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 JUNE 30, 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.
[S]
Class Outstanding at June 30, 1997
----- ----------------------------
Common Stock, $0.005 par value 26,003,000
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TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the three months ended
June 30, 1997 and 1996, the six months ended June 30, 1997 and 1996,
and the period from August 2, 1989 (date of incorporation)
through June 30, 1997 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996, and the period from August 2, 1989
(date of incorporation) through June 30, 1997 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 18
ITEM 2: Changes in Securities 18
ITEM 3: Defaults Upon Senior Securities 18
ITEM 4: Submission of Matters to a Vote of Security Holders 19
ITEM 5: Other Information 20
ITEM 6: Exhibits and Reports on Form 8-K 20
SIGNATURES 21
INDEX TO EXHIBITS 22
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(a development stage enterprise)
Consolidated Balance Sheets
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,374,844 2,127,999
Short term investments 7,919,487 11,262,292
Short term note receivable 122,500 122,500
Prepaids 387,070 546,752
Inventory 167,560 --
Other current assets 1,262,679 602,975
------------ ------------
Total current assets 11,234,140 14,662,518
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 5) 3,378,806 3,458,012
Other assets 59,591 59,591
------------ ------------
Total assets $ 14,672,537 18,180,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,583,722 1,661,339
Accrued expenses 509,581 2,266,376
Deferred revenue (note 8) 250,000 625,000
------------ ------------
Total current liabilities 3,343,303 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 June 30, 1997 5,000,000
shares authorized; 4,600 shares of 5% cumulative convertible
issued and outstanding. At December 31, 1996,
5,000,000 shares authorized, none outstanding 23 --
Common stock, par value $.005 per share. At June 30, 1997,
75,000,000 shares authorized; 26,003,000 shares issued and
outstanding. At December 31, 1996, 75,000,000 shares
authorized; 25,490,269 shares issued and outstanding 130,014 127,451
Additional paid-in capital 85,683,271 77,808,331
Deficit accumulated during the development stage (74,484,074) (64,308,376)
------------ ------------
Total stockholders' equity 11,329,234 13,627,406
------------ ------------
Total liabilities and stockholders' equity $ 14,672,537 18,180,121
============ ============
See accompanying notes to consolidated financial statements
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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 SIX MONTHS ENDED TO
JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
Revenues:
Research agreements (note 8) $ 687,501 $ 1,280,000 1,485,002 3,195,110 17,918,798
Products and services 2,499 2,500 4,998 3,939 410,578
Grant revenue -- 974 -- 1,727 668,951
------------ ------------ ------------ ------------ ------------
Total revenues 690,000 1,283,474 1,490,000 3,200,776 18,998,327
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development 4,545,311 6,023,929 8,830,365 11,504,545 64,669,915
Charge for purchase of in-process research
and development (note 9) -- -- -- -- 9,465,610
General and administrative 1,987,010 1,012,145 3,071,308 2,124,637 22,543,447
Restructuring & Impairment charges (note 10) -- -- -- 421,165 1,064,915
------------ ------------ ------------ ------------ ------------
Total expenses 6,532,321 7,036,074 11,901,673 14,050,347 97,743,887
------------ ------------ ------------ ------------ ------------
Operating loss 5,842,321 5,752,600 10,411,673 10,849,571 78,745,560
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income 166,088 251,390 323,476 497,278 4,440,634
Interest expense -- -- -- -- (91,647)
Other (15,458) -- (5,840) -- (5,840)
------------ ------------ ------------ ------------ ------------
Total other income (expense) 150,630 251,390 317,636 497,278 4,343,147
Net loss $ 5,691,691 $ 5,501,210 10,094,037 10,352,293 74,402,413
Preferred dividend requirement 450,442 -- 847,394 -- 847,394
Net loss applicable to common shares $ 6,142,133 $ 5,501,210 10,941,431 10,352,293 75,249,807
Net loss per share $ 0.24 $ 0.23 0.43 0.46 6.59
============ ============ ============ ============ ============
Weighted average common shares used to compute
net loss per share 25,775,955 24,064,064 25,647,058 22,479,819 11,421,006
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Cash Flows
For the periods ended June 30, 1997 and
1996, and the period from August 2, 1989 (date of
incorporation) to June 30, 1997
(Unaudited)
August 2, 1989
(date of
Six months ended incorporation)
June 30, to
June 30,
1997 1996 1997
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(10,094,037) (10,352,293) (74,402,413)
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 373,107 369,612 4,985,274
Interest expense converted on notes payable -- -- 87,755
Non cash acquisition costs expensed (notes 9 and 10) -- -- 9,465,610
Expenses paid with stock (note 3) 5,472 -- 29,972
Compensation expense related to stock options (note 3) 1,303,094 42,927 1,590,252
Loss on disposition of fixed assets -- -- 7,056
Impairment of intangible assets -- -- 643,750
Preferred dividends payable not included in net loss (68,497) (68,497)
Change in operating assets and liabilities, net of effect of acquisition:
(Increase) decrease in prepaids 159,682 58,144 (209,412)
(Increase) decrease in receivables -- 7,291 (90,286)
(Increase) in other current assets (659,704) (243,175) (1,370,571)
(Increase) in other assets -- -- (33,594)
(Increase) in inventories (167,560) -- (106,315)
Increase (decrease) in current liabilities (834,412) 180,799 3,027,187
(Decrease) in deferred revenue (375,000) (400,110) (1,422,122)
------------ ------------ ------------
Net cash used in operating activities (10,357,855) (10,336,805) (57,517,276)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (293,901) (66,895) (8,009,821)
Proceeds from disposition of fixed assets -- -- 27,400
Purchase of short term investments (7,919,487) (17,548,480) (91,017,098)
Maturity of short term investments 11,262,292 10,311,249 83,097,611
Acquisition of subsidiary, net of cash acquired -- -- (167,331)
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,048,904 (7,304,126) (16,069,239)
------------ ------------ ------------
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 630,527 13,548,074 67,536,418
Proceeds from sale of preferred stock, net 5,925,269 -- 5,925,269
Repurchase of common stock -- -- (3,750)
Cost of delayed offering -- -- (349,078)
------------ ------------ ------------
Net cash provided by financing activities 6,555,796 13,548,074 74,961,359
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (753,155) (4,092,857) 1,374,844
Cash and cash equivalents at beginning of period 2,127,999 5,724,264 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,374,844 1,631,407 1,374,844
============ ============ ============
Supplemental schedule of noncash financing activities
(notes 2, 9) $ 13,164 -- 11,419,029
============ ============ ============
See accompanying notes to consolidated financial statements
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
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") (now discontinued), a San
Diego, California based company, in exchange for Common Stock of the
Company. TBC consolidated the IPI operation into TBC in the first
half of 1996. (See note 10)
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
June 30, 1997, approximately $280,000 was invested in demand and
money market accounts and approximately $1,095,000 was invested in
Corporate Commercial Paper. Short term investments are those
investments which have an original maturity of less than one year and
greater than three months. At June 30, 1997, the Company's short term
investments consisted of approximately $967,000 in Government Agency
Discount Notes and $6,953,000 in Corporate Commercial Paper. Cash
equivalents and short term investments are stated at cost, which
approximates market value. Interest income is accrued as earned.
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(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, certain rent
and related building services, research supplies and services,
clinical trial expenses and other associated costs. With respect to
research and development, salaries and benefits for the three months
ended June 30, 1997 and 1996, totaled approximately $2,613,000 and
$1,554,000, respectively, of which approximately $1,462,000 and
$1,246,000, respectively, was charged to research and development.
For the six months ended June 30, 1997 and 1996, and the period from
August 2, 1989 (date of incorporation) through June 30, 1997,
salaries and benefits totaled approximately $4,200,000, $3,482,000
and $27,486,000, respectively, of which approximately $2,600,000,
$2,709,000 and $19,545,000, 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 for the three and six months ended June 30,
1997 included $67,688 and $81,661, respectively, of accrued dividends
and, pursuant to a Securities and Exchange Commission Staff
Position, deemed dividends attributable to the conversion discount
factor at issuance of the Preferred Stock of $382,754 and $765,733,
respectively. For the three months ended June 30, 1997 and 1996, the
weighted average common shares used to compute net loss per common
share totaled 25,775,955 and 24,064,064, respectively. For the six
months ended June 30, 1997 and 1996, and the period from August 2,
1989 (date of incorporation) through June 30, 1997, the weighted
average common shares used to compute net loss per common share
totaled 25,647,058, 22,479,819 and 11,421,006, 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 June 30, 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.
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(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.
(l) Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("Statement 128"), which the Company is required to adopt for
both interim and annual periods ending after December 15, 1997.
Statement 128 simplifies the EPS calculation by replacing primary EPS
with basic EPS. Basic EPS is computed by dividing reported earnings
available to common stockholders by the weighted average shares
outstanding. Since the Company has incurred losses in both the three
month and six month periods ended June 30, 1997 and 1996, there is no
effect on net loss per share as reported.
(m) Interim Financial Information
The Consolidated Balance Sheet as of June 30, 1997, and the related
Consolidated Statements of Operations for the three and six month
periods ended June 30, 1997 and 1996, and for the period from August
2, 1989 (date of incorporation) through June 30, 1997 and
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1997 and 1996, and for the period from August 2, 1989 (date
of Incorporation) through June 30, 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 ("the 5% Preferred") which
provided net proceeds to the Company of approximately $5.8 million. The 5%
Preferred 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 5% Preferred were sold at a price of
$1,000 per share to two institutional investors. In accordance with the
terms of the private placement, the Company filed, pursuant to Rule 415 of
the Securities Act, a Shelf Registration Statement as to the resale of the
shares of the underlying Common Stock which became effective on May 23,
1997. The 5% Preferred holds preferential rights 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 5% Preferred 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 5% Cumulative
Convertible Preferred, dividends not declared and paid are considered
additions to the 5% Preferred 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 5% Preferred has been shown
as an increase of net loss applicable to
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common shareholders. The liquidation preference (which included accrued
dividends) amount of 5% Preferred at June 30, 1997 is $4,668,496. As of
June 30, 1997, 1,400 shares of the 5% Preferred and accrued dividends of
$13,164 on such shares have been converted into 355,461 shares of Common
Stock.
(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 229,756 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 1,549,339 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 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
amendment 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 298,848 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 amendments were approved by stockholders at the
annual meeting on May 6, 1997.
A summary of stock options as of June 30, 1997, follows:
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
------------------ -------------- ---------- ----------- ------- ----------- ---------
1990 Plan $1.38 - $5.19 285,715 182,622 55,959 172,841 47,134
1992 Plan $1.41 - $5.36 1,700,000 1,333,509 150,661 964,727 215,830
Director Plan $2.40 - $4.54 71,429 42,576 --- 38,862 28,853
1995 Plan $1.31 - $5.88 2,000,000 1,202,900 --- 225,676 797,100
1995 Director Plan $1.38 - $5.19 300,000 135,306 1,152 71,522 163,542
--------- --------- ------- --------- ---------
TOTALS 4,357,144 2,896,913 207,772 1,473,628 1,252,459
========= ========= ======= ========= =========
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As of March 4, 1997, the Board of Directors approved increases on 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 were approved
by stockholders at the annual meeting on May 6, 1997, and are include
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. During 1997, option holders elected to extend 1,022,833 options,
originally expiring during 1997, 1998 1999 and 2000, for an additional
five years. Accordingly, the Company recorded a non-cash charge of
$1,303,094 for the six months ended June 30, 1997 of which $1,149,829 was
recorded in the second quarter. Of the total for the six months,
approximately $350,000 was charged to research and development and the
remainder to general and administrative for the difference between the
original option exercise price and fair market value as of the effective
date of election.
In April 1997, 1,152 shares of stock were issued pursuant to the 1995
Director Plan to two directors for board fees in lieu of cash and are
included in the amount exercised for that plan.
(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 June 30, 1997, the net deferred tax asset totaled approximately
$25,568,000 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 :
June 30,1997 December 31,1996
------------ ----------------
Laboratory and office equipment $ 4,373,629 $ 4,079,728
Leasehold improvements 3,701,772 3,701,772
------------ ------------
8,075,401 7,781,500
Less accumulated depreciation and amortization (4,696,595) (4,323,488)
------------ ------------
$ 3,378,806 $ 3,458,012
============ ============
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(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of June 30, 1997 as
follows:
Stock option plans 4,149,372
Agreement with Genentech, Inc. 285,715
Warrants issuable under the Genentech Agreement 142,858
Warrants outstanding 5,347,269
Underwriters purchase options and related warrants 710,000
IPI acquisition (contingent shares) 1,000,000
Conversion of Preferred Stock 2,644,539 (See note 2)
----------
Total shares reserved 14,279,753
==========
In addition to the above, LG Chemical, Ltd. ("LG Chem") has the option to
purchase $5 million of Common Stock on September 30, 1997 or December 31,
1997. LG Chem and TBC must agree on the purchase price or the option cannot
be exercised.
(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 remuneration 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 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.
(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 agreed to revise the terms of the
payment for the third year to be $750,000, which amount 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", of TBC 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. In exchange for the above
consideration, Synthelabo has received 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.
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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. As of June 30, 1997, $375,000 has been recognized as revenue and
$250,000 is included in current deferred revenue. Synthelabo will pay
royalties to TBC, based on net sales, in those geographic areas covered by
the agreement.
During 1995 and 1997, the Company and Synthelabo mutually agreed to
exchange certain clinical data with regard to NOVASTAN(R). Additionally,
during 1996, the Company signed two agreements with Synthelabo with
respect to the supply of information related to certain clinical studies
of NOVASTAN(R). 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 June 30, 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 to develop and market compounds derived from the Company's
endothelin receptor and selectin antagonist programs 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. LG Chem has committed to pay $10.7 million in research payments.
Of this amount, $1.1 million has been paid and $1.0 million will be paid
on December 31, 1997 and on each of June 30 and December 31 of 1998, 1999
and 2000, and $1.3 million will be paid on June 30 and December 31, 2001.
LG Chem has the right to terminate future 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 with LG Chem, a commission on all consideration
received including a royalty on net sales.
(9) LICENSE AGREEMENT
TBC has entered into an agreement with Mitsubishi Chemical Corporation
("Mitsubishi") to license Mitsubishi's rights and technology relating to
NOVASTAN(R) and to license Mitsubishi's own proprietary technology
developed with respect to NOVASTAN(R) (the "Mitsubishi Agreement"). Under
the Mitsubishi Agreement, the Company has an exclusive license to use and
sell NOVASTAN(R) in the U.S. and Canada for all specified indications. The
Company is required to pay Mitsubishi specified royalties on net sales of
NOVASTAN(R) by the Company and its sublicensees after its commercial
introduction in the U.S. and Canada. Either party may terminate the
Mitsubishi 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 levy.
Unless terminated sooner pursuant to the above described termination
provisions, the Mitsubishi Agreement expires on the later of termination
of patent rights in a particular country or 20 years after first
commercial sale of products. Under the Mitsubishi Agreement, TBC has
access to an improved formulation patent granted in 1993 which expires in
2010 and a use patent which expires in 2009. In conjunction with the
Mitsubishi Agreement, a consulting firm involved in negotiations related
to the agreement will receive a percentage of net sales received as a
result of the agreement.
Mitsubishi further agreed to supply the Company with its requirements of
bulk NOVASTAN(R) throughout the term of the Mitsubishi Agreement for TBC's
clinical testing and commercial sales of NOVASTAN(R) in the U.S. and
Canada. In the event Mitsubishi should discontinue the manufacture of
NOVASTAN(R), Mitsubishi 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
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 (see note 12) are unavailable or uneconomic, the
Company's results of operations would be materially adversely affected.
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In exchange for the license to Genentech's (the "Former Licensor")
NOVASTAN(R) technology, TBC issued the Former Licensor 285,714 shares of
Common Stock and agreed to issue (i) an additional 214,286 shares of
Common Stock within ten days after acceptance of 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 the Former Licensor within ten
days after the FDA's first approval of an NDA for NOVASTAN(R). The Company
has also agreed to grant the Former Licensor 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 acceptance 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 the Former Licensor due to circumstances beyond the Company's
control, the Company has agreed to pay the Former Licensor, 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
the Former Licensor 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 the
Former Licensor demand and piggyback registration rights with regard to
shares of Common Stock issued to the Former Licensor.
During the third quarter of 1997, the Company sublicensed certain rights
to NOVASTAN(R) to SmithKline Beecham, plc ("SmithKline"). (see note 12) In
conjunction with this agreement, the Company agreed to make certain
payments to Mitsubishi, to pay an additional royalty to Mitsubishi
beginning January 1, 2001 and to provide access to certain
NOVASTAN(R) clinical data to Mitsubishi in certain circumstances.
(10) CONSOLIDATION OF IMMUNOPHARMACEUTICS, INC
The Company consolidated the IPI operation into TBC in the first half of
1996. The Company believes the $643,750 of goodwill 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 were expensed during 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, 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. 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
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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 D. Blech & Co. 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's 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. There can be no assurance, however that the final
disposition of this case will be favorable to the Company.
(12) SUBSEQUENT EVENTS
SmithKline Beecham plc
In connection with TBC's development and commercialization of
NOVASTAN(R), in August 1997, TBC entered into a Product Development,
License and CoPromotion Agreement with SmithKline Beecham plc (the
"SmithKline Agreement") whereby SmithKline was granted exclusive
rights to collaborate with TBC in the development and
commercialization of NOVASTAN(R) in the U.S. and Canada for all
specified indications. The SmithKline Agreement provides that
SmithKline will pay $8.5 million in upfront license fees and up to $20
million in additional milestone payments based on the clinical
development and FDA approval of NOVASTAN(R) for the heparin-induced
thrombocytopenia ("HIT") and HIT with thrombosis syndrome ("HITTS")
and acute myocardial infarction ("AMI") indications. SmithKline has
also agreed to provide 60% of the funding for clinical trials for the
HIT/HITTS and AMI indications. The parties have also formed a joint
development committee to analyze the development of additional
NOVASTAN(R) indications to be funded 60% by SmithKline except for
certain Phase IV trials which shall be funded entirely by SmithKline.
Pursuant to the Mitsubishi Agreement, TBC and SmithKline must make a
determination as to their desire to pursue the stoke indication by
December 1998. SmithKline has the exclusive right to commercialize all
products arising out of the collaboration, subject to the obligation
to pay royalties on net sales to TBC and to the rights of TBC to
copromote these products through its own sales force in certain
circumstances. TBC will retain the rights to any indications which
SmithKline determines it does not wish to pursue, subject to the
requirement that TBC must use its own sales force to commercialize any
such indications. Any indications which TBC elects not to pursue will
be returned to Mitsubishi. In conjunction with the SmithKline
Agreement, a consulting firm involved in negotiations related to the
agreement will receive a percentage of all consideration received by
TBC as a result of the agreement.
At present, Mitsubishi is the only manufacturer of NOVASTAN(R), and
has entered into the Mitsubishi Supply Agreement with SmithKline to
supply NOVASTAN(R) in bulk in order to meet SmithKline's
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and TBC's needs under the SmithKline Agreement. Should Mitsubishi
fail during any consecutive nine-month period to supply SmithKline at
least 80% of its requirements, and such requirements cannot be
satisfied by existing inventories, the Mitsubishi Supply Agreement
provides for the nonexclusive transfer of the production technology
to SmithKline. If SmithKline cannot commence manufacturing of
NOVASTAN(R) or alternate sources of supply are unavailable or
uneconomic, the Company's results of operations would be materially
and adversely affected.
The SmithKline Agreement generally terminates on a country by country
basis upon the earlier of the termination of TBC's rights under the
Mitsubishi Agreement, the expiration of applicable patent rights or
in the case of royalty payments the commencement of substantial
third-party competition. SmithKline also has the right to terminate
the agreement on a country by country basis by giving TBC at least
three months written notice at anytime before SmithKline first
markets products in that country based on a reasonable determination
by SmithKline that the commercial profile of the product in question
would not justify continued development in that country. SmithKline
has similar rights to terminate the SmithKline Agreement on a country
by country basis after marketing has commenced. In addition, either
party may terminate the SmithKline Agreement on 60 days notice if the
other party defaults in its obligations under the agreement, declares
bankruptcy or is insolvent.
In connection with the execution of the SmithKline Agreement, an
affiliate of SmithKline purchased 176,992 shares of TBC's Common
Stock for $1.0 million and agreed to purchase, at TBC's option, an
additional $2.0 million in Common Stock anytime before August 5,
1998, based on the average trading price for the Common Stock for the
period beginning 10 days before and ending on the 9 day after TBC's
exercise of the option. TBC granted limited piggyback registration
rights regarding these shares which expire when the shares may be
sold pursuant to Rule 144 (k) under the Securities Act.
Proposed Public Offering
On August 13, 1997, the Company filed a registration statement on Form
S-3 (No. 333-33473) (the "Registration Statement") with the
Securities and Exchange Commission related to the proposed firm
commitment underwritten public offering of 5,000,000 shares of Common
Stock (the "Proposed Public Offering"). The Registration Statement
has not yet become effective. The Common Stock offered by the
Registration Statement may not be sold nor may offers to buy be
accepted prior to the time that the Registration Statement becomes
effective. This Report on Form 10-Q shall not constitute an offer to
sell or the solicitation of an offer to buy any of such Common Stock.
Other
During August 1997, the Company filed a new drug application with the
United States Food and Drug Administration for it's lead product
candidate, NOVASTAN(R) (argatroban) for use as an anticoagulant in
patients with HIT. Also in August, the Company began Phase II
clinical trials for TBC 11251 (TBC's lead compound for
vasospasm/hypertension) in congestive heart failure. Additionally,
the Company expects to begin Phase II clinical trials for TBC 1269
(TBC's lead compound for vascular inflamation) in allergic asthma
during the third quarter of 1997.
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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, 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 $74.5 million from inception to June 30, 1997. The
Company has primarily financed its operations to date through certain private
placements of Common Stock and debt, which have raised an aggregate of $21.3
million in net proceeds, the Initial Public Offering 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 the 5% Preferred on
March 14, 1997, which raised approximately $6.0 million in net proceeds.
On July 25, 1994, the Company acquired all of the outstanding stock of
ImmunoPharmaceutics, Inc. ("IPI") in exchange for 1,599,958 shares of Common
Stock, 999,956 shares of escrowed Common Stock which were released upon
satisfaction of certain research milestones, and contingent stock issue rights
to acquire 1,400,000 shares of which 399,961 shares were issued upon
satisfaction of certain research milestones. IPI's financial results have been
included in the Company's financial statements beginning August 1, 1994. In
March 1996, IPI's remaining operations in California were consolidated with the
Company's Houston operations.
The Company signed a collaborative agreement with Synthelabo on October 11,
1994. Upon consummation of the transaction, Synthelabo purchased 1,428,571
shares of Common Stock for a total of $5.0 million and paid a licensing fee of
$3 million. In addition, Synthelabo has paid $3.0 million annually in research
payments (payable in quarterly installments) for two years and paid $750,000
for the third year. During 1996, TBC signed agreements with Synthelabo to
provide copies of certain clinical data. Over the life of the agreements TBC
may receive as much as $2.9 million, of which $2.3 million has been received as
of June 30, 1997. During October 1996, the Company executed a research and
Common Stock purchase agreement with LG Chem. LG Chem purchased 1,250,000
shares of Common Stock for $5.0 million and committed to pay up to $10.7
million over a five year period to develop two compounds in clinical
development. Of this amount, $1.1 million has been paid and $1.0 million will
be paid on December 31, 1997 and on each of June 30 and December 31, of 1998,
1999 and 2000, and $1.3 million will be paid on June 30 and December 31, 2001.
In August 1997, the Company entered into the SmithKline Agreement whereby
SmithKline was granted exclusive rights to collaborate with TBC in the
development and commercialization of NOVASTAN(R) in the U.S. and Canada for
specified indications. SmithKline has paid an $8.5 million license fee to TBC
and is committed to pay an additional $20.0 million in milestone payments based
on the clinical development and FDA approval of NOVASTAN(R) for the
indications of HIT, HITTS and
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AMI. In connection with the SmithKline Agreement, SmithKline purchased 176,922
shares of Common Stock for $1.0 million and agreed to purchase, at TBC's
option, an additional $2.0 million in Common Stock on or before August 5, 1998,
at a price per share based on an average trading price for the Common Stock for
the period beginning 10 days before and ending on the 9 day after TBC exercises
its option.
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.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
Revenues decreased from $1,283,474 in the three month period ended June 30,
1996 to $690,000 in the same period of 1997, a decrease of 46%. Revenues were
primarily composed of earned revenues under research agreements. Such revenue
decreased primarily because of the revision to the payment terms of the
Synthelabo collaborative agreement effective November 1, 1996, which
substantially reduced the research payments associated with this agreement. In
addition, data payments from Synthelabo were lower in 1997 as the contracts
neared completion.
Total operating expenses decreased 7% from $7,036,074 in the three month period
ended June 30, 1996 to $6,532,321 in the same period of 1997 due primarily to
the decrease in research and development expenses. Research and development
expenses decreased 25% from $6,023,929 in the three month period ended June 30,
1996 to $4,545,311 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). General and administrative expenses increased 96% from
$1,012,145 in the three month period ended June 30, 1996 to $1,987,010 in the
same period of 1997 primarily because of a $828,716 noncash charge related to
the extension of the exercise period for certain stock options. Excluding the
effect of the stock option extension, general and administrative expenses
increased 14% to $1,158,294 in the three month period ended June 30, 1997 verses
the amount for the same period of 1996. This change was due to increases in
patent and other legal fees and consulting fees.
Other income and expense is composed of investment income on invested funds,
interest expense and foreign currency exchange gains and losses. The decrease
is caused by a 34% decrease in investment income from $251,390 in the three
month period ended June 30, 1996 to $166,088 in the same period of 1997,
attributed primarily to lower investment balances.
SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
Revenues decreased from $3,200,776 in the six month period ended June 30, 1996
to $1,490,000 in the same period of 1997, a decrease of 53%. Revenues were
primarily composed of earned revenues under research agreements. Such revenue
decreased primarily because of the revision to the payment terms of the
Synthelabo collaborative agreement effective November 1, 1996, which
substantially reduced the research payments associated with this agreement. In
addition, data payments from Synthelabo were lower in 1997 as the contracts
neared completion.
Total operating expenses decreased 15% from $14,050,347 in the six month period
ended June 30, 1996 to $11,901,673 in the same period of 1997 primarily because
of the decrease in research and development expenses. Research and development
expenses decreased 23% from $11,504,545 in the six month period ended June 30,
1996 to $8,830,365 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). General and administrative expenses increased 45% from
$2,124,637 in the six month period ended June 30, 1996 to $3,071,308 in the
same period of 1997 primarily because of a $952,919 noncash charge related to
the extension of the exercise period for certain stock options. Excluding the
effect of the
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stock option extensions, general and administrative expenses decreased less
than 1% to 2,118,389 in the six month period ended June 30, 1997 compared with
2,124,637 for the same period of 1996. Restructuring and impairment charges
during 1996 related to the consolidation of the IPI operations into TBC did not
reoccur in 1997. However, the 1997 period included market research expenses
related to NOVASTAN(R) and higher legal fees.
Other income and expense is composed of investment income on invested funds,
interest expense and foreign currency exchange gains and losses. The decrease
is caused by a 36% decrease in investment income from $497,278 in the six month
period ended June 30, 1996 to $323,476 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 5% Preferred
Stock and the Initial Public Offering of a unit security, (ii) issuances of
Common Stock in conjunction with acquisitions and research and collaboration
agreements and exercises of stock options and warrants, (iii) milestone and
research payments received in conjunction with research and collaborative
agreements, and (iv) investment income, net of interest expense. During the
first six months of 1997, the Company utilized net cash of $10,357,855 in
operating activities. The use of cash in operations was caused primarily by
the Company's net loss of $10,094,037. Investing activities primarily reflect
the utilization of $5,925,269 in net proceeds from the 1997 private placement
of the 5% Preferred, net of redemptions of short term investments during the
first quarter. At June 30, 1997, the Company had cash, cash equivalents and
short-term investments of $9,294,331.
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 may 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 because of ongoing NOVASTAN(R)
trials and will continue to be significant through the FDA approval process and
as clinical trial work for additional clinical indications is performed. The
Company began incurring clinical trial costs in 1997 for the compounds
Endothelin and Selectin. In 1998, the Company expects to begin to incur costs
for clinical trials related to additional compounds. These costs include,
among other things, hiring personnel to direct and carry out all operations
related to the clinical trials, 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 the Company's ongoing research, clinical development and
commercialization efforts.
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 1998. This date is contingent upon various factors, including
the rates of patient enrollment and spending associated with the clinical trials
of NOVASTAN(R), the compounds TBC 11251 and TBC 1269, and the level of research
and development expenditures for other compounds. The Company's existing
capital resources may not be sufficient to fund the Company's operations through
commercialization of its first product, NOVASTAN(R). Moreover, TBC's agreement
with Synthelabo requires the Company to maintain a "net worth", as defined in
the agreement, of at least $5.0 million during the term of the agreement. If
the Company fails 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. 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.
On August 13, 1997, the Company filed a registration statement on Form S-3
(No. 333-33473) (the "Registration Statement") with the Securities and Exchange
Commission related to the proposed firm commitment underwritten public offering
of 5,000,000 shares of Common Stock (the "Proposed Public Offering"). The
Registration Statement has not yet become effective. The Common Stock offered
by the Registration Statement may not be sold nor may offers to buy be accepted
prior to the time that the Registration Statement becomes effective. This
Report on Form 10-Q shall not constitute an offer to sell or the solicitation
of an offer to buy any of such Common Stock.
The Company anticipates that it may need to raise substantial funds for future
operations in addition to the net proceeds of the Proposed Public Offering,
which may be raised through collaborative arrangements, public or private
issuance of debt and equity, or other arrangements. The Company expects that
additional
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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 such 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 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 it would not otherwise relinquish. See Part I, Item 1, note 12,
Financial Statements.
PENDING LITIGATION
As of June 30, 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 such laws, regulations and
standards currently in effect and that the cost of compliance with such laws,
regulations, and standards will not have a material adverse effect on the
Company. The Company does not expect to incur any material 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 the operations of the
Company.
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, (b) "License Agreements" regarding TBC's expectations for future
supply of NOVASTAN(R), (c) "Subsequent Events -- SmithKline" regarding TBC's
expectations for future development and commercialization of NOVASTAN(R), (d)
"Subsequent Events -- Proposed Public Offering" regarding TBC's expectations for
future financing and (e) "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, its
ability to raise additional capital to fund cash requirements for future
operations and its Proposed Public Offering. 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) effect of any current or
future competitive products, (vi) ability to manufacture and market products
commercially, (vii) retention of key personnel and (viii) capital market
conditions.
Page 17
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 21, 1994, a class action shareholders' suit was filed in the
U.S. District Court for the Southern District of Texas, Houston Division
seeking damages in the amount of $16.0 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, certain members of the board of
directors and certain officers alleging violations of Sections 11, 12 and
15 of the Securities Act. Plaintiffs have also named David Blech, D. Blech
& Co., Incorporated ("D. Blech & Co.") 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 U.S. 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 Exchange Act
and Rule 10b-5 promulgated thereunder by 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 U.S. District Court for the Southern
District of Texas, Houston Division be transferred to the U.S. 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 D. Blech & Co. 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's 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. There can be no assurance,
however that the final disposition of this case will be favorable to the
Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
Page 18
21
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1997, an annual meeting of the stockholders of the Company was
held. The holders of 18,820,504 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
---- --------- ----------------
Frank C. Carlucci 18,311,307 509,197
- -------------------- ---------- -------
Rita R. Colwell 18,325,892 494,612
- -------------------- ---------- -------
Robert J. Cruikshank 18,325,592 494,912
- -------------------- ---------- -------
Richard A. F. Dixon 18,325,892 494,612
- -------------------- ---------- -------
David B. McWilliams 18,325,892 494,612
- -------------------- ---------- -------
John M. Pietruski 18,325,459 495,045
- -------------------- ---------- -------
James A. Thomson 18,325,892 494,612
- -------------------- ---------- -------
James T. Willerson 18,325,892 494,612
- -------------------- ---------- -------
(b) Approval of the Amendment to the Company's 1995 Stock Option Plan
The stockholders approved the proposal to amend the Company's 1995
Stock Option Plan to increase the authorized number of issuable
shares from 1,000,000 shares to 2,000,000 shares. Votes were cast as
follows:
NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
---------- ------------- ----------------
17,742,393 1,026,531 51,580
---------- ------------- ----------------
(c) Approval of the Amendment to the Company's 1995 Non-Employee Director
Stock Option Plan
The stockholders approved the proposal to amend the Company's 1995
Non-Employee Director Stock Option Plan to increase the authorized
number of issuable shares from 200,000 shares to 300,000 shares and
to revise the formula for issuing options. Votes were cast as
follows:
NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
- ---------- ------------- ----------------
17,720,268 1,031,276 68,960
- ---------- ------------- ----------------
Page 19
22
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
10.60(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
10.62 Amendment to the 1995 Stock Option Plan of Texas Biotechnology
Corporation dated March 4, 1997
10.63 Amendment to the 1995 Non-Employee Director Stock Option Plan of
Texas Biotechnology Corporation dated March 4, 1997
27.1 Financial Data Schedule
- ------------
(1) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the
Securities and Exchange Commission (the "Commission") on April 2, 1997 and
incorporated herein by reference.
REPORTS ON FORM 8-K
One report on Form 8-K was filed during the quarter ended June 30, 1997.
The report was dated March 14, 1997 and filed April 2, 1997, and announced
that the Company raised $6 million through a private placement of 6,000
shares of 5% Cumulative Convertible Preferred Stock.
Page 20
23
TEXAS BIOTECHNOLOGY CORPORATION
JUNE 30, 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 14th day of August, 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)
Page 21
24
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
4.8(1) Certificate of Designations of 5% Cumulative Convertible
Preferred Stock for Texas Biotechnology Corporation
10.60(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
10.62 Amendment to the 1995 Stock Option Plan of Texas Biotechnology
Corporation dated March 4, 1997
10.63 Amendment to the 1995 Non-Employee Director Stock Option Plan of
Texas Biotechnology Corporation dated March 4, 1997
27.1 Financial Data Schedule
- ------------
(1) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the
Securities and Exchange Commission (the "Commission") on April 2, 1997 and
incorporated herein by reference.