FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2000
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: 0-11749
Scios Inc.
(Exact name of Registrant as specified in its charter)
Delaware 95-3701481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Scios Inc.
820 W. Maude Ave.
Sunnyvale, CA 94086
(Address of principal executive offices) (Zip code)
(408) 616-8200
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.001 par value 38,468,652
SCIOS INC.
AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
- ------
Item 1. Financial Statements
SCIOS INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS March 31, December 31,
2000 1999
------------------ -------------------
(Unaudited)
Current assets:
Cash and cash equivalents $4,713 $11,582
Marketable securities 18,910 18,776
Accounts receivable 3,333 3,068
Prepaid expenses 659 899
------------------ -------------------
Total current assets 27,615 34,325
Marketable securities, non-current 66,319 70,354
Property and equipment, net 11,185 11,534
Other assets 1,519 2,059
------------------ -------------------
TOTAL ASSETS $106,638 $118,272
------------------ -------------------
------------------ -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,639 $1,572
Other accrued liabilities 10,311 11,157
Deferred contract revenue 16,988 17,890
Current portion of long term debt -- 2,000
------------------ -------------------
Total current liabilities 28,938 32,619
Long-term debt, net of current portion 43,857 42,866
------------------ -------------------
Total liabilities 72,795 75,485
------------------ -------------------
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000
shares authorized; none issued and outstanding -- --
Common stock; $.001 par value; 150,000,000
shares authorized; issued and outstanding
38,468,652 and 38,468,652 shares, respectively 38 38
Additional paid-in capital 416,703 416,600
Treasury stock; 630,467 and 735,036
shares, respectively (2,970) (3,458)
Notes receivable from stockholders (108) (108)
Deferred compensation, net (254) (340)
Accumulated other comprehensive loss (1,156) (1,060)
Accumulated deficit (378,410) (368,885)
------------------ -------------------
Total stockholders' equity 33,843 42,787
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $106,638 $118,272
------------------ -------------------
------------------ -------------------
[FN]
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
SCIOS INC.
AND SUBSIDIARY
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share data)
Three months ended
March 31,
2000 1999
---------------- ---------------
(Unaudited) (Unaudited)
Revenues:
Product sales $5,307 $7,822
Co-promotion commissions 2,025 2,728
Research & development contracts 1,894 2,177
---------------- ---------------
9,226 12,727
---------------- ---------------
Costs and expenses:
Cost of goods sold 3,100 4,308
Research and development 9,284 10,543
Marketing, general and administration 5,776 5,319
Profit distribution to third party 601 1,117
Restructuring charges -- 6,670
----------------
18,761 27,957
---------------- ---------------
Loss from operations (9,535) (15,230)
Other income and expense:
Investment income 1,384 1,026
Interest expense (991) (670)
Realized gains (losses) on securities (84) 4,786
Other income (expense), net (299) 231
---------------- ---------------
10 5,373
---------------- ---------------
Net loss (9,525) (9,857)
---------------- ---------------
Other comprehensive loss:
Unrealized losses on securities (96) (10,830)
---------------- ---------------
Comprehensive loss ($9,621) ($20,687)
---------------- ---------------
Loss per common share:
Basic ($0.25) ($0.26)
---------------- ---------------
Diluted ($0.25) ($0.26)
---------------- ---------------
Weighted average number of common shares outstanding used in
calculation of:
Basic 37,780,077 37,746,605
---------------- ---------------
Diluted 37,780,077 37,746,605
---------------- ---------------
[FN]
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
SCIOS INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Three months ended
March 31,
2000 1999
------------ -----------
(Unaudited)
Cash flows from operating activities:
Net loss ($9,525) ($9,857)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 978 826
Accrued long-term interest payable 991 670
Minority interest -- (20)
Deferred compensation 85 74
Change in assets and liabilities:
Accounts receivable (265) 114
Accounts payable 66 2,239
Other accrued liabilities (662) (3,517)
Other 779 (317)
Deferred contract revenue (902) 94
Restructuring charges (184) 5,745
------------ -----------
Net cash used in operating activities (8,639) (3,949)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (628) (141)
Sales/maturities of marketable securities 6,738 49,316
Purchases of marketable securities (2,933) (38,549)
------------ -----------
Net cash provided by investing activities 3,177 10,626
------------ -----------
Cash flows from financing activities:
Issuance of common stock and collection of notes
receivable from stockholders, net 594 400
Purchase of treasury stock -- (358)
Repayment of notes payable (2,000) --
------------ -----------
Net cash provided by (used in) financing activities (1,406) 42
------------ -----------
Net increase (decrease) in cash and cash equivalents (6,868) 6,719
Cash and cash equivalents at beginning of period 11,582 6,683
------------ -----------
Cash and cash equivalents at end of period $ 4,714 $ 13,402
============ ===========
Supplemental cash flow data:
Cash paid during the period for interest $ 2,000 $ --
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains on securities $ 96 $ 10,830
[FN]
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
SCIOS INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Accounting Policies
The unaudited consolidated financial statements of Scios Inc.
("Scios" or the "Company") reflect, in the opinion of management, all
adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's consolidated financial
position at March 31, 2000 and the Company's consolidated results of
operations and cash flows for the three-month periods ended March 31,
2000 and 1999. Interim-period results are not necessarily indicative of
results of operations or cash flows for a full-year period.
These financial statements and the notes accompanying them
should be read in conjunction with the Company's annual report on Form
10-K for the year ended December 31, 1999. Investors are encouraged to
review the Form 10-K for a broader discussion of the Company's business
and the opportunities and risks inherent in the Company's business.
Copies of the 10-K are available from the Company on request and from
the Securities and Exchange Commission's Edgar database at web site
www.sec.gov.
The year-end balance sheet data were derived from audited
financial statements, but do not include all disclosures required by
generally accepted accounting principles.
2. Restructuring Charges and Expenses
On March 1, 1999, the Company announced a restructuring plan
that included reduction of the Company's full-time workforce by
approximately 30% and the consolidation of its headquarters,
development and research staff into currently leased facilities in
Sunnyvale, California. The Company recorded a one-time restructuring
charge of approximately $6.7 million for the disposal of certain excess
assets and severance costs. At March 31, 2000, the remaining balance in
the reserve was $0.9 million.
Lease
Workforce Asset exit Contractual
Restructuring charge reductions Disposals costs commitments Facilities Total
---------------------------------------------------------------------------------------------------------------------
Restructuring provisions at March 1, 1999 $2,819 $1,800 $581 $1,110 $360 $6,670
Charges to restucture in 1999 (2,293) (400) (1,795) (555) (305) (5,348)
1999 change in estimate 233 (1,400) 1,507 (555) (55) (270)
-----------------------------------------------------------------------
Restructuring liability at December 31, 1999 759 -- 293 -- -- 1,052
-----------------------------------------------------------------------
First quarter 2000 activity (111) -- (73) -- -- (184)
-----------------------------------------------------------------------
Restructuring liability at March 31, 2000 $648 $ -- $220 $ -- $ -- $868
=======================================================================
3. Computation of Loss Per Share
The following table sets forth the computation of the
Company's basic and diluted loss per share (in thousands, except per
share amounts):
Three months ended
March 31,
2000 1999
--------------------------------------------------------- -------------- ----- -------------
Numerator
Basic
Net loss ($ 9,525) ($ 9,857)
Diluted
Net loss ($ 9,525) ($ 9,857)
Denominator
Basic
Weighted average shares 37,780 37,747
Effect of dilutive securities:
Employee stock options --- ---
Weighted average shares and assumed
Conversions 37,780 37,747
Basic loss per share ($0.25) ($0.26)
Diluted loss per share ($0.25) ($0.26)
The potentially dilutive effect of outstanding options to
purchase common stock would have been anti-dilutive in both 2000 and
1999, and they were therefore excluded from the diluted earnings
calculation for both periods. Although potentially dilutive, the payoff
of the Genentech loan through the issuance of stock would have been
anti-dilutive in both 2000 and 1999 and was therefore excluded from the
calculations.
At March 31, 2000, stock options at prices ranging from $3.688
to $6.125 per share would have increased the number of weighted average
common shares outstanding by 597 shares for the three-month period of
2000 but were not included in the computation of diluted loss per share
because they were antidilutive.
4. Industry and Geographic Segment Information
Management uses one measurement of profitability for its
business. The Company receives revenue from product sales and from
licensing and development of products. The Company markets its products
in the U.S. and Japan and receives licensing revenue from partners in
the U.S., Canada, Europe and Asia Pacific and operates in one business
segment.
All long-lived assets are located in the United States and all
revenues were earned in the United States in the first quarter of 2000
and 1999, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In accordance with Federal laws, the Company reminds readers that the
following discussion contains forward-looking statements about plans,
objectives, future results and intentions of The Company. These forward-looking
statements are based on the current expectations of the Company, and the Company
assumes no obligation to update this information. Realization of these plans and
results involves risks and uncertainties, and the Company's actual results could
differ materially from the historical results or future plans discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those items discussed below, as well as the considerations discussed
in the Company's Form 10-K for the year ended December 31, 1999.
Operating Results
The net loss for the quarter ended March 31, 2000 was $9.5 million
compared to the net loss of $9.9 million in the corresponding quarter of 1999.
In the first quarter of 1999, the Company recorded a $6.7 million restructuring
charge that was partially offset by $4.8 million in gains on the sale of
Guilford Pharmaceuticals Inc. ("Guilford") stock.
Total revenues for the three months ended March 31, 2000 were $9.2
million versus $12.7 million in the first quarter of 1999. The decrease in
revenues was principally due to a $2.5 million decline in sales from psychiatric
products under license from SmithKline Beecham Corporation (the "SB Products")
and from a decline in co-promotion commissions. The decrease in SB Product sales
was partially the result of reduced distributor inventories due to a temporary
shortening of the shelf-life of Eskalith CR, one of five products developed and
manufactured by SmithKline Beecham that are now sold by the Company. The Company
expects that over time SB Product sales will continue to erode because of
competition from new market entrants and generic drugs. The decrease of $0.8
million in co-promotion commissions was mainly due to the timing of co-promotion
incentive payments received in the first quarter of 1999 for co-promotion of
Risperdal(R) (risperidone). The Company expects to receive the next Risperdal(R)
co-promotion incentive payment in the second quarter of 2000, although the
amount cannot be presently predicted. Contract revenues for the three months
ended March 31, 2000 were $1.9 million compared to $2.2 million in 1999.
Included in first quarter contract revenues was a milestone payment of $0.6
million from Biosite under the Company's license agreement with Biosite for
diagnostic uses of BNP. In the first quarter Biosite was unsuccessful in
achieving a recommendation for approval of its diagnostic product from an FDA
advisory panel as the panel requested further data which Biosite is developing.
Total costs and expenses for the three months ended March 31, 2000 were
$18.8 million compared to $28.0 million for the same period in 1999. The
spending decrease was mainly due to a one-time charge of $6.7 million for
restructuring the Company that was recorded in the first quarter of 1999.
Spending for research and development decreased from $10.5 million in the first
quarter of 1999 to $9.3 million for the comparable period in 2000 due to cost
savings from
the reorganization and down-sizing of the Company on March 1, 1999. Expenses for
marketing, general and administration increased to $5.8 million from $5.3
million for the three-month periods ended March 31, 2000 and 1999, respectively,
because of increased proxy, consulting, legal and Natrecor(R) marketing
expenses. The first quarter decrease of $1.2 million in cost of goods from 1999
to 2000 was the result of lower SB Product sales. Profit distribution to SB
decreased from $1.1 million for the first quarter of 1999 to $0.6 million for
the same period in 2000 because of the decline in SB product sales.
Other income and expense decreased $5.4 million from the quarter ended
March 31, 1999 to the comparable quarter in 2000. The decrease in income was
principally due to the $4.8 million decrease in realized gains on sale of
securities. In the first quarter of 1999, the Company sold 1.3 million shares of
Guilford stock for a gain of $4.8 million. In the quarter ended March 31, 2000,
investment income increased by $0.3 million from the same period in 1999. The
increase was due to higher interest rates in the first quarter of 2000 and a
higher cash balance from quarter to quarter. Interest expense increased from
$0.7 million to $1.0 million for the three months ended March 31, 2000 and 1999,
respectively, due to increased notes payable balances period to period.
In 1999, the Company determined with the FDA the nature of the
additional clinical trial (referred to by the Company as the "VMAC Trial") that
the agency will require before it will consider approval of Natrecor for
marketing. The Company has continued regular interactions with the FDA about the
filing of an amended NDA containing the results of the VMAC Trial. The Company
initiated enrollment in the VMAC Trial in October 1999 and as of April 25, 2000
has enrolled 352 patients in the study, which will consist of approximately 500
patients at an estimated cost of $10.0 million.
The ability of the Company to achieve profitability depends principally
on the Company's success in developing and commercializing its own products and
on its ability to complete agreements with third parties that result in
additional revenue. Among the factors that will determine the Company's success
in commercializing its products are: the demonstrated safety and efficacy of
products in development; the cost of and the time taken to complete clinical
trials and regulatory submissions; the timing and scope of regulatory approvals,
particularly with respect to the Company's lead product Natrecor; the Company's
ability to maintain a cost-effective drug supply; the Company's success in
developing and implementing cost effective sales and marketing strategies either
on its own behalf or in partnership with other companies; and the level of
market acceptance if products are approved, both at product launch and over
time. The Company's ability to raise additional revenue through third parties
will be dependent on the factors described above, as well as other factors such
as: its success in marketing and selling the third-party products which it may
acquire the right to co-promote; the disposition of various patent proceedings
related to the protection of the Company's potential products; the perceived
value of the Company's current product portfolio and research programs to
outside parties; and the success of third parties, such as Kaken Pharmaceutical
Co., Ltd. and Chiron Corporation on Fiblast and Novo Nordisk A/A on GLP-1, in
developing and commercializing the Company's products.
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $89.9 million at March 31, 2000, a decrease of $10.8
million from December 31, 1999. The decrease was primarily attributable to cash
used to fund operations and to the repayment of $2.0 million in debt.
The Company is striving to achieve profitability over the next several
years. The timing of the Company's success in reaching its objectives to achieve
and sustain profitability, in the short term, depends principally on the success
of the Company in achieving regulatory approvals and generating sales from
Natrecor. Profitability will also depend on a number of other factors including
the Company's success and timeliness of its product development, clinical trial,
regulatory approval and product introduction efforts. Other contributing factors
will be the Company's ability to develop new revenue sources to support research
and development programs and its success in marketing and promoting the products
of third parties that may be licensed by the Company.
The Company's resources of $89.9 million in cash, cash equivalents and
marketable securities (both current and non-current) at March 31, 2000, together
with a $3.4 million operating lease line that expires December 31, 2001 and
revenues from product sales, collaborative agreements, interest income and any
funding from existing or future debt or equity arrangements, will be used to
support current and new clinical trials for proprietary products under
development, to support development and commercialization efforts for
prospective products and for other general purposes. The Company believes its
cash resources will be sufficient to meet its operating and capital requirements
for at least the next several years. Key factors that will affect future cash
use and the timing of the Company's need to seek additional financing include
the Company's decisions concerning the degree to which it will incur expenses to
launch its products in the United States market following the necessary
regulatory approvals, the results of the Company's partnering efforts, the
timing and amounts realized from licensing and partnering activities, the rate
of spending required to develop the Company's products and respond to changing
business conditions, and the net contribution produced by the Company's ability
to co-promote and market products for third parties.
Over the long-term, the Company may need to arrange additional
financing for the future operation of its business, including the
commercialization of products currently under development, and it will consider
collaborative arrangements and additional public or private financings,
including additional equity financings. Factors influencing the availability of
additional funding include, but are not limited to, the Company's progress in
product development, investor perception of the Company's prospects and the
general conditions of the financial markets.
The information above contains forward-looking statements including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements should
be read in conjunction with the Company's disclosures in its most recent Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
Part II. Other Information
Item 2. Changes in Securities
The Certificate of Designation authorizing 50,000 shares of the
Company's Series B Preferred Stock, $.001 par value was filed with the Delaware
Secretary of State on April 17, 2000 (See the attached Exhibit 3.3). The Series
B Preferred Stock does not have any voting rights and each share is convertible
into 100 shares of the Company's Common Stock at the option of the holder. The
holders of the Series B Preferred Stock have certain preferences over the
holders of Common Stock upon the liquidation, dissolution or winding up of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on February 28,
2000.
(a) The following individuals were elected directors of the Company,
each to serve until a successor is elected:
Total Vote For Total Vote Withheld
Name Each Director From Each Director
Samuel H. Armacost 30,184,440 177,204
Richard B. Brewer 30,108,197 253,447
Randal J. Kirk 23,974,045 590,796
Donald B. Rice, Ph.D. 30,186,487 175,157
Charles A. Sanders, M.D. 30,164,751 196,893
Solomon H. Snyder, M.D. 30,182,749 178,895
Burton E. Sobel, M.D. 30,188,588 173,056
Eugene L. Step 30,213,540 148,104
(b) The following matter was approved by stockholder vote, with votes
cast as indicated:
o To ratify the selection of PricewaterhouseCoopers LLP as the
Company's independent auditors for fiscal year 1999:
Votes cast for: 30,167,023
Votes cast against: 74,322
Abstentions: 120,229
Broker non-votes were not relevant to the foregoing matters.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
3.3 Certificate of Designation of Series B Preferred
Stock filed with the Delaware Secretary of State on
April 17, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K, dated January 24, 2000 (pursuant to Item 5)
regarding the adoption of the Company's Change of Control Severance
Plan.
Report on Form 8-K, dated February 1, 2000 (pursuant to Item 5)
regarding the Company's Proxy Settlement Agreement dated January 31,
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIOS INC.
May 15, 2000 By: /s/ Richard B. Brewer
---------------------------------------
Richard B. Brewer, President and CEO
May 15, 2000 By: /s/ David W. Gryska
---------------------------------------
David W. Gryska, Vice President and CFO