1
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 MARCH 31, 1997
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Fannin, Suite 1920, Houston, Texas 77030
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
(713) 796-8822
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 March 31, 1997
----- -----------------------------
Common Stock, $0.005 par value 25,625,965
2
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 and the period from August 2, 1989 (date of
incorporation) through March 31, 1997 2
Consolidated Statements of Cash Flows the three months ended March
31, 1997 and 1996, and the period from August 2, 1989 (date of
incorporation) through March 31, 1997 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 18
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 18
SIGNATURES 19
INDEX TO EXHIBITS 20
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
------- ------------ -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,592,436 2,127,999
Short term investments 10,650,745 11,262,292
Short term note receivable 122,500 122,500
Prepaids 470,718 546,752
Inventory 167,560 --
Other current assets 810,915 602,975
------------ ------------
Total current assets 15,814,874 14,662,518
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 5) 3,486,568 3,458,012
Other assets 59,591 59,591
------------ ------------
Total assets $ 19,361,033 18,180,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,593,964 1,661,339
Accrued expenses 409,577 2,266,376
Deferred revenue (note 8) 437,500 625,000
------------ ------------
Total current liabilities 3,441,041 4,552,715
Commitments and contingencies (notes 6, 8, 9 and 11)
Stockholders' equity (notes 2, 3 and 6):
Preferred stock, par value $.005 per share. At March 31, 1997
5,000,000 shares authorized; 6,000 shares of 5% cumulative
convertible issued and outstanding. At December 31, 1996,
5,000,000 shares authorized, none outstanding 30 --
Common stock, par value $.005 per share. At March 31, 1997,
75,000,000 shares authorized; 25,625,965 shares issued and
outstanding. At December 31, 1996, 25,490,269 shares
issued and outstanding 128,129 127,451
Additional paid-in capital 84,502,555 77,808,331
Deficit accumulated during the development stage (68,710,722) (64,308,376)
------------ ------------
Total stockholders' equity 15,919,992 13,627,406
------------ ------------
Total liabilities and stockholders' equity $ 19,361,033 18,180,121
============ ============
See accompanying notes to consolidated financial statements
FORM 10-Q Page 1
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
AUGUST 2, 1989
(DATE OF
INCORPORATION)
THREE MONTHS ENDED TO
MARCH 31, MARCH 31,
1997 1996 1997
------------ ------------ --------------
Revenues:
Research agreements (note 8) $ 797,501 1,915,110 17,231,297
Products and services 2,499 1,439 408,079
Grant revenue -- 753 668,951
----------- ----------- -----------
Total revenues 800,000 1,917,302 18,308,327
----------- ----------- -----------
Expenses:
Research and development 4,285,054 5,480,616 60,124,604
Charge for purchase of in-process research
and development (notes 9 and 10) -- -- 9,465,610
General and administrative 1,084,298 1,112,492 20,556,437
Restructuring & Impairment charges (note 10) -- 421,165 1,064,915
----------- ----------- -----------
Total expenses 5,369,352 7,014,273 91,211,566
----------- ----------- -----------
Operating loss 4,569,352 5,096,971 72,903,239
----------- ----------- -----------
Other income (expense):
Interest income 157,388 245,888 4,274,546
Interest expense -- -- (91,647)
Other 9,618 -- 9,618
----------- ----------- -----------
Total other income (expense) 167,006 245,888 4,192,517
Net loss $ 4,402,346 4,851,083 68,710,722
Preferred dividend requirement 396,952 -- 396,952
Net loss applicable to common shares $ 4,799,298 4,851,083 69,107,674
Net loss per share $ 0.19 0.24 6.31
=========== =========== ===========
Weighted average common shares used to compute
net loss per share 25,516,729 20,617,041 10,954,303
=========== =========== ===========
See accompanying notes to consolidated financial statements
FORM 10-Q Page 2
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996,
AND THE PERIOD FROM AUGUST 2, 1989 (DATE OF INCORPORATION) TO MARCH 31, 1997
AUGUST 2, 1989
(DATE OF
INCORPORATION)
THREE MONTHS ENDED TO
MARCH 31,, MARCH 31,
1997 1996 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,402,346) (4,851,083) (68,710,722)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of deferred offering costs related
to delayed offering -- -- 349,078
Depreciation and amortization 186,365 185,035 4,798,532
Interest expense converted on notes payable -- -- 87,755
Non cash acquisition costs expensed (notes 9 and 10) -- -- 9,465,610
Expenses paid with stock -- -- 24,500
Compensation expense related to stock options (note 3) 153,265 21,886 440,423
Loss on disposition of fixed assets -- -- 7,056
Impairment of intangible assets -- -- 643,750
Change in operating assets and liabilities, net of
effect of acquisition:
(Increase) decrease in prepaids 76,034 (47,906) (293,060)
(Increase) decrease in receivables -- 21,099 (90,286)
(Increase) decrease in other current assets (207,940) 95,896 (918,807)
(Increase) in other assets -- -- (33,594)
(Increase) in inventories (167,560) -- (106,315)
Increase (decrease) in current liabilities (924,174) 169,343 2,937,425
(Decrease) in deferred revenue (187,500) (400,110) (1,234,622)
----------- ----------- -----------
Net cash used in operating activities (5,473,856) (4,805,840) (52,633,277)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (214,921) (35,677) (7,930,841)
Proceeds from disposition of fixed assets -- -- 27,400
Purchase of short term investments (5,483,103) (13,568,320) (88,580,714)
Maturity of short term investments 6,094,650 8,195,307 77,929,969
Acquisition of subsidiary, net of cash acquired -- -- (167,331)
----------- ----------- -----------
Net cash provided by (used in) investing activities 396,626 (5,408,690) (18,721,517)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders and
related trusts -- -- 1,852,500
Proceeds from sale of common stock and options and
warrant exercises, net 586,092 13,011,696 67,491,983
Proceeds from sale of preferred stock, net 5,955,575 -- 5,955,575
Repurchase of common stock -- -- (3,750)
Cost of delayed offering -- -- (349,078)
----------- ----------- -----------
Net cash provided by financing activities 6,541,667 13,011,696 74,947,230
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,464,437 2,797,166 3,592,436
Cash and cash equivalents at beginning of period 2,127,999 5,724,264 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,592,436 8,521,430 3,592,436
=========== =========== ===========
Supplemental schedule of noncash financing activities
(note 9) $ -- -- 11,405,865
=========== =========== ===========
See accompanying notes to consolidated financial statements
FORM 10-Q Page 3
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(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.
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 small amounts of monoclonal antibody compounds and
services produced and sold by ImmunoPharmaceutics, Inc. ("IPI")
(now discontinued), 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 principal 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 March 31, 1997, approximately $3,273,000 was
invested 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 March 31,
1997, the Company's short term investments consisted of
approximately $998,000 in U.S. Treasury Bills and $9,653,000 in
Corporate Commercial Paper. Cash equivalents and short term
investments are stated at cost, which approximates market value.
Interest income is accrued as earned.
(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.
FORM 10-Q Page 4
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(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 March 31, 1997 and 1996 and the period from
August 2, 1989 (date of incorporation) through March 31, 1997,
salaries and benefits totaled approximately $1,587,000, $1,928,000
and $24,873,000, respectively, of which approximately $1,137,000,
$1,463,000 and $18,083,000, respectively, was charged to research
and development. Payments related to the acquisition of
in-process research and development are expensed.
(g) Loss Per Common Share
Loss per common share is based upon the loss applicable to common
shares after preferred dividend requirements and upon the weighted
average of common shares outstanding during the period. Preferred
dividend requirements included $13,973 of accrued dividends and,
pursuant to an SEC Staff Position, deemed dividends attributable
to the discount factor at issuance of the Preferred Stock of
$382,979. For the three months ended March 31, 1997 and 1996 and
the period from August 2, 1989 (date of incorporation) through
March 31, 1997, the weighted average common shares used to compute
net loss per common share totaled 25,516,729, 20,617,041 and
10,954,303, respectively. The conversion of securities
convertible into common stock and the exercise of stock options
and warrants were not assumed in the calculation of loss per
common share because the effect would have been antidilutive.
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 March 31, 1997 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.
(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 consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from these estimates.
FORM 10-Q Page 5
8
(l) Interim Financial Information
The Consolidated Balance Sheet as of March 31, 1997, and the
related Consolidated Statements of Operations for the three month
periods ended March 31, 1997 and 1996, and for the period from
August 2, 1989 (date of incorporation) through March 31, 1997 and
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1997 and 1996, and from August 2, 1989 (date of
Incorporation) through March 31, 1997, 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, except as
stated in note 2 below. 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.
(2) CAPITAL STOCK
On March 14, 1997, the Company completed a $6.0 million private placement
of 5% Cumulative Convertible Preferred Stock which provided net proceeds
to the Company of approximately $5.8 million. The Preferred Stock is
convertible into Common Stock at discounts ranging from 6% to 17% from
the average of the daily low trading price of the Common Stock for the
ten consecutive trading days immediately preceding the conversion date.
A total of 6,000 shares of Preferred Stock were sold at a price of $1,000
per share to two institutional investors. The Company agreed that it
will cause to be filed, pursuant to Rule 415 of the Securities Act, an
S-3 Registration Statement as to the Common Stock into which the
Preferred Stock is convertible and to gain effectiveness by June 12,
1997. The Preferred Stock holds preferential treatment compared to all
other classes of stock regarding dividend payments and liquidation.
Dividends have been accrued at the rate of five percent (5%) per annum on
the amount of Preferred Stock outstanding during the quarter and are
payable quarterly commencing June 30, 1997 when and as declared by the
Board of Directors. In accordance with the Certificate of Designation of
the Preferred Stock, dividends not declared and paid are considered
additions to the Preferred Stock amount at the time of conversion and can
be paid in Common Stock of the Company at time of conversion. Dividends
and the discount related to the conversion of the Preferred Stock has
been shown as a reduction of net loss applicable to common shareholders.
The liquidation preference (which included accrued dividends) amount of
Preferred Stock at March 31, 1997 is $6,013,973. As of March 31, 1997,
none of the Preferred Stock has been converted and no dividends have
been declared or paid.
(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 1,558,173 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.
FORM 10-Q Page 6
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The Amended and Restated 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 2,000,000 shares
of common stock are reserved for issuance out of authorized but unissued
shares of the Company. The Board of Directors amended the 1995 Plan
effective March 4, 1997 to allow 2,000,000 shares to be reserved for
issuance which was approved by stockholders at the annual meeting on May
6, 1997.
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 300,000 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.
The Board of Directors amended the 1995 Director Plan effective March 4,
1997 to allow 300,000 shares to be reserved for issuance and also to
revise the formula for issuing options, both of which were approved by of
stockholders at the annual meeting on May 6, 1997.
A summary of stock options as of March 31, 1997, follows:
Exercise Price Available
Stock Option Plans Per Share Authorized Outstanding Exercised Exercisable for Grant
------------------ -------------- ---------- ----------- --------- ----------- ---------
1990 Plan $3.50 $3.56 285,715 173,369 55,125 166,203 57,221
-
1992 Plan $1.41 - $5.36 1,700,000 1,300,343 141,827 933,563 257,830
Director Plan $2.40 - $4.54 71,429 42,576 --- 33,148 28,853
1995 Plan $1.31 - $5.88 2,000,000 1,185,400 --- 188,176 814,600
1995 Director Plan $1.38 - $5.19 300,000 82,806 --- 49,422 217,194
--------- --------- ------- --------- ---------
TOTALS 4,357,144 2,784,494 196,952 1,370,512 1,375,698
========= ========= ======= ========= =========
As of March 4, 1997, the Board of Directors approved increases in the
number of shares authorized of 1,000,000 shares in the 1995 Plan and
100,000 shares in the 1995 Director Plan respectively, which was approved
by stockholders at the annual meeting on May 6, 1997, which increases are
included above.
The Company applies APB Opinion 25 and related interpretations on
accounting for its plans. 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 $92,765 was
charged to expense in 1995. The unamortized deferred compensation
expense of $46,177 at December 31, 1995 was expensed during 1996.
During December, 1996, the Compensation and Personnel Committee of the
Board of Directors authorized the extension of options originally granted
for a five year period to ten years upon election by individual option
holders. In the first quarter of 1997, elections to extend 262,153
options, originally expiring during 1997, from five to ten years were
made. Accordingly, the Company recorded a charge to "deficit accumulated
during the development stage" of $153,265 as of March 31, 1997, for the
difference between the original option exercise price and fair market
value on the effective date of election. In addition, management
anticipates offering additional option extensions on the basis noted
above, and when such elections are made, may result in additional
compensation expense being recorded.
FORM 10-Q Page 7
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(4) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
As of March 31, 1997, the net deferred tax asset totaled approximately
$23,541,000 and was fully reserved. The Company did not incur any tax
expense in any year due to operating losses.
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following :
March 31,1997 December 31,1996
------------- ----------------
Laboratory and office equipment $ 4,294,649 $ 4,079,728
Leasehold improvements 3,701,771 3,701,772
----------- -----------
7,996,420 7,781,500
Less accumulated depreciation and amortization (4,509,852) (4,323,488)
----------- -----------
$ 3,486,568 $ 3,458,012
=========== ===========
(6) COMMON STOCK RESERVED
The Company has reserved common stock for issuance as of March 31, 1997
as follows:
Stock option plans 4,160,192
Agreement with Genentech, Inc. 285,715
Warrants issuable under the Genentech Agreement 142,858
Warrants outstanding 5,490,541
Underwriters purchase options and related warrants 710,000
IPI acquisition (contingent shares) 1,000,000 (See note 10)
Conversion of Preferred Stock 3,000,000 (See note 2)
----------
Total shares reserved 14,789,306
==========
LG Chem has the option to purchase up to $5 million of common stock on
one of three exercise dates ending on December 31, 1997. The minimum
purchase amount is $1,000,000 and LG Chem and TBC must agree on the
purchase price or the option cannot be exercised on the given exercise
date. As of March 4, 1997, the Board of Directors approved an additional
1.1 million in Common Stock issuable pursuant to the stock option plans,
which was approved by stockholders at the annual meeting on May 6, 1997,
which is included in the reserved shares shown.
(7) CLINICAL RESEARCH AGREEMENTS
On June 1, 1995, the Company entered into an agreement with Coromed,
Inc., to coordinate the clinical evaluation of NOVASTAN(R) as an adjunct
to t-PA in acute myocardial infarction. Coromed is responsible for
managing all aspects of the clinical trial and making all financial
renumberation to testing sites. The term of the agreement is 16 months,
subject to extension upon the mutual written agreement of both parties.
The term of the contract expired on October 1, 1996, but was extended on
April 11, 1997 for one year through September 30, 1997 or until all
services detailed in the original contract are completed. The parties
have agreed to a total budget of $961,659. Of this amount, $44,000 was
paid upon execution of a letter of intent and $138,566 was paid upon
execution of the agreement. Subsequent payments will be made monthly on
a
FORM 10-Q Page 8
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per patient basis, to a maximum total of approximately $734,000. Three
additional payments of $15,000 each will be made upon completion of
specified tasks by Coromed. If the clinical trial is completed in less
than 13 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 $45,000.
(8) 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 proliferative disease derived from the Company's
research 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 becoming the Company's largest shareholder at that
time and paid the Company a non- refundable licensing fee of $3 million.
In addition, Synthelabo committed to pay $3 million annually in research
payments (payable in quarterly installments of $750,000). Beginning
October 31, 1996, the parties to the agreement have agreed to revise the
payment for the third year to be $750,000 which has already been paid.
No such payments will be made in 1997. Synthelabo has agreed, upon the
achievement of certain milestones, to make 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, 1997
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 will terminate and
TBC will pay Synthelabo a royalty on net sales of any products sold in a
certain territory (Europe, Middle East, Africa and countries of the
former Soviet Union) 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. For the years ended December 31, 1995 and December 31, 1996,
TBC received $3 million related to the Synthelabo agreement. Synthelabo
will pay royalties to TBC based on the net sales in those 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. The first quarterly
research payment of $750,000 was received on October 31, 1994, of which
$500,000 was recognized in 1994. During the year ended December 31,
1996, research payments of $3,000,000 were received of which $2,625,000
was recognized as income during the year. Synthelabo amended the contract
effective on November 1, 1996 noting that the November 1996 research
payment of $750,000 would be for research conducted during the period of
November 1, 1996 through October 31, 1997. As of March 31, 1997,
$187,500 has been recognized as revenue and $437,500 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.
During 1995, the Company and Synthelabo mutually agreed to exchange
certain clinical data. During 1996, the Company signed two agreements
with Synthelabo with respect to the supply of information related to
certain clinical studies. Over the term of the agreements as certain
milestones are met, Synthelabo has committed to pay TBC up to $2,920,000.
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. As of March 31, 1997, TBC has
recognized approximately $2.4 million of revenue related to these
agreements. Synthelabo is the licensee for NOVASTAN(R) in certain
territories other than those which were sublicensed to TBC.
On October 10, 1996, the Company signed a strategic alliance agreement
with LG Chem, a Korean corporation, to develop and market compounds
derived from the Company's Endothelin Receptor and Selectin Antagonist for
certain disease indications. Upon consummation of the transaction, LG
Chem purchased 1,250,000 shares of common stock for $4.00 per share for a
total of $5 million. In addition, LG Chem has committed to pay $10.7
million in research payments. Of this amount, $100,000 was paid on
December 31, 1996, $1.0 million will be paid on each of June 30 and
December 31 of 1997, 1998, 1999 and 2000, and $1.3 million on June 30
and December 31, 2001. LG Chem has the right to terminate future
FORM 10-Q Page 9
12
research payments if TBC fails to meet certain Agreement milestones,
which milestones will be established by the parties in accordance with
the agreement. LG Chem will pay royalties to TBC, based on net sales,
in those geographic areas covered by the agreement, which include Korea,
China, India and certain other Asian countries, excluding Japan. The
Company will pay its agents in the contract negotiations, a commission
on all future research payments as well as a royalty on net sales. As
of March 31, 1997, the Company has recognized approximately $500,000 in
revenues and approximately $40,000 in commissions related to these
payments.
(9) 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
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(R) with the FDA no later than June 30, 1997, subject to certain
additional goals being met by TBC. As of March 31, 1997, 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(R) clinical trials; (ii) on or before
March 31, 1997, TBC shall complete, report and analyze certain other
NOVASTAN(R) 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. As of December 31, 1996, TBC had not met certain of these
goals and to date, Mitsubishi has not asserted its rights to terminate
the license arising out of this default. 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
FORM 10-Q Page 10
13
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.
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.
(10) CONSOLIDATION OF IMMUNOPHARMACEUTICS, INC.
The Company decided to consolidate the IPI operation into TBC's in the
first half of 1996. 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 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.
(11) COMMITMENTS AND CONTINGENCIES
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
FORM 10-Q Page 11
14
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. The
Company also filed a Motion seeking leave of court to prosecute an
immediate appeal of the Court's denial of the Company's Motion to
Dismiss. The Court heard argument on that Motion on October 10,
1996. The motion was denied on January 16, 1997. Given the early
stage of that case, which is the only remaining shareholder
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.
FORM 10-Q Page 12
15
ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
OVERVIEW
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that
involve risks and uncertainties.
Since its inception 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 $68,710,722 from inception to
March 31, 1997. The Company has primarily financed its operations to
date through private placements of common stock and debt, which have
raised an aggregate of $21.3 million in net proceeds, an initial public
offering ("IPO") of a Unit security which raised an aggregate of $24.2
million in net proceeds including the over-allotment sold in January
1994, a private placement of common stock on February 13, 1996, which
raised $13.0 million in net proceeds and a private placement of preferred
stock on March 14, 1997, which raised $6.0 million in net proceeds. On
July 25, 1994, the Company acquired all of the outstanding stock of 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. The Company signed a collaborative agreement with
Synthelabo, a French pharmaceutical group on October 11, 1994. Upon
consummation of the transaction, Synthelabo purchased 1,428,571 shares of
common stock for a total of $5 million and paid a licensing fee of $3
million. In addition, Synthelabo has paid $3 million annually in
research payments (payable in quarterly installments) for two years and
paid $750,000 for the third year. During 1996, TBC signed an agreement
with Synthelabo to provide copies of certain clinical data. Over the life
of the agreement TBC may receive as much as $2.9 million, of which $2.3
million has been received as of March 31, 1997. 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. During October 1996, the Company
executed a research and common stock purchase agreement with LG Chem. LG
Chem purchased $5 million in Common Stock of the Company and committed to
pay up to $10.7 million over a five year period to develop two compounds
in clinical development. In March, 1997, the Company sold 6,000 shares
of 5% Cumulative Convertible Preferred Stock to two institutional
investors for $6 million.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
Revenues decreased from $1,917,302 in the three month period ended March
31, 1996 to $800,000 in the same period of 1997, a decrease of 58%.
Revenues were composed of earned revenues under research agreements,
sales of products and services, and grant income. Revenue from research
agreements decreased primarily due to the amendment to the Synthelabo
agreement effective November 1, 1996, which
FORM 10-Q Page 13
16
substantially reduced the research payments associated with this
agreement. In addition, data payments from Synthelabo were lower in
1997.
Total operating expenses decreased 23% from $7,014,273 in the three month
period ended March 31, 1996 to $5,369,352 in the same period of 1997 due
primarily to the decrease in research and development expenses. Research
and development expenses decreased 22% from $5,480,616 in the three month
period ended March 31, 1996 to $4,285,054 in the same period of 1997.
This decrease was primarily attributable to continued decreases in
research and development activity related to the completion of enrollment
in certain clinical trials for the compound NOVASTAN(R) (argatroban).
General and administrative expenses decreased 3% from $1,112,492 in the
three month period ended March 31, 1996 to $1,084,298 in the same period
of 1997 due primarily to the consolidation of IPI's operations into TBC.
Also, in the first quarter of 1996, restructuring and impairment charges
related to the consolidation of IPI were incurred and were completed
during 1996. The Company had 74 employees at March 31, 1997 and 78
employees at March 31, 1996.
Other income and expense is composed of investment income on invested
funds, interest expense and foreign currency exchange gains. The
decrease is due to a 36% decrease in investment income from $245,888 in
the three month period ended March 31, 1996 to $157,388 in the same
period of 1997, attributed primarily to lower investment balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its research and development activities to date
principally through (i) private placements of Common Stock and Preferred
Stock and an initial public offering of a unit security, (ii) issuances
of common stock in conjunction with assumption of liabilities and assets
to acquire IPI and the NOVASTAN(R) license, (iii) revenues from research
and collaborative agreements, and (iv) investment income, net of interest
expense.
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 1997
and subsequent years. The Company began to incur costs to develop
NOVASTAN(R) during the third quarter of 1993. These costs will continue
during 1997 due to the continuation of clinical trials and will continue
to be significant through the FDA approval process and additional
clinical trial work for other clinical indications. These costs 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 March 31, 1997 and December 31, 1996, the Company had cash, cash
equivalents and short-term investments of approximately $14,243,181 and
$13,390,291, respectively. The Company anticipates that its existing
capital resources should be sufficient to fund its cash requirements into
the fourth quarter of 1997. This date is contingent upon various
factors, including rate of patient enrollment and spending rate for the
clinical trials of NOVASTAN(R), Selectin and Endothelin compounds, and
expenditures on research and development of other compounds. However,
the Company's existing capital resources will not be sufficient to fund
the Company's operations through commercialization of its first product.
Moreover, the Genentech and Synthelabo Agreements require the Company to
maintain a tangible net worth of at least $5.0 million during the term of
the Agreements. If the Company fails to maintain the prescribed net
worth or fails to exercise due diligence in performing its obligations
under the Genentech Agreement, Genentech may, at its option, terminate
the Genentech Agreement or cause the license to become non-exclusive.
For failure to maintain at least $5.0 million of net worth, Synthelabo
may require that the technology be transferred to, and
FORM 10-Q Page 14
17
the development program be conducted by, a joint venture owned by TBC and
Synthelabo. The outcome of certain lawsuits that have been filed against
the Company could also have an impact on liquidity. See Part II, Item 1.
Legal Proceedings.
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 financing on acceptable terms or in time to fund any
necessary or desirable expenditures. In the event such financing are not
obtained, the Company's development and research projects will be delayed
or scaled back.
PENDING LITIGATION
As of March 31, 1997, 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.
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.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Report are forward
looking statements. Such forward looking statements include, without
limitation, statements under (a) "Organization and Significant Accounting
Policies -- Organization" regarding TBC's expectations for future drug
discovery and development and related expenditures and (b) "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" - regarding TBC's estimate of sufficiency
of existing capital resources and ability to raise additional capital to
fund cash requirements for future operations. Although TBC believes that
the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations reflected in
such forward looking statements will prove to have been correct. The
ability to achieve TBC's expectations 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)
FORM 10-Q Page 15
18
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.
FORM 10-Q Page 16
19
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. The
Company also filed a Motion seeking leave of court to prosecute an
immediate appeal of the Court's denial of the Company's Motion to
Dismiss. The Court heard argument on that Motion on October 10, 1996.
The motion was denied on January 16, 1997. 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
On March 14, 1997, the Company completed a $6.0 million private placement
of 5% Cumulative Convertible Preferred Stock which provided net proceeds
to the Company of approximately $5.8 million. The Preferred Stock is
convertible into Common Stock at discounts ranging from 6% to 17% from
the average of the daily low trading price of the Common Stock for the
ten consecutive trading days immediately preceding the conversion date.
A total of 6,000 shares of Preferred Stock were sold at a price of $1,000
per share to two
FORM 10-Q Page 17
20
institutional investors. The Company agreed that it will cause to be
filed, pursuant to Rule 415 of the Securities Act, an S-3 Registration
Statement as to the Common Stock into which the Preferred Stock is
convertible and to gain effectiveness by June 12, 1997. The Preferred
Stock holds preferential treatment compared to all other classes of stock
regarding dividend payments and liquidation. Dividends have been accrued
at the rate of five percent (5%) per annum on the amount of Preferred
Stock outstanding during the quarter and are payable quarterly commencing
June 30, 1997 when and as declared by the Board of Directors. In
accordance with the Certificate of Designation of the Preferred Stock,
dividends not declared and paid are considered additions to the Preferred
Stock amount at the time of conversion and can be paid in Common Stock of
the Company at time of conversion. The liquidation preference (which
included accrued dividends) amount of Preferred Stock at March 31, 1997
is $6,013,973. As of March 31, 1997, none of the Preferred Stock has
been converted and no dividends have been declared or paid.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
----------- -----------
4 .8 (1) Certificate of Designations of 5% Cumulative
Convertible Preferred Stock for Texas Biotechnology
Corporation
10.6 (1) Preferred Stock Investment Agreement dated March
13, 1997 between Texas Biotechnology Corporation
and certain investors
10.61 (1) Registration Rights Agreement dated March 13, 1997
between Texas Biotechnology Corporation and certain
investors
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 8-K (File No. 1-12574) filed with
the Securities and Exchange Commission (the "Commission") on April 2, 1997
and incorporated herein by reference.
FORM 10-Q Page 18
21
TEXAS BIOTECHNOLOGY CORPORATION
MARCH 31, 1997
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 8th day of May, 1997.
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)
FORM 10-Q Page 19
22
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
4 .8 (1) Certificate of Designations of 5% Cumulative
Convertible Preferred Stock for Texas Biotechnology
Corporation
10.6 (1) Preferred Stock Investment Agreement dated March
13, 1997 between Texas Biotechnology Corporation
and certain investors
10.61 (1) Registration Rights Agreement dated March 13, 1997
between Texas Biotechnology Corporation and certain
investors
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 8-K (File No. 1-12574) filed with
the Securities and Exchange Commission (the "Commission") on April 2, 1997
and incorporated herein by reference.
FORM 10-Q Page 20