<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER 000-30231
TANOX, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0196733
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10301 Stella Link, Suite 110
Houston, Texas 77025-5497
(Address of Principal Executive Offices) (Zip Code)
(713) 578-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 9, 2000, the registrant had 43,266,311 shares of Common
Stock issued and outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TANOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(UNAUDITED)
ASSETS
--------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 36,998,000 $ 44,242,000
Short-term investments 151,057,000 3,012,000
Accounts receivable 221,000 125,000
Interest receivable 5,095,000 414,000
Income taxes receivable 132,000 132,000
Prepaid and deferred expenses 635,000 114,000
------------ ------------
Total current assets 194,138,000 48,039,000
LONG-TERM INVESTMENTS 84,895,000 -
PROPERTY AND EQUIPMENT:
Laboratory and office equipment 9,830,000 9,369,000
Leasehold improvements 2,782,000 2,102,000
Furniture and fixtures 123,000 119,000
------------ ------------
12,735,000 11,590,000
Accumulated depreciation and amortization (5,402,000) (4,577,000)
------------ ------------
Net property and equipment 7,333,000 7,013,000
OTHER ASSETS, net of accumulated amortization
$83,000 and $59,000, respectively 172,000 276,000
------------ ------------
TOTAL ASSETS $286,538,000 $ 55,328,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable 1,283,000 874,000
Accrued liabilities 2,086,000 947,000
Accrued arbitration award 3,520,000 3,500,000
------------ ------------
Total current liabilities 6,889,000 5,321,000
NOTE PAYABLE TO RELATED PARTY 10,000,000 10,000,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value; 120,000,000 shares
authorized; 42,640,220 shares in 2000 and 33,324,402
shares in 1999 issued and outstanding 426,000 333,000
Additional paid-in capital 301,323,000 71,701,000
Deferred compensation (677,000) (651,000)
Loans receivable from employees (1,895,000) (1,086,000)
Other comprehensive income, cumulative translation adjustment 190,000 171,000
Retained earnings (deficit) (29,718,000) (30,461,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 269,649,000 40,007,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $286,538,000 $ 55,328,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
------------------------------------- -----------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Development agreement
with related party $ 1,000 $ 15,000 $ 2,010,000 $ 1,061,000
Other development
agreements and licensing
fees 201,000 85,000 10,454,000 261,000
----------- ----------- ---------- ------------
Total revenues 202,000 100,000 12,464,000 1,322,000
OPERATING COSTS AND
EXPENSES:
Research and development 4,468,000 8,070,000 13,928,000 14,590,000
General and administrative 1,509,000 568,000 3,986,000 4,146,000
----------- ----------- ---------- ------------
Total operating costs
and expenses 5,977,000 8,638,000 17,914,000 18,736,000
(LOSS) FROM OPERATIONS (5,775,000) (8,538,000) (5,450,000) (17,414,000)
OTHER INCOME (EXPENSE):
Interest income 4,612,000 400,000 8,927,000 1,196,000
Interest expense (222,000) (183,000) (628,000) (536,000)
Other 2,000 (46,000) (49,000) (97,000)
----------- ----------- ---------- ------------
Total other income 4,392,000 171,000 8,250,000 563,000
INCOME (LOSS) BEFORE INCOME
TAXES (1,383,000) (8,367,000) 2,800,000 (16,851,000)
(Provision) benefit for
income taxes (357,000) 10,000 (2,057,000) (34,000)
----------- ----------- ---------- ------------
NET INCOME (LOSS) $(1,740,000) $(8,357,000) $ 743,000 $(16,885,000)
=========== =========== ========== ============
EARNINGS (LOSS) PER SHARE
Basic $(0.04) $(0.27) $0.02 $(0.55)
Diluted $(0.04) $(0.27) $0.02 $(0.55)
SHARES USED IN COMPUTING
EARNINGS (LOSS) PER SHARE
Basic 42,630,000 31,377,000 39,096,000 30,563,000
Diluted 42,630,000 31,377,000 41,646,000 30,563,000
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $(1,740,000) $(8,357,000) $ 743,000 $(16,885,000)
Foreign currency
translation adjustment (20,000) 38,000 19,000 122,000
----------- ----------- ---------- ------------
TOTAL COMPREHENSIVE INCOME
(LOSS) $(1,760,000) $(8,319,000) $ 762,000 $(16,763,000)
=========== =========== =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------------
September 30, September 30,
2000 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 743,000 $(16,886,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 857,000 762,000
Interest expense forgiven by related party
Amortization of deferred compensation related to stock options 470,000 4,807,000
In-process research and development - 3,026,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts and interest receivables (4,778,000) 41,000
Change in taxes receivable or payable - 1,920,000
Income tax benefit related to stock options exercised 1,967,000 -
Increase in prepaid expenses (523,000) (81,000)
Decrease in accounts payable and accrued liabilities 1,569,000 125,000
------------- ------------
Net cash provided by (used in) operating activities 305,000 (6,286,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (327,152,000) (9,055,000)
Maturity of investments 94,213,000 13,437,000
Employee loans (261,000) -
Proceeds from repayment of employee loans 411,000 -
Purchases of property and equipment (1,153,000) (585,000)
Change in other assets (71,000) 36,000
------------- -----------
Net cash provided by (used in) investing activities (234,013,000) 2,747,000
CASH FLOWS FROM FINANCING ACTIVITIES
Employee Loans in connection with option exercises (1,188,000) (1,086,000)
Proceeds from repayment of employee loans connected with option exercises 379,000 -
Proceeds from the issuance of stock 227,253,000 10,474,000
------------- ------------
Net cash provided by financing activities 226,444,000 10,474,000
IMPACT OF EXCHANGE RATES ON CASH 20,000 122,000
------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,244,000) 7,057,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 44,242,000 28,352,000
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 36,998,000 $ 35,409,000
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for taxes $ - $ 25,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TANOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. BASIS OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X and include the accounts of Tanox, Inc.
and its wholly owned subsidiaries (collectively the "Company" or "Tanox").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal, recurring adjustments considered
necessary for fair presentation have been included. These condensed
consolidated interim financial statements and notes thereto should be
considered in conjunction with the Company's Consolidated Financial Statements
and accompanying Notes for the year ended December 31, 1999, which were included
in the Company's Registration Statement on Form S-1 (Registration No. 333-
96025). Results for the interim period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
NOTE 2. LICENSE AGREEMENT WITH PROTEIN DESIGN LABS, INC.
During March 2000, Tanox entered into an agreement with Protein Design
Labs, Inc. ("PDL") to acquire the right to take non-exclusive licenses to
patents and patent applications owned by PDL for up to four of the Company's
antibodies. Under the agreement, Tanox agreed to pay initial license fees to
PDL of $2.5 million, in addition to $1.5 million that was previously paid to PDL
in 1998 under a prior licensing agreement. Tanox also agreed to pay up to $4.0
million ($1.0 million per antibody), plus maintenance fees, to PDL if Tanox
exercises its option to license all four antibodies. In addition, Tanox agreed
to pay royalties on future sales if a product using the PDL technology is
successfully commercialized. During the first quarter of 2000, Tanox recorded a
research and development expense of $2.5 million, representing the cost of the
initial option payment.
NOTE 3. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed in the same manner as basic EPS, except that
diluted EPS reflects the potential dilution that would occur if outstanding
options and warrants were exercised.
Since Tanox incurred net losses for the three month period ended
September 30, 2000 and for the three month and nine month periods ended
September 30, 1999, basic and diluted EPS are the same for these periods. For
the three month period ended September 30, 2000, the treasury stock method
effect of 2.6 million weighted average options have been excluded from the
calculation of EPS as it is anti-dilutive. The following table reconciles basic
and diluted EPS for the nine month period ended September 30, 2000.
5
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<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
---------- ---------- ------
<S> <C> <C> <C>
Basic EPS $743,000 39,096,000 $0.02
Effect of dilutive options outstanding - 2,550,000
-------- ----------
Diluted EPS $743,000 41,646,000 $0.02
======== ========== =====
</TABLE>
NOTE 4. INITIAL PUBLIC OFFERING
On April 12, 2000, Tanox concluded the principal part of its initial public
offering of common stock and, on May 11, 2000, completed the offering with the
exercise by the underwriters of their over-allotment option. In the offering,
Tanox sold 8,568,000 shares of common stock at $28.50 per share for gross
proceeds of approximately $244.2 million, including the underwriters' over-
allotment option. The net proceeds from the offering were approximately $225.8
million. Both the shares issued and the proceeds of the offering are reflected
in Tanox's financial results for the nine months ended September 30, 2000. The
proceeds of the IPO have been invested principally in investment grade
commercial paper and corporate bonds with maturities of less than two years and
which are classified as held-to-maturity.
NOTE 5. LOANS TO EMPLOYEES
In April 2000, Tanox loaned certain employees an aggregate of $1.2 million
for payment of their tax obligations pursuant to the exercise of stock options
in 1999. All loans are full recourse, secured by shares of Tanox common stock
owned by the employees, bear interest at a rate of 8.5 percent, and are due and
payable in full in September 2001. The loans, net of repayments, have been
reflected as contra-equity in the accompanying financial statements.
NOTE 6. INCOME TAXES
The Company's effective tax rate differs from the U.S. federal statutory
rate because of foreign losses that are not deductible and an increase in the
valuation allowance. The actual tax payable is significantly lower than the
provision for income taxes due to tax benefits attributable to the exercise of
nonqualified stock options.
NOTE 7. LITIGATION
Tanox is currently engaged in litigation and arbitration relating to a fee
dispute with the law firms that represented Tanox in a lawsuit with Genentech
relating to, among other things, the intellectual property rights surrounding
the development of anti-IgE technology. An arbitration panel issued an award in
1999 entitling the attorneys to receive approximately $3.5 million, including
interest, payments ranging from 33 1/3% to 40% of the future payments Tanox may
receive from Genentech following product approval, and 10% of the royalties that
Tanox may receive on all sales of anti-IgE products by Genentech and Novartis.
The Company is contesting this award. During the appeals process, Tanox is
required to post a bond or place amounts in escrow to secure payment of the
award. In July 2000, Tanox posted with the court a $3.7 million supersedeas
bond to continue the appeals process and to secure payment of the award.
NOTE 8. COMMITMENTS AND CONTINGENCIES
As of September 30, 2000, Tanox had agreed to make an equity investment of
$1 million in a small biopharmaceutical company developing therapeutics for the
treatment of cancer and hematopoietic disorders.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious diseases
and cancer. E25, our most advanced product in development, is an anti-IgE
antibody that we are developing in collaboration with Novartis Pharma AG and
Genentech, Inc. E25 has successfully completed Phase III clinical trials in
both allergic asthma and seasonal allergic rhinitis (hay fever). Based on the
results of these trials, on June 2, 2000, our collaboration partners filed for
marketing approval in the United States, the EU, Switzerland, Australia and New
Zealand for both indications. In addition, we are developing a number of
monoclonal antibodies to treat other diseases or conditions, such as severe
allergic reactions to peanuts, autoimmune diseases, HIV and neutropenia.
We currently have no products available for sale and are focusing on
product development, clinical trials and process development. We have incurred
substantial losses since inception and incurred an accumulated deficit through
September 30, 2000, of $29.7 million. We expect to continue to incur
substantial operating losses for the foreseeable future, particularly as we
expand our research and development, manufacturing, clinical trial and
administrative activities. We expect that losses will continue until such time,
if ever, that we generate sufficient revenue from E25 to cover our expenses.
Historically, we have earned revenues primarily from license fees,
milestone payments and sponsored research under our collaboration agreements.
In the future, we expect our principal revenues will be milestone payments,
royalties and profit-sharing payments from Novartis and Genentech. We may also
receive royalties from Hoffman-La Roche Ltd. should it participate in selling
E25 in Europe. Our near term revenues will depend primarily on the success of
our collaboration partners in developing, manufacturing, obtaining regulatory
approvals for and marketing E25. Because a substantial portion of our revenues
for the foreseeable future will depend on achieving development and
commercialization milestones, we anticipate that our results of operations will
vary substantially from year to year and even quarter to quarter.
The following is a discussion of our results of operations for the three
month and nine month periods ended September 30, 2000 as compared to the same
periods in 1999. This discussion should be read in conjunction with our
Condensed Consolidated Financial Statements that are included in this report and
our Consolidated Financial Statements and related Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1999 included in our Registration Statement on Form S-1
(Registration No. 333-96025).
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Revenues. Revenues totaled $202,000 in the third quarter of 2000, compared
to $100,000 in the third quarter of 1999. Revenues primarily consisted of grant
and licensing revenue.
Research and Development Expenses. Research and development expenses were
$4.5 million in the third quarter of 2000 compared to $8.1 million in the third
quarter of 1999. Although expenses increased in the 2000 period for salaries,
clinical research and contract research, in the third quarter of 1999, Tanox
expensed $3.4 million of in-process research and development related to the
acquisition of PanGenetics B.V. in the Netherlands. Further, the 1999 period
included expenses of $1.7 million for stock-based compensation, primarily
related to the extension of certain employee stock options. This compared to
charges of $0.2 million for stock-based compensation in the third quarter of
2000.
7
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased to $1.5 million in the third quarter of 2000 from $0.6 million in the
third quarter of 1999. The increase relates primarily to increased spending in
professional fees and increases in personnel.
Other Income. Other income increased to $4.4 million in the third quarter
of 2000 from $0.2 million in the third quarter of 1999. This increase was
principally due to an increase in interest income resulting from higher cash
balances in the current period, as a result of proceeds from private stock
offerings in late 1999 and the Company's initial public offering (IPO) in April
2000, and higher prevailing interest rates in 2000 than in 1999.
Income Taxes. The provision for income taxes was $0.4 million in the third
quarter of 2000; there was no provision for income taxes in the third quarter of
1999. This increase was due to the change in the Company's pretax estimate in
2000 from a pretax loss of $8.4 million in the third quarter of 1999. The
Company's effective tax rate differs from the U.S. federal statutory rate
because of foreign losses that are not deductible and an increase in the
valuation allowance. The actual tax payable is significantly lower than the
provision for income taxes due to tax benefits attributable to the exercise of
nonqualified stock options.
Net Income (Loss). As a result of the above factors, the net loss for the
third quarter of 2000 was $1.7 million or $0.04 per share for both basic and
diluted earnings, compared to a net loss of $8.4 million or $0.27 per share on
both a basic and diluted basis during the third quarter of 1999.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended
September 30, 1999
Revenues. Revenues totaled $12.5 million during the first nine months of
2000, compared to $1.3 million during the same period of 1999. The increase in
revenues during the first nine months of 2000 resulted primarily from $12.0
million in milestone revenues earned under our collaborative agreements with
Novartis and Genentech when the Biologics License Application for E25 was
submitted to the FDA in June 2000. During the first nine months of 1999,
revenues were principally from an E26 milestone payment earned under our
collaborative agreements with Novartis. The agreements with Novartis and
Genentech accounted for 96% of our revenues in the first nine months of 2000 and
81% of our revenues in the same period of 1999.
Research and Development Expenses. Research and development expenses were
$13.9 million in the first nine months of 2000, compared to $14.6 million in the
same period of 1999. The 2000 results included a $2.5 million charge in the
first quarter to acquire the right to non-exclusive licenses to patents and
patent applications owned by Protein Design Labs, Inc. for up to four of our
products in development. The 1999 results included (i) expense of $3.4 million
of in-process research and development related to the acquisition of PanGenetics
B.V. in March 1998 and (ii) stock-based compensation expense of $2.8 million.
Excluding these charges, research and development expense increased by $3.0
million from 1999 to 2000 due primarily to increased personnel and expansion of
preclinical and clinical development activities.
General and Administrative Expenses. General and administrative expense
remained virtually unchanged at $4.0 million in the first nine months of 2000 as
compared to $4.1million in the first nine months of 1999. General and
administrative expenses in 1999 included non-cash charges of $1.9 million for
stock-based compensation. The decrease in stock-based compensation expense from
1999 was partially offset by increases in 2000 in expenses associated with
reincorporating in Delaware and becoming a public company, including state
franchise taxes and expenses for investor relations activities, as well as
increased spending for professional fees, recruitment costs and personnel.
8
<PAGE>
Other Income. Other income increased $7.7 million to $8.3 million in the
first nine months of 2000 from $0.6 million in the same period of 1999. This
increase was principally due to an increase in interest income in 2000 resulting
from higher cash balances and higher prevailing interest rates in 2000 than in
1999.
Income Taxes. The provision for income taxes was $2.1 million in the
first nine months of 2000, compared to $34,000 in the same period of 1999. This
increase was due to the change in the Company's profitability from a pretax loss
of $16.9 million in the first nine months of 1999 to pretax income of $2.8
million in the first nine months of 2000. The Company's effective tax rate
differs from the U.S. federal statutory rate because of foreign losses that are
not deductible and an increase in the valuation allowance. The actual tax
payable is significantly lower than the provision for income taxes due to tax
benefits attributable to the exercise of nonqualified stock options.
Net Income (Loss). As a result of the above factors, the net income for
the first nine months of 2000 was $0.7 million or $0.02 per share for both basic
and diluted earnings, compared to a net loss of $16.9 million or $0.55 per share
on both a basic and diluted basis during the first nine months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through
collaboration and grant revenues, sales of equity securities, interest income
and equipment financing agreements. From inception through September 30, 2000,
we recognized $71.7 million in collaboration, grant and other revenues.
Additionally, we have raised $280.7 million from sales of equity securities and
$2.7 million from the exercise of stock options, and we have earned $18.4
million of interest income. As of September 30, 2000, we had $273.0 million in
cash, cash equivalents and investments, of which $188.1 million were classified
as current assets.
During the first nine months of 2000, we generated $0.3 million of cash
from operating activities. The primary sources of cash during the period were
$12.0 million in milestone payments received under our collaborative agreements
with Novartis and Genentech and $4.3 million of interest payments received. The
primary uses of cash for operating activities were operating expenses and an
increase in accrued interest receivable on our invested cash. Investing
activities used $234.0 million of cash in the first nine months of 2000,
primarily for the purchase of short-term and long-term investments. Financing
activities generated $226.4 million of cash during the first nine months of
2000, including $225.8 million from the proceeds of the Company's IPO in April
and May 2000 and $1.2 million from the exercise of stock options. These sources
of cash were partially offset by a net increase in loans to employees of $0.8
million. The combination of the above items resulted in a cash decrease of $7.2
million during the first nine months of 2000.
On April 12, 2000, we sold 7,500,000 shares of common stock in an initial
public offering at a price of $28.50 per share and, on May 11, 2000, sold an
additional 1,068,000 shares pursuant to the exercise by the underwriters of
their over-allotment option. In total, we received gross proceeds of $244.2
million and net proceeds of $225.8 million.
From 1994 through 1998, Novartis advanced us $10.0 million, pursuant to a
loan agreement, to finance our new clinical manufacturing facility. The loan
bears interest at the London Interbank Offered Rate, or LIBOR, plus two percent
(7.3% and 8.1% at December 31, 1998 and 1999, respectively). Through December
31, 1999, Novartis has agreed to forgive interest on the loan. For the years
1997, 1998 and 1999, the interest Novartis has forgiven has been reflected as
interest expense and a capital contribution. Although the loan is currently
scheduled to be due in full on December 31, 2005, Novartis may partially or
totally forgive the principal and future interest payments based on the future
use of the facility.
9
<PAGE>
From inception through September 30, 2000, we have invested approximately
$12.7 million in property and equipment, primarily to support research and
product development activities and to construct our new clinical manufacturing
facility. We pledged all of the assets of the new clinical manufacturing
facility as security for the Novartis loan.
We loaned certain employees an aggregate of $1.2 million in April 2000 to
pay tax obligations resulting from their stock option exercises in 1999.
As of September 30, 2000, Tanox had agreed to make an equity investment of
$1 million in a small biopharmaceutical company developing therapeutics for the
treatment of cancer and hematopoietic disorders.
Our current and anticipated development projects will require substantial
additional capital to complete. We anticipate that the amount of cash we need
to fund operations, including research and development, manufacturing and other
costs, and for capital expenditures, will grow substantially in the future as
our projects move from research to pre-clinical and clinical development. We
also expect that we will need to expand our administrative, clinical development
and business development activities, as well as our facilities, to support the
future development of our programs and to support the ongoing requirements of a
public company. Consequently, we may need to raise substantial additional
funds. We expect that the net proceeds from our initial public offering,
together with cash on hand and revenue from operations, will be sufficient to
fund our operations for the next three years. However, our future capital needs
will depend on many factors, including successfully commercializing E25,
receiving payments from our collaboration partners, progress in our research and
development activities, the magnitude and scope of these activities, the
progress and level of unreimbursed costs associated with pre-clinical studies
and clinical trials, the costs and magnitude of product or technology
acquisitions, the cost of preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in or terminations of existing
collaboration and licensing arrangements, establishing additional collaboration
and licensing arrangements, and manufacturing scale-up costs and marketing
activities, if we undertake those activities. We do not have committed external
sources of funding and we cannot assure that we will be able to obtain
additional funds on acceptable terms, if at all. If adequate funds are not
available, we may be required to:
. delay, reduce the scope of or eliminate one or more of our programs;
. obtain funds through arrangements with collaboration partners or other that
may require us to relinquish rights to technologies, product candidates or
products that we would otherwise seek to develop or commercialize ourselves;
or
. license rights to technologies, product candidates or products on terms that
are less favorable to us than might otherwise be available.
We are currently engaged in litigation and arbitration relating to a fee
dispute with the law firms that represented us in a litigation with Genentech
relating to, among other things, the intellectual property rights surrounding
the development of anti-IgE technology. An arbitration panel issued an award
entitling the attorneys to receive approximately $3.5 million (including
interest), payments ranging from 33 1/3% to 40% of the future payments we would
receive from Genentech following product approval, and 10% of the royalties that
we would receive on all sales of anti-IgE products by Genentech and Novartis.
We are contesting this award. During the appeals process, we are required to
post a bond or place amounts in escrow to secure payment of the award. In July
2000, we secured a $3.7 million supersedeas bond, which was posted with the
court to continue the appeals process and to secure payment of the award.
10
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency exchange
fluctuations and changes in interest rates. In the normal course of business,
we have established policies and procedures to manage these risks.
Foreign Currency Exchange Rates. During the first nine months of 2000, our
operating results reflect foreign exchange losses of $20,000 and our balance
sheet reflects a foreign currency translation adjustment of $190,000. We are
subject to foreign currency exchange risk because:
. we invest in our foreign subsidiaries;
. we incur a significant portion of our costs and expenses and a smaller
portion of our revenues in the local currencies of the countries where we do
business; and
. we finance part of the cost of our subsidiaries' operations through dollar
denominated inter-company loans and equity investments that are recorded on
their books in the respective local currencies.
Fluctuations in exchange rates have not had a material impact on our revenues or
costs and expenses, but have affected the value of our equity investments and
inter-company loans. As a result of our international operations and our
current financing approach, fluctuations in exchange rates of the local
currencies versus the U.S. dollar impact our operating results. We are
primarily exposed to gains and losses with respect to Dutch guilders and Taiwan
dollars because our subsidiaries conduct business in these currencies. To date,
we have not implemented a program to hedge our foreign currency risk, but we may
do so in the future.
Interest Rate Risk. Cash and investments were approximately $273 million at
September 30, 2000. These assets were primarily invested in investment grade
commercial paper and corporate bonds with maturities of less than two years,
which we hold to maturity. We do not invest in derivative securities. Although
our portfolio is subject to fluctuations in interest rates and market
conditions, no gain or loss on any security would actually be recognized in
earnings unless we dispose of the asset. In addition, our loan from Novartis is
based on a premium over LIBOR. As such, if general interest rates increase, our
interest costs will increase.
Factors Affecting Forward-Looking Statements. Some of the information in this
Quarterly Report on Form 10-Q contains forward-looking statements. We typically
identify forward-looking statements by using terms such as "may," "will,"
"should," "could," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue" or similar words, although we express some
forward-looking statements differently. You should be aware that actual events
could differ materially from those suggested in the forward-looking statements
due to a number of factors, including:
. the ability to develop safe and efficacious drugs;
. failure to achieve positive results in clinical trials;
. failure to successfully commercialize our products;
. relationships with our collaboration partners;
. variability of royalty, license and other revenues;
. ability to enter into future collaboration agreements;
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. competition and technological change; and
. existing and future regulations affecting our business.
You should also consider carefully the statements under other sections of
this Quarterly Report, which address additional factors that could cause our
actual results to differ from those set forth in the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Quantitative and Qualitative Disclosures About Market Risk" under
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for quantitative and qualitative disclosures about market risk.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 6, 2000, the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1, Commission File No. 333-96025,
registering the sale of 8,568,000 shares of our Common Stock (including the
over-allotment option) for net proceeds of $225,837,000. None of the proceeds
from the initial public offering were used during the three months ended
September 30, 2000; however, we expect that our use of these proceeds will be as
described in the prospectus to our Registration Statement. Pending such use,
the net proceeds are being invested in interest-bearing investment-grade
securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 First Amendment to the Tanox, Inc. 1997 Stock Plan
27 Financial Data Schedule.
(b) Reports on Form 8-K.
We filed a report on Form 8-K on September 14, 2000, reporting certain
information and developments with respect to E25 and E26 trials.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANOX, INC.
Date: November 13, 2000 By: Michael A. Kelly
-----------------------------------
Michael A. Kelly
Vice President of Finance and Chief
Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Description
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10.1 First Amendment to the Tanox, Inc. 1997 Stock Plan
27 Financial Data Schedule
