UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3532643
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Fannin, Suite 1920, Houston, Texas 77030
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(Address of principal executive office) (Zip code)
(713) 796-8822
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 31, 1996
----- ----------------------------
Common Stock, $0.005 par value 24,185,266
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations for the three months ended
June 30, 1996 and 1995, the six months ended June 30, 1996 and 1995,
and the period from August 2, 1989 (date of incorporation)
through June 30, 1996 2
Consolidated Statements of Cash Flows the six months ended
June 30, 1996 and 1995, and the period from August 2, 1989
(date of incorporation) through June 30, 1996 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 17
ITEM 2: Changes in Securities 17
ITEM 3: Defaults Upon Senior Securities 17
ITEM 4: Submission of Matters to a Vote of Security Holders 18
ITEM 5: Other Information 18
ITEM 6: Exhibits and Reports on Form 8-K 19
SIGNATURES 20
INDEX TO EXHIBITS 21
PART I FINANCIAL INFORMATION
- ----------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
------ ------------------ ------------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 1,631,407 5,724,264
Short term investments 15,432,539 8,195,307
Short term note receivable 122,500 122,500
Prepaids 496,063 554,208
Other current assets 783,275 547,391
--------------- --------------
Total current assets 18,465,784 15,143,670
Equipment, furniture and fixtures, and leasehold improvements 7,596,310 7,529,415
Less: Accumulated depreciation and amortization (4,116,198) (3,746,586)
--------------- --------------
Net property 3,480,112 3,782,829
--------------- --------------
Total assets $ 21,945,896 18,926,499
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,747,063 2,566,264
Deferred revenue 250,000 650,110
--------------- --------------
Total current liabilities 2,997,063 3,216,374
Commitments and contengencies --- ---
Stockholders' equity:
Preferred stock, par value $.005 per share. At June 30, 1996 and
December 31, 1995, 5,000,000 shares authorized; none outstanding --- ---
Common stock, par value $.005 per share. At June 30, 1996,
75,000,000 shares authorized; 24,180,062 shares issued and
outstanding. At December 31, 1995, 40,000,000 shares authorized;
17,439,365 shares issued and outstanding (notes 2 and 5) 120,900 87,198
Additional paid-in capital 73,055,102 59,540,730
Deferred compensation expense (note 3) (3,250) (46,177)
Deficit accumulated during the development stage (54,223,919) (43,871,626)
--------------- --------------
Total stockholder's equity 18,948,833 15,710,125
--------------- --------------
Total liabilities and stockholders' equity $ 21,945,896 18,926,499
=============== ==============
See accompanying notes to consolidated financial statements
Page 1
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
AUGUST 2, 1989
(DATE OF
INCORPORATION)
THREE MONTHS ENDED SIX MONTHS ENDED TO
JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995 1996
------------ ------------ ----------- ---------- -------------
Revenues:
Research agreements $ 1,280,000 1,150,110 3,195,110 2,300,220 14,233,796
Products and services 2,500 101,893 3,939 172,201 400,580
Grant revenue 974 63,259 1,727 176,548 668,951
----------- ---------- ---------- ---------- ----------
Total revenues 1,283,474 1,315,262 3,200,776 2,648,969 15,303,327
----------- ---------- ---------- ---------- ----------
Expenses incurred in the development stage:
Research and development 6,023,929 3,965,457 11,504,545 6,807,852 45,092,200
Charge for purchase of in-process
research and development --- 1,973,883 --- 1,973,883 9,465,610
General and administrative 1,012,145 1,480,902 2,124,637 2,704,746 17,529,271
Restructuring and impairment of
intangible assets (note 9) --- --- 421,165 --- 1,064,915
----------- ---------- ---------- ---------- ----------
Total expenses 7,036,074 7,420,242 14,050,347 11,486,481 73,151,996
----------- ---------- ---------- ---------- ----------
Operating loss 5,752,600 6,104,980 10,849,571 8,837,512 57,848,669
----------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income 251,390 323,312 497,278 675,207 3,716,397
Interest expense --- (969) --- (969) (91,647)
----------- ---------- ---------- ---------- ----------
Net loss $ 5,501,210 5,782,637 10,352,293 8,163,274 54,223,919
=========== ========== ========== ========== ==========
Net loss per share $ 0.23 0.36 0.46 0.51 5.69
=========== ========== ========== ========== ==========
Weighted average common shares used to
compute net loss per share 24,064,064 16,054,832 22,479,819 16,047,182 9,530,469
=========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements
Page 2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
AUGUST 2, 1989
(DATE OF
SIX MONTHS ENDED INCORPORATION)
JUNE 30, TO
JUNE 30,
1996 1995 1996
-------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,352,293) (8,163,274) (54,223,919)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of deferred offering costs related
to delayed offering --- --- 324,938
Depreciation and amortization 369,612 387,267 4,222,451
Interest expense converted on notes payable
to stockholders --- --- 87,755
Expenses paid with stock --- --- 24,500
Non cash acquisition costs expensed --- 1,973,883 9,465,610
Deferred compensation expense 42,927 47,530 283,908
Impairment of intangible assets --- --- 643,750
Change in operating assets and liabilities, net of
effect of acquisition:
(Increase) decrease in prepaids 58,144 --- (318,404)
(Increase) decrease in receivables 7,291 87,500 (82,995)
(Increase) decrease in other current assets (243,175) (48,688) (898,458)
Decrease in inventories --- --- 61,245
Increase (decrease) in current liabilities 180,799 28,494 2,680,947
(Decrease) in deferred revenue (400,110) (1,061,294) (1,422,122)
------------- ----------- -----------
Net cash used in operating activities (10,336,805) (6,748,582) (39,150,794)
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (66,895) (155,016) (7,287,850)
Purchase of short term investments (17,548,480) (16,050,408) (69,469,701)
Redemption of short term investments 10,311,249 17,850,800 54,037,161
Acquisition of subsidiary, net of cash acquired --- --- (167,331)
-------------- ---------- -----------
Net cash used in investing activities (7,304,126) 1,645,376 (22,887,721)
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders and
related trusts --- --- 1,852,500
Proceeds from sale of common stock and option and warrant
exercises, net 13,548,074 --- 62,146,110
Repurchase of common stock --- --- (3,750)
Cost of delayed offering --- --- (324,938)
------------- ----------- -----------
Net cash provided by financing activities 13,548,074 --- 63,669,922
------------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (4,092,857) (5,103,206) 1,631,407
Cash and cash equivalents at beginning of period 5,724,264 7,199,942 ---
------------- ----------- -----------
Cash and cash equivalents at end of period $ 1,631,407 2,096,736 1,631,407
============= =========== ===========
Supplemental schedule of noncash financing activities $ --- 1,973,883 11,405,865
============= =========== ===========
See accompanying notes to consolidated financial statements
Page 3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a
biopharmaceutical company, applies innovative drug discovery techniques
and its specialized knowledge of the role of vascular cell biology in
cardiovascular disease to the design and development of novel
pharmaceutical compounds. The Company was incorporated in the state of
Delaware in 1989.
During the period from August 2, 1989, (date of incorporation) through
March 1990, the Company was largely inactive. Since that time, the
Company has been engaged principally in research and drug discovery
programs and clinical development of a drug compound. On July 25, 1994,
the Company acquired all of the outstanding common stock of
ImmunoPharmaceutics, Inc. ("IPI"), a San Diego, California based company,
in exchange for common stock of the Company. TBC decided to consolidate
the IPI operation into TBC in the first half of 1996. (See note 9)
The Company is presently working on a number of long-term development
projects which involve experimental and unproven technology, which may
require many years and substantial expenditures to complete, and which
may be unsuccessful. To date, other than monoclonal antibody compounds
and services produced and sold by IPI, the Company has not developed or
sold any products, and no assurance can be given that the Company will be
able to develop, manufacture or market any products in the future. In
addition, no assurance exists that future revenues will be significant,
that any sales will be profitable, or that the Company will have
sufficient funds available to complete its research and development
programs or market any products which it may develop. Accordingly, the
Company is considered to be in the development stage as it has not to
date derived significant revenues from its planned principle operations.
(b) Basis of Consolidation
The Company's consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, IPI. All material
intercompany transactions have been eliminated. The Company's
consolidated financial statements include the activity related to IPI
since August 1, 1994.
(c) Cash, Cash Equivalents and Short Term Investments
Cash equivalents are considered to be those securities or instruments
with original maturities, when purchased, of three months or less. At
June 30, 1996, approximately $1,285,500 was invested in Corporate
Commercial Paper and the remainder was in demand and money market
accounts. Short term investments are those investments which have an
original maturity of less than one year and greater than three months.
At June 30, 1996, the Company's short term investments consisted of
approximately $1,997,000 in Government Agency Discount Notes, $998,000 in
U.S. Treasury Bills and $12,438,000 in Corporate Commercial Paper. Cash
equivalents and short term investments are stated at cost, which
approximates market value. Interest income is accrued as earned.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (Statement 115), Accounting for Certain Investments in
Debt and Equity Securities. Statement 115
Page 4
provides for the use of the amortized cost method for investments in debt
securities when management has the positive intent and ability to hold
such securities to maturity. In connection with the adoption of Statement
115, the Company classified all short term investments as held to
maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation of furniture and equipment is
provided on the straight-line method over the estimated useful lives of
the respective assets (3 to 10 years). Amortization of leasehold
improvements is provided on the straight-line method over the remaining
minimum lease term.
(e) Intangible Assets
Intangible assets are amortized on a straight line basis over ten years.
(f) Research and Development Costs
All research and development costs are expensed as incurred and include
salaries of research and development employees. For the three months
ended June 30, 1996 and 1995, salaries and benefits totaled approximately
$1,554,000 and $1,740,000, respectively, of which approximately
$1,246,000 and $1,456,000, respectively, was charged to research and
development. For the six months ended June 30, 1996 and 1995, salaries
and benefits totaled approximately $3,482,000 and $3,426,000,
respectively, of which approximately $2,709,000 and $2,725,000,
respectively, was charged to research and development. Payments related
to the acquisition of in-process research and development are expensed.
(g) Net Loss Per Share
Net loss per share is calculated using the weighted average shares of
common stock outstanding during the period. For the three months ended
June 30, 1996 and 1995, the weighted average common shares used to
compute net loss per share totaled 24,064,064 and 16,054,832
respectively. For the six months ended June 30, 1996 and 1995, and the
period from August 2, 1989 (date of incorporation) through June 30, 1996,
the weighted average common shares used to compute net loss per share
totaled 22,479,819, 16,047,182 and 9,530,469 respectively. Stock options
and stock warrants are considered common stock equivalents, however are
not included in the loss per share computations as their effect is anti-
dilutive. Shares held in escrow through June 30, 1995, pending
satisfaction of certain future conditions, and shares related to
contingent stock issue rights related to the IPI acquisition have been
excluded from the net loss per share calculation until such shares were
released or issued.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the June 30, 1996 presentation with no effect
on net loss reported.
(i) Revenue Recognition
Revenue from grants is recognized as earned under the terms of the
related grant agreements. Revenue from service contracts is recognized
as the services are performed and/or as milestones are achieved. Revenue
from products and services is recognized when the products are shipped or
the services are performed. Amounts received in advance of services to
be performed under contracts are recorded as deferred revenue.
Page 5
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
(l) Interim Financial Information
The Consolidated Balance Sheet as of June 30, 1996, and the related
Consolidated Statements of Operations for the three and six month periods
ended June 30, 1996 and 1995, and the period from August 2, 1989 (date of
incorporation) through June 30, 1996, and Consolidated Statements of Cash
Flows for the six month periods ended June 30, 1996 and 1995, and the
period from August 2, 1989 (date of incorporation) through June 30, 1996,
are unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been included.
Such adjustments consisted of normal recurring items. Interim results
are not necessarily indicative of results for a full year. The
consolidated financial statements and notes are presented as permitted by
Form 10-Q and do not contain certain information included in the
Company's Annual Consolidated Financial Statements and Notes which should
be read in conjunction with these consolidated financial statements and
notes.
(m) Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (Statement 121). The Company has
adopted the statement effective December 31, 1995. Statement 121
requires that long-lived assets and certain identifiable intangible
assets to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In addition, Statement 121
requires that certain long-lived assets and certain identifiable
intangible assets to be disposed of be reported at the lower of carrying
amount or fair value less costs to sell. The Company believes the
goodwill associated with IPI, $643,750, is impaired due to the decision
to cease operations at IPI and the sale of the QED business unit and has
recorded a charge to expense. (See note 9)
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement
123). Statement 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans using a fair value
based methodology as an alternative to intrinsic value based methodology.
In addition, Statement 123 establishes the fair value as the measurement
basis for transactions in which an entity issues its equity instruments
to acquire goods or services from non-employees. The accounting and
reporting requirements of Statement 123 are effective beginning January
1, 1996. The Company intends to continue using the intrinsic value
method.
(2) CAPITAL STOCK
In February, 1996, the Company completed a private placement of common
stock. The Company issued 6,550,990 shares of Common Stock at $2 1/8 per
share with proceeds of approximately $13.0 million, net of selling
commissions and expenses of approximately $900,000. In accordance with the
terms of the offering, the Company filed, pursuant to Rule 415 of the
Securities Act, a Shelf Registration Statement as to the shares of Common
Stock sold to the purchasers in the private placement which became effective
on June 4, 1996.
Page 6
In connection with the private placement, the co-exclusive
agent, Harris, Webb & Garrison received a $634,630 selling commission,
49,775 warrants with an exercise price of $3.05 per share and no
registration rights, and 497,749 warrants with an exercise price of $3.66
per share with the underlying common stock being registered, under certain
circumstances, on a "piggyback" basis in the event of a public offering of
common stock by the Company. The co-exclusive agent, Aurora Capital Corp.,
received a $124,653 selling commission, 25,587 warrants with an exercise
price of $3.36 per share, and 149,002 warrants with an exercise price of
$4.58 per share. The common stock underlying Aurora's warrants will be
registered with the Common Stock issued in the private placement. The co-
exclusive agents assigned some of these warrants to others.
In May 1996, the Board of Directors proposed, and stockholders approved, an
amendment to the Company's Certificate of Incorporation to increase the
authorized number of shares of the Company's common stock from 40 million
shares to 75 million shares.
(3) STOCK OPTIONS
The Company has in effect the following stock option plans:
The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan")
allows for the issuance of incentive and non-qualified options to employees,
directors, officers, non-employee independent contractors and non-employee
directors, pursuant to which 230,590 shares of common stock are reserved for
issuance out of authorized but unissued shares of the Company.
The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan")
allows for the issuance of incentive and non-qualified options to employees,
directors, officers, non-employee independent contractors and non-employee
directors, pursuant to which 1,620,929 shares of common stock are reserved
for issuance out of authorized but unissued shares of the Company.
The Stock Option Plan for Non-Employee Directors ("Director Plan") allows
for the issuance of non-qualified options to non-employee directors,
pursuant to which 71,429 shares of common stock are reserved for issuance
out of authorized but unissued shares of the Company to be issued to non-
employee members of the Board of Directors of the Company based on a
formula.
The 1995 Stock Option Plan ("1995 Plan") allows for the issuance of
incentive and non-qualified options, shares of restricted stock and stock
bonuses to employees, officers, and non-employee independent contractors,
pursuant to which 1,000,000 shares of common stock are reserved for issuance
out of authorized but unissued shares of the Company.
The Amended and Restated 1995 Non-Employee Director Stock Option Plan ("1995
Director Plan") allows for the issuance of non-qualified options to non-
employee directors, pursuant to which 200,000 shares of common stock are
reserved for issuance out of authorized but unissued shares of the Company
to be issued to non-employee members of the Board of Directors of the
Company based on a formula. In June 1996, the 1995 Director Plan was amended
with respect to the election date requirement for a director to request
stock in lieu of cash payment of director fees.
Page 7
A summary of stock options as of June 30, 1996, follows:
Exercise Price Available
Stock Option Plans Per Share Outstanding Exercised Exercisable for Grant
- ------------------- ---------------- ----------- --------- ----------- ---------
1990 Plan $3.50 166,798 55,125 158,464 63,792
1992 Plan $1.41 - $5.36 1,503,394 79,071 620,665 117,535
Director Plan $2.40 - $4.54 42,576 --- 26,656 28,853
1995 Plan $1.31 - $4.53 564,500 --- 37,500 435,500
1995 Director Plan $1.38 - $5.19 82,806 --- 27,606 117,194
----------- --------- ----------- ---------
TOTALS 2,360,074 134,196 870,891 762,874
=========== ========= =========== =========
The Company has recorded deferred compensation for the difference between
the grant price and the deemed fair value for financial statement
presentation purposes related to certain options granted in the period
subsequent to May 27, 1993 and prior to the initial public offering. Such
amount totaled $287,158, of which $42,927 has been charged to expense in
1996. The unamortized deferred compensation expense of $3,250 at June 30,
1996 will be amortized over the remaining vesting periods of the options.
(4) INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" effective January 1, 1993. As of June 30,
1996, the Company had a net deferred tax asset of approximately
$18,989,000, primarily composed of the tax benefit associated with net
operating loss carry forwards, start-up and other capitalized costs. A
valuation allowance for the full amount of the deferred tax asset has been
established as realization of the benefit is uncertain.
(5) COMMON STOCK RESERVED
The Company has reserved common stock for issuance as of June 30, 1996 as
follows:
Stock option plans 3,122,948
Agreement with Genentech, Inc. 285,715
Warrants issuable under the Genentech Agreement 142,858
Warrants outstanding 5,378,191
Underwriters purchase options and related warrants 710,000
IPI acquisition (contingent shares) 1,000,000
----------
Total shares reserved 10,639,712
==========
(6) CLINICAL RESEARCH AGREEMENTS
On February 10, 1995, the Company entered into an agreement with Coromed,
Inc., a contract research organization, to coordinate the clinical
evaluation of NOVASTAN(R) as an adjunct to Streptokinase in acute
myocardial infarction. Coromed is responsible for managing all aspects of
the clinical trial and making all financial remuneration to testing sites.
The term of the agreement is 19 months, subject to extension upon the
mutual written agreement of both parties. The parties have agreed to a
total budget of approximately $3,196,000. Of this amount, $106,000 was paid
upon execution of a letter of intent and approximately $450,000 was paid
upon execution of the agreement. Subsequent payments will be made monthly
on a per
Page 8
patient basis, to a maximum total of approximately $2,490,000. Three
additional payments of $50,000 each will be made upon completion of
specified tasks by Coromed. If the clinical trial is completed in less than
19 months, the Company will pay Coromed a bonus calculated as a percentage
of personnel costs as set forth in the budget, to a maximum bonus amount of
approximately $327,000. In addition, the Company has engaged Coromed to
provide various services related to other ongoing NOVASTAN(R) trials being
conducted by the Company.
On May 1, 1996, the Company amended the above agreement with Coromed, Inc.
The term of the contract was extended to 24 months with an additional cost
of $1,200,000. The bonus payment, if any, is now based on the completion in
less than 24 months.
(7) RESEARCH AGREEMENTS
On October 11, 1994, the Company signed a collaborative agreement with
Synthelabo, a French pharmaceutical group, to develop and market compounds
for vascular proliferation disease derived from the Company's FGF and
antisense programs. Upon consummation of the transaction, Synthelabo
purchased 1,428,571 shares of common stock for $3.50 per share for a total
of $5 million and paid a non-refundable licensing fee of $3 million. In
addition, Synthelabo has committed to pay $3 million annually in research
payments (payable in quarterly installments of $750,000) for three years.
Synthelabo has agreed, upon the achievement of certain milestones, to
further payments of up to $3 million per year for up to $18 million in
total. Synthelabo has the right to terminate the agreement any time on or
after October 15, 1996, for any reason and either party has the right to
terminate the contract for breach of any material obligation. If Synthelabo
exercises this termination right, the license granted to Synthelabo shall
terminate and TBC will pay Synthelabo a royalty on net sales of any
products sold in a certain territory for a period of time. In addition,
Synthelabo may, at its option, require that the technology be transferred
to and the development program be conducted by a joint venture owned by TBC
and Synthelabo should "net worth" as defined in the agreement be less than
$5 million as of the end of any calendar quarter during the term of the
agreement. The first quarterly research payment of $750,000 was received on
October 31, 1994, of which $500,000 was recognized in 1994. As of June 30,
1996, $250,000 is included in current deferred revenue. Synthelabo will pay
royalties to TBC, based on the net sales, in those geographic areas covered
in the agreement. In exchange for the above consideration, Synthelabo will
receive an exclusive license to manufacture, use, and sell any products
generated from the research in Europe, the Middle East, Africa and the
countries of the former Soviet Union. One of the programs, which involves
antisense, is being jointly reviewed and may result in a redirection of the
research into another area
During 1995, the Company and Synthelabo mutually agreed to exchange certain
clinical data. In January 1996, the Company signed two agreements with
Synthelabo with respect to the supply of information related to certain
clinical studies. Synthelabo paid TBC $500,000 upon execution of the
agreement. In addition, over the term of the agreements as certain
milestones are met, Synthelabo has committed to pay TBC additional payments
that total $2,400,000. These payments are dependent on rate of enrollment
in certain clinical studies, the completion of certain clinical studies and
date of completion of certain clinical studies. Synthelabo is the licensee
for NOVASTAN(R) in certain territories other than those which were
sublicensed to TBC.
(8) LICENSE AGREEMENT
In May 1993, TBC entered into an agreement with Genentech to sublicense
Genentech's rights and technology relating to NOVASTAN(R) (argatroban)
originally licensed to Genentech by Mitsubishi Chemical Corporation
("Mitsubishi"), and to license Genentech's own proprietary technology
developed with respect to NOVASTAN(R) (the "Genentech Agreement"). Under
the license and sublicense, the Company has an exclusive license to use and
sell NOVASTAN(R) in the United States and Canada for specified human
cardiovascular indications, not including cerebral thromboembolism
(stroke). The Company is required to pay Genentech and Mitsubishi specified
royalties on net sales of NOVASTAN(R) by the Company and its
Page 9
sublicensees after its commercial introduction in the United States and
Canada. Genentech has the right to terminate the agreement or to cause the
license to become non-exclusive if the Company fails to exercise due
diligence in performing its obligations under the agreement for a period of
60 days after receiving written notice from Genentech or fails to maintain
a minimum consolidated tangible net worth of $5.0 million. The Genentech
Agreement, as amended, provides that Mitsubishi may terminate Genentech's
license with Mitsubishi (which results in the termination of the Genentech
Agreement as well) if TBC does not file an NDA for Novastan with the FDA no
later than June 30, 1997, subject to certain additional goals being met by
TBC. As of December 31, 1995, TBC had not met certain of those goals.
However, Mitsubishi has agreed to withhold its rights to terminate the
license with Genentech if the NDA is filed by June 30, 1997, and if TBC
accomplishes the following milestones: (i) on or before December 31, 1996,
TBC shall have met certain enrollment guidelines for certain Novastan
clinical trials; (ii) on or before March 31, 1997, TBC shall complete,
report and analyze certain other Novastan clinical trials; (iii) on or
before September 30, 1997, TBC shall have agreed to proceed with the Phase
III trial in AMI, and (iv) TBC shall comply with certain reporting and
information meeting requirements. If these milestones are not met,
Mitsubishi will retain the rights to terminate the Genentech license;
provided, that if such termination results from TBC's violation of the
milestone described in (iii) above, TBC will receive a license from
Mitsubishi in the field of HIT/HITTS on the same terms, as presently
included in the Genentech Agreement. Either party may terminate the
Genentech Agreement on 60 days notice if the other party defaults in its
material obligations under the agreement, declares bankruptcy or is
insolvent, or if a substantial portion of its property is subject to
attachment. The Genentech Agreement is also subject to the continuation of
Genentech's license agreement with Mitsubishi, which is only terminable if
Genentech defaults in its material obligations under the agreement,
declares bankruptcy or is insolvent, or if a substantial portion of its
property is subject to attachment. Unless terminated sooner pursuant to the
above described termination provisions, the Genentech Agreement is expected
to expire in June 2007. Under the Genentech Agreement, TBC has access to an
improved formulation patent granted in 1993 which expires in 2010 and a use
patent which expires in 2009.
Mitsubishi further agreed to supply the Company with its requirements of
NOVASTAN(R) throughout the term of the Genentech Agreement for TBC's
clinical testing and commercial sales of NOVASTAN(R) in the United States
and Canada. In the event Mitsubishi should discontinue the manufacture of
NOVASTAN(R), Mitsubishi, Genentech and TBC have agreed to discuss in good
faith the means by which, and the party to whom, NOVASTAN(R) production
technology will be transferred. The transferee may be a person or entity
other than Genentech or TBC. At present, Mitsubishi is the only
manufacturer of NOVASTAN(R). Should Mitsubishi terminate or default in its
supply commitment, there can be no assurance that alternate sources of bulk
NOVASTAN(R) will be available to the Company at reasonable cost, if at all.
If such alternate sources of supply are unavailable or uneconomic, the
Company's results of operations would be materially and adversely affected.
In exchange for the license to Genentech's NOVASTAN(R) technology, TBC
issued Genentech 285,714 shares of Common Stock and agreed to issue (i) an
additional 214,286 shares of Common Stock to Genentech within 10 days after
the filing of the first New Drug Application ("NDA") with the FDA for
NOVASTAN(R), and (ii) an additional 71,429 shares of Common Stock to
Genentech within 10 days after the FDA's first approval of an NDA for
NOVASTAN(R). The Company has also agreed to grant Genentech a warrant to
purchase an additional 142,858 shares of Common Stock at an exercise price
of $14.00 per share, subject to adjustment, within ten days of the filing
of the first NDA for NOVASTAN(R) with the FDA. If the Company is unable to
issue any of the additional shares of Common Stock or the warrant to
Genentech due to circumstances beyond the Company's control, the Company
has agreed to pay Genentech, in lieu thereof, an amount equal to the value
of the securities plus interest from May 27, 1993 at the prime rate plus
one percent, compounded annually. The value of the Common Stock is deemed
to be $7.00 per share, which represents the cash consideration the Company
will be obligated to pay to Genentech as liquidated damages, and the value
of the warrants is to be determined by appraisal, based on the warrants'
market value. The Company will not be required to make any cash payment if
both of the filing and approval of the NDA do not occur. TBC has also
granted Genentech demand and piggyback registration rights with regard to
shares of Common Stock issued to Genentech.
Page 10
Due to the additional research and development required to commercialize
the technologies associated with the Sublicense and License Agreement, the
Company expensed the value associated with the 285,714 shares issued to
Genentech, charging $1,000,000 to purchase of in-process research and
development expense in the year ended December 31, 1993.
In connection with the Genentech Agreement, a consultant involved in
negotiations related to the Agreement will receive a royalty on net sales
of licensed products.
(9) CONSOLIDATION OF IMMUNOPHARMACEUTICS, INC.
The Company decided to consolidate the IPI operation into TBC's in the
first half of 1996. The overall financial impact on the Company's
performance will be positive in 1996 due to expected reduction in general
and administrative expenses and the elimination of some research and
development positions associated with IPI. The Company believes the
goodwill associated with IPI, $643,750, is impaired due to the decision to
cease operations at IPI and the sale of the QED business unit and has
charged it to expense in the year ended December 31, 1995. The
restructuring costs associated with the consolidation of the IPI operation
were approximately $421,000 and have been expensed in the three months
ended March 31, 1996. This cost included waste disposal, future lease
commitments, severance pay and related taxes.
(10) COMMITMENTS AND CONTINGENCIES
a) Employment Agreements
Since inception, the Company has entered into employment agreements with
certain officers and key employees. One of the officers, Dr. Maggio,
resigned his position as CEO of IPI effective March 31, 1996. As of June
30, 1996, remaining commitments total approximately $276,000 in 1996 and
$232,000 in 1997. These amounts include payments due to one former
employee pursuant to his severance agreement. The employment agreements
of various officers and key employees provide for salary continuation for
up to twelve months from date of termination upon dismissal by the
Company, which would approximate $465,000 currently. In addition to
salary, the Company has agreed to reimburse certain officers and other
employees for costs of relocation and temporary travel and living
expenses.
In addition, the Company has signed agreements with five of its officers
to provide certain benefits in the event of a "change of control" as
defined in the agreement and the occurrence of certain other events. The
agreements provide for a lump-sum payment in cash equal to eighteen (18)
months to three (3) years of annual base salary and annual bonus if any.
The base salary portion of the agreements would aggregate approximately
$1.9 million at current rate of compensation. In addition, the agreements
provide for gross-up for certain taxes on the lump-sum payment,
continuation of certain insurance and other benefits for periods of
eighteen (18) months to three (3) years and reimbursement of certain
legal expenses in conjunction with the agreements. These provisions are
intended to replace compensation continuation provisions of any other
agreement in effect for an officer if the specified event occurs.
b) Legal Proceedings
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16 million. Plaintiffs are two
individuals who purchased shares of the Company on December 16, 1993
following the Company's initial public offering. In their complaint,
plaintiffs have sued the Company, and certain members of the board of
directors and certain officers alleging violations of Sections 11, 12 and
15 of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have
also named David Blech, D. Blech & Co., Incorporated and Isaac Blech as
defendants. On January 23, 1995, the Company and
Page 11
the members of the board of directors filed a motion to dismiss the
plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the
Federal Rules of Civil Procedure. In addition, defendant John Pietruski,
Chairman of the Board of Directors, filed a motion to dismiss the
plaintiffs' complaint pursuant to Rule 12(b)(2) of the Federal Rules of
Civil Procedure. On February 7, 1995, the plaintiffs filed a motion for
class certification. The Court denied the motion by the Company and by
John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in
the United States District Court for the Southern District of New York
seeking unspecified damages. Plaintiffs are eight individuals who
purchased shares in various companies for which D. Blech & Co. acted as
an underwriter (or co-underwriter) or marketmaker. In their complaint,
the plaintiffs have sued the Company alleging violations of Section 10(b)
of the Securities Exchange Act of 1934, as Amended (the "Exchange Act")
and Rule 10b-5 promulgated thereunder by the Securities and Exchange
Commission (the "Commission"). Plaintiffs have named a number of
defendants, including David Blech and D. Blech & Co., four individuals,
two brokerage firms, one investment management company and ten other
companies for which D. Blech & Co. acted as underwriter or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District Litigation
ordered that the action filed in the United States District Court for the
Southern District of Texas, Houston Division be transferred to the United
States District Court for the Southern District of New York for
coordinated or consolidated pretrial proceedings with the action pending
there. In light of the transfer and consolidation of the Texas case with
similar cases against other companies for which Blech acted as
underwriter, the Company requested that the Court in New York reconsider
the Texas Court's denial of its motion to dismiss as a part of the
Court's consideration of similar motions to dismiss filed by those
companies. All of these motions were presented to the Court on February
6, 1996. On June 6, 1996, the New York District Court entered two
memorandum opinions in the consolidated cases. In one of its opinions,
the Court dismissed all of the Exchange Act and common law fraud claims
filed against the Company and its officers and directors, but afforded
those plaintiffs the right to attempt to preserve those claims by
repleading them. The Court ordered that those claims be repleaded no
later than July 26, 1996. Plaintiffs did not replead those claims by the
deadline, resulting in the dismissal of all claims against the Company in
that litigation. In its opinion in the second case, i.e., the case filed
on November 21, 1994, the Court granted the Company and its officers and
directors' motion for reconsideration, but together with all other
similar pending motions, denied the requested relief. Pursuant to the
court's order, the Company therefore filed an answer in that case. Given
the early stage of that case, which is the only remaining litigation
against the Company, the Company is unable to evaluate its potential
outcome at this time. The Company disputes these claims and intends to
contest them vigorously.
Page 12
ITEM 2.
-------
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
OVERVIEW
--------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in the forward-looking statements as a result of certain
factors including those set forth under "Risk Factors" and elsewhere in the
Prospectus.
Since its formation in 1989, the Company has primarily devoted its resources
to fund research, drug discovery and development. The Company has been
unprofitable to date and expects to incur substantial losses for the next
several years as the Company invests in product research and development,
preclinical and clinical testing and regulatory compliance. The Company has
sustained net losses of approximately $54.2 million from inception to June
30, 1996. The Company has primarily financed its operations to date through
private placements of Common Stock and debt, which have raised an aggregate
of $34.3 million in net proceeds and an initial public offering ("IPO") in
December 1993, which raised an aggregate of $24.2 million in net proceeds
including the over-allotment.
On July 25, 1994, the Company acquired all of the outstanding stock of
ImmunoPharmaceutics, Inc. ("IPI") in exchange for Common Stock of the
Company. IPI's results of operations have been included in the consolidated
results of operations beginning August 1, 1994. During September 1993, IPI
entered into an agreement to provide research and development services, over
a period of 30 months, to EISAI Co., LTD ("EISAI"). The agreement, which
expired in March 1996, guaranteed contract research funding and allowed for
additional amounts to be received upon the attainment of certain milestones.
On August 10, 1995, IPI received a $2.0 million milestone payment from EISAI.
The Company decided to consolidate the IPI operation into TBC's in the first
half of 1996. The overall financial impact on the Company's performance will
be positive in 1996 due to expected reduction in general and administrative
expenses and the elimination of some research and development positions
associated with IPI. The Company believes the goodwill associated with IPI,
$643,750, was impaired due to the decision to cease operations at IPI and the
sale of IPI's QED business unit and charged it to expense in the year ended
December 1995. Restructuring costs, $421,165, associated with the
consolidation of the IPI operation were recorded in the quarter ended March
31, 1996.
The Company signed a collaborative agreement with Synthelabo, the
pharmaceutical division of L'Oreal on October 11, 1994 (the "Synthelabo
Agreement"). Upon consummation of the transaction, Synthelabo purchased
1,428,571 shares of Common Stock for a total of $5 million and paid the
Company a nonrefundable licensing fee of $3 million. In addition, Synthelabo
has committed to pay $3 million annually in research payments (payable in
quarterly installments) through July 31, 1997. In 1996, TBC has signed two
agreements with Synthelabo to provide to them copies of certain clinical data
for Novastan. TBC received $500,000 at the execution of one of these
agreements. Over the life of the agreements TBC may receive as much as $2.9
million, including the $500,000 received, from Synthelabo.
The Company's operating results have fluctuated significantly during each
quarter, and the Company anticipates that such fluctuations, largely
attributable to varying research and development commitments and
expenditures, will continue for the next several years.
Page 13
RESULTS OF OPERATIONS
---------------------
THREE MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
Revenues decreased from $1,315,262 in the three month period ended June 30,
1995 to $1,283,474 in the same period of 1996, a decrease of 2%. Revenues
were composed of earned revenues under research agreements, sales of products
and services, and grant income. Revenue decreased due to the elimination of
the QED operation on October 1995 and the expiration of several grants.
Total operating expenses decreased 5% from $7,420,242 in the three month
period ended June 30, 1995 to $7,066,074 in the same period of 1996.
Excluding a one time charge for purchase of in-process research and
development in the second quarter of 1995, total operating expenses would
have increased 30% from $5,446,359 in the three month period ended June 30,
1995 to $7,066,074 in the same period of 1996. Research and development
expenses increased 52% from $3,965,457 in the three month period ended June
30, 1995 to $6,023,929 in the same period of 1996. This increase was
primarily attributable to continued increases in research and development
activity related to the clinical trials on the compound NOVASTAN/R/
(argatroban). General and administrative expenses decreased 30% from
$1,480,902 in the three month period ended June 30, 1995 to $1,042,145 in the
same period of 1996. The decrease was primarily attributable to the
elimination of the QED operation in October 1995. The Company had 101
employees at June 30, 1995, including 34 employees at IPI, and 80 employees
at June 30, 1996, including 2 employees at IPI.
Other income and expenses was composed entirely of investment income on
invested funds and interest expense. Investment income decreased from
$322,343 in the three month period ended June 30, 1995 to $251,390 in the
same period of 1996, a decrease of 22%. The decrease is due to lower
interest rates from 1995 to 1996 and a lower investment balance throughout
1996.
The Company incurred a net loss of $5,782,637 for the three month period
ended June 30, 1995, compared with a net loss of $5,531,210 for the same
period of 1996.
SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
Revenues increased from $2,648,969 in the six month period ended June 30,
1995 to $3,200,776 in the same period of 1996, an increase of 21%. Revenues
were composed of earned revenues under research agreements, sales of products
and services, and grant income. Revenue from research agreements increased
due to a payment from Synthelabo of $500,000 which was related to the signing
of an agreement to supply them with certain clinical data.
Total operating expenses increased 23% from $11,468,481 in the six month
period ended June 30, 1995 to $14,080,347 in the same period of 1996.
Research and development expenses increased 69% from $6,807,852 in the six
month period ended June 30, 1995 to $11,504,545 in the same period of 1996.
General and administrative expenses decreased 20% from $2,704,746 in the six
month period ended June 30, 1995 to $2,154,637 in the same period of 1996.
See comments under the preceding three month period comparison for
explanation of the changes.
Other income and expenses was composed entirely of investment income on
invested funds and interest expense. Investment income decreased from
$674,238 in the six month period ended June 30, 1995 to $497,278 in the same
period of 1996, a decrease of 26%. See comments under the preceding three
month period comparison for explanation of the decrease.
The Company incurred a net loss of $8,163,274 for the six month period ended
June 30, 1995, compared with a net loss of $10,382,293 for the same period of
1996.
Page 14
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has financed its research and development activities to date
principally through (i) private sales of Common Stock and an initial public
offering of a unit security, (ii) issuance of Common Stock in conjunction
with assumption of liabilities and assets to acquire IPI and the Novastan(R)
license, (iii) revenues from research agreements and sales of products and
services and (iv) investment income, net of interest expense. During the
first six months of 1996, the Company utilized $10,336,805 net cash in
operating activities and $13,548,074 was provided by financing activities.
The use of cash in operations was caused by the Company's net loss of
$10,352,293. Financing activities produced approximately $13,000,000 in net
proceeds for the Company resulting from the 1996 private placement and the
remaining was from exercise of stock options and warrants.
The Company expects to incur substantial research and development
expenditures as it designs and develops biopharmaceutical products for the
prevention and treatment of cardiovascular diseases. The Company anticipates
that operating expenses will continue to increase during 1996 and subsequent
years. These costs to develop Novastan(R) have increased and will continue to
increase during 1996 due to the continuation of clinical trials and will
continue to be significant through the FDA approval process. These costs will
include, among other things, hiring personnel to direct and carry out all
operations related to the clinical trials, paying for hospital and procedural
costs, services of a contract research organization, and purchasing and
formulating large quantities of the compound to be used in such trials. In
addition, the Company anticipates that the administrative costs associated
with this effort will be significant. The amounts and timing of expenditures
will depend on the progress of ongoing research and clinical development and
product launch costs.
At June 30, 1996, the Company had cash, cash equivalents and short-term
investments of approximately $17.0 million. The Company anticipates that its
existing capital resources and its other revenue sources should be sufficient
to fund its cash requirements into the second quarter of 1997. The Company's
existing capital resources may not be sufficient to fund the Company's
operations through commercialization of its first product. Moreover, the
Genentech Agreement and Synthelabo Agreement require the Company to maintain
a tangible net worth of at least $5.0 million during the term of these
agreements. For failure to maintain at least $5.0 million of net worth,
Synthelabo may require that the technology be transferred to, and the
development program be conducted by, a joint venture owned by TBC and
Synthelabo. As of June 30, 1996, the Company's tangible net worth
significantly exceeded $5.0 million. The Genentech Agreement and Synthelabo
Agreement are also terminable for other reasons. Termination of either of
these agreements will have a material adverse effect on the Company.
The Company will need to raise substantial funds for future operations and is
actively seeking such funding through collaborative arrangements, public or
private financing, including equity financing, and other arrangements. The
Company expects that additional expenditures will be required if additional
product candidates enter clinical trials which may require additional
expenditures for laboratory space, scientific and administrative personnel,
and services of contract research organizations. There can be no assurance
that the Company will be able to obtain additional financings on acceptable
terms or in time to fund any necessary or desirable expenditures. In the
event such financing are not obtained, the Company's drug discovery or
development and programs may be delayed, scaled back or eliminated; or it
may be required to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to
certain of its technologies, product candidates or products that the Company
would not otherwise relinquish. TBC's ability to raise additional funding is
contingent upon a number of factors which include (i) ongoing cost of
research and development activities, (ii) cost of clinical development of
product candidates, (iii) attainment of research and clinical goals of
product candidates, (iv) timely approval of TBC's product candidates by
appropriate governmental and regulatory agencies, (v) effect of any current
or future competitive products, (vi) ability to manufacture and market
products commercially, (vii) retention of key personnel and (viii) obtaining
and timing of sufficient financing through capital raising or collaborative
agreements to fund operations.
PENDING LITIGATION
As of July 31, 1996, one class action shareholder lawsuit remains pending
against the Company, and includes certain directors and officers as
defendants. The Company disputes all claims set forth in this lawsuit and
intends to contest it vigorously. However, the Company is unable to
evaluate the potential outcome at this time.
Page 15
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled use
of hazardous and radioactive materials. The Company is subject to federal,
state, and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Management believes that the Company is in compliance with all such laws,
regulations and standards currently in effect and that the cost of compliance
with such laws, regulation, and standards will not have a material adverse
effect on the Company. The Company does not expect to incur any capital
expenditures for environmental control in the foreseeable future.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and
related expenses increase in inflationary periods. The lease of space and
related building services for the Houston facility contains a clause that
escalates rent and related services each year based on the increase in
building operating costs and the increase in the Houston Consumer Price
Index, respectively. To date, inflation has not had a significant impact on
operations.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (Statement 121). The Company has adopted the
statement effective December 31, 1995. Statement 121 requires that long-
lived assets and certain identifiable intangible assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In addition, Statement 121 requires that certain long-lived
assets and certain identifiable intangible assets to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell.
The Company believes the goodwill associated with IPI, $643,750, was impaired
due to the decision to cease operations at IPI and the sale of the QED
business unit and has recorded a charge to expense.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
Statement 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans using a fair value based methodology
as an alternative to intrinsic value based methodology. In addition,
Statement 123 established the fair value as the measurement basis for
transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. The accounting and reporting
requirements of Statement 123 were effective beginning January 1, 1996. The
adaptation of Statement 123 is not expected to have a material impact on
TBC's 1996 financial position or results of operations as the Company intends
to continue using the intrinsic value method.
Page 16
PART II OTHER INFORMATION
- -------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16 million. Plaintiffs are two
individuals who purchased shares of the Company on December 16, 1993
following the Company's initial public offering. In their complaint,
plaintiffs have sued the Company, and certain members of the board of
directors and certain officers alleging violations of Sections 11, 12 and 15
of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have also
named David Blech, D. Blech & Co., Incorporated and Isaac Blech as
defendants. On January 23, 1995, the Company and the members of the board of
directors filed a motion to dismiss the plaintiffs' complaint pursuant to
Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In
addition, defendant John Pietruski, Chairman of the Board of Directors, filed
a motion to dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of
the Federal Rules of Civil Procedure. On February 7, 1995, the plaintiffs
filed a motion for class certification. The Court denied the motion by the
Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in the
United States District Court for the Southern District of New York seeking
unspecified damages. Plaintiffs are eight individuals who purchased shares
in various companies for which D. Blech & Co. acted as an underwriter (or co-
underwriter) or marketmaker. In their complaint, the plaintiffs have sued the
Company alleging violations of Section 10(b) of the Securities Exchange Act
of 1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission (the "Commission").
Plaintiffs have named a number of defendants, including David Blech and D.
Blech & Co., four individuals, two brokerage firms, one investment management
company and ten other companies for which D. Blech & Co. acted as underwriter
or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District Litigation
ordered that the action filed in the United States District Court for the
Southern District of Texas, Houston Division be transferred to the United
States District Court for the Southern District of New York for coordinated
or consolidated pretrial proceedings with the action pending there. In
light of the transfer and consolidation of the Texas case with similar cases
against other companies for which Blech acted as underwriter, the Company
requested that the Court in New York reconsider the Texas Court's denial of
its motion to dismiss as a part of the Court's consideration of similar
motions to dismiss filed by those companies. All of these motions were
presented to the Court on February 6, 1996. On June 6, 1996, the New York
District Court entered two memorandum opinions in the consolidated cases. In
one of its opinions, the Court dismissed all of the Exchange Act and common
law fraud claims filed against the Company and its officers and directors,
but afforded those plaintiffs the right to attempt to preserve those claims
by repleading them. The Court ordered that those claims be repleaded no
later than July 26, 1996. Plaintiffs did not replead those claims by the
deadline, resulting in the dismissal of all claims against the Company in
that litigation. In its opinion in the second case, i.e., the case filed on
November 21, 1994, the Court granted the Company and its officers and
directors' motion for reconsideration, but together with all other similar
pending motions, denied the requested relief. Pursuant to the court's order,
the Company therefore filed an answer in that case. Given the early stage of
that case, which is the only remaining litigation against the Company, the
Company is unable to evaluate its potential outcome at this time. The Company
disputes these claims and intends to contest them vigorously.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
Page 17
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
On May 3, 1996, an annual meeting of the stockholders of the Company was
held. The holders of 16,447,395 shares of Common Stock were present in
person or represented by proxy at the meeting. At the meeting, the
stockholders took the following actions:
(a) Election of Directors
The stockholders elected the following persons to serve as
directors of the company until the next annual meeting of stockholders,
or until their successors are duly elected and qualified:
NUMBER OF NUMBER OF
NAME VOTES FOR VOTES ABSTAINING
-------------------- ---------------- ----------------
PATRICK OWEN BURNS 16,381,565 65,830
---------- ------
FRANK CARLUCCI 16,362,552 84,843
---------- ------
ROBERT J. CRUIKSHANK 16,366,980 80,415
---------- ------
RICHARD A.F. DIXON 16,395,850 51,545
---------- ------
DAVID B. MCWILLIAMS 16,395,850 51,545
---------- ------
JOHN M. PIETRUSKI 16,366,980 80,415
---------- ------
JAMES A. THOMSON 16,381,565 65,830
---------- ------
JAMES T. WILLERSON 16,395,850 51,545
---------- ------
(b) Approval of the Amendment to the Certificate of Incorporation
The stockholders approved the proposal to amend the Company's
Certificate of Incorporation to increase the authorized number of shares
of the Company's common stock from 40 million shares to 75 million
shares. Votes were cast as follows:
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
---------- ------------- ---------------- ----------------
15,863,798 245,522 66,591 271,484
---------- ------------- ---------------- ----------------
ITEM 5. OTHER INFORMATION
- --------------------------
The lead compound in the Company's vascular inflammation program, TBC 1269,
an antagonist of selectin, is currently in preclinical studies and is
expected to enter Phase I clinical trials in Europe in 1996 followed by the
filing of a U.S. investigational new drug application ("IND") in early 1997.
Page 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBIT NO. DESCRIPTION
----------- -----------
3.6 Certificate of Amendment of Certificate of Incorporation
10.51 (1)* Letter Agreement regarding Argatroban Studies Information
dated December 14, 1995, between the Company and Synthelabo
Recherche
10.52 (1) Amendment B to Clinical Trial Research Agreement dated
February 10, 1995 between Texas Biotechnology Corporation
and Coromed Inc.
10.53 Letter of Understanding between Texas Biotechnology Corporation
and Mitsubishi Chemical Corporation dated July 10, 1996
10.54 Form of Indemnification Agreement between Texas Biotechnology
Corporation and its officers and directors dated May 3, 1996
10.55 Amended and Restated 1995 Non-Employee Director Stock Option
Plan (as amended by the Board of Directors on June 30, 1996)
27.1 Financial Data Schedule
- -----------
* The Company has omitted certain portions of this agreement in reliance on
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended March 31, 1996 and incorporated herein by reference.
REPORTS ON FORM 8-K
--------------------
None
Page 19
TEXAS BIOTECHNOLOGY CORPORATION
JUNE 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 13th day of August, 1996.
TEXAS BIOTECHNOLOGY CORPORATION
BY: /s/ David B. McWilliams
---------------------------------
DAVID B. MCWILLIAMS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BY: /s/ Stephen L. Mueller
---------------------------------
STEPHEN L. MUELLER
VICE PRESIDENT OF ADMINISTRATION
SECRETARY AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Page 20
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.6 Certificate of Amendment of Certificate of Incorporation
10.51 (1)* Letter Agreement regarding Argatroban Studies Information
dated December 14, 1995, between the Company and Synthelabo
Recherche
10.52 (1) Amendment B to Clinical Trial Research Agreement dated
February 10, 1995 between Texas Biotechnology Corporation
and Coromed Inc.
10.53 Letter of Understanding between Texas Biotechnology Corporation
and Mitsubishi Chemical Corporation dated July 10, 1996
10.54 Form of Indemnification Agreement between Texas Biotechnology
Corporation and its officers and directors dated May 3, 1996
10.55 Amended and Restated 1995 Non-Employee Director Stock Option
Plan (as amended by the Board of Directors on June 30, 1996)
27.1 Financial Data Schedule
- -----------
* The Company has omitted certain portions of this agreement in reliance on
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended March 31, 1996 and incorporated herein by reference.
Page 21