- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q <TABLE> <C> <S> /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 </TABLE> FOR THE PERIOD ENDING JUNE 30, 1999 OR <TABLE> <C> <S> / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO </TABLE> COMMISSION FILE NO. 0-19731 ------------------------ GILEAD SCIENCES, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 94-3047598 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 333 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404 (Address of principal executive offices) (Zip Code) </TABLE> REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 650-574-3000 ------------------------ 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 / / Number of shares outstanding of the issuer's common stock, par value $.001 per share, as of July 28, 1999: 31,159,325. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
GILEAD SCIENCES, INC. INDEX <TABLE> <CAPTION> PAGE NO. ------------- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements and Notes Consolidated Balance Sheets--June 30, 1999 and December 31, 1998........................... 3 Consolidated Statements of Operations--for the three and six months ended June 30, 1999 and 1998..................................................................................... 4 Consolidated Statements of Cash Flows--for the six months ended June 30, 1999 and 1998..... 5 Notes to Consolidated Financial Statements................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................................................... 12 SIGNATURES............................................................................................. 13 </TABLE> 2
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES GILEAD SCIENCES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) (NOTE) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents........................................................... $ 45,339 $ 32,475 Short-term investments.............................................................. 195,195 247,464 Other current assets................................................................ 14,915 8,371 ----------- ------------ Total current assets.............................................................. 255,449 288,310 Property and equipment, net........................................................... 12,460 10,182 Other assets.......................................................................... 4,211 4,368 ----------- ------------ $ 272,120 $ 302,860 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 3,558 $ 3,422 Accrued clinical and preclinical expenses........................................... 9,336 11,925 Other accrued liabilities........................................................... 9,535 12,358 Deferred revenues................................................................... 3,813 3,275 Current portion of equipment financing obligations and long-term debt............... 776 770 ----------- ------------ Total current liabilities......................................................... 27,018 31,750 Non-current portion of equipment financing obligations and long-term debt............. 207 563 Commitments Stockholders' equity: Preferred stock, par value $.001 per share, issuable in series; 5,000,000 shares authorized; 1,133,786 shares of Series B convertible preferred issued and outstanding at June 30, 1999 and December 31, 1998 (liquidation preference of $40,000).......................................................................... 1 1 Common stock, par value $.001 per share; 60,000,000 shares authorized; 31,115,015 shares and 30,710,435 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively............................................................ 31 31 Additional paid-in capital.......................................................... 495,798 489,183 Accumulated other comprehensive income (loss)....................................... (1,462) 43 Deferred compensation............................................................... (97) (157) Accumulated deficit................................................................. (249,376) (218,554) ----------- ------------ Total stockholders' equity............................................................ 244,895 270,547 ----------- ------------ $ 272,120 $ 302,860 ----------- ------------ ----------- ------------ </TABLE> - ------------------------------ Note: The consolidated balance sheet at December 31, 1998 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes 3
GILEAD SCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE JUNE 30, 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues: Product sales, net.............................................. $ 1,461 $ 1,598 $ 2,906 $ 3,393 Contract revenue................................................ 6,573 4,682 9,514 16,089 Royalty revenue, net............................................ 646 756 1,197 1,114 ---------- ---------- ---------- ---------- Total revenues.................................................... 8,680 7,036 13,617 20,596 Costs and expenses: Cost of product sales........................................... 53 114 187 344 Research and development........................................ 18,240 18,330 34,026 37,260 Selling, general and administrative............................. 7,946 8,443 15,724 15,186 Merger related expenses......................................... 738 -- 1,327 -- ---------- ---------- ---------- ---------- Total costs and expenses.......................................... 26,977 26,887 51,264 52,790 ---------- ---------- ---------- ---------- Loss from operations.............................................. (18,297) (19,851) (37,647) (32,194) Interest income, net.............................................. 3,262 5,007 6,825 9,965 ---------- ---------- ---------- ---------- Net loss.......................................................... $ (15,035) $ (14,844) $ (30,822) $ (22,229) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted net loss per common share....................... $ (0.48) $ (0.49) $ (1.00) $ (0.74) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Common shares used to calculate basic and diluted net loss per common share.................................................... 31,051 30,295 30,958 30,199 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See accompanying notes 4
GILEAD SCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE IN CASH AND CASH EQUIVALENTS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ----------------------- 1999 1998 ---------- ----------- <S> <C> <C> Cash flows from operating activities: Net loss............................................................................... $ (30,822) $ (22,229) Adjustments used to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................................................ 1,653 1,382 Changes in assets and liabilities: Other current assets............................................................... (6,544) 8,809 Other assets....................................................................... 157 37 Accounts payable................................................................... 136 427 Accrued clinical and preclinical expenses.......................................... (2,589) (2,037) Other accrued liabilities.......................................................... (2,823) 1,530 Deferred revenues.................................................................. 538 (412) ---------- ----------- Total adjustments................................................................ (9,472) 9,736 ---------- ----------- Net cash used in operating activities............................................ (40,294) (12,493) ---------- ----------- Cash flows from investing activities: Purchases of short-term investments.................................................... (61,522) (262,154) Sales of short-term investments........................................................ 54,674 215,847 Maturities of short-term investments................................................... 57,612 60,832 Capital expenditures................................................................... (3,871) (1,054) ---------- ----------- Net cash provided by investing activities........................................ 46,893 13,471 ---------- ----------- Cash flows from financing activities: Payments of equipment financing obligations and long-term debt......................... (350) (1,378) Proceeds from issuances of common stock................................................ 6,615 5,431 ---------- ----------- Net cash provided by financing activities........................................ 6,265 4,053 ---------- ----------- Net increase in cash and cash equivalents................................................ 12,864 5,031 Cash and cash equivalents at beginning of period......................................... 32,475 31,990 ---------- ----------- Cash and cash equivalents at end of period............................................... $ 45,339 $ 37,021 ---------- ----------- ---------- ----------- </TABLE> See accompanying notes 5
GILEAD SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The information at June 30, 1999, and for the three- and six-month periods ended June 30, 1999 and 1998, is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth therein in accordance with generally accepted accounting principles. Such interim results are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited financial statements for the fiscal year ended December 31, 1998 included in the Company's Annual Report on Form 10-K/A furnished to the Securities and Exchange Commission. COMPREHENSIVE INCOME Following are the components of comprehensive income (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net loss.......................................................... $ (15,035) $ (14,844) $ (30,822) $ (22,229) Net unrealized losses on available-for-sale securities............ (979) (35) (1,505) (163) ---------- ---------- ---------- ---------- Comprehensive income (loss)....................................... $ (16,014) $ (14,879) $ (32,327) $ (22,392) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> BASIC AND DILUTED NET LOSS PER COMMON SHARE For each period presented, basic and diluted net loss per common share are computed based on the weighted average number of common shares outstanding during the period. Convertible preferred stock and stock options could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share as their effect is antidilutive for the periods presented. 2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC. On July 29, 1999, the Company acquired all of the outstanding stock of NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar"), pursuant to an Agreement and Plan of Merger, dated as of February 28, 1999 ("Merger Agreement"), among Gilead, NeXstar, and a merger subsidiary wholly owned by Gilead. Pursuant to the Merger Agreement, NeXstar was merged with the wholly owned subsidiary of Gilead, with NeXstar as the surviving corporation. As a result, NeXstar became a wholly owed subsidiary of Gilead. In connection with the merger, Gilead issued a total of approximately 11,212,730 shares of Gilead common stock, or 0.3786 of a share of Gilead common stock for each share of NeXstar common stock, to the existing stockholders of NeXstar as consideration for all shares of common stock of NeXstar. In addition, holders of options and warrants outstanding at the time of the merger to purchase an aggregate of approximately 2,236,413 shares of NeXstar common stock will receive, upon exercise of such options and warrants, the same fraction of a share of Gilead's common stock, and holders of $80,000,000 principal amount of 6.25% Convertible Subordinated Debentures of NeXstar (the "Debentures") will now have the right to convert the Debentures into an indeterminate number of shares of Gilead common stock. 6
GILEAD SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1999 (UNAUDITED) 2. MERGER WITH NEXSTAR PHARMACEUTICALS, INC. (CONTINUED) The merger is intended to qualify as a tax-free reorganization and to be accounted for as a pooling of interests. 3. CONVERSION OF PREFERRED STOCK In June 1997, the Company issued 1,133,786 shares of Series B Convertible Preferred Stock ("Preferred Stock") to Pharmacia & Upjohn S.A. ("Pharmacia & Upjohn") for approximately $40.0 million, or $35.28 per share. The Preferred Stock is automatically convertible into the Company's common stock if the average of the closing prices of such common stock over any 30 consecutive trading days exceeds $49.39 or 140% of the original issue price of the Preferred Stock of $35.28 per share. On July 15, 1999, the average of the closing price of the Company's common stock for the 30 days then ended was $49.79, which triggered the automatic conversion of the Preferred Stock. Accordingly, the Preferred Stock converted into 1,133,786 shares of common stock at the original issue price of $35.28 per share on July 16, 1999. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in June 1987, Gilead has devoted the substantial portion of its resources to its research and development programs. In June 1996, the U.S. Food and Drug Administration ("FDA") granted marketing clearance of VISTIDE-Registered Trademark- (cidofovir injection) for the treatment of cytomegalovirus ("CMV") retinitis in patients with AIDS. Since that time, the Company has independently marketed VISTIDE in the United States with an antiviral specialty sales force and has entered into a collaboration agreement with Pharmacia & Upjohn to market VISTIDE in all countries outside the United States. The Company began to incur significant expenses relating to commercialization of VISTIDE and other potential product candidates in 1996. With the exception of the second quarter of 1997 and the third quarter of 1996, when the Company earned significant one-time fees related to collaborations, the Company has incurred losses since its inception. Gilead expects to continue to incur losses for at least an additional year, due primarily to its research and development programs, including preclinical studies, clinical trials and manufacturing, as well as marketing and sales efforts in support of VISTIDE and other potential products. FORWARD-LOOKING STATEMENTS AND RISK FACTORS This report contains forward-looking statements relating to clinical and regulatory developments, marketing and sales matters, future expense levels, financial results and Year 2000 matters. These statements involve inherent risks and uncertainties. The Company's actual financial and operating results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the risks summarized below and described in more detail in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. In particular, factors that could result in a material difference include, but are not limited to, those relating to the ongoing development and commercialization of the Company's potential pharmaceutical products and, in the case of Year 2000 matters, the ability to identify and correct all relevant computer code and the success of remedial efforts implemented by third-party suppliers and business partners. The successful development and commercialization of the Company's products will require substantial and ongoing efforts at the forefront of the life sciences industry. The Company is pursuing preclinical or clinical development of a number of product candidates. Even if these product candidates appear promising during various stages of development, they may not reach the market for a number of reasons. Such reasons include the possibilities that the potential products will be found ineffective or unduly toxic during preclinical or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical to market or be precluded from commercialization by either proprietary rights or competing products of others. As a company in an industry undergoing rapid change, the Company faces significant challenges and risks, including the risks inherent in its research and development programs, uncertainties in obtaining and enforcing patents, the lengthy, expensive and uncertain regulatory approval process, intense competition from pharmaceutical and biotechnology companies, increasing pressure on pharmaceutical pricing from payors, patients and government agencies and uncertainties associated with the market acceptance of and size of the market for VISTIDE or any of the Company's products in development. The Company expects that its financial results will continue to fluctuate from quarter to quarter and that such fluctuations may be substantial. There can be no assurance that the Company will successfully develop, commercialize, manufacture and market additional products, nor can there be assurance that the Company will either achieve or sustain profitability. As of June 30, 1999, the Company's accumulated deficit was approximately $249.4 million. 8
As a result of the acquisition of NeXstar on July 29, 1999, Gilead's business will be subject to additional risks related to NeXstar's business. Stockholders and potential investors in the Company should carefully consider these risks in evaluating the Company and should be aware that the realization of any of these risks could have a dramatic and negative impact on the Company's business, operating results, financial condition and stock price. In addition, the forward-looking statements included in this Report relate to Gilead as a stand-alone business, and do not take into account the impact of the merger with NeXstar, which was consummated on July 29, 1999. RESULTS OF OPERATIONS REVENUES The Company had total revenues of $8.7 million and $7.0 million for the quarters ended June 30, 1999 and 1998, respectively. For the six-month periods ended June 30, 1999 and 1998, total revenues were $13.6 million and $20.6 million, respectively. Total revenues include revenues from net product sales, contracts, including research and development ("R&D") collaborations, and net royalties. Aggregate net product sales and net royalty revenues were $2.1 million and $2.4 million for the quarters ended June 30, 1999 and 1998, respectively. In the six-month periods, aggregate net product sales and royalties were $4.1 million in 1999 and $4.5 million in 1998. All of the Company's product sales and royalty revenue relate to VISTIDE, which the Company began to sell in mid-1996. As expected, VISTIDE sales have continued to decline in 1999, primarily due to a decline in the incidence of CMV retinitis as a result of more effective human immunodeficiency virus ("HIV") therapies. In each period, net royalty revenue is primarily comprised of royalties from Pharmacia & Upjohn on sales of VISTIDE outside the United States. The Company anticipates that VISTIDE product sales and royalty revenues will be comparable to 1998 levels or will decline further in 1999 and later years as HIV therapies continue to improve. Also included in total revenues are contract revenues of $6.6 million and $4.7 million for the quarters ended June 30, 1999 and 1998, respectively. In the six-month periods, total revenues include contract revenues of $9.5 million in 1999 and $16.1 million in 1998. Substantially all of the contract revenue recognized during 1999 relates to the Company's agreement with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche, Inc. (collectively, "Roche") for the development of Tamiflu-TM- (oseltamivir phosphate), formerly known as GS 4104, for the potential prevention and treatment of influenza. During the second quarter of 1999, Gilead recorded two milestone payments totaling $6.0 million from Roche associated with submissions for marketing clearance of Tamiflu for the treatment of influenza in the United States and European Union. In the first quarter of 1999, the Company also recognized a $2.0 milestone payment from Roche based upon the commencement of pivotal clinical trials of Tamiflu in Japan. Contract revenue for the three- and six-month periods ended June 30, 1999 also includes $0.6 million and $1.3 million, respectively, received from Roche as reimbursement of expenses related to the development of Tamiflu. Similarly, contract revenue for the three- and six-month periods ended June 30, 1998 include $3.9 million and $14.6 million, respectively, of such development-related expenses. The $14.6 million received from Roche during the six months ended June 30, 1998 includes $5.2 million attributable to research and development expenses incurred in the fourth quarter of 1997, which were subject to Roche's approval as of December 31, 1997. Such expenses were approved for reimbursement in the first quarter of 1998. For the three- and six-month periods ended June 30, 1998, contract revenue includes $0.8 million and $1.5 million, respectively, recognized under the Company's collaborative research and development agreement with Glaxo Wellcome Inc. related to the Company's code blocker program. This agreement was terminated in June 1998. 9
OPERATING COSTS AND EXPENSES The Company's cost of product sales relates to VISTIDE and was $0.1 million for each of the quarters ended June 30, 1999 and 1998. Cost of product sales for the six-month periods ended June 30, 1999 and 1998 was $0.2 million and $0.3 million, respectively. Presently, cost of product sales is not a significant operating cost of the Company. R&D expenses for the second quarter of 1999 were $18.2 million, compared to $18.3 million for the same period in 1998. R&D expenses for the six-month periods ended June 30, 1999 and 1998 were $34.0 million and $37.3 million, respectively. These expenses decreased slightly in the 1999 periods relative to 1998 because of Gilead's reduced level of involvement in the development of Tamiflu, offset in part by greater levels of expense in 1999 for the development programs for adefovir dipivoxil for hepatitis B and tenofovir disoproxil fumarate (PMPA oral prodrug) for HIV. The Company expects its R&D expenses to increase during the remaining quarters of 1999 relative to 1998, reflecting increased expenses related to clinical trials for several product candidates as well as related increases in staffing and manufacturing process development. Selling, general and administrative ("SG&A") expenses were $7.9 million and $8.4 million for the quarters ended June 30, 1999 and 1998, respectively. For the six-month periods ended June 30, 1999 and 1998, SG&A expenses were $15.7 million and $15.2 million, respectively. The Company expects its SG&A expenses will increase during the remainder of 1999 over 1998 expense levels, primarily to support the increased level of R&D activities and, to a lesser extent, to support the expansion of sales and marketing capacity in anticipation of the potential launch of adefovir dipivoxil, an investigational reverse transcriptase inhibitor currently being studied to treat HIV. Merger related expenses attributable to the Company's merger with NeXstar were $0.7 million for the quarter ended June 30, 1999 and $1.3 million for the six months then ended. Merger-related expenses incurred to date are primarily for professional services and other merger-related fees. The Company will recognize significant one-time merger-related expenses related to the closing of the NeXstar merger in the third quarter of 1999. NET INTEREST INCOME The Company had net interest income of $3.3 million and $5.0 million for the quarters ended June 30, 1999 and 1998, respectively. Net interest income earned during the six-month periods ended June 30, 1999 and 1998 was $6.8 million and $10.0 million, respectively. As expected, the Company's net interest income is decreasing in each 1999 period as compared to the corresponding 1998 period, primarily due to the decline in cash, cash equivalents and short-term investments. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments totaled $240.5 million at June 30, 1999, compared to $279.9 million at December 31, 1998. The decrease is primarily due to the net use of cash to fund operations of $40.3 million and the use of cash to purchase property and equipment items of $3.9 million. Aggregate cash receipts from exercises of employee stock options and shares issued under the employee stock purchase plan of $6.6 million offset such uses of cash. Significant changes in working capital during 1999 include a $6.5 million increase in the balance of other current assets. This use of cash is primarily attributable to a receivable from Roche of $5.6 million and prepayments of clinical trial costs. At December 31, 1998, other accrued liabilities includes a $5.0 million accrued liability to Roche, which represents Roche's 1998 R&D funding in excess of the Company's related R&D spending. During 1999, the Company has achieved three milestones under its R&D agreement with Roche and recognized $8.0 million of contract revenue as a result. Roche funded a portion of these milestone payments, as well as the $0.7 million of R&D reimbursement revenue for the first quarter of 1999, by permitting Gilead to offset its liability to Roche. Accordingly, the $5.0 million 10
reported as an accrued liability at December 31, 1998 is reported as contract revenue during 1999. Offsetting in part this $5.0 million decrease in other accrued liabilities at June 30, 1999 as compared to December 31, 1998, are increases in several other accrued operating account balances. The Company believes that its existing capital resources, supplemented by net product revenues and contract and royalty revenues, will be adequate to satisfy its capital needs for the foreseeable future. As of June 30, 1999, Gilead was entitled to additional cash payments of up to $26.0 million from Roche upon achieving specific developmental and regulatory milestones, although there can be no assurance that the milestones will be met. The Company's future capital requirements will depend on many factors, including its merger with NeXstar, the progress of the Company's research and development efforts, the scope and results of preclinical studies and clinical trials, the cost, timing and outcomes of regulatory reviews, the rate of technological advances, determinations as to the commercial potential of the Company's products under development, the commercial performance of VISTIDE and any of the Company's products in development that receive marketing approval, administrative and legal expenses, the status of competitive products, the establishment of manufacturing capacity or third-party manufacturing arrangements, the expansion of sales and marketing capabilities, possible geographic expansion and the establishment of additional collaborative relationships with other companies. The Company may in the future require additional funding, which could be in the form of proceeds from equity or debt financings or additional collaborative agreements with corporate partners. If such funding is required, there can be no assurance that it will be available on favorable terms, if at all. IMPACT OF YEAR 2000 The Company is implementing a Year 2000 project to address the issue of computer software and hardware correctly processing dates through and beyond the Year 2000. The goal of this project is to ensure that all computer software and hardware that the Company uses or relies upon is retired, replaced or made Year 2000 compliant before December 31, 1999. There are three primary aspects to the Company's Year 2000 project: computers and other equipment, information systems software and third-party suppliers and business partners. Gilead is addressing each of these areas on a phased basis, as follows: 1) educating the internal user community at Gilead; 2) conducting an inventory of all software and hardware; 3) evaluating all software and hardware for Year 2000 compliance; 4) implementing modifications, retirement or replacement of software or hardware, prioritized based on an analysis of importance to Gilead's business; 5) testing and validating all modified or replaced software and hardware; and 6) designing and implementing contingency and business continuation plans for critical systems. To date, Gilead has completed the education, inventory and evaluation phases of the project. Implementation of modifications or replacements and testing and validation are on schedule, and the Company anticipates that, for business-critical systems, all of these activities will be complete by the end of 1999. The Company has prioritized the implementation phase to first address software or hardware that affects product manufacturing, quality control and safety, employee safety, revenues or cash reserves. Two systems that have been identified as critical to Gilead's operations are software programs from JD Edwards, Inc. ("JDE") and Beckman-Coulter, Inc. ("Beckman"). The JDE system is an enterprise-wide program that tracks financial information, processes sales orders and monitors purchasing and manufacturing activities. During 1998, the Company upgraded the JDE system to a Year 2000 compliant version, which is now operational. The Beckman system monitors and records laboratory data. The Beckman system upgrades were successfully completed during the second quarter of 1999. To date, the Company has initiated evaluations of all its critical third-party suppliers and business partners. Responses to Gilead's inquiries regarding Year 2000 compliance in many cases have been general and nonbinding. To date, substantially all respondents indicate that their Year 2000 compliance efforts are 11
progressing on schedule, and that their computer systems either are or will be Year 2000-compliant at the appropriate time. A significant majority of these respondents are presently in the final testing phase of their Year 2000 compliance projects, and many of them indicate that they are concurrently developing contingency plans. Among the most critical third parties the Company relies on are the financial institutions that manage Gilead's cash and investments of approximately $240.5 million at June 30, 1999, the Company's stock transfer agent, contract manufacturers, contract research and laboratory organizations and the FDA. The Company intends to continue monitoring and evaluating these third parties to the extent practical through the end of 1999. Gilead anticipates that the total cost of its Year 2000 compliance efforts will not be material to its financial condition or results of operations. The current estimate for external costs of total compliance efforts is approximately $2.1 million, of which $2.0 million has been incurred to date. Of the amount incurred to date, $1.3 million has been expensed and the remainder has been capitalized. The $0.1 million of remaining costs are primarily consulting fees and will be charged to expense. These amounts do not include any costs to Gilead that may result from the failure of any third-party supplier or business partner to achieve Year 2000 compliance. The Company is also developing a series of contingency plans for certain critical applications. These plans involve, among other actions, manual solutions, increased inventories and modified staffing strategies. These contingency plans are expected to be finalized and ready for implementation, if necessary, before the end of 1999. The Company's Year 2000 project is designed to significantly reduce uncertainty and risk arising from the Year 2000 problem. The Company believes that the implementation actions described above reduce the potential for disruption of operations or significant financial impact. Due to the uncertainty inherent in the Year 2000 problem, however, there can be no assurance that Year 2000 failures will not occur. Should such a Year 2000 failure occur with any of Gilead's business critical operating systems, appropriate contingency plans have been established which the Company believes would result in only a temporary disruption in its ability to sell and distribute products. The Company does not believe that any such disruption would have a material impact on its financial condition or results of operations. The Company cannot predict with any certainty whether its critical third-party suppliers and business partners will achieve Year 2000 compliance, or whether the failure of any such third party to do so would have a material effect on the Company's business. However, the Company is establishing contingency plans for maintaining operations with all its critical third-party suppliers and business partners to minimize any disruption in its day-to-day business operations. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits No. 27--Financial Data Schedule (b) Reports on Form 8-K On August 6, 1999, the Registrant filed a Current Report on Form 8-K regarding its merger with NeXstar Pharmaceuticals, Inc. 12
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. <TABLE> <S> <C> GILEAD SCIENCES, INC. ------------------------------------------- (Registrant) Date: August 13, 1999 /s/ JOHN C. MARTIN ------------------------------------------- John C. Martin President and Chief Executive Officer Date: August 13, 1999 /s/ MARK L. PERRY ------------------------------------------- Mark L. Perry Senior Vice President, Chief Financial Officer and General Counsel (Principal Financial and Accounting Officer) </TABLE> 13