytical Industries, Inc.
(incorporated by reference to Exhibit 10.11 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 21, 1997)
10.11.2 Second Amendment, dated May 6, 1996 to Agreement dated January 1,
1995 between the Registrant and Applied Analytical Industries, Inc.
(incorporated by reference to Exhibit 10.11.2 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 21, 1997)
10.12 Agreement, dated as of September 23, 1993, between Registrant and
Ben Venue Laboratories, Inc. (incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1994)
10.12.1 Amendment, dated April 11, 1995, to Agreement dated September 23,
1993 between the Registrant and Ben Venue Laboratories, Inc.
(incorporated by reference to Exhibit 10.12.1 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 21, 1997)
10.12.2 Amendment, dated December 12, 1995, to Agreement dated September 23,
1993 between the Registrant and Ben Venue Laboratories, Inc.
(incorporated by reference to Exhibit 10.12.2 to the
41
<PAGE> 43
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 21, 1997)
10.13 License Agreement, dated February 14, 1992, between the Registrant
and Schering Overseas Limited (incorporated by reference to Exhibit
10.14 to the Registrant's Annual Report on Form 10- K filed with the
Securities and Exchange Commission on March 31, 1993)
10.13.1 Amendment dated October 15, 1993 to License Agreement between
Registrant and Schering Overseas Limited (incorporated by reference
to Exhibit 10.14.1 to the Registrant's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 28, 1994)
10.14 Amended and Restated License Agreement dated May 10, 1994 between
the Registrant and Scherico, Ltd. (incorporated by reference to
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 20, 1998)
10.15* Distribution and Supply Agreement, dated as of May 10, 1993 between
Registrant and Scherico, Ltd. (incorporated by reference to Exhibit
10.16 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1995)
10.15.1* Amendment to Distribution and Supply Agreement, dated as of August
31, 1996 between the Registrant and Scherico, Ltd. (incorporated by
reference to Exhibit 10.16.1 to the Registrant's Current Report on
Form 8-K/A dated September 19, 1996 filed with the Securities and
Exchange Commission on December 19, 1996)
10.16 Agreement, dated as of March 10, 1994 between Registrant and Sipsy
S.A. (incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1994)
10.17 License Agreement, effective November 28, 1990 between Registrant
and National Technical Information Service (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 28,
1994)
10.18 Non-Executive Stock Option Plan (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on May 9, 1997)
10.19* Ethyol (Amifostine) Distribution and Marketing Collaboration
Agreement between U.S. Bioscience, Inc. and ALZA Corporation dated
December 12, 1995 (incorporated by reference to Exhibit 5 to
Registrant's Current Report on Form 8-K dated December 22, 1995)
10.19.1 Amendment No. 2 to Distribution and Marketing Collaboration
Agreement between the Registrant and ALZA Corporation dated as of
February 3, 1997 (incorporated by reference to Exhibit 10.25.2 to
the Registrant's Current Report on Form 8-K dated February 3, 1997)
10.20 Stock Purchase Agreement between the Registrant and ALZA Corporation
dated as of February 3, 1997 (incorporated by reference to Exhibit
10.25.1 to the Registrant's Current Report on Form 8-K dated
February 3, 1997)
42
<PAGE> 44
10.21 License Agreement between the Registrant and Scherico, Ltd. dated as
of November 6, 1997 (incorporated by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1998)
10.21.1 Amendment No. 1 to License Agreement dated as of November 6, 1997
between the Registrant and Scherico, Ltd. (incorporated by reference
to Exhibit 10.27.1 to the Registrant's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 20, 1998)
Executive Compensation Plans and Arrangements
10.22 U.S. Bioscience, Inc. 1987 Incentive Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (File No. 33-43981) filed with the Securities
and Exchange Commission on November 15, 1991)
10.23 U.S. Bioscience, Inc. 1987 Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8 (File No. 33-43981) filed with
the Securities and Exchange Commission on November 15, 1991)
10.24 U.S. Bioscience, Inc. 1987 Special Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-8 (File No. 33-43981) filed with
the Securities and Exchange Commission on November 15, 1991)
10.25 U.S. Bioscience, Inc. 1991 Special Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8 (File No. 33-43981) filed with
the Securities and Exchange Commission on November 15, 1991)
10.26 U.S. Bioscience, Inc. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.27 to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 28,
1995)
10.27 Executive Benefits Plan and related Form of Split Dollar Agreement
(incorporated by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1995)
10.28 Pension Restoration Plan (incorporated by reference to Exhibit 10.29
to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1995)
10.29 Amendment 1996-1 to Pension Restoration Plan (incorporated by
reference to the Registrant's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 20, 1998)
10.30 Agreement between the Registrant and Philip S. Schein, M.D. dated as
of March 10, 1998 (incorporated by reference to Exhibit 10.28.1 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1998)
10.31 Form of Executive Severance Agreement executed with each Executive
Vice President, each elected Vice President, and the Controller of
the Registrant (incorporated by reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1993)
43
<PAGE> 45
10.32 Executive Severance Agreement, dated September 3, 1996, between the
Registrant and C. Boyd Clarke (incorporated by reference to the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 20, 1998)
10.33 Executive severance arrangement, dated March 4, 1997, between the
Registrant and C. Boyd Clarke (incorporated by reference to Exhibit
10.42 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 21, 1997)
10.34 Executive severance arrangement, dated March 4, 1997, between the
Registrant and Wolfgang Oster, M.D. (incorporated by reference to
Exhibit 10.43 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 21, 1997)
10.35 Agreement, dated as of December 31, 1998, between the Registrant and
Barbara J. Scheffler
10.36 U.S. Bioscience, Inc. 1999 Incentive Compensation Plan
10.37 Letter agreement dated May 5, 1997 between the Registrant and Robert
L. Capizzi, M.D. (incorporated by reference to Exhibit 10.40.1 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1998)
10.37.1 Letter agreement, dated April 30, 1998, between the Registrant and
Robert L. Capizzi, M.D.
22 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
- --------------
* Confidential portions have been omitted and have been separately filed
with the Commission.
44
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. BIOSCIENCE, INC.
Date: March 12, 1999 By: /s/ C. Boyd Clarke
------------------------------------
Title: President and Chief Executive
Officer
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints C.
Boyd Clarke and Robert I. Kriebel, and each of them acting alone, his true and
lawful attorney-in-fact, with full power of substitution, to execute and cause
to be filed with the Securities and Exchange Commission any and all amendments
to this report.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. Boyd Clarke Principal Executive Officer and Director March 12, 1999
- -----------------------------
C. Boyd Clarke
/s/ Robert I. Kriebel Principal Financial Officer and March 12, 1999
- ----------------------------- Director
Robert I. Kriebel
/s/ Mark R. Bausinger Principal Accounting Officer March 12, 1999
- -----------------------------
Mark R. Bausinger
/s/ Paul Calabresi Director March 12, 1999
- -----------------------------
Paul Calabresi, M.D.
Director March 12, 1999
- -----------------------------
Robert L. Capizzi, M.D.
/s/ Brian H. Dovey Director March 12, 1999
- -----------------------------
Brian H. Dovey
/s/ Douglas J. MacMaster Director March 12, 1999
- -----------------------------
Douglas J. MacMaster
/s/ Allen Misher Director March 12, 1999
- -----------------------------
Allen Misher, Ph.D.
/s/ George H. Ohye Director March 12, 1999
- -----------------------------
George H. Ohye
/s/ Betsey Wright
- -----------------------------
Betsey Wright Director March 12, 1999
</TABLE>
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................. F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996....................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................................... F-5
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996. ........................................ F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
<PAGE> 48
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
U.S. Bioscience, Inc.
We have audited the accompanying consolidated balance sheets of U.S. Bioscience,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, cash flows and stockholders' equity for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U.S.
Bioscience, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 15, 1999
F-2
<PAGE> 49
U.S. BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,771,000 $ 26,569,400
Investments 18,114,200 12,075,100
Accounts receivable, net of allowances of $727,000 and
$427,000 in 1998 and 1997, respectively 1,729,600 2,577,400
Interest receivable 29,400 269,700
Inventories 2,873,200 2,434,500
Other 707,100 1,298,400
------------ ------------
Total current assets 30,224,500 45,224,500
Investments in long-term securities 17,063,700 12,006,300
Property, plant and equipment at cost, less accumulated depreciation 5,433,700 5,149,800
------------ ------------
Total assets $ 52,721,900 $ 62,380,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payab $ 1,183,000 $ 1,926,200
Accrued clinical grants payable 4,167,100 2,790,500
Accrued product manufacturing costs payable 795,400 798,700
Accrued marketing costs payable 390,300 437,400
Accrued professional fees payable 1,478,500 977,200
Line of credit 849,300 745,300
Current maturities of long-term debt 645,800 747,100
Accounts payable and other accrued liabilities 2,035,100 3,967,500
------------ ------------
Total current liabilities 11,544,500 12,389,900
Long-term liabilities:
Long-term debt, net of current maturities 522,600 1,135,000
Other long-term liabilities 1,921,600 1,831,900
------------ ------------
Total long-term liabilities 2,444,200 2,966,900
------------ ------------
Total liabilities 13,988,700 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; 24,363,200 shares
issued and outstanding at December 31, 1998, and 24,208,100 shares
issued and outstanding at December 31, 1997 243,600 242,100
Additional paid-in capital 170,645,100 169,905,800
Accumulated deficit (131,580,200) (122,526,300)
Accumulated other comprehensive loss (430,700) (597,800)
------------ ------------
38,877,800 47,023,800
Less cost of treasury stock - 13,600 shares (144,600) --
------------ ------------
Total stockholders' equity 38,733,200 47,023,800
------------ ------------
Total liabilities and stockholders' equity $ 52,721,900 $ 62,380,600
============ ============
</TABLE>
See accompanying notes
F-3
<PAGE> 50
U. S. BIOSCIENCE, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Net sales $ 20,729,700 $ 12,985,800 $ 10,785,200
Net investment income 2,736,300 2,824,000 2,335,300
Licensing, royalty and other income 6,004,900 11,913,500 7,343,500
------------ ---------- ----------
29,470,900 27,723,300 20,464,000
Expenses:
Cost of sales 5,787,800 4,157,800 2,955,700
Selling, general and administrative costs 13,546,200 14,386,700 12,274,800
Research and development costs 19,041,900 16,904,500 14,383,300
Interest expense 148,900 183,400 537,600
------------ ---------- ----------
38,524,800 35,632,400 30,151,400
------------ ---------- ----------
Net loss $ (9,053,900) (7,909,100) (9,687,400)
============ ========== ==========
Basic and diluted loss per common share $ (0.37) (0.33) (0.43)
============ ========== ==========
Weighted average number of common shares outstanding 24,306,500 23,872,000 22,395,600
</TABLE>
See accompanying notes
F-4
<PAGE> 51
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net loss $ (9,053,900) $ (7,909,100) $ (9,687,400)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 890,300 819,100 1,054,800
Loss on disposal of property, plant and equipment -- 270,900 --
Compensation element of stock option grants 40,000 40,000 --
(Gain) loss on investments (18,000) 26,900 8,700
Amortization of debenture interest -- -- 154,300
Change in accounts receivable 847,800 (651,200) (1,123,700)
Change in interest receivable 240,300 (49,000) (160,700)
Change in inventories (326,300) 30,800 (482,900)
Change in other current assets 600,300 296,300 5,312,500
Change in current liabilities (906,300) 48,100 (4,166,400)
Change in other long-term liabilities 89,700 370,100 426,000
------------- ------------- -------------
Total adjustments 1,457,800 1,202,000 1,022,600
------------- ------------- -------------
Net cash provided by (used in) operating activities (7,596,100) (6,707,100) (8,664,800)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 43,561,400 100,879,100 43,212,500
Purchase of investments (54,657,900) (101,338,600) (62,875,300)
Purchase of property, plant and equipment (843,800) (876,600) (1,057,200)
------------- ------------- -------------
Net cash provided by (used in) investing activities (11,940,300) (1,336,100) (20,720,000)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement
of securities 5,100 21,441,000 191,900
Purchase of treasury stock (144,600) -- --
Proceeds from exercise of stock options 695,700 730,300 1,258,800
Proceeds from line of credit 45,600 181,600 92,100
Repayment of long-term debt (751,200) (606,500) (689,200)
------------- ------------- -------------
Net cash provided by (used in) financing activities (149,400) 21,746,400 853,600
Effect of exchange rate changes on cash (112,600) (188,600) (32,800)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (19,798,400) 13,514,600 (28,564,000)
Cash and cash equivalents-beginning of year 26,569,400 13,054,800 41,618,800
------------- ------------- -------------
Cash and cash equivalents-end of year $ 6,771,000 $ 26,569,400 $ 13,054,800
============= ============= =============
Supplemental cash flow disclosure:
Interest paid $ 125,700 $ 156,700 $ 629,100
Subordinate debentures and accrued interest converted to common stock -- -- $ 16,841,700
</TABLE>
See accompanying notes
F-5
<PAGE> 52
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------ ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
---------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 21,046,800 $ 210,500 $ 133,157,700
Proceeds from exercise of stock options 255,500 2,500 1,256,300
Conversion of warrants 200 -- 4,500
Conversion of debentures 1,577,400 15,800 16,825,900
Comprehensive loss:
Net loss for the year ended
December 31, 1996 -- -- --
Foreign currency translation adjustment -- -- --
Unrealized gain (loss) on investments -- -- --
Comprehensive loss
---------- ------------- -------------
Balance at December 31, 1996 22,879,900 $ 228,800 $ 151,244,400
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 share, 1,178,900 11,800 17,892,000
Conversion of warrants -- -- 600
Comprehensive loss:
Net loss for the year ended
December 31, 1997 -- -- --
Foreign currency translation adjustment -- -- --
Unrealized gain (loss) on investments -- -- --
Comprehensive loss
---------- ------------- -------------
Balance at December 31, 1997 24,208,100 $ 242,100 $ 169,905,800
Proceeds from exercise of stock options 154,800 1,500 694,200
Compensation related to stock options -- -- 40,000
Treasury stock -- -- --
Conversion of warrants 300 -- 5,100
Comprehensive loss:
Net loss for the year ended
December 31, 1998 -- -- --
Foreign currency translation adjustment -- -- --
Unrealized gain (loss) on investments -- -- --
Comprehensive loss
---------- ------------- -------------
Balance at December 31, 1998 24,363,200 $ 243,600 $ 170,645,100
========== ============= =============
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED TREASURY COMPREHENSIVE STOCKHOLDERS'
DEFICIT STOCK INCOME / (LOSS) EQUITY
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $(104,929,800) $ -- $ 349,500 $ 28,787,900
Proceeds from exercise of stock options -- -- -- 1,258,800
Conversion of warrants -- -- -- 4,500
Conversion of debentures -- -- -- 16,841,700
Comprehensive loss:
Net loss for the year ended
December 31, 1996 (9,687,400) -- -- (9,687,400)
Foreign currency translation adjustment -- -- (301,300) (301,300)
Unrealized gain (loss) on investments -- -- (9,900) (9,900)
--------------
Comprehensive loss (9,998,600)
------------- ------------- ------------- -------------
Balance at December 31, 1996 $(114,617,200) $ -- $ 38,300 $ 36,894,300
Proceeds from exercise of stock options -- -- -- 730,300
Compensation related to stock options -- -- -- 40,000
Issuance of shares ($18.256 per share, -- -- -- 17,903,800
Conversion of warrants -- -- -- 600
Comprehensive loss:
Net loss for the year ended
December 31, 1997 (7,909,100) -- -- (7,909,100)
Foreign currency translation adjustment -- -- (663,100) (663,100)
Unrealized gain (loss) on investments -- -- 27,000 27,000
--------------
Comprehensive loss (8,545,200)
------------- ------------- ------------- -------------
Balance at December 31, 1997 $(122,526,300) $ -- $ (597,800) $ 47,023,800
Proceeds from exercise of stock options -- -- -- 695,700
Compensation related to stock options -- -- -- 40,000
Treasury stock -- (144,600) -- (144,600)
Conversion of warrants -- -- -- 5,100
Comprehensive loss:
Net loss for the year ended
December 31, 1998 (9,053,900) -- -- (9,053,900)
Foreign currency translation adjustment -- -- 185,100 185,100
Unrealized gain (loss) on investments -- -- (18,000) (18,000)
-------------
Comprehensive loss (8,886,800)
------------- ------------- ------------- -------------
Balance at December 31, 1998 $(131,580,200) $ (144,600) $ (430,700) $ 38,733,200
============= ============= ============= =============
</TABLE>
See accompanying notes
F-6
<PAGE> 53
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Business and Organization
U.S. Bioscience, Inc. ("the company"), was incorporated in the State of
Delaware on May 7, 1987. The company has two wholly-owned operating
subsidiaries; USB Pharma B.V. incorporated in The Netherlands and USB Pharma
Limited incorporated in the United Kingdom. USB Pharma B.V. operates the
company's manufacturing plant located in Nijmegen, The Netherlands, and USB
Pharma Limited manages the company's European clinical research activities. The
company also has two wholly-owned inactive subsidiaries in the State of
Delaware, USB Resources, Inc. and USB Technologies, Inc.
From the company's inception until March 31, 1998 the company was
considered for accounting purposes a development stage enterprise as defined in
Statement of Financial Accounting Standards No. 7 "Development Stage
Enterprises." During its development stage, the company devoted a substantial
portion of its efforts toward raising capital, developing its initial product
portfolio, establishing its manufacturing, laboratory and research capabilities
and structure and organizing its worldwide commercial presence principally
through the establishment of distribution agreements with established
pharmaceutical companies. During the quarter ended March 31, 1998, the company
completed a planned change in senior management and the transition from a
development stage enterprise to an enterprise focusing on commercial operations
and marketing.
The company is a pharmaceutical company specializing in the development
and commercialization of products for patients with cancer and allied diseases.
Through December 31, 1998, the company's revenues have been derived principally
from the sale of drug products, Hexalen, NeuTrexin and Ethyol, from licensing of
rights to develop and market certain products, from contract development
activities and from investment income. Expenses incurred have been primarily for
the development of its drugs and related therapies, marketing and sales
activities and corporate organizational and administrative activities.
2. Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
U.S. Bioscience, Inc. and its wholly-owned subsidiaries. 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.
Cash and Cash Equivalents
The company generally classifies as cash equivalents all highly liquid
instruments with a maturity of three months or less at the time of purchase.
F-7
<PAGE> 54
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments
The company determines the appropriate classifications of debt securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. The investments held by the company at December 31, 1998 and 1997
were classified as "available for sale." Unrealized gains and losses have been
reported separately as a component of other comprehensive income (loss) .
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or fair
value.
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.
Fair Values of Financial Instruments
Fair values of cash equivalents, investments, accounts receivable,
payables, the line of credit and long term debt approximate their carrying
values.
Product Revenues
Product revenues are recognized upon shipment to the customer. The
company's product revenues to date have principally been domestic sales of drug
products Hexalen and NeuTrexin primarily to drug wholesalers in the United
States and sales of Ethyol to the company's distribution partners. During 1998,
1997 and 1996 a significant portion of the company's sales and accounts
receivable related to ALZA, the company's US distribution partner for Ethyol.
Research and Development Costs
All costs of research and development activities are expensed as incurred.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Patents and Trademarks
It is the company's practice to seek patent and trademark protection on
processes and products in various countries. Patent and trademark application
costs are expensed as incurred.
F-8
<PAGE> 55
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Foreign Currency Translation
All balance sheet accounts have been translated using exchange rates in
effect at the balance sheet date. Income statement amounts have been translated
using monthly average exchange rates for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported separately as a component of other comprehensive income (loss).
Net Loss Per Share
Basic earnings per share is calculated by dividing the net loss by the
weighted average common shares outstanding for the period. Diluted earnings per
share is calculated by dividing net income by the weighted average common shares
outstanding for the period plus the dilutive effect of stock options, warrants
and convertible securities. The company incurred losses in 1998, 1997 and 1996
and therefore the effect of stock options, warrants and convertible securities
were anti-dilutive.
Accounting for Stock Options
The company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for stock options. Under APB 25, if the exercise
price of the company's stock options equals the market price of the underlying
common stock on the date of grant, no compensation expense is recognized. Note
14 to these consolidated financial statements includes the required disclosure
and pro forma information provided for under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("FASB 123").
Newly Adopted Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards
for reporting comprehensive income. SFAS 131 establishes standards for annual
and interim disclosures of operating segments, products and services, geographic
areas and major customers. Both SFAS 130 and SFAS 131 were adopted by the
company in 1998. Notes 9 and 10 to these consolidated financial statements
includes the required disclosure provided under SFAS 130 and SFAS 131,
respectively. The adoption of SFAS 130 and SFAS 131 had no impact on the
company's results of operations or financial condition.
F-9
<PAGE> 56
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Investments
Investments are comprised of the following:
<TABLE>
<CAPTION>
Fair Value at
Name of Issuer Principal Amortized Balance Sheet
and Title of Each Amount Cost Date
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1998
U.S. Government obligations
Treasury Notes $5,599,900 $5,641,800 $5,640,600
Federal Home Loan Mortgage 3,451,800 3,465,500 3,466,300
-------------------------------------------------
Sub-total 9,051,700 9,107,300 9,106,900
Corporate Bonds 24,423,700 24,444,900 24,600,100
Corporate Discount Notes 1,464,500 1,470,000 1,470,900
-------------------------------------------------
Total $34,939,900 $35,022,200 $35,177,900
=================================================
December 31, 1997
U.S. Government obligations
Treasury Notes $1,995,600 $1,998,000 $2,000,000
Corporate Bonds 16,904,400 16,902,400 16,918,000
Corporate Discount Notes 5,031,600 5,163,900 5,163,400
-------------------------------------------------
Total $23,931,600 $24,064,300 $24,081,400
=================================================
</TABLE>
The amortized cost and fair market value of investments at December 31,
1998 and 1997, by contractual maturities are:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $18,068,600 $18,114,200 $12,065,800 $12,075,100
Due after one year
through two years 9,488,400 9,576,700 7,500,000 7,510,600
Due after two years
through four years 7,465,200 7,487,000 4,498,500 4,495,700
----------- ----------- ----------- -----------
Total $35,022,200 $35,177,900 $24,064,300 $24,081,400
=========== =========== =========== ===========
</TABLE>
4. Accounts Receivable Allowance
The company establishes an allowance in accounts receivable for
potentially uncollectible accounts, for estimated credits to be issued for
returned product and for estimated price adjustments related to the
non-commercial use of Ethyol by its U.S. distributor. The following is a
rollforward of this allowance:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at begining of the year $ 427,000 $ 257,000 $ 142,600
Additions (charged to expense) 300,000 220,000 114,400
Deductions -- (50,000) --
--------- --------- ---------
Balance at end of year $ 727,000 $ 427,000 $ 257,000
========= ========= =========
</TABLE>
F-10
<PAGE> 57
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Inventories
Inventory balances at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 1,086,900 $ 752,000
Work in process 1,014,700 1,376,000
Finished goods 771,600 306,500
------------ ------------
Total $ 2,873,200 $ 2,434,500
============ ============
</TABLE>
6. Property, Plant and Equipment
Property, plant and equipment balances at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Land, buildings, and leasehold improvements $ 2,034,900 $ 1,871,800
Equipment, furniture and fixtures 10,131,200 8,965,700
Accumulated depreciation (6,732,400) (5,687,700)
------------- -------------
Property, plant and equipment, net $ 5,433,700 $ 5,149,800
============= =============
</TABLE>
7. Long-Term Debt
Long-term debt at December 31, consisted of:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
MELF equipment loan $ 106,900 $ 180,600
Mortgage loan 456,000 462,100
Term loan 500,000 1,100,000
Capital lease obligations 105,500 139,400
------------- ------------
$ 1,168,400 $ 1,882,100
Less current portion 645,800 747,100
------------- ------------
Long-term debt $ 522,600 $ 1,135,000
============= ============
</TABLE>
Maturities of long-term debt for each of the five years succeeding
December 31, 1998 are as follows; 1999--$645,800; 2000--$106,700; 2001--$75,700;
2002--$56,700; 2003--$43,200 and thereafter $240,300.
In April 1993, the company received $500,000 from the Commonwealth of
Pennsylvania Machinery and Equipment Loan Fund Program (MELF), which provides
financing for companies expanding employment in the Commonwealth. Proceeds of
this loan were used to purchase laboratory equipment for the company's
analytical laboratory located in Exton, Pennsylvania. The loan will amortize
over a seven-year term and bears interest at a rate of 2% per annum.
F-11
<PAGE> 58
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In May 1994, USB Pharma B.V., entered into a mortgage loan with
Cooperatieve Rabobank B.A. in the amount of Dutch Guilders 1,180,000
(approximately $680,000) secured by the land and buildings of its manufacturing
facility in Nijmegen, The Netherlands and guaranteed by U.S. Bioscience, Inc.
Proceeds of this loan were used to partly fund the purchase of additional
equipment for the company's manufacturing facility in The Netherlands. The
mortgage loan has a 15-year term, requires quarterly Dutch Guilder installments
of principal repayment which began in March 1995 and bears a quarterly variable
interest rate. Interest is payable quarterly in Dutch Guilders and the current
interest rate is 5.8%.
In June 1995, the company received a term loan from its principal bank in
the amount of $2,400,000. This loan will fully amortize in the fourth quarter of
1999, bears an annual interest rate of 6.86% and is collateralized by a portion
of the company's investment portfolio.
8. Line of Credit
In June 1995, the company established a $1,000,000 credit line with an
international financial institution. This line of credit is denominated in Dutch
Guilders, currently bears an annual interest rate of 5.3125% and is utilized by
the company's subsidiary, USB Pharma B.V., for funding working capital
requirements. As of December 31, 1998, approximately $850,000 of this credit
line has been utilized. The credit line is guaranteed by U.S. Bioscience, Inc.
and collateralized by a portion of the company's investment portfolio. The
weighted average interest rates on the line of credit for the years ended
December 31, 1998 and 1997 were 5.3% and 4.6%, respectively.
9. Accumulated Other Comprehensive Loss
The components of other comprehensive loss are as follows:
<TABLE>
<CAPTION>
Currency Unrealized Gain
Translation on Available-for
Adjustment Sale Securities Total
---------- --------------- -----
<S> <C> <C> <C>
Balance at December 31, 1995 $ 349,500 $ -- $ 349,500
Currency transaction adjustment (301,300) -- (301,300)
Unrealized gain on available for sale securities -- (9,900) (9,900)
--------- --------- ---------
Balance at December 31, 1996 48,200 (9,900) 38,300
Currency Translation adjustment (663,100) -- (663,100)
Unrealized gain on available for sale securities -- 27,000 27,000
--------- --------- ---------
Balance at December 31, 1997 (614,900) 17,100 (597,800)
Currency transaction adjustment 185,100 -- 185,100
Unrealized gain on available for sale securities -- (18,000) (18,000)
--------- --------- ---------
Balance at December 31, 1998 $(429,800) $ (900) $(430,700)
========= ========= =========
</TABLE>
F-12
<PAGE> 59
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Segment Disclosures
The company operates in only one "dominant segment," as substantially all
of its combined 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 47% and 14% in 1998, 53% and 13% in 1997, and 16% and 33% in 1996,
respectively of total revenue.
A summary of revenues from customers, net income/(loss) and identifiable
assets by geographic area for the years ending December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues from customers:
United States $ 21,697,000 $ 20,331,300 $ 9,853,200
International 5,037,600 4,568,000 8,275,500
------------ ------------ ------------
$ 26,734,600 $ 24,899,300 $ 18,128,700
============ ============ ============
Net income / (loss)
United States ($ 6,698,800) ($ 1,486,200) ($ 3,057,000)
International (2,355,100) (6,422,900) (6,630,400)
------------ ------------ ------------
($ 9,053,900) ($ 7,909,100) ($ 9,687,400)
============ ============ ============
Identifiable assets:
United States $ 47,516,800 $ 57,193,800 $ 43,047,100
International 5,205,100 5,186,800 6,064,000
------------ ------------ ------------
$ 52,721,900 $ 62,380,600 $ 49,111,100
============ ============ ============
</TABLE>
11. Commitments
The company leases office, warehouse and laboratory space under four
operating leases, the last of which terminates in December 2003. Future minimum
annual lease payments are as follows: 1999 -- $1,036,300; 2000 -- $1,001,800;
2001 -- $846,300; 2002 -- $846,300 and 2003 -- $715,200. Rent expense for each
of the years ended December 31, was; 1998 -- $907,200; 1997 -- $1,036,200 and
1996 -- $911,400. The lease on the company's principal office expires in October
2003. However, both the company and the landlord have early termination rights
effective October 31, 2000 and October 31, 2001. The above minimum lease
payments assume that neither the company nor the landlord exercise such rights.
The company has entered into various license agreements with unrelated
parties which provide the company with rights to develop, produce and market
drugs and related therapies which the company believes demonstrate effectiveness
in the treatment of cancer and allied diseases. The agreements allow the company
to use certain knowledge and patent rights of the licensors. Terms of the
agreements require the company to pay percentage fees and royalties of varying
amounts based upon defined future net sales, if any, and in general, variable
percentages of any royalty income received from foreign licensees. Some of the
agreements also require minimum annual payments and the payment of lump sums
upon the achievement of certain milestones in the clinical development of the
chemical compound. For the years ended December 31 listed below, the company has
incurred sales related royalty expense as follows: 1998 -- $1,247,600; 1997 --
$728,300 and 1996 -- $488,700.
As of December 31, 1998, the company had contracted, and continues to
contract, with third parties to serve as clinical investigators of certain
investigational drugs through terms, in general, expiring in 1999 and 2000. The
clinical investigators are compensated in accordance with their respective
agreements. As of December 31, 1998, the clinical investigator agreements, in
the aggregate, provide for minimum payments of approximately $8,348,500 over the
terms of the agreements, of which approximately $4,279,000 had been paid through
December 31, 1998.
F-13
<PAGE> 60
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Major Distribution and Marketing Agreements
The company has an exclusive marketing and distribution agreement with
ALZA Corporation ("ALZA") for Ethyol in the United States. Under the terms of
this agreement, ALZA has exclusive rights to market Ethyol in the United States
through March 2001 and is responsible for sales and marketing; the company's
sales force co-promotes the product with ALZA. After the initial five-year
period, which ALZA has an option to extend for one year, marketing rights to
Ethyol revert to the company, and ALZA will receive payments from the company
for ten years (nine years if ALZA exercises the option) based on sales of Ethyol
in the United States. ALZA paid the company $14 million in December 1995 and $6
million in January 1996 as initial fees for the rights noted above. In July
1997, ALZA made an additional clinical milestone payment to the company of $10
million and in February 1998, ALZA made the final clinical milestone payment of
$5 million. There can be no assurance that the marketing of Ethyol in the United
States will result in meaningful revenues to the company.
In May 1996, the company entered into a co-promotion agreement with ALZA
to co-promote the company's products, Hexalen and NeuTrexin in the United
States. Under the terms of this agreement, the company pays ALZA a commission,
which is based upon a percentage of net sales of Hexalen and NeuTrexin in the
United States above a base level of sales. The commission payment is subject to
an annual minimum and the commission percentage rises as net sales increase. The
company elected to give ALZA notice of termination under this agreement in
December 1998 and the termination will become effective in June 1999. Under the
terms of the original agreement, ALZA's sales force will continue to co-promote
Hexalen and NeuTrexin through June 1999, at which time the company will assume
all promotional activities. At the end of the co-promotion term, the agreement
provides for ALZA to be paid a residual commission. The residual commission is
based on a percentage of net sales during the residual period subject to a
maximum payment of a decreasing percentage of actual commission payments made to
ALZA under the agreement during the co-promotion period. At December 31, 1998,
the company accrued $100,000 payable to ALZA related to this agreement. There
can be no assurance that the marketing of Hexalen and NeuTrexin in the United
States will result in meaningful revenues to the company.
The company has entered into an exclusive marketing and distribution
agreement ("Agreement") with Scherico Ltd., ("Scherico") a subsidiary of
Schering Plough Corporation, for Ethyol in the countries comprising the EU and
EFTA (the "European Territories"). In September 1996, the company and Scherico
entered into an amendment to the original agreement ("Scherico Amendment")
pursuant to which, retroactive to January 1, 1996, Scherico began purchasing
Ethyol from the company at a price based on a percentage of in-market net sales
and the company stopped participating in operating profits/losses previously
shared by the parties. In conjunction with the Scherico Amendment, Scherico paid
the company a total of $6.2 million in the fourth quarter of 1996.
Under the terms of the amended Agreement, Scherico's exclusive rights to
market the product will continue for seven years from January 1, 1997. During
such seven-year period the company will sell Ethyol to Scherico at a price based
upon a percentage of in-market net sales. The company may co-promote Ethyol with
Scherico for the two years following such seven-year period. Thereafter, the
company will reacquire sole marketing rights subject to the reverse royalty
payable to Scherico as described below. Under certain circumstances Scherico is
required to pay the company additional milestone payments when additional
regulatory approvals, if any, are obtained. There can be no assurance that all
milestone payments will be made to the company under the amended Agreement.
After reacquiring sole marketing rights, the company will pay Scherico a
percentage of its Ethyol sales, if any, from the European Territory for a period
of three years. The company will supply Ethyol to Scherico throughout the term
of the Agreement. Scherico may terminate the Agreement at any time by providing
180 days
F-14
<PAGE> 61
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
written notice to the company of its desire to terminate the agreement. There
can be no assurance that the Agreement will not be terminated by Scherico. There
can be no assurance that the marketing of Ethyol in the European Territories
will result in meaningful revenues to the company.
13. Common Stock
Voting rights of common stock are one vote per share. The company's
Certificate of Incorporation, as amended, permits the company's Board of
Directors, without further approval of the company's stockholders, except as may
be required by Delaware law or the rules of the American Stock Exchange, to
issue additional shares of the company's common stock, from time to time as the
Board of Directors may determine, for such consideration as the Board of
Directors establishes. This provides flexibility in structuring possible
acquisitions of other businesses, enables the company to raise additional equity
capital, if and when needed, and allows the Board of Directors, in its
discretion, to declare stock splits or stock dividends in the future. The
company has no present definitive plans, arrangements or understandings with
respect to possible acquisitions, financings, stock splits or dividends
requiring the availability of additional authorized common stock.
The company has a Preferred Stock Purchase Rights Plan (the "Rights Plan")
designed to protect company stockholders in the event of takeover actions that
would deny them the full value of their investment. Each stock certificate
representing outstanding shares of Common Stock of the company also represents
the same number of rights to purchase, under certain circumstances, shares of
Series A Junior Preferred Stock of the company (the "Rights"). The Rights will
become exercisable only in the event, with certain exceptions, a person or group
of related persons accumulates 15 percent or more of the company's voting stock.
The Rights will expire on May 29, 2005. Each Right entitles the holder to buy
two one-hundredths of a share of the new Series A Junior Preferred Stock at a
price of $30. In addition, upon the occurrence of certain events, holders of the
Rights will be entitled to purchase either company stock or shares in an
"acquiring entity" at half the market value. The company generally will be
entitled to redeem the Rights at one-twentieth of one cent ($.0005) per Right at
any time until the tenth day following the acquisition by any person or group of
related persons of 15 percent or more of the company's outstanding voting stock.
Until such time, the Rights automatically trade with the underlying common
stock.
On April 22, 1996, the company's stockholders, at the company's annual
meeting, approved an amendment to the company's Certificate of Incorporation to
effect a 1 for 2 reverse stock split in which each two shares of the company's
Common Stock, par value $.005 per share, whether issued and outstanding or held
in treasury, were reclassified into one new share of Common Stock, par value
$.01 per share. The amendment to the company's Certificate of Incorporation
reduced the number of authorized shares of Common Stock from 100,000,000 to
50,000,000 shares and increased the par value of the Common Stock from $.005 per
share to $.01 per share.
14. Stock Option Plans
The company has adopted various stock option plans, primarily as
incentives for recipients to remain affiliated with the company. At December 31,
1998, 5,611,172 shares of common stock were reserved for issuance pursuant to
company stock option plans. Option plan grants generally are exercisable at
rates from 20% to 33 1/3% per year, beginning one year from the date of grant.
With the exception of options granted to certain consultants and advisors to the
company, all options expire 10 years from the date of grant.
F-15
<PAGE> 62
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The company currently grants stock options under three stock option plans:
the Non-Executive Stock Option Plan, which was established in 1994, and amended
in 1997, and is used to provide option incentives to employees who are not
officers or directors of the company for purposes of Section 16 of the
Securities Exchange Act of 1934, as amended and the regulations thereunder, and
consultants and advisors to the company; the 1992 Stock Option Plan, which is
used to provide option incentives to Section 16 officers and directors; and the
1996 Non-employee Directors Stock Option Plan, which is used to provide options
in lieu of fees to elected non-employee directors.
Detail information concerning stock option plans is as follows:
<TABLE>
<CAPTION>
1987 1991 1996
1987 1987 SPECIAL SPECIAL NON- NON-
INCENTIVE NON- NON- NON- 1992 EXECUTIVE EMPLOYEE
STOCK OPTION STATUTORY STATUTORY STATUTORY STOCK OPTION STOCK OPTION DIRECTORS
PLAN STOCK OPTION STOCK OPTION STOCK OPTION PLAN PLAN STOCK OPTION
PLAN PLAN PLAN PLAN
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPTIONS AUTHORIZED 1,000,000 1,000,000 500,000 1,000,000 2,850,000 2,250,000 50,000
======================================================================================================
OPTIONS OUTSTANDING 200,400 584,300 48,600 318,400 956,600 368,200 0
DECEMBER 31, 1995
GRANTED 0 0 0 0 687,800 505,700 0
EXERCISED (24,500) (30,500) (11,700) (36,700) (121,800) (30,300) 0
CANCELED (3,800) 0 0 (57,000) (26,500) (143,800) 0
------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING 172,100 553,800 36,900 224,700 1,496,100 699,800 0
DECEMBER 31, 1996
======================================================================================================
GRANTED 0 0 0 0 550,000 494,300 5,900
EXERCISED (26,700) (37,000) (2,700) (6,200) (57,800) (19,000) 0
CANCELED (200) 0 0 (1,000) (110,400) (114,700) 0
------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING 145,200 516,800 34,200 217,500 1,877,900 1,060,400 5,900
DECEMBER 31, 1997
======================================================================================================
GRANTED 0 0 0 0 854,000 1,107,100 6,000
EXERCISED (51,500) (48,500) 0 (2,300) (42,600) (10,100) 0
CANCELED 0 0 0 (2,500) (129,100) (152,300) 0
- ------------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING 93,700 468,300 34,200 212,700 2,560,200 2,005,100 11,900
DECEMBER 31, 1998
====================================================================================================================================
</TABLE>
A summary of stock option prices and exercisable shares for stock option
plans is as follows:
<TABLE>
<CAPTION>
TOTAL OPTION OPTION WEIGHTED SHARES
ACTIVITY PRICE PRICE AVERAGE EXERCISABLE
ALL PLANS PER PER EXERCISE AT
(SHARES) SHARE SHARE PRICE YEAR-END
(LOW) (HIGH)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING DECEMBER 31, 1995 2,476,500 $4.62 $30.20 $6.51 1,180,850
GRANTED 1,193,500 $10.00 $16.75 $13.07 --
EXERCISED (255,500) $4.88 $10.25 $4.93 --
CANCELED (231,100) $4.88 $30.20 $13.63 --
---------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1996 3,183,400 $4.62 $30.20 $8.66 1,283,400
GRANTED 1,050,200 $2.88 $15.00 $14.04 --
EXERCISED (149,400) $4.88 $4.88 $4.91 --
CANCELED (226,300) $4.88 $22.00 $12.52 --
---------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1997 3,857,900 $2.88 $30.20 $10.05 1,765,100
GRANTED 1,967,100 $5.88 $10.94 $8.74 --
EXERCISED (155,000) $4.88 $8.00 $4.90 --
CANCELED (283,900) $4.88 $14.75 $12.38 --
- ------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1998 5,386,100 $2.88 $30.20 $9.59 2,239,400
========================================================================================================================
</TABLE>
F-16
<PAGE> 63
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The price range of outstanding and exercisable stock options as at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
OUT-STANDING AVERAGE AVERAGE EXERCIS- AVERAGE
RANGE OF OPTION AT REMAINING EXERCISE ABLE EXERCISE
EXERCISE PRICES YEAR-END CONTRACT PRICE AT PRICE
LIFE OUTSTANDING YEAR-END EXERCISABLE
(YEARS) OPTIONS OPTIONS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.88 - $4.63 16,900 8.08 $3.39 14,900 $3.22
$4.88 - $5.25 1,461,600 3.95 $4.88 1,352,200 $4.88
$5.63 - $8.00 1,073,400 9.77 $7.03 21,400 $7.00
$8.75 - $11.19 1,215,800 8.80 $10.70 166,100 $10.59
$11.63 - $30.20 1,618,400 7.63 $14.76 684,800 $15.40
- ----------------------------------------------------------------------------------------------------
$2.88 - $30.20 5,386,100 7.33 $9.59 2,239,400 $8.53
====================================================================================================
</TABLE>
The exercise price of options currently granted under the plans is equal
to the fair market value of the underlying share of common stock at the time of
grant, except in respect to the 1996 Non-employee Directors Stock Option Plan
where options are granted in lieu of annual fees. Options for which the exercise
price is less than the fair market value at the time of grant are considered
compensatory and the difference in value is charged to operations.
The company has elected to follow Accounting Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FASB 123") requires the use of
option valuation models that were not developed for use in valuing employee
incentive stock options.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FASB 123, which also requires that the information be
determined as if the company has accounted for stock options granted subsequent
to December 31, 1994 under the fair value method of FASB 123. The fair value for
the company's stock options granted subsequent to December 31, 1994 is estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996, 1997 and 1998; risk-free
interest rate of 6.28%, 5.60% and 4.77% respectively; no expected dividend
payments; volatility factors of the expected market price of the company's
common stock, based on historical volatility, of 0.4252; 0.5341 and 0.6843
respectively; and a weighted-average expected life of the option of 8.00, 6.12
and 5.83 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. As noted above, the company's stock options are
vested over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in managements opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the company's stock options. The weighted average fair values of option
grants, as calculated using the Black-Scholes option valuation model, for the
years ending December 31 are as follows: 1998 -- $5.66; 1997 -- $8.06; and 1996
- -- $7.63.
F-17
<PAGE> 64
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For purposes of pro forma disclosure under FASB 123, the estimated fair
value of the company's options is amortized over the option's vesting period.
The company's pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported under APB 25 ($9,053,900) ($7,909,100) ($9,687,400)
Stock option expense per FASB 123 (5,400,600) (4,062,600) (1,304,400)
------------- ------------- -------------
Pro forma net loss ($14,454,500) ($11,971,700) ($10,991,800)
Pro forma net loss per common share ($0.59) ($0.50) ($0.49)
</TABLE>
Because FASB 123 is applicable only to options granted subsequent to
December 31,1994, its pro forma effect will not be fully reflected until the
year 2000 due to the five year vesting period of options granted in 1995, the
initial year pro forma disclosure of stock option accounting under FASB 123 was
required.
15. Employee Benefit Plans
The company has a defined contribution pension plan covering substantially
all of its U. S. employees, subject to age and service requirements. In
addition, the company has an Employee Savings Plan 401(k) available for all of
its U.S. employees subject to age and service requirements and matches employee
contributions in an amount equal to the lesser of one-third of the employee's
contribution or 2% of the employee's compensation subject to government tax
regulation limits. The company also provides a deferred compensation program for
certain executives of the company. The company funded Employee Savings Plan
401(k) costs during 1998 on a monthly basis. The company funded pension costs on
a quarterly basis in 1998. Amounts accrued under the deferred compensation plan
are reflected as "Long-term Liabilities" in the company's consolidated balance
sheet. Costs of the Employee Pension Plan, the Employee Savings Plan 401(k) and
the deferred compensation plans were for the years ended December 31,
1998--$1,260,000, 1997--$1,226,400 and 1996--$993,000.
16. Income Taxes
As of December 31, 1998, the company had a net operating loss carry
forward of approximately $140,220,000 for federal income tax purposes. In
addition, the company had a research and development tax credit carry forward of
$6,159,000.
The company records deferred tax assets and liabilities for the tax
effects of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. A valuation allowance equal to the net deferred tax asset has been
recorded on the basis of the uncertainty with respect to the ultimate
realization of the net deferred tax assets. Due to this uncertainty, no benefit
has been recorded for the year ended December 31, 1998, or any prior period for
any net operating loss carryforwards or other deferred tax assets generated
during the year.
F-18
<PAGE> 65
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Significant components of the company's estimated deferred tax assets
and liabilities as at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards(1) $ 50,690,600 $ 48,091,200
Book over income tax depreciation 114,600 174,800
Research and development tax credits 6,159,800 5,338,000
Other non-salary compensation and benefits 877,000 869,500
Other, principally reserves 729,200 308,600
------------ ------------
Total deferred tax assets 58,571,200 54,782,100
Deferred tax liabilities
Prepaid expenses (102,800) (121,200)
------------ ------------
Total deferred tax liabilities (102,800) (121,200)
------------ ------------
58,468,400 54,660,900
Valuation allowance for net deferred tax assets (58,468,400) (54,660,900)
------------ ------------
Net deferred tax assets $ 0 $ 0
============ ============
</TABLE>
(1) Includes estimated state and foreign net operating loss carryforwards
of $1,613,500.
The reconciliation of the expected tax benefit for the years ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax benefit at expected rate(35%) $ 3,168,900 $ 2,768,100
Permanent differences (406,800) (370,600)
Research and development tax credit 781,900 707,400
State taxes, net (102,400) (217,900)
Foreign taxes, net 173,900 (94,000)
Other (15,000) 125,000
----------- -----------
Income tax benefit 3,600,500 2,918,000
Stock option benefit recorded in equity 207,000 335,500
Increase in valuation allowance (3,807,500) (3,253,500)
----------- -----------
Tax benefit $ 0 $ 0
=========== ===========
</TABLE>
Approximately $9,964,300 of tax benefits related to the exercise of
stock options is included in the deferred tax asset relating to net operating
loss carryforwards listed above. Although not a component of tax expense, the
reserve for the future realization of this asset is reflected in the valuation
allowance and will be credited to additional paid-in capital if and when
realized.
F-19
<PAGE> 66
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The federal income tax carryforwards expire as follows:
<TABLE>
<CAPTION>
Research and
Net Operating Development
Losses Credits
------------- ------------
<S> <C> <C>
2002 $ 1,000 $ 0
2003 1,250,000 46,000
2004 5,206,000 140,000
2005 6,750,000 192,000
2006 23,486,000 545,000
2007 21,993,000 889,000
2008 27,367,000 1,072,000
2009 24,430,000 710,000
2010 3,659,000 473,000
2011 10,275,000 593,000
2012 7,441,000 717,000
2018 8,362,000 782,000
------------ ------------
$140,220,000 $ 6,159,000
============ ============
</TABLE>
The timing and manner in which the company will utilize net operating
loss and research and development tax credit carryforwards in any year, or in
total, may be limited by provisions of the Internal Revenue Service Tax Code
regarding changes in the ownership of the company. Such limitations may have an
impact on the ultimate realization of these federal income tax carryforwards.
17. CONTINGENCY
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.
18. SUBSEQUENT EVENT
In January 1999, the company entered in 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. Following the closing of this transaction, the
company had cash and marketable securities of approximately $60 million.
F-20
<PAGE> 67
EXHIBIT INDEX
Description
-----------
Item No.
- --------
The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3(a) to the Registrant's Registration Statement on Form S-1
(File No. 33-39576) filed with the Securities and Exchange
Commission on March 22, 1991)
3.1.1 Certificate of Amendment to Certificate of Incorporation
(incorporated by reference to Exhibit 3.1.1 to the Registrant's
Registration Statement on Form S-3 (File No. 33-00077) filed with
the Securities and Exchange Commission on January 5, 1996)
3.1.2 Certificate of Designations of Series A Junior Preferred Stock
(incorporated by reference to Exhibit 1 to the Registrant's Current
Report on Form 8-K dated June 7, 1995)
3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 28, 1994)
4.1 Rights Agreement dated as of May 19, 1995 by and between Registrant
and Chemical Melon Shareholder Services L.L.C. (incorporated by
reference to Exhibit 1 to Registrant's Current Report on Form 8-K
dated June 7, 1995)
4.2 Securities Purchase Agreement dated as of January 27, 1999 by and
among the Registrant and Domain Partners IV, L.P, DP IV Associates,
L.P., and Proquest Investments, L.P. (including form of Warrant)
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated January 27, 1999)
10.1* Agreement dated August 9, 1991, between the Registrant and
Warner-Lambert Company, as amended by Amendment No. 1 dated December
12, 1991, Amendment No. 2 dated March 10, 1994 and Amendment No. 3
dated March 11, 1994 (incorporated by reference to Exhibit 10.1 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1994)
10.2 Office Lease Agreement, dated September 1990, between U.S.
Bioscience, Inc. and Tower Bridge Associates (incorporated by
reference to Exhibit 10(k) to the Registrant's Registration
Statement on Form S-1 (File No. 33-39576) filed with the Securities
and Exchange Commission on March 22, 1991)
10.2.1 Amendment No. 1, dated August 31, 1991, to Office Lease Agreement
between U.S. Bioscience, Inc. and Tower Bridge Associates
(incorporated by reference to Exhibit 10(I)(ii) to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 1992)
10.2.2 Addendum, dated April 8, 1992, to Amendment No. 1 of Office Lease
Agreement between U.S. Bioscience and Tower Bridge Associates
(incorporated by reference to Exhibit 10.2.2 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 31, 1993)
<PAGE> 68
10.2.3 Amendment No. 2, dated June 30, 1995, to Office Lease Agreement
between U.S. Bioscience, Inc. and Tower Bridge Associates
(incorporated by reference to Exhibit 10.2.3 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 20, 1996)
10.2.4 Amendment No. 3, dated May 12, 1998, to Office Lease Agreement
between U.S. Bioscience and Tower Bridge Associates (incorporated by
reference to Exhibit 10.2.3.1 to Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on July
31, 1998)
10.3 Lease Agreement, dated June 15, 1992, between U.S. Bioscience, Inc.
and Pickering Acquisition Associates (incorporated by reference to
Exhibit 10.3 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1993)
10.3.1 Amendment No. 1, dated March 17, 1993, to Lease Agreement between
the Registrant and Pickering Acquisition Associates (incorporated by
reference to Exhibit 10.3.1 to the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
31, 1993)
10.3.2 Second Amendment to Lease Agreement between the Registrant and
Pickering Acquisition Associates dated February 8, 1995
(incorporated by reference to Exhibit 10.3.2 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1995)
10.3.3 Third Amendment to Lease Agreement between the Registrant and
Pickering Associates dated October 12, 1995 (incorporated by
reference to Exhibit 10.3.3 to the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
20, 1998)
10.3.4 Fourth Amendment to Lease Agreement between the Registrant and
Pickering Acquisition Associates dated January 20, 1998
(incorporated by reference to Exhibit 10.3.4 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 20, 1998)
10.4 Research Agreement, dated May 14, 1987, between the Registrant and
Georgetown University, as amended May 27, 1988 (incorporated by
reference to Exhibit 10.13 to the Registrant's Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on September 21, 1989)
10.4.1 Amendment No. 2, dated as of January 23, 1990, to Research
Agreement, dated May 14, 1987, between the Registrant and Georgetown
University (incorporated by reference to Exhibit 10.13.1 to the
Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on February 5, 1990)
10.5 Letter agreement, dated January 22, 1992, between the Registrant and
Chemsyn Science Laboratories (incorporated by reference to Exhibit
10(k) to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 27, 1992)
10.6 License Agreement dated January 30, 1995 between Registrant and
National Institutes of Health (incorporated by reference to Exhibit
10.6 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1995)
<PAGE> 69
10.7 Agreement for Assignment of Rights, dated January 8, 1988, between
the Registrant and Wyeth Laboratories, Inc. (incorporated by
reference to Exhibit 10.18 to the Registrant's Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on September 21, 1989)
10.8* Amended and Restated License Agreement, effective as of May 1, 1993,
between the Registrant and Southern Research Institute (incorporated
by reference to Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
28, 1994)
10.9 Agreement, dated as of November 25, 1988, between the Registrant and
Warner-Lambert Company (incorporated by reference to Exhibit 10.23
to the Registrant's Registration Statement on Form 10 filed with the
Securities and Exchange Commission on September 21, 1989)
10.9.1 Amendment No. 1, dated March 13, 1992 to Agreement dated as of
November 25, 1988, between the Registrant and Warner-Lambert Company
(incorporated by reference to Exhibit 10(o)(ii) to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 1992)
10.10 License Agreement, dated as of December 6, 1990, between the
National Technical Information Service and the Registrant
(incorporated by reference to Exhibit 10(t) to the Registrant's
Registration Statement on Form S-1 (File No. 33-39576) filed with
the Securities and Exchange Commission on March 25, 1991)
10.11 Agreement, dated as of January 1, 1995, between Registrant and
Applied Analytical Industries, Inc. (incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 28, 1995)
10.11.1 Amendment, dated April 12, 1995, to Agreement dated January 1995
between Registrant and Applied Analytical Industries, Inc.
(incorporated by reference to Exhibit 10.11 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 21, 1997)
10.11.2 Second Amendment, dated May 6, 1996 to Agreement dated January 1,
1995 between the Registrant and Applied Analytical Industries, Inc.
(incorporated by reference to Exhibit 10.11.2 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 21, 1997)
10.12 Agreement, dated as of September 23, 1993, between Registrant and
Ben Venue Laboratories, Inc. (incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1994)
10.12.1 Amendment, dated April 11, 1995, to Agreement dated September 23,
1993 between the Registrant and Ben Venue Laboratories, Inc.
(incorporated by reference to Exhibit 10.12.1 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 21, 1997)
10.12.2 Amendment, dated December 12, 1995, to Agreement dated September 23,
1993 between the Registrant and Ben Venue Laboratories, Inc.
(incorporated by reference to Exhibit 10.12.2 to the
<PAGE> 70
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 21, 1997)
10.13 License Agreement, dated February 14, 1992, between the Registrant
and Schering Overseas Limited (incorporated by reference to Exhibit
10.14 to the Registrant's Annual Report on Form 10- K filed with the
Securities and Exchange Commission on March 31, 1993)
10.13.1 Amendment dated October 15, 1993 to License Agreement between
Registrant and Schering Overseas Limited (incorporated by reference
to Exhibit 10.14.1 to the Registrant's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 28, 1994)
10.14 Amended and Restated License Agreement dated May 10, 1994 between
the Registrant and Scherico, Ltd. (incorporated by reference to
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 20, 1998)
10.15* Distribution and Supply Agreement, dated as of May 10, 1993 between
Registrant and Scherico, Ltd. (incorporated by reference to Exhibit
10.16 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1995)
10.15.1* Amendment to Distribution and Supply Agreement, dated as of August
31, 1996 between the Registrant and Scherico, Ltd. (incorporated by
reference to Exhibit 10.16.1 to the Registrant's Current Report on
Form 8-K/A dated September 19, 1996 filed with the Securities and
Exchange Commission on December 19, 1996)
10.16 Agreement, dated as of March 10, 1994 between Registrant and Sipsy
S.A. (incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1994)
10.17 License Agreement, effective November 28, 1990 between Registrant
and National Technical Information Service (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 28,
1994)
10.18 Non-Executive Stock Option Plan (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on May 9, 1997)
10.19* Ethyol (Amifostine) Distribution and Marketing Collaboration
Agreement between U.S. Bioscience, Inc. and ALZA Corporation dated
December 12, 1995 (incorporated by reference to Exhibit 5 to
Registrant's Current Report on Form 8-K dated December 22, 1995)
10.19.1 Amendment No. 2 to Distribution and Marketing Collaboration
Agreement between the Registrant and ALZA Corporation dated as of
February 3, 1997 (incorporated by reference to Exhibit 10.25.2 to
the Registrant's Current Report on Form 8-K dated February 3, 1997)
10.20 Stock Purchase Agreement between the Registrant and ALZA Corporation
dated as of February 3, 1997 (incorporated by reference to Exhibit
10.25.1 to the Registrant's Current Report on Form 8-K dated
February 3, 1997)
<PAGE> 71
10.21 License Agreement between the Registrant and Scherico, Ltd. dated as
of November 6, 1997 (incorporated by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1998)
10.21.1 Amendment No. 1 to License Agreement dated as of November 6, 1997
between the Registrant and Scherico, Ltd. (incorporated by reference
to Exhibit 10.27.1 to the Registrant's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 20, 1998)
Executive Compensation Plans and Arrangements
10.22 U.S. Bioscience, Inc. 1987 Incentive Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (File No. 33-43981) filed with the Securities
and Exchange Commission on November 15, 1991)
10.23 U.S. Bioscience, Inc. 1987 Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8 (File No. 33-43981) filed with
the Securities and Exchange Commission on November 15, 1991)
10.24 U.S. Bioscience, Inc. 1987 Special Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-8 (File No. 33-43981) filed with
the Securities and Exchange Commission on November 15, 1991)
10.25 U.S. Bioscience, Inc. 1991 Special Non-Statutory Stock Option Plan
(incorporated by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8 (File No. 33-43981) filed with
the Securities and Exchange Commission on November 15, 1991)
10.26 U.S. Bioscience, Inc. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.27 to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 28,
1995)
10.27 Executive Benefits Plan and related Form of Split Dollar Agreement
(incorporated by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1995)
10.28 Pension Restoration Plan (incorporated by reference to Exhibit 10.29
to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1995)
10.29 Amendment 1996-1 to Pension Restoration Plan (incorporated by
reference to the Registrant's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 20, 1998)
10.30 Agreement between the Registrant and Philip S. Schein, M.D. dated as
of March 10, 1998 (incorporated by reference to Exhibit 10.28.1 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1998)
10.31 Form of Executive Severance Agreement executed with each Executive
Vice President, each elected Vice President, and the Controller of
the Registrant (incorporated by reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1993)
<PAGE> 72
10.32 Executive Severance Agreement, dated September 3, 1996, between the
Registrant and C. Boyd Clarke (incorporated by reference to the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 20, 1998)
10.33 Executive severance arrangement, dated March 4, 1997, between the
Registrant and C. Boyd Clarke (incorporated by reference to Exhibit
10.42 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 21, 1997)
10.34 Executive severance arrangement, dated March 4, 1997, between the
Registrant and Wolfgang Oster, M.D. (incorporated by reference to
Exhibit 10.43 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 21, 1997)
10.35 Agreement, dated as of December 31, 1998, between the Registrant and
Barbara J. Scheffler
10.36 U.S. Bioscience, Inc. 1999 Incentive Compensation Plan
10.37 Letter agreement dated May 5, 1997 between the Registrant and Robert
L. Capizzi, M.D. (incorporated by reference to Exhibit 10.40.1 to
the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1998)
10.37.1 Letter agreement, dated April 30, 1998, between the Registrant and
Robert L. Capizzi, M.D.
22 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
- --------------
* Confidential portions have been omitted and have been separately filed
with the Commission.
<PAGE> 1
EXHIBIT 10.35
AGREEMENT
BARBARA J. SCHEFFLER (hereafter "Ms. Scheffler"), and U.S.
BIOSCIENCE, INC. (hereafter "U.S. Bioscience") desire and agree to enter into
this agreement as of December 31, 1998 (the "Effective Date"), pursuant to the
following terms and conditions, provided, however, that this Agreement shall be
null and void and of no effect whatsoever if it shall not have been duly
executed and delivered by or on behalf of each of the parties on or before
January 14, 1999. In consideration of the mutual covenants and agreements herein
contained, and intending to be legally bound, the parties hereto agree as
follows:
1. Ms. Scheffler has resigned as Senior Vice President, Corporate
and Scientific Affairs and as an employee of U.S. Bioscience effective on the
Effective Date and agrees to provide services as a consultant and independent
contractor, as further specified herein.
2. For and in consideration of the undertakings of Ms. Scheffler as
set forth herein, U.S. Bioscience shall retain Ms. Scheffler as a consultant for
the period commencing on the Effective Date and ending December 31, 1999 (the
"Consulting Term"). The Consulting Term may be extended by mutual agreement of
the parties in writing, which agreement shall set forth the duration of the
extension (the "Extended Term"), the consulting fees to be paid during the
Extended Term, and any other special terms and conditions applicable to the
Extended Term. The parties agree to meet on or before September 30, 1999 to
discuss their mutual interest in entering into an agreement providing for the
Extended Term and the terms thereof.
<PAGE> 2
During the Consulting Term, U.S. Bioscience shall provide Ms.
Scheffler the following compensation and benefits:
(a) Consulting fees to be paid in respect of services rendered
during the Consulting Term in the aggregate amount of $192,919.94
payable in 26 installments on a bi-weekly schedule. Ms. Scheffler
shall be solely responsible for the payment of all federal, state
and local taxes or contributions imposed under unemployment
insurance, workmen's compensation, social security and income tax
laws that pertain to the compensation to be paid to her for
consulting services hereunder.
(b) A bonus in respect of services rendered as an employee
during 1998 at the target level of 25 percent of annual salary, to
be paid in a lump sum when annual bonuses for 1998 are paid to other
senior officers of U.S. Bioscience.
(c) Reimbursement of the amounts payable by Ms. Scheffler to
continue her coverage under COBRA for medical benefits for herself
and her husband (including health, dental and prescription drug),
less $38 per pay period (i.e., the employee contribution for such
coverage in 1998), as provided to employees of U.S. Bioscience
throughout the Consulting Term, or until other substantially
equivalent employer-provided medical insurance is available,
whichever occurs first, subject to Ms. Scheffler's right to continue
such coverage under COBRA. In the event that such other medical
insurance becomes available through any entity other than U.S.
Bioscience, Ms. Scheffler will promptly advise
-2-
<PAGE> 3
U.S. Bioscience and reimbursement for health care coverage pursuant
to this subsection 2(c) shall cease.
(d) It is agreed and understood that from and after the close
of business on the Effective Date, except as otherwise provided in
Section 2(c) above, Ms. Scheffler will no longer be entitled to
participate in any of the benefit plans for employees of U.S.
Bioscience, provided that Ms. Scheffler shall continue to be
entitled to all benefits available or accrued under such plans up to
the Effective Date, including without limitation the U.S. Bioscience
Executive Benefits Plan and the Officers' Pension Restoration Plan.
(e) The right to continue to vest non-statutory stock options
during the Consulting Term (and the Extended Term, if any) and the
right during the Consulting Term (and the Extended Term, if any) and
for a period of three months following the end of the end of the
Consulting Term (or the end of the Extended Term, if any) to a
cashless exercise of such vested options, subject to Ms. Scheffler's
compliance with all applicable securities laws.
(f) The rights to indemnification and advancement of expenses
presently provided pursuant to U.S. Bioscience's certificate of
incorporation and bylaws, or such greater rights as subsequently may
be adopted by amendment thereto, in respect of service as an officer
of U.S. Bioscience.
(g) A contingent, incentive cash bonus in respect of services
rendered during the Consulting Term, which shall be payable, if at
all, by January 14, 2000 in an amount equal to 10,000 multiplied by
the excess, if any, of (i) the closing
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price of one share of U.S. Bioscience Common Stock on the American
Stock Exchange on December 31, 1999 (or if, for any reason, no
closing price for U.S. Bioscience Common Stock shall be available
for December 31, 1999, the closing price for U.S. Bioscience Common
Stock on the then most recent date prior to December 31, 1999 for
which a closing price shall have been reported) over (ii) $7.00
(which was the closing price of one share of U.S. Bioscience Common
Stock on the American Stock Exchange on December 16, 1998).
3. Separate and apart from the foregoing, on January 4, 1999, U.S.
Bioscience shall pay Ms. Scheffler $25,227.99, which represents unused accrued
vacation hours, accrued through the Effective Date, less normal withholding and
payroll taxes. After the Effective Date, Ms. Scheffler shall not accrue
additional vacation benefits.
4. It is expressly agreed and understood that U.S. Bioscience does
not have and will not have any obligation to provide Ms. Scheffler at any time
in the future with any payments, benefits or considerations other than those
recited herein.
5. (a) In consideration for the payments, benefits and agreements of
U.S. Bioscience contained herein, Ms. Scheffler releases and discharges
U.S. Bioscience and its past, present and future officers, directors,
attorneys, employees, agents, successors and assigns, jointly and
severally, from any and all actions, charges, causes of action or claims
of any kind, known or unknown, against any of them, which she, her heirs,
agents, successors or assigns ever had, now have or hereafter may have
arising out of any matter, occurrence or event existing or occurring prior
to the execution hereof, including, without limitation: any claims
relating to or arising out of her employment with U.S. Bioscience,
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including but not limited to, any claims for unpaid or withheld wages,
benefits, bonuses and/or other compensation of any kind, including accrued
sick pay and vacation; any claims for attorneys' fees, costs or expenses;
any claims of discrimination based on sex, age, race, religion, color,
creed, handicap, citizenship, national origin or any other factor
prohibited by Federal, State or Local law, including but not limited to,
any claims under Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Pennsylvania Human Relations Act,
the Americans With Disabilities Act, and the Employee Retirement Income
Security Act of 1974, as amended; and any and all common law claims
whatsoever, whether existing or hereinafter recognized, including, but not
limited to, breach of contract, libel, slander, fraud, promissory
estoppel, breach of covenant of good faith and fair dealing, equitable
estoppel, misrepresentation or wrongful discharge. Excluded from this
Release are only: claims which arise subsequent to the execution of this
Agreement; actions to enforce vested rights under any option agreement,
401(k) or qualified or unqualified retirement or benefit plan; and actions
to enforce this Agreement and/or the Executive Severance Agreement (as
defined in Section 26 below).
(b) U.S. Bioscience, intending to be legally bound, does hereby
release and discharge Ms. Scheffler, her heirs, executors, administrators,
successors and assigns, from any and all manner of actions and causes of
action, suits, debts, claims and demands arising from conduct or actions
undertaken by her in good faith within the scope of her employment and
authority as an officer of U.S. Bioscience.
6. (a) Ms. Scheffler shall make herself available to U.S. Bioscience
for approximately 250 hours of consulting services during the Consulting
Term (the "Total
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<PAGE> 6
Hours"), with respect to matters which may include, but shall not be
limited to (a) preparing and/or presenting regulatory applications for
U.S. Bioscience products, (b) preparing and/or reviewing statistical
analyses and research in connection therewith, (c) assisting in addressing
regulatory and/or statistical questions, (d) preparation of manuscripts
and other publications, (e) assisting in study design, and (f) assisting
U.S. Bioscience in assigning, obtaining, maintaining, and enforcing all
proprietary rights relating to inventions she conceived or reduced to
practice during her employment with U.S. Bioscience that relate to any of
U.S. Bioscience's products, services or activities of which she is aware.
U.S. Bioscience will provide Ms. Scheffler with reasonable secretarial
support and equipment and will make reasonable efforts to provide Ms.
Scheffler with advance notice of the times and places where her services
are requested, and Ms. Scheffler will make reasonable efforts to adapt her
schedule to comply with U.S. Bioscience's reasonable requests. Although
certain of such consulting services may be performed by telephone and/or
by written communication, it is anticipated and agreed that a substantial
portion of such consulting services may require Ms. Scheffler's presence
at U.S. Bioscience's facilities and other such consulting services may
require her travel outside of the greater Philadelphia area. U.S.
Bioscience shall advance to Ms. Scheffler or reimburse promptly all
out-of-pocket travel, lodging and meal expenses incurred in connection
with the performance of such consulting services if such expenses have
been approved in advance by U.S. Bioscience and are incurred in accordance
with U.S. Bioscience's policies for reimbursing its employees for the
corresponding type of expense.
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(b) For the purposes of calculating the hours of consulting services
rendered under this Agreement, the following principles shall apply:
(i) For services provided at U.S. Bioscience's principal
offices and/or for services involving "local" travel (e.g.,
Philadelphia - New York - Washington): the lesser of actual hours
(door-to-door from Ms. Scheffler's suburban Philadelphia residence)
or 8 hours per day shall be the number of hours of consulting
services rendered.
(ii) For services involving "distant" or overnight travel: 8
hours per day or partial day away from Ms. Scheffler's residence
shall be the number of hours of consulting services rendered.
(iii) All reservations, ticketing and other and travel
arrangements in connection with consulting services rendered under
this Agreement shall be made by U.S. Bioscience.
(c) The hours of consulting services rendered by Ms. Scheffler
during the Consulting Term upon the request of U.S. Bioscience shall be
calculated in accordance with Section 6(c) above and deducted from the
Total Hours until exhausted. In the event that U.S. Bioscience requests,
and Ms. Scheffler agrees to provide and provides, consulting services
during the Consulting Term in excess of the Total Hours (calculated in
accordance with Section 6(c) above), U.S. Bioscience shall pay Ms.
Scheffler for such excess hours (calculated in accordance with Section
6(c) above) at the rate of $250 per hour or, subject to mutual agreement
in writing, at such per project rate as may be agreed upon in respect of
any proposed consulting project.
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<PAGE> 8
(d) All requests for consulting services and calculations of
services rendered by Ms. Scheffler under this Agreement shall be made on
behalf of U.S. Bioscience through the office of C. Boyd Clarke, President
and Chief Executive Officer.
(e) U.S. Bioscience agrees that (i) from and after September 30,
1999, Ms. Scheffler shall be entitled to refuse any consulting assignments
that would require disclosure to her of material non-public information of
U.S. Bioscience and (ii) that any refusal by Ms. Scheffler made pursuant
to and in accordance with clause (i) of this Section 6(e) shall not
constitute a breach of this Agreement by Ms. Scheffler. In the event that
Ms. Scheffler is in possession of material non-public information at the
end of the Consulting Term or Extended Term, if any, USB shall use
reasonable efforts to extend such Term, upon mutually agreeable terms and
conditions, for a reasonable period to permit the cashless exercise of her
options in accordance with applicable securities laws.
7. Ms. Scheffler will not disclose to any other person or company,
or use for her own personal benefit, except as may be necessary in the
performance of her duties as a consultant for U.S. Bioscience, any confidential
or proprietary information disclosed to her or of which she has or shall become
aware by reason of her employment or consulting association with U.S.
Bioscience. Such confidential and/or proprietary information shall include all
data and information relating to the business of U.S. Bioscience, whether or not
it constitutes a trade secret, which has been or shall be disclosed to Ms.
Scheffler or of which Ms. Scheffler has become aware or shall become aware as a
consequence of her employment or consulting relationship with U.S. Bioscience
and which has value to U.S. Bioscience, including, but not limited to,
information relating to scientific and research work of U.S. Bioscience,
clinical, pharmacological and toxicological data, regulatory filings, products,
methods, processes, licenses, projects, developments, formulas, and the
financial or business affairs of U.S. Bioscience regarding existing or potential
business ventures and/or relationships, employees or employees' compensation,
projections, plans, development, accounting and marketing studies or analyses
and
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<PAGE> 9
all information, improvements, invention proposals and patent applications which
have been conceived or reduced to practice including, but not limited to, those
conceived by Ms. Scheffler during her employment by U.S. Bioscience or while
performing consulting services under this Agreement excepting only such
information which shall have become a part of the public domain. If Ms.
Scheffler is required by law, administrative or judicial order to disclose any
confidential or proprietary information of U.S. Bioscience, Ms. Scheffler shall
give U.S. Bioscience prompt notice of such fact so that U.S. Bioscience may
obtain a protective order or other appropriate remedy concerning any such
disclosure and/or waive compliance with the non-disclosure provisions of this
Agreement. Ms. Scheffler shall fully cooperate with U.S. Bioscience in
connection with U.S. Bioscience's efforts to obtain any such order or other
remedy. If any such order or other remedy does not fully preclude disclosure or
U.S. Bioscience waives such compliance, Ms. Scheffler will make such disclosure
only to the extent that such disclosure is legally required.
8. Without prior written consent of U.S. Bioscience, while Ms.
Scheffler is engaged by U.S. Bioscience as a consultant and continuing through
the period ending one (1) year after the conclusion of the Consulting Term (or
the later conclusion of the Extended Term, if any), Ms. Scheffler will not
solicit or divert, either directly or indirectly, on her own behalf or in the
service of or on behalf of any other, or attempt to solicit or divert or
appropriate any business opportunity related to the pharmaceutical business of
which Ms. Scheffler became aware while an employee of U.S. Bioscience or may
become aware in the course of her service as a consultant to U.S. Bioscience
hereunder
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9. Without prior written consent of U.S. Bioscience, during the
Consulting Term (and the Extended Term, if any), Ms. Scheffler will not solicit,
induce or assist anyone else in soliciting or inducing any current employee of
U.S. Bioscience to terminate his/her employment with U.S. Bioscience to accept
employment with Ms. Scheffler or in any business with which she is associated.
10. (a) During the Consulting Term (and the Extended Term, if any),
Ms. Scheffler will not engage in or render any services to or be employed
by any Competing or Principal Partner Business (as hereinafter defined).
The term "Competing or Principal Partner Business" shall mean (i) those
businesses whose products compete directly with products in which U.S.
Bioscience has rights including, without limitation, proprietary or
commercial rights, (ii) ALZA Corporation and its affiliates, and (iii)
Schering-Plough corporation and its affiliates.
(b) Ms. Scheffler agrees that she will not engage in or render
services to or be employed by any business or enterprise that makes, uses,
sells or seeks regulatory approval for generic substitutes for lodenosine
or any of the company's products that as of the Effective Date are drugs
approved by the United States Food and Drug Administration (i.e.,
amifostine, trimetrexate glucuronate and altretamine).
(c) Notwithstanding any other provision of this Section 10, during
the Consulting Term (and the Extended Term, if any), Ms. Scheffler may
render consulting services to ALZA Corporation or Schering-Plough
Corporation, or any of their respective affiliates, for the purpose of
designing clinical studies and/or developing educational and/or
promotional materials relating to Ethyol(R) (amifostine), subject to the
prior written
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approval of U.S. Bioscience in respect of each such consulting assignment,
such consent not to be unreasonably withheld.
11. Ms. Scheffler acknowledges and agrees that the type and periods
of restrictions imposed in this Agreement are fair and reasonable, and that such
restrictions are intended solely to protect the legitimate interests of U.S.
Bioscience, rather than to prevent Ms. Scheffler from earning a livelihood. Ms.
Scheffler recognizes that U.S. Bioscience competes on a worldwide basis and that
the access to confidential information that Ms. Scheffler has had make it
necessary for U.S. Bioscience to restrict Ms. Scheffler's post-employment
activities in the limited market in which U.S. Bioscience competes and in which
Ms. Scheffler's access to confidential information and other proprietary
information could be used to the detriment of U.S. Bioscience.
12. Ms. Scheffler acknowledges and agrees that if she should breach
any of the covenants, restrictions and agreements contained herein, irreparable
loss and injury would result to U.S. Bioscience, and that damage arising out of
such a breach may be difficult to ascertain. Ms. Scheffler therefore agrees
that, in addition to all other remedies provided at law or at equity, U.S.
Bioscience may petition and obtain from a court of law or equity all necessary
temporary, preliminary and permanent injunctive relief to prevent a breach by
Ms. Scheffler of any covenant contained in this Agreement. Ms. Scheffler agrees
further, that if it is determined by a court that she has breached the terms of
this Agreement, U.S. Bioscience shall be entitled to recover from her all costs
and attorneys' fees incurred as a result of its attempt to redress such a breach
or to enforce its rights and protect its legitimate interests.
13. Ms. Scheffler hereby acknowledges that she is aware that United
States securities laws restrict the purchase and sale of securities by persons
who possess certain non-
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public information relating to the issuer of such securities. Ms. Scheffler
further acknowledges that she is in possession of material non-public
information relating to U.S. Bioscience and agrees to comply with her
obligations with respect thereto under applicable securities laws. U.S.
Bioscience agrees to provide such reasonable assistance as Ms. Scheffler may
request for the purpose of assisting Ms. Scheffler to comply with her duties
with respect to U.S. Bioscience securities under applicable securities laws
(e.g., identifying material non-public information relating to U.S. Bioscience
and the dates of public disclosure thereof and providing a reasonable
opportunity to discuss the same with U.S. Bioscience in-house counsel).
14. (a) All documents, notes and other materials of any nature
relating to any confidential or proprietary information of U.S. Bioscience
that are or have been generated by Ms. Scheffler or come into her
possession shall be owned exclusively by U.S. Bioscience. Ms. Scheffler
will not take any original of the foregoing and will return the same to
U.S. Bioscience upon request. In addition to the foregoing, Ms. Scheffler
will not publish any confidential or proprietary information of U.S.
Bioscience without the prior written consent of U.S. Bioscience.
(b) All U.S. Bioscience equipment that has been provided to Ms.
Scheffler for her use in performing employment duties at her residence
(e.g., computers, software) shall continue to be made available for her
use in performing consulting services under this Agreement. At the end of
the Consulting Term (or any Extended Term) or upon the request of U.S.
Bioscience prior thereto, Ms. Scheffler shall return all such equipment to
U.S. Bioscience.
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15. In any action brought by either party for enforcement of the
rights given by this Agreement, the prevailing party shall be entitled to
payment by the other of all reasonable attorneys' fees and costs incurred due to
or resulting from the action.
16. In the event of Ms. Scheffler's death prior to the receipt of
all amounts to which she is entitled hereunder, such amounts (including, without
limitation, all amounts due pursuant to Section 2 hereof) shall be paid to Ms.
Scheffler's spouse, or such other beneficiary as Ms. Scheffler may name by
written notice to U.S. Bioscience.
17. Neither party shall engage in any communications that disparage
or interfere with the other party's existing or prospective business
relationships.
18. This Agreement embodies the complete understanding and agreement
between U.S. Bioscience and Ms. Scheffler and supersedes any and all other prior
agreements between them, oral or written, express or implied, except for the
Executive Severance Agreement (as defined in Section 26 below) and the option
agreements previously issued to Ms. Scheffler.
19. This Agreement shall be governed by the law of the Commonwealth
of Pennsylvania and any suit against U.S. Bioscience or Ms. Scheffler claiming a
breach hereof shall be maintained in a state or federal court in Pennsylvania.
20. Nothing in this Agreement is to be construed as an admission or
concession of liability or wrongdoing by either U.S. Bioscience or Ms.
Scheffler.
21. Ms. Scheffler recognizes and acknowledges that the obligation of
U.S. Bioscience to provide the consideration recited herein is expressly
contingent upon her fulfillment and satisfaction of the obligations set forth
herein and recognizes that if she should fail to comply in any material respect
with any of the provisions set forth herein, U.S. Bioscience may seek any
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appropriate remedy including the recovery of damages, including any amounts paid
pursuant to this Agreement, for such breach of the Agreement.
22. It is agreed and understood that Ms. Scheffler will make herself
available and cooperate in any reasonable manner during the Consulting Term and
for a reasonable time thereafter to provide assistance to U.S. Bioscience as may
be reasonably requested with due notice for the purpose of concluding any
matters that may arise in the future relating to Ms. Scheffler's term of
employment or consultant services with U.S. Bioscience. It is understood that
such cooperation and assistance shall be requested and rendered on a basis not
to interfere with any subsequent employment or enterprise engaged in by Ms.
Scheffler, nor shall such cooperation and assistance be deemed to extend any of
the restrictions contained in Section 8-10 of this Agreement. It is agreed that,
in the event that Ms. Scheffler is requested to provide assistance during the
period in which she is receiving payments from U.S. Bioscience pursuant to
paragraph 2, she shall be reimbursed for reasonable out-of-pocket expenses
incurred in providing such assistance. In the event that such assistance is
provided after the end of the Consulting Term and any Extended Term, Ms.
Scheffler shall be reimbursed for reasonable out-of-pocket expenses and shall be
compensated at a rate of $250 per hour for time spent in providing such
assistance.
23. Ms. Scheffler agrees and represents that:
(a) She has read carefully all of the terms of this Agreement;
(b) She has been encouraged to review this Agreement with an
attorney;
(c) She understands the meaning and effect of the terms of
this Agreement;
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(d) She has been advised that she has at least twenty-one (21)
days to determine whether she wishes to enter into this Agreement;
(e) She understands that she has seven (7) days from the date
of execution of this Agreement to revoke her execution thereof;
(f) The entry into and execution of this Agreement is of her
own free will and a voluntary act without compulsion of any kind;
and
(g) No promise or inducement not expressed herein has been
made to her.
24. U.S. Bioscience hereby represents to Ms. Scheffler that it has
all requisite corporate power and authority to enter into this Agreement and
perform its obligations hereunder, and that this Agreement has been duly
authorized, executed and delivered by U.S. Bioscience and constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms.
25. If any part or term of this Agreement is subsequently determined
by any court of competent jurisdiction to be unenforceable or illegal, such
determination shall not affect the enforceability, legality or binding nature of
any other term or provision of this Agreement.
26. The parties to this Agreement are parties to an Executive
Severance Agreement dated October 14, 1991, as amended (the "Executive Severance
Agreement"). Ms. Scheffler agrees that in the event she becomes eligible to
receive compensation under the Executive Severance Agreement, such compensation
shall be reduced by an amount equal to the amount paid to Ms. Scheffler under
this Agreement. The Executive Severance Agreement shall
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cease to be applicable to Ms. Scheffler in accordance with paragraph 2(b) of the
Executive Severance Agreement.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
/s/ Barbara J. Scheffler Date: 1/12/99
- --------------------------------------
Barbara J. Scheffler
residing at 540 Chandler Lane
Villanova, PA 19085
U.S. BIOSCIENCE, INC.
/s/ C. Boyd Clarke Date: 12/23/98
- --------------------------------------
C. Boyd Clarke
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.36
U.S. BIOSCIENCE, INC.
1999 INCENTIVE COMPENSATION PLAN
EFFECTIVE FEBRUARY 11, 1999
ARTICLE I - ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan. U.S. Bioscience, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), hereby establishes,
effective February 11, 1999 (the "Effective Date"), this incentive compensation
plan known as the U.S. Bioscience, Inc. 1999 Incentive Compensation Plan
(hereinafter referred to as the "Plan"), subject to the consent of the Company's
stockholders, which permits the grant of Incentive Stock Options, Nonqualified
Stock Options, Performance Shares, and Directors' Awards, as described more
fully herein.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
success of the Company and its Affiliates by providing incentives to Key
Employees and Directors that will link their personal interests to the long-term
financial success of the Company and its Affiliates and to growth in stockholder
value. The Plan is designed to provide flexibility to the Company and its
Affiliates in their ability to motivate, attract, and retain the services of Key
Employees upon whose judgment, interest, and special effort the successful
conduct of their operations is largely dependent. The plan is intended to permit
compensation expense attributable to the exercise of Nonqualified Stock Options
to be treated as "performance-based compensation" as that term is used for
purposes of Code Section 162(m).
1.3 Duration of the Plan. The Plan will commence on February 11,
1999, as described in Section 1.1 herein. The Plan shall remain in effect,
subject to the right of the Board of Directors to terminate the Plan at any
time, until all Shares subject to it shall have been purchased or acquired
according to the provisions herein.
ARTICLE II - DEFINITIONS AND CONSTRUCTION
2.1 Definitions. Whenever used in the Plan, the following terms
shall have the meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized:
(a) "Affiliate" means a corporation which is a parent
corporation or a subsidiary corporation with respect to the Company within the
meaning of Section 424(e) or (f) of the Code.
(b) "Award" means, individually or collectively, a grant under
this Plan of ISOs, NQSOs, Performance Shares, Directors' Awards or Cash Awards.
<PAGE> 2
(c) "Award Agreement" means a written agreement setting forth
the terms of any Award granted under the Plan.
(d) "Board" or "Board of Directors" means the Board of
Directors of the Company.
(e) "Cash Award" shall mean a grant of an Award as described
in Article IX.
(f) "Cause" shall be deemed to exist whenever there has been a
finding by the Committee, after full consideration of the facts presented on
behalf of both the Company and the Participant, that the Participant has
breached his or her employment or service contract with the Company or an
Affiliate, or has been engaged in disloyalty to the Company or an Affiliate,
including, without limitation, fraud, embezzlement, theft, commission of a
felony or proven dishonesty in the course of his employment or service, or has
disclosed trade secrets or confidential information of the Company or an
Affiliate.
(g) "Change in Control" shall be deemed to have occurred if:
(i) there has been a change in control of a nature that
would be required, if the Company would be subject to reporting requirements
under the Exchange Act, to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Exchange Act or Item 1 of Form 8-K
promulgated under the Exchange Act; or
(ii) any person, entity or group (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any subsidiary of the Company, is or becomes the beneficial owner, directly
or indirectly, of securities of the Company representing 30% or more of the
combined voting power in the election of directors; or
(iii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board cease for
any reason to have authority to cast at least a majority of the votes which all
directors on the Board are entitled to cast, unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the votes entitled to be cast by
the directors then still in office who were directors at the beginning of the
period.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(i) "Committee" means the administrative committee or
committees established by the Board for the purpose of administering the Plan,
as described more fully in
2
<PAGE> 3
Article III.
(j) "Company" means U.S. Bioscience, Inc., a Delaware
corporation, or any successor thereto as provided in Article XV herein.
(k) "Director" shall mean each member of the Board of
Directors.
(l) "Directors' Award" means an Award made pursuant to Article
VIII of this Plan.
(m) "Disability" means "permanent and total disability" as
that term is defined in Code Section 22(e)(3).
(n) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time.
(o) "Fair Market Value" means the fair market value of a
Share, determined as follows: If Shares are traded in a public market, then the
Fair Market Value per Share shall be, if the Common Stock is listed on a
national securities exchange or included in the NASDAQ National Market System,
the last reported sale price thereof on the relevant date, or, if the Common
Stock is not so listed or included, the mean between the last reported "bid" and
"asked" prices thereof on the relevant date, as reported on NASDAQ or, if not so
reported, as reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable and as the
Committee determines. If Shares are not traded in any public market, the Fair
Market Value shall be the value of a Share as determined by the Committee in
good faith, taking into account all relevant facts and circumstances. It is
intended that any determination of Fair Market Value of a Share shall be equal
to the Share's "fair market value" as that term is used for purposes of Code
Section 422.
(p) "Incentive Stock Option" or "ISO" means an option to
purchase Stock, granted under Article VI herein, which is designated as an
incentive stock option and is intended to meet the requirements of Section 422
of the Code.
(q) "Key Employee" means an employee of the Company or any of
its Affiliates, including an employee who is an officer or a director of the
Company or any of its Affiliates, who, in the opinion of the Committee, can
contribute significantly to the growth and profitability of the Company and its
Affiliates. "Key Employee" also may include any other employee, identified by
the Committee, in special situations involving extraordinary performance,
promotion, retention, or recruitment. The granting of an Award under this Plan
shall be deemed a determination by the Committee that such employee is a Key
Employee, but shall not create a right to remain a Key Employee.
(r) "Non-employee Director" means each member of the Board who
is
3
<PAGE> 4
not an employee of the Company or an Affiliate.
(s) "Nonqualified Stock Option" or "NQSO" means an option to
purchase Stock, granted under Article VI herein, which is not intended to be an
ISO.
(t) "Option" means an ISO or a NQSO.
(u) "Optionee" means a Participant who has been granted an
Option under the Plan.
(v) "Outside Director" means any director who qualifies as an
"outside director" as that term is defined in Code Section 162(m) and the
regulations issued thereunder and who qualifies as a "non-employee director" as
that term is defined in Rule 16b-3.
(w) "Participant" means a Key Employee or Director who has
been granted an Award under the Plan.
(x) "Performance Share" means a Share granted to a Participant
pursuant to Article VII herein.
(y) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.
(z) "Plan" means this U.S. Bioscience, Inc. 1999 Incentive
Compensation Plan, as herein described and as hereafter from time to time
amended.
(aa) "Retirement" shall mean the termination of employment or
service of a Participant after the attainment of the normal retirement age under
the applicable retirement plan of the Company or any of its affiliates, or, if
no such plan is applicable, age 65, provided, however, that if a Participant's
employment or service is terminated for Cause, such termination of employment or
service shall not be treated as Retirement regardless of the age of the
Participant as of the date of such termination of employment or service.
(bb) "Rule 16b-3" means Rule 16b-3 promulgated under the
Securities Exchange Act.
(cc) "Stock" or "Shares" means the common stock of the
Company, par value $.01 per share.
2.2 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine, the
plural shall include the singular, and the singular shall include the plural.
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2.3 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
ARTICLE III - ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Board or by
a committee or committees established by the Board for the purpose of
administering the Plan. The Board may (i) designate a committee composed of two
or more of its Outside Directors to operate and administer the Plan in its
stead, (ii) designate two committees to operate and administer the Plan in its
stead, one of such committees composed of two or more of its Outside Directors
to operate and administer the Plan with respect to the Company's "Principal
Officers" (as defined below), and the other such committee composed of two or
more directors or other persons designated to serve as a committee for these
purposes (which may include directors who are also employees of the Company) to
operate and administer the Plan with respect to persons other than Principal
Officers and Non-employee Directors or (iii) designate only one of the two
committees referred to in subparagraph (ii) and itself operate and administer
the Plan with respect to persons not within the jurisdiction of such committee.
Any of such committees designated by the Board of Directors, and the Board of
Directors itself in its administrative capacity with respect to the Plan, is
referred to as the "Committee." With respect to Non-employee Directors, who are
to be granted Options in accordance with the provisions of Article VIII, the
Directors to whom Options will be granted, the timing of grants of Options, the
price at which Shares may be purchased and the number of Shares covered by
Options granted to each Optionee shall be as specifically set forth herein, and
subject to the foregoing and the other provisions set forth herein, the Plan, as
it pertains to Non-employee Directors, shall be administered by the Board of
Directors. As used herein, the term "Principal Officers" means the Chairman of
the Board of Directors (if the Chairman of the Board of Directors is a payroll
employee), President, Executive Vice Presidents, Senior Vice Presidents, Vice
Presidents, Treasurer, and any other person who is an "officer" within the
meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934,
as amended, or any successor rule.
3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have full power to construe and interpret the Plan; to
establish, amend or waive rules and regulations for its administration; to
accelerate the exercisability of any Award or the end of a performance period or
any Award Agreement, or any other instrument relating to an Award under the
Plan; and (subject to the provisions of Article XII herein) to amend the terms
and conditions of any outstanding Option or other Award to the extent such terms
and conditions are within the discretion of the Committee as provided in the
Plan. Notwithstanding the foregoing, the Committee shall have no authority to
take any of the foregoing actions or to take any other action to the extent that
such action or the Committee's ability to take such action
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would cause the income attributable to the exercise of any NQSO Award under the
Plan to fail to qualify as "performance-based compensation" within the meaning
of Code Section 162(m)(4) and the regulations issued thereunder. Notwithstanding
the foregoing, no action of the Committee may, without the consent of the person
or persons entitled to exercise any outstanding Option or to receive any other
outstanding Award, adversely affect the rights of such person or persons.
3.3 SELECTION OF PARTICIPANTS. The Committee shall have the
authority to grant Awards under the Plan, from time to time, to such Key
Employees and Directors as may be selected by it. The Committee shall select
Participants from among those who they have identified as being Key Employees or
Directors.
3.4 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive and binding on
all persons, including the Company and its Affiliates, its stockholders,
employees, and Participants and their estates and beneficiaries, and such
determinations and decisions shall not be reviewable.
3.5 DELEGATION OF CERTAIN RESPONSIBILITIES. The Committee may, in
its sole discretion, delegate to an officer or officers of the Company the
administration of the Plan under this Article III; provided, however, that no
such delegation by the Committee shall be made with respect to the
administration of the Plan as it affects directors of the Company or Principal
Officers. The Committee may delegate to the Chief Executive Officer of the
Company its authority under this Article III to grant Awards to Key Employees
who are not directors of the Company or officers of the Company or its
Affiliates subject to the reporting requirements of Section 16(a) of the
Exchange Act. All authority delegated by the Committee under this Section 3.5
shall be exercised in accordance with the provisions of the Plan and any
guidelines for the exercise of such authority that may from time to time be
established by the Committee.
3.6 PROCEDURES OF THE COMMITTEE. All determinations of the Committee
shall be made by not less than a majority of its members present at the meeting
(in person or otherwise) at which a quorum is present. A majority of the entire
Committee shall constitute a quorum for the transaction of business. Any action
required or permitted to be taken at a meeting of the Committee may be taken
without a meeting if a unanimous written consent, which sets forth the action,
is signed by each member of the Committee and filed with the minutes for
proceedings of the Committee. Service on the Committee shall constitute service
as a director of the Company so that members of the Committee shall be entitled
to indemnification, limitation of liability and reimbursement of expenses with
respect to their services as members of the Committee to the same extent that
they are entitled under the Company's Certificate of Incorporation and Delaware
law for their services as directors of the Company.
3.7 AWARD AGREEMENTS. Stock-based Awards under the Plan shall be
evidenced by an Award Agreement which shall be signed by an authorized officer
of the Company or delegate and by the Participant, and shall contain such terms
and conditions as may be
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approved by the Committee. Such terms and conditions need not be the same in all
cases.
3.8 RULE 16b-3 REQUIREMENTS. Notwithstanding any other provision of
the Plan, the Board or the Committee may impose such conditions on any Award
(including, without limitation, the right of the Board or the Committee to limit
the time of exercise to specified periods) as may be required to satisfy the
requirements of Rule 16b-3 (or any successor rule), under the Exchange Act
("Rule 16b-3").
ARTICLE IV - STOCK SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section
4.3 herein, the aggregate number of Shares that may be delivered under the Plan
at any time shall not exceed 3,000,000 Shares of common stock of the Company. No
more than three-quarters of such aggregate number of such Shares shall be issued
as Performance Shares under Article VII. Stock delivered under the Plan may
consist, in whole or in part, of authorized and unissued Shares, treasury Shares
or Shares purchased on the open market.
4.2 LAPSED AWARDS. If any Award granted under this Plan terminates,
expires, or lapses for any reason, any Stock subject to such Award again shall
be available for the grant of an Award under the Plan. If the value of any
Performance Shares issued under Article VII are paid in cash after a Performance
Period has ended, such stock subject to such Award shall again be available for
the grant of an Award under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, share combination, or other change in the corporate
structure of the Company affecting the Stock, such adjustment shall be made in
the number and class of shares which may be delivered under the Plan, and in the
number and class of and/or price of shares subject to outstanding Options and
Performance Shares, granted under the Plan, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; and provided that the number of Shares
subject to any Award shall always be a whole number. Any adjustment of an ISO
under this paragraph shall be made in such a manner so as not to constitute a
modification within the meaning of Section 425(h)(3) of the Code.
ARTICLE V - ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to receive Awards under all
Articles of this Plan except Article VIII include all employees of the Company
and its Affiliates who, in the opinion of the Committee, are Key Employees. Key
Employees may include employees who are members of the Board, but may not
include directors who are not employees. Directors who are
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not employees may receive Awards under this Plan exclusively as set forth in
Article VIII.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may from time to time select those Key Employees to whom Awards shall
be granted and determine the nature and amount of each Award. No employee shall
have any right to be granted an Award under this Plan even if previously granted
an Award.
ARTICLE VI - STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the
Plan, Options may be granted to Participants at any time and from time to time
as shall be determined by the Committee. The maximum number of Shares subject to
Options granted to any individual Participant in any calendar year shall be
three hundred thousand (300,000) Shares. The Committee shall have the sole
discretion, subject to the requirements of the Plan, to determine the actual
number of Shares subject to Options granted to any Participant. The Committee
may grant any type of Option to purchase Stock that is permitted by law at the
time of grant including, but not limited to, ISOs and NQSOs. However, no
employee may receive an Award of ISOs that are first exercisable during any
calendar year to the extent that the aggregate Fair Market Value of the Stock
(determined at the time the options are granted) exceeds $100,000. Nothing in
this Article VI shall be deemed to prevent the grant of NQSOs in excess of the
maximum established by Section 422 of the Code. Unless otherwise expressly
provided at the time of grant, Options granted under the Plan will be NQSOs.
Notwithstanding any other provision of the Plan, no ISO shall be granted on or
after February 11, 2009.
6.2 OPTION AWARD AGREEMENT. Each Option grant shall be evidenced by
an Award Agreement that shall specify the type of Option granted, the Option
price, the duration of the Option, the number of Shares to which the Option
pertains, and such other provisions as the Committee shall determine. The Award
Agreement with respect to any Option shall specify whether the Option is
intended to be an ISO within the meaning of Section 422 of the Code, or a NQSO
whose grant is not intended to be subject to the provisions of Code Section 422.
6.3 OPTION PRICE. The purchase price per Share covered by an Option
shall be determined by the Committee, which may be less than, equal to, or
greater than the Fair Market Value of the Shares on the date the Option is
granted. Each ISO granted under the Plan shall have an exercise price which is
at least 100% of the Fair Market Value of the Stock subject to the Option, and
provided, further, that an ISO granted to an Employee who, at the time of grant,
owns (within the meaning of Section 425(d) of the Code) Stock possessing more
than 10% of the total combined voting power of all classes of Stock of the
Company, shall have an exercise price which is at least 110% of the Fair Market
Value of the Stock subject to the Option.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as
the
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Committee shall determine at the time of grant provided, however, that no Option
shall be exercisable later than the tenth (10th) anniversary date of its grant,
or, in the case of an ISO granted to an Employee who, at the time of grant, owns
(within the meaning of Section 425(d) of the Code) Stock possessing more than
10% of the total combined voting power of all classes of Stock of the Company,
the fifth (5th) anniversary of its date of grant.
6.5 EXERCISE OF OPTIONS. Subject to Section 3.8 herein, Options
granted under the Plan shall be exercisable at such times and be subject to such
restrictions and conditions as the Committee shall in each instance approve,
which need not be the same for all Participants. Notwithstanding anything
contained herein to the contrary, no Option shall be deemed to have been
exercised prior to the receipt by the Company of written notice of such exercise
and payment in full of the Option Price for the Shares to be purchased. Each
such notice shall specify the number of Shares to be purchased and shall (unless
the Shares are covered by a then current registration statement or a
Notification under Regulation A under the Securities Act of 1933, as amended
(the "Act")), contain the Optionee's acknowledgment in form and substance
satisfactory to the Company that (a) such Shares are being purchased for
investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company, may be made
without violating the registration provisions of the Act), (b) the Optionee has
been advised and understands that (i) the Shares have not been registered under
the Act and are "restricted securities" within the meaning of Rule 144 under the
Act and are subject to restrictions on transfer and (ii) the Company is under no
obligation to register the Shares under the Act or to take any action which
would make available to the Optionee any exemption from such registration, (c)
such Shares may not be transferred without compliance with all applicable
federal and state securities laws, and (d) an appropriate legend referring to
the foregoing restrictions on transfer and any other restrictions imposed under
the Option Documents may be endorsed on the certificates. Notwithstanding the
foregoing, if the Company determines that issuance of Shares should be delayed
pending (A) registration under federal or state securities laws, (B) the receipt
of an opinion of counsel acceptable to the Company that an appropriate exemption
from such registration is available, (C) the listing or inclusion of the Shares
on any securities exchange or an automated quotation system or (D) the consent
or approval of any governmental regulatory body whose consent or approval is
necessary in connection with the issuance of such Shares, the Company may defer
exercise of any Option granted hereunder until any of the events described in
this Section 6.5 has occurred.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice to the Company setting forth the number of Shares with respect to which
the Option is to be exercised, accompanied by full payment for the Shares. The
Option price upon exercise of any Option shall be payable to the Company in full
either in cash or its equivalent or by such other mode of payment as the
Committee may approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. Without
limiting the foregoing, the Committee may provide (and in the case of Options
granted to Non-employee Directors, shall provide) in an Award Agreement that
payment may be made in whole or in part in shares of the Company's Common Stock.
If payment is made in whole or in part in
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Shares, then the Optionee shall deliver to the Company certificates registered
in the name of such Optionee representing the Shares owned by such Optionee,
free of all liens, claims and encumbrances of every kind and having an aggregate
Fair Market Value on the date of delivery that is at least as great as the
Option Price of the Shares (or relevant portion thereof) with respect to which
such Option is to be exercised by the payment in Shares, accompanied by stock
powers duly endorsed in blank by the Optionee. In the event that certificates
for Shares delivered to the Company represent a number of Shares in excess of
the number of Shares required to make payment for the Option Price of the Shares
(or relevant portion thereof) with respect to which such Option is to be
exercised by payment in Shares, the stock certificate issued to the Optionee
shall represent (i) the Shares in respect of which payment is made, and (ii)
such excess number of Shares. Notwithstanding the foregoing, the Committee may
impose from time to time such limitations and prohibitions on the use of Shares
to exercise an Option as it deems appropriate.
6.7 RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee shall
impose such restrictions on any Shares acquired pursuant to the exercise of an
Option under the Plan as it may deem advisable, including, without limitation,
restrictions under applicable Federal securities law, under the requirements of
any stock exchange upon which such Shares are then listed and under any blue sky
or state securities laws applicable to such Shares.
6.8 TERMINATION OF OPTIONS FOLLOWING TERMINATION OF EMPLOYMENT DUE
TO DEATH OR DISABILITY. Except as may be otherwise specified in an Award
Agreement applicable to an Option, in the event the employment of a Participant
is terminated by reason of the Participant's death or Disability, any of such
Participant's outstanding Options shall become immediately exercisable, and
shall be exercisable until the one year anniversary of the Participant's
termination of employment or until the expiration date of the Options, whichever
occurs first, by the Participant or by such person or persons as shall have
acquired the Participant's rights under the Option pursuant to Article X hereof
or by will or by the laws of descent and distribution, as the case may be.
6.9 TERMINATION OF OPTIONS OTHER THAN IN CONNECTION WITH A
TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY.
(a) Except as may be otherwise provided in an Award Agreement
applicable to an Option, if a Participant's employment terminates for any reason
other than death, or Disability, the Participant shall have the right to
exercise his or her outstanding Options during the three month period following
his or her termination of employment; provided, however, that no Option may be
exercised after the expiration of its term; and, provided further, that such
Option or Options shall be exercisable during a period following the
Participant's termination of employment only to the extent that the Participant
was entitled to exercise the Option or Options at the date of his or her
termination of employment. In its sole discretion, the Committee may extend the
three month period for a period of up to one year but, however, in no event
beyond the expiration date of the Option.
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(b) Notwithstanding the foregoing, in the event the Committee
determines that the employment of a Participant has been terminated for Cause,
or if there is a finding with respect to a Participant that Cause exists
(without regard to whether a Participant's employment has terminated), all
outstanding Options granted under the Plan to such Participant shall be
immediately forfeited, and the Participant shall have no rights with respect to
any such Options. In addition, any Participant with respect to whom a finding of
Cause has been made shall forfeit any Shares attributable to any Option
previously exercised if share certificates have not yet been delivered on the
refund to the Participant of the purchase price paid in connection with the
exercise of the Option. If the Committee determines that it is appropriate to
conduct an inquiry as to whether Cause exists with respect to a Participant, the
Company may withhold delivery of share certificates for any Shares otherwise
transferable to the Participant under the Plan pending the resolution of any
such inquiry.
6.10 NONTRANSFERABILITY OF OPTIONS. No ISO may be transferred,
except by will or by the laws of descent and distribution. No NQSO may be
transferred, except by will or by the laws of descent and distribution, or as
follows: If the terms of the Award Agreement governing the NQSO so provide, the
NQSO may be transferred by the Participant by bona fide gift, with no
consideration for the transfer, to a lineal descendent, sibling, lineal
descendent of a sibling, in each case whether by blood or adoption, a spouse or
former spouse (collectively "family members"), to a trust for the benefit of one
or more family members or to a partnership in which family members are the only
partners. If the Participant receiving such an Option, or having an outstanding
Option amended to provide for such transferability, is a Principal Officer, such
Option or Option amendment must be approved by the Committee which administers
the Plan with respect to Principal Officers. Notwithstanding the foregoing, an
NQSO may be transferred pursuant to the terms of a "qualified domestic relations
order," as that term is used in the Code and the Employee Retirement Income
Security Act of 1974, as amended.
ARTICLE VII - PERFORMANCE SHARES
7.1 GRANT OF PERFORMANCE SHARES. Subject to the terms and provisions
of the Plan, Performance Shares may be granted to Participants at any time and
from time to time as shall be determined by the Committee (such date being
referred to herein as the "Performance Share Grant Date").
7.2 GRANT OF PERFORMANCE SHARES. The Committee shall establish
performance periods ("Performance Periods") with respect to grants of
Performance Shares under the Plan. Performance Periods may be applicable to a
group of Participants receiving grants of Performance Shares at one time, or may
be established from time to time with respect to a grant of Performance Shares
to one Participant, all as determined by the Committee at its sole discretion.
Prior to commencement of a Performance Period, the Committee shall:
(a) designate the Participant or Participants who are to
receive grants
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of Performance Shares with respect to such Performance Period;
(b) establish the number of Shares to be granted as
Performance Shares to each such Participant for that Performance Period;
(c) establish the performance goal or goals (the "Performance
Goal") that will be used to determine whether any portion of a Participant's
Performance Shares shall become vested on an accelerated basis; and
(d) establish the time or times (which may include a time
established by reference to the occurrence of an event or events) at which all
or a portion of the Participant's Performance Shares may become vested on an
accelerated basis.
The determination of whether a Participant's Performance Shares are to become
vested on an accelerated basis shall be made by the Committee, which must
certify in writing that the requirements for such accelerated vesting have been
satisfied prior to a distribution of any Stock attributable to the accelerated
vesting of the Participant's Performance Shares.
7.3 TERMS AND CONDITIONS APPLICABLE TO PERFORMANCE SHARES.
Performance Shares granted to a Participant shall, in all events, become fully
vested on the eighth (8th) anniversary of the Performance Share Grant Date,
provided the Participant continues to be employed by the Company or an Affiliate
as of such date.
7.4 PERFORMANCE GOALS APPLICABLE TO PERFORMANCE SHARES. The
Committee shall establish Performance Goals based on the attainment, by the
Company or its Affiliates, or based on objective performance standards
applicable to an individual Participant or separate business division, or based
on a combination of such goals. The Performance Goals may include, but are not
limited to, one or more of the following: total stockholder return, return on
equity, return on capital, earnings per share, market share, stock price, sales,
costs, net income, cash flow, retained earnings, operating profit and operating
cash flow. Such Performance Goals may also be based upon the attainment of
specified levels of performance of the Company or one or more Affiliates
relative to the performance of other entities.
7.5 DIVIDENDS AND DISTRIBUTIONS. Except as may be otherwise provided
in an Award Agreement, cash dividends that are paid with respect to Performance
Shares that have been granted but which have not vested shall be paid to the
Participant. Notwithstanding the foregoing, extraordinary dividends and
distributions of property or of stock, or of any combination thereof, including
distributions that are in the nature of a stock split or stock dividend, shall,
at the discretion of the Committee, be retained by the Company and paid out to
the Participant only at the time or times the underlying Performance Shares with
respect to which such dividends have been paid or distributed become vested.
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7.6 DISTRIBUTION OF CERTIFICATES. Certificates for Performance
Shares shall be distributed to Participants as soon as practicable following the
date on which such Performance Shares become vested. Distribution of such
certificates shall, however, be subject to any other applicable provisions or
requirements set forth in the Plan or in an Award Agreement, and may be legended
to indicate any restrictions which may be applicable to such Shares. Any such
distribution of Shares shall also be subject to the restrictions on transfer in
Section 3.8 herein.
7.7 COMMITTEE DISCRETION TO ADJUST AWARDS. The Committee shall have
the authority to modify, amend or adjust the terms and conditions of any grant
of Performance Shares at any time or from time to time, including but not
limited to adjustments or modifications to the applicable Performance Goals.
7.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR
RETIREMENT. In the case of death, Disability, or Retirement, the holder of
Performance Shares shall vest with respect to a prorated portion of such
Performance Shares based on the Participant's number of full months of service
during the Performance Period, further adjusted based on the achievement of the
Performance Goals, as computed by the Committee. The Committee may require that
a Participant have a minimum number of full months of service during the
Performance Period to qualify for any such prorated vesting of Performance
Shares.
7.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a
Participant terminates employment with the Company or any of its Affiliates for
any reason other than death, Disability, or Retirement, all Performance Shares
that have not become vested under the terms of the Plan or pursuant to the terms
of the applicable Award Agreement shall be forfeited; provided, however, that in
the event of a termination of the employment of the Participant by the Company
or any of its Affiliates other than for Cause, the Committee may, in its sole
discretion, waive the automatic forfeiture provisions.
7.10 OTHER FORFEITURES. In the event the Committee determines that
Cause exists with respect to a Participant (without regard to whether such
Participant's employment has terminated), all Performance Shares granted under
the Plan to such Participant that have not previously become vested shall be
immediately forfeited, and the Participant shall have no further rights with
respect to any such Performance Shares. If the Committee determines that it is
appropriate to conduct an inquiry as to whether Cause exists with respect to a
Participant, the Company may suspend the vesting of such Participant's
Performance Shares and withhold delivery of certificates for any Performance
Shares that have otherwise become transferable to the Participant under the Plan
pending the resolution of any such inquiry, and all Performance Shares which
have not vested or for which certificates have not been transferred shall be
forfeited upon a finding of Cause as a result of such inquiry.
7.11 NONTRANSFERABILITY. No Performance Shares granted under the
Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated,
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otherwise than by will or by the laws of descent and distribution until the
Performance Shares become vested, either on the attainment of Performance Goals
established with respect to any applicable Performance Period, or on the eighth
anniversary of the date the Performance Shares were granted.
ARTICLE VIII - AWARDS TO NON-EMPLOYEE DIRECTORS
8.1 AUTOMATIC GRANT. Options granted pursuant to the Plan to
Non-employee Directors shall be granted, without any further action by the
Committee, in accordance with the terms and conditions set forth in this Article
VIII. Each Option granted pursuant to this Article VIII shall be evidenced by an
Award Agreement detailing the terms of such Option, which Award Agreement shall
be in such form as the Committee shall from time to time approve, and which
shall comply with and be subject to the following terms and conditions and such
other terms and conditions as the Committee shall from time to time require
which are not inconsistent with the terms of the Plan.
8.2 TIMING OF GRANTS; NUMBER OF SHARES SUBJECT OF OPTIONS;
EXERCISABILITY OF OPTIONS; OPTION PRICE. Each Director who was an Non-employee
Director on the Effective Date, and who received an option grant (a "Prior Plan
Grant") under Section 9 of the U.S. Bioscience, Inc. 1992 Stock Option Plan (the
"1992 Plan") shall be granted an Option under this Article VIII to acquire
30,000 Shares on the terms set forth in this Article VIII (an "Article VIII
Option") on the third anniversary of the grant date of such Prior Grant, and
thereafter on each subsequent third anniversary of such date of grant. Each
Director who is or becomes an Non-employee Director on or after the Effective
Date, but who has not received a Prior Plan Grant shall be granted an Article
VIII Option as of the date such Director first qualifies as an Non-employee
Director, or the Effective Date, whichever occurs first and an additional
Article VIII Option on each third anniversary of such date. Notwithstanding
anything to the contrary contained herein, no Article VIII Option shall be
granted to any person who does not qualify as an Non-employee Director as of the
date such Article VIII Option would otherwise be granted.
8.3 VESTING. Each Article VIII Option shall be a Nonqualified Stock
Option becoming exercisable over a period of three (3) years, so that the
Optionee shall have the right to exercise the Article VIII Option with respect
to one third (1/3) of the Shares covered thereby commencing on the first
anniversary of the date of grant, and the right to exercise the Option with
respect to an additional one third (1/3) of such Shares commencing on each of
the following two anniversaries of the date of grant. The Option Price shall be
equal to the Fair Market Value of the Shares on the date the Article VIII Option
is granted.
8.4 TERMINATION OF ARTICLE VIII OPTIONS. All Article VIII Options
shall be exercisable until the first to occur of the following:
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(a) Expiration of ten (10) years from the date of grant;
(b) Expiration of three months from the date the Optionee's
service as a Director terminates for any reason other than Disability or death;
or
(c) Expiration of one year from the date the Optionee's
service with Company as a Director terminates due to the Optionee's Disability
or death.
8.5 APPLICABILITY OF PLAN PROVISIONS TO ARTICLE VIII OPTIONS. To the
extent consistent with the provisions of this Article VIII, all of the
provisions of the Plan applicable to NQSOs shall be applicable to Article VIII
Options; provided, however, that the vesting and exercisability of Article VIII
Options shall be governed solely by Section 8.2, and the termination of Article
VIII Options shall be governed exclusively by Section 8.4.
ARTICLE IX - CASH AWARDS
9.1 GRANT OF CASH AWARD. Subject to the terms of this Plan, a Cash
Award may be made to any Participant at any time and from time to time as shall
be determined by the Committee. The Committee shall have complete discretion in
the determining the timing and form of the Cash Awards granted to Participants,
and the conditions applicable thereto, consistent with the terms of the Plan.
9.2 CASH AWARD PERFORMANCE CRITERIA. All Cash Awards made under this
Plan shall be subject to pre-established, objective, business-related
performance criteria or goals. The performance measures or goals to be
established with respect to Cash Awards shall be approved by the Committee and
the Committee shall certify their attainment and the resulting payout of any
Cash Award. Performance measures for Cash Awards may be measurable for such
periods as may be established by the Committee, and may allow for pro-rated
Awards for new Participants.
9.3 PERFORMANCE MEASURES. The performance measures established under
this Article IX may include, but shall not be limited to: operational measures,
financial measures, or any other criteria deemed appropriate at the discretion
of the Committee. Performance measures may, but need not, be established using
overlapping cycles. Each cycle of performance measures shall, for each
Participant designated as participating in any Cash Award program established,
have a distinct Cash Award established with respect to each cycle for which the
Participant is eligible to participate.
9.4 PAYOUT OF CASH AWARDS. Payouts of Cash Awards are made in
relationship to a target payout level determined prior to each cycle on a per
Participant basis. Target levels under multiple cycles will be calibrated to
provide, in total, an annualized level of incentives consistent with the
Company's compensation philosophy as set by the Compensation
15
<PAGE> 16
Committee of the Board. The Committee shall have full discretion to reduce or
eliminate any Cash Award otherwise payable to a Participant as it deems
appropriate, taking into account all relevant facts and circumstances,
including, but not limited to, the overall performance of the Company and the
Committee's evaluation of the performance of the individual Participant.
ARTICLE X - BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any beneficiary or
beneficiaries (who may be named contingently or successively and who may include
a trustee under a will or living trust) to whom any benefit under the Plan is to
be paid in case of his death before he receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be
in a form prescribed by the Committee, and will be effective only when filed by
the Participant in writing with the Committee during his lifetime. In the
absence of any such designation or if all designated beneficiaries predecease
the Participant, benefits remaining unpaid at the Participant's death shall be
paid to the Participant's estate.
ARTICLE XI - RIGHTS OF EMPLOYEES
11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit
in any way the right of the Company or any of its Affiliates to terminate any
Participant's employment at any time, nor confer upon any Participant any right
to continue in the employ of the Company or any of its Affiliates.
11.2 PARTICIPATION. No employee shall have a right to be selected as
a Participant, or, having been so selected, to be selected again as a
Participant.
11.3 NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither
the establishment of the Plan nor any amendment thereof shall be construed as
giving any Participant, beneficiary, or any other person any legal or equitable
right unless such right shall be specifically provided for in the Plan or
conferred by specific action of the Committee in accordance with the terms and
provisions of the Plan. Except as expressly provided in this Plan, neither the
Company nor any of its Affiliates shall be required or be liable to make any
payment under the Plan.
11.4 NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any
other person shall acquire, by reason of the Plan, any right in or title to any
assets, funds or property of the Company or any of its Affiliates whatsoever
including, without limiting the generality of the foregoing, any specific funds,
assets, or other property which the Company or any of its Affiliates, in its
sole discretion, may set aside in anticipation of a liability hereunder. Any
benefits which become payable hereunder shall be paid from the general assets of
the Company or the applicable Affiliate. The Participant shall have only a
contractual right to the amounts, if any, payable hereunder unsecured by any
asset of the Company or any of its Affiliates.
16
<PAGE> 17
Nothing contained in the Plan constitutes a guarantee by the Company or any of
its Affiliates that the assets of the Company or the applicable Affiliate shall
be sufficient to pay any benefit to any person.
ARTICLE XII - CHANGE IN CONTROL
Notwithstanding any other provisions of the Plan, in the event a Change in
Control is deemed to have occurred, as to any Participant who is employed by the
Company or an Affiliate or who is serving as a Director as of the date of such
Change in Control, all Options granted under this Plan shall immediately become
fully vested and exercisable, and all Performance Shares granted under the Plan
shall become fully vested.
ARTICLE XIII - AMENDMENT, MODIFICATION, AND TERMINATION
13.1 AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from
time to time, the Board or Committee may terminate, amend, or modify the Plan.
Notwithstanding the foregoing, however, no amendment or modification to the Plan
may be made to the extent such amendment or modification would increase the
aggregate amount of Stock which may be issued under Options, extend the period
of time during which ISOs may be granted, or change the employees or class of
employees eligible to receive Options without the approval of the Company's
stockholders within twelve (12) months before or after such amendment or
modification. In addition, to the extent required in order to comply with any
rules or regulations promulgated under Section 16 of the Exchange Act which
provide for an exemption from insider trading or similar rules, any provisions
of the Code, any national securities exchange or system on which the Stock is
then listed or reported, or any other regulatory body having jurisdiction with
respect to the Company or its affiliate, approval by the Company's stockholders
shall be required for any termination, amendment, or modification of the Plan
which:
(a) Increases the total amount of Stock which may be issued
under the Plan (except as provided in Section 4.3 herein); or
(b) Changes the class of employees eligible to participate in
the Plan; or
(c) Materially increases the cost of the Plan or materially
increases the benefits to Participants; or
(d) Extends the maximum period after the date of grant during
which Options may be exercised.
13.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or
modification of the Plan other than pursuant to Section 4.3 hereof shall in any
manner adversely
17
<PAGE> 18
affect any Award theretofore granted under the Plan, without the written consent
of the Participant.
ARTICLE XIV - WITHHOLDING AND DEFERRAL
14.1 TAX WITHHOLDING. Whenever the Company proposes or is required
to deliver or transfer Shares in connection with the exercise of an Option or
the occurrence of any other event that may, as a result of the Plan, give rise
to a withholding obligation of the Company or an Affiliate, the Company or any
Affiliate shall have the right to (a) require the Participant to remit or
otherwise make available to the Company (or the Affiliate, as the case may be)
an amount sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such Shares or (b) take whatever other action it deems
necessary to protect its interests with respect to tax liabilities. The
Company's obligation to make any delivery or transfer of Shares shall be
conditioned on the Optionee's compliance, to the Company's satisfaction, with
any withholding requirement.
14.2 STOCK DELIVERY OR WITHHOLDING. With respect to withholding
required upon the exercise of NQSOs, or upon the vesting of Performance Shares,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by tendering to the Company shares
of previously acquired Stock or by having the Company withhold Shares, in each
such case in an amount having a Fair Market Value equal to the amount required
to be withheld to satisfy the tax withholding obligations described in Section
14.1. The value of the Shares to be tendered or withheld is to be based on the
Fair Market Value of the Stock on the date that the amount of tax to be withheld
is to be determined. All Stock withholding elections shall be irrevocable and
made in writing, signed by the Participant on forms approved by the Committee in
advance of the day that the transaction becomes taxable.
Stock withholding elections made by Participants who are subject to the short-
swing profit restrictions of Section 16 of the Exchange Act must comply with the
additional restrictions of Section 16 and Rule 16b-3 in making their elections.
ARTICLE XV - SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards granted
hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
18
<PAGE> 19
ARTICLE XVI - REQUIREMENTS OF LAW
16.1 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under this Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
16.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware.
19
<PAGE> 1
EXHIBIT 10.37.1
April 30, 1998
Robert L. Capizzi, M.D.
100 Turnbridge Circle
Haverford, PA 19041
Re: Agreement dated as of March 4, 1996, as amended (the "Agreement")
Dear Dr Capizzi:
The purpose of this letter is to confirm our arrangements to extend your
consulting relationship with U.S. Bioscience by modifying the Agreement in
certain respects, as follows. All capitalized terms used, and not otherwise
defined, herein are used as defined in the Agreement.
As provided in the Agreement, your Consulting Term would terminate on May 31,
1998. We are very pleased that you have agreed with U.S. Bioscience to extend
the Consulting Term for an additional year, through May 31, 1999.
Except as modified by this letter, the parties agree that the Agreement is
confirmed to be and shall remain in full force and effect.
Please indicate your acceptance of the terms set forth in this letter in the
space provided below and return it to me. An additional executed copy of this
letter is enclosed for your file.
Sincerely yours,
U.S. Bioscience, Inc.
By: /s/ C. Boyd Clarke
-------------------------------------
C. Boyd Clarke
President and Chief Executive Officer
<PAGE> 2
Robert L. Capizzi, M.D.
April 30, 1998
Page 2
Accepted and agreed as of the 30th day of April, 1998:
/s/ Robert L. Capizzi
- -----------------------
Robert L. Capizzi, M.D.
<PAGE> 1
EXHIBIT 22
U.S. BIOSCIENCE, INC.
Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation
-------------
<S> <C>
USB Pharma B.V. The Netherlands
USB Pharma Limited United Kingdom
USB Resources, Inc. Delaware, USA
USB Technology, Inc. Delaware, USA
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-43981, Form S-8 No. 33-63456, Form S-8 No. 33-82108, Form S-8 No.
33-12611 and Form S-8 No. 333-26735) pertaining to the Stock Option Plans of
U.S. Bioscience, Inc. of our report dated February 15, 1999 with respect to the
consolidated financial statements of U.S. Bioscience, Inc. included in this
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 17, 1999
<TABLE> <S> <C>
<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(S) INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,771,000
<SECURITIES> 35,177,900
<RECEIVABLES> 2,456,600
<ALLOWANCES> 727,000
<INVENTORY> 2,873,200
<CURRENT-ASSETS> 30,224,500
<PP&E> 12,166,100
<DEPRECIATION> 6,732,400
<TOTAL-ASSETS> 52,721,900
<CURRENT-LIABILITIES> 11,544,500
<BONDS> 2,444,200
0
0
<COMMON> 243,600
<OTHER-SE> 38,489,600
<TOTAL-LIABILITY-AND-EQUITY> 52,721,900
<SALES> 20,729,700
<TOTAL-REVENUES> 29,470,900
<CGS> 5,787,800
<TOTAL-COSTS> 38,375,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,900
<INCOME-PRETAX> (9,053,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,053,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,053,900)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
