<PAGE> 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 SEPTEMBER 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.
<TABLE>
<CAPTION>
Class Outstanding at September 30, 1997
----- ---------------------------------
<S> <C>
Common Stock, $0.005 par value 26,463,869
</TABLE>
<PAGE> 2
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996, the nine months ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 19
ITEM 2: Changes in Securities 19
ITEM 3: Defaults Upon Senior Securities 20
ITEM 4: Submission of Matters to a Vote of Security Holders 20
ITEM 5: Other Information 20
ITEM 6: Exhibits and Reports on Form 8-K 21
SIGNATURES 22
INDEX TO EXHIBITS 23
</TABLE>
<PAGE> 3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 816,615 2,127,999
Short term investments 13,491,927 11,262,292
Other current receivables 1,262,455 590,575
Short term note receivable 122,500 122,500
Prepaids 291,664 546,752
Other current assets 355,568 12,400
------------ ---------
Total current assets 16,340,729 14,662,518
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 5) 3,265,919 3,458,012
Other assets 59,591 59,591
------------ ---------
Total assets $ 19,666,239 18,180,121
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,090,296 1,661,339
Accrued expenses 1,690,468 2,266,376
Deferred revenue (note 8) 62,500 625,000
------------ ---------
Total current liabilities 2,843,264 4,552,715
Commitments and contingencies (notes 6, 8, 9, 10 and 11)
Stockholders' equity (notes 2, 3 and 6):
Preferred stock, par value $.005 per share. At September 30, 1997
5,000,000 shares authorized; 3,580 shares of 5% cumulative
convertible issued and outstanding. At December 31, 1996,
5,000,000 shares authorized, none outstanding. 18 --
Common stock, par value $.005 per share. At September 30, 1997,
75,000,000 shares authorized; 26,463,869 shares issued and
outstanding. At December 31, 1996, 75,000,000 shares
authorized; 25,490,269 shares issued and outstanding 132,319 127,451
Additional paid-in capital 86,809,978 77,808,331
Accumulated deficit (70,119,340) (64,308,376)
------------ ---------
Total stockholders' equity 16,822,975 13,627,406
------------ ---------
Total liabilities and stockholders' equity $ 19,666,239 18,180,121
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
FORM 10-Q Page 1
<PAGE> 4
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
----------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Research agreements (note 8) $ 1,187,500 $ 1,100,000 $ 2,672,502 $ 4,295,110
License fee income 8,500,000 -- 8,500,000 --
Other income 2,502 2,500 7,500 8,166
----------- ------------ --------------- -------------
Total revenues 9,690,002 1,102,500 11,180,002 4,303,276
----------- ------------ --------------- -------------
Expenses:
Research and development 4,287,056 5,980,096 13,117,421 17,484,641
General and administrative 1,177,642 952,299 4,248,950 3,076,936
Restructuring & Impairment charges -- -- -- 421,165
----------- ------------ --------------- -------------
Total expenses 5,464,698 6,932,395 17,366,371 20,982,742
----------- ------------ --------------- -------------
Operating income (loss) 4,225,304 (5,829,895) (6,186,369) (16,679,466)
----------- ------------ --------------- -------------
Other income (expense):
Interest income 183,494 199,811 506,970 697,089
Other 8,093 -- 2,253 --
----------- ------------ --------------- -------------
Total other income (expense) 191,587 199,811 509,223 697,089
Net income (loss) $ 4,416,891 $ (5,630,084) $ (5,677,146) $ (15,982,377)
Preferred dividend requirement 297,229 -- 1,144,623 --
Net loss applicable to common shares $ 4,119,662 $ (5,630,084) $ (6,821,769) $ (15,982,377)
Net income (loss) per share:
Primary $ 0.15 $ (0.23) (0.26) $ (0.69)
Fully diluted $ 0.15 $ -- $ -- $ --
Weighted average common shares used to
compute net income (loss) per share:
Primary 27,305,955 24,188,708 25,853,961 23,053,607
Fully diluted 28,762,873 -- -- --
</TABLE>
See accompanying notes to consolidated financial statements
FORM 10-Q Page 2
<PAGE> 5
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,677,146) (15,982,377)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 561,095 547,651
Expenses paid with stock (note 3) 9,967 --
Compensation expense related to stock options (note 3) 1,303,094 46,177
Preferred dividends payable not included in net loss (98,965) --
Change in operating assets and liabilities, net of effect of acquisition:
(Increase) decrease in prepaids 255,088 276,136
(Increase) decrease in receivables (671,880) 7,291
(Increase) decrease in other current assets (343,168) 154,833
Increase (decrease) in current liabilities (1,146,951) 417,280
(Decrease) in deferred revenue (562,500) (400,110)
------------ ------------
Net cash used in operating activities (6,371,366) (14,933,119)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (369,003) (82,123)
Purchase of short term investments (18,987,527) (24,007,757)
Maturity of short term investments 16,757,893 20,464,414
------------ ------------
Net cash provided by (used in) investing activities (2,598,637) (3,625,466)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and options and
warrant exercises, net 1,733,350 13,642,447
Proceeds from sale of preferred stock, net 5,925,269 --
------------ ------------
Net cash provided by financing activities 7,658,619 13,642,447
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,311,384) (4,916,138)
Cash and cash equivalents at beginning of period 2,127,999 5,724,264
------------ ------------
Cash and cash equivalents at end of period $ 816,615 808,126
============ ============
Supplemental schedule of noncash financing activities $ 34,853 --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
FORM 10-Q Page 3
<PAGE> 6
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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. Since its formation in 1989, the Company has
been engaged principally in research and drug discovery programs and
clinical development of a certain drug compounds. 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.
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 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.
(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
September 30, 1997, approximately $817,000 was invested in demand and
money market accounts. Short term investments are those investments
which have an original maturity of less than one year and greater than
three months. At September 30, 1997, the Company's short term
investments consisted of approximately $961,000 in Government Agency
Discount Notes and $12,531,000 in Corporate Commercial Paper. Cash
equivalents and short term investments are stated at cost, which
approximates market value. Interest income is accrued as earned.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of furniture
and equipment is provided on the straight-line method over the
estimated useful lives of the respective assets (3 to 10 years).
Amortization of leasehold improvements is provided on the straight-line
method over the remaining minimum lease term.
FORM 10-Q Page 4
<PAGE> 7
(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 September
30, 1997 and 1996, totaled approximately $1,445,000 and $1,469,000,
respectively, of which approximately $1,136,000 and $1,179,000,
respectively, was charged to research and development. For the nine
months ended September 30, 1997 and 1996, salaries and benefits totaled
approximately $4,257,000 and $4,936,000, respectively, of which
approximately $3,335,000 and $3,872,000, respectively, was charged to
research and development. Payments related to the acquisition of
in-process research and development are expensed.
(g) Net Income (Loss) Per Common Share
Primary net income (loss) per common share is based upon the net income
(loss) applicable to common shares after preferred dividend
requirements and upon the weighted average of common and common
equivalent shares outstanding during the period. Preferred dividend
requirements for the three and nine months ended September 30, 1997
included $52,157 and $133,817, 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 $245,072 and $1,010,806, respectively. For the
three months ended September 30, 1997 and 1996, the weighted average
common shares used to compute primary net income (loss) per common
share totaled 27,305,955 and 24,188,708, respectively. For the nine
months ended September 30, 1997 and 1996, the weighted average common
shares used to compute primary net loss per common share totaled
25,853,961 and 23,053,607, respectively. The conversion of securities
convertible into Common Stock and the exercise of stock options and
warrants were not assumed in the calculation of primary net loss per
common share for the three months ended September 30, 1996 and the nine
months ended September 30, 1997 and 1996 because the effect would have
been antidilutive. For the three months ended September 30, 1997,
primary net income per common share includes the exercise of dilutive
stock options and warrants. The 4,082,500 warrants which are traded
publicly are not included in net income per share since they are
anti-dilutive.
Fully diluted net income per common share is based upon the net income
applicable to common shares before the preferred dividend requirement.
For the three months ended September 30, 1997, the weighted average
shares used to compute fully diluted net income per share totaled
28,762,873 and included the conversion of securities convertible into
Common Stock and the exercise of dilutive stock options and warrants.
Shares held in escrow through September 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 September 30, 1997 presentation with no
effect on net loss reported.
FORM 10-Q Page 5
<PAGE> 8
(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.
Milestone payments related to contractual agreements are recognized as
the milestones are achieved. Revenue from products and services is
recognized when the products are shipped or the services are performed.
Revenue from licensing fees is recorded when the license is granted.
Amounts received in advance of services to be performed under contracts
are recorded as deferred revenue.
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these
estimates.
(l) Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 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 nine
month periods ended September 30, 1997 and 1996, and the three month
period ended September 30, 1996, there is no effect on net loss per
share as reported for those periods.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997. This Statement requires that
all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement further requires that an entity classify
items of other comprehensive income by their nature in a financial
statement. For example, other comprehensive income may include foreign
currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities.
Reclassification of financial statements for earlier periods, provided
for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on
the Company s consolidated financial statements. The Company will adopt
this accounting standard on January 1, 1998, as required.
(m) Interim Financial Information
The Consolidated Balance Sheet as of September 30, 1997, and the
related Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1997 and 1996 and Consolidated
Statements of Cash Flows for the nine month periods ended September 30,
1997 and 1996 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted of normal
recurring items, 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
rules 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.
FORM 10-Q Page 6
<PAGE> 9
(n) Development Stage Enterprise
In prior periods, the Company reported as a development stage
enterprise. With the signing of a commercialization agreement for
NOVASTAN(R), the Company has begun reporting as an operating Company.
(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 September 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 common
shareholders. The liquidation preference (which included accrued dividends)
amount of 5% Preferred at September 30, 1997 is $3,678,965. As of September
30, 1997, 2,420 shares of the 5% Preferred and accrued dividends of $34,853
on such shares have been converted into 596,546 shares of Common Stock.
During October 1997, 3,000 shares of Preferred Stock and accrued dividends
converted into 684,539 shares of Common Stock. Following this conversion,
580 shares of Preferred Stock remain outstanding.
During October 1997, the Company sold 5,750,000 shares of Common Stock for
$5.00 per share pursuant to an underwritten public offering. The net
proceeds to the Company for the 5,750,000 shares sold were approximately
$26.6 million after deducting selling commissions and expenses of
approximately $2.2 million related to the offering.
Additionally, during October 1997, the Company issued 214,286 shares of
Common Stock and a seven year warrant to purchase 142,858 shares of Common
Stock exercisable at $14.00 per share, pursuant to a license agreement.
(See notes 9 and 13)
(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.
FORM 10-Q Page 7
<PAGE> 10
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 37,020 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 296,363 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 September 30, 1997, follows:
<TABLE>
<CAPTION>
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
-------------------- -------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1990 Plan $1.38 - $5.19 285,715 181,193 55,959 172,246 48,563
1992 Plan $1.41 - $5.36 1,700,000 1,326,677 150,661 1,035,129 222,662
Director Plan $2.40 - $4.54 71,429 37,020 34,409 37,020 ---
1995 Plan $1.31 - $5.88 2,000,000 1,197,900 --- 226,510 802,100
1995 Director Plan $1.38 - $5.19 300,000 130,705 3,637 67,885 165,658
---------- ---------- ---------- ------------ -----------
TOTALS 4,357,144 2,873,495 244,666 1,538,790 1,238,983
========== ========== ========== ============ ===========
</TABLE>
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 nine months ended September 30, 1997 of which $1,149,829
was recorded in the second quarter and the remainder in the first quarter.
Of the total for the nine 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.
FORM 10-Q Page 8
<PAGE> 11
As of September 30, 1997, 2,074 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 September 30, 1997, the net deferred tax asset totaled approximately
$24,022,000 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 :
<TABLE>
<CAPTION>
September 30,1997 December 31,1996
----------------- ----------------
<S> <C> <C>
Laboratory and office equipment $ 4,448,731 $ 4,079,728
Leasehold improvements 3,701,772 3,701,772
----------- -----------
8,150,503 7,781,500
Less accumulated depreciation and amortization (4,884,584) (4,323,488)
----------- -----------
$ 3,265,919 $ 3,458,012
=========== ===========
</TABLE>
(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of September 30, 1997
as follows:
<TABLE>
<S> <C>
Stock option plans 4,112,478
Common stock issuable under licensing agreement 285,715 (See note 9, 13)
Warrants issuable under the licensing Agreement 142,858 (See note 9, 13)
Publicly traded warrants outstanding 4,082,500
Other warrants outstanding 1,232,092
Underwriters purchase options and related warrants 710,000
Public offering of Common Stock 5,750,000 (See note 2, 13)
Conversion of Preferred Stock 2,451,719 (See note 2)
---------
Total shares reserved 18,767,362
==========
</TABLE>
In addition to the above, LG Chemical, Ltd. ("LG Chem") has the option to
purchase $5 million of Common Stock on December 31, 1997. LG Chem and TBC
must agree on the purchase price or the option cannot be exercised.
Additionally, on October 9, 1997 the Company issued 214,286 shares of
Common Stock and a warrant to purchase an additional 142,858 shares of
Common Stock at an exercise price of $14.00 per share. (See note 13)
(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
FORM 10-Q Page 9
<PAGE> 12
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.
During August 1997, the Company began Phase IIa clinical trials for TBC
11251 (TBC's lead compound for vasospasm/hypertension) in congestive heart
failure. On August 5, 1997, the Company entered into a letter of intent
with Coromed, Inc. to pursue negotiations and possible execution of an
agreement to conduct the clinical evaluation of TBC 11251 to determine
acute hemodynamic efficacy and safety in congestive heart failure. The
clinical trial work contemplated in the letter of intent will cost
approximately $1,000,000. The term of the original letter of intent ended
on September 30, 1997, but was extended until October 31, 1997.
(8) RESEARCH AGREEMENTS
On October 11, 1994, the Company signed a collaborative agreement with
Synthelabo, S.A. ("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. 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 September
30, 1997, $562,500 has been recognized as revenue and $62,500 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 September 30, 1997, TBC has recognized approximately
$2,880,000 of revenue related to these agreements, $610,000 of which is in
other current receivables. 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
FORM 10-Q Page 10
<PAGE> 13
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. As of September 30, 1997, $500,000 is in other
current receivables. 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 sale 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 10) are unavailable or uneconomic, the Company's results
of operations would be materially adversely affected.
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 during 1993 and issued an additional 214,286 shares of Common
Stock on October 9, 1997, after acceptance of the filing of the first New
Drug Application ("NDA") with the FDA for NOVASTAN(R). An additional 71,429
shares of Common Stock will be issued to the Former Licensor within ten
days after the FDA's first approval of an NDA for NOVASTAN(R).
Additionally, on October 9, 1997, upon acceptance of the filing of the
first NDA for NOVASTAN(R) with the FDA, the Company granted 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, which
expires on October 9, 2004. 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 the approval of the NDA does 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.
FORM 10-Q Page 11
<PAGE> 14
During the third quarter of 1997, the Company sublicensed certain rights to
NOVASTAN(R) to SmithKline Beecham, plc ("SmithKline"). (see note 10) In
conjunction with this agreement, the Company agreed to make certain
payments to Mitsubishi, which are included in research and development
expense, 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) COMMERCIALIZATION AGREEMENT
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 work with
TBC in the development and commercialization of NOVASTAN(R) in the U.S. and
Canada for specified indications. SmithKline paid $8.5 million in upfront
license fees during August 1997, a $5 million milestone payment in October
1997, and will pay up to $15 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 stroke 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 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 any
time 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, SmithKline
Beecham plc purchased 176,992 shares of TBC's Common Stock for $1.0 million
and an additional 400,000 shares of Common Stock for $2.0 million in
connection with the public offering which closed on October 1, 1997. (see
note 2). TBC granted limited piggyback registration rights regarding the
176,992 shares which expire when the shares may be sold pursuant to Rule
144(k) under the Securities Act.
FORM 10-Q Page 12
<PAGE> 15
(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 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) REGULATORY FILING
During August 1997, the Company filed an NDA with the FDA for it's lead
product candidate, NOVASTAN(R)(argatroban) for use as an anticoagulant in
patients with HIT. During September 1997, the FDA granted
FORM 10-Q Page 13
<PAGE> 16
priority review status to the new drug application for
NOVASTAN(R)(argatroban). During October, 1997, the Company was notified by
the FDA that the filed NDA for NOVASTAN(R)was accepted. The Company
anticipates a decision on the approval of the filed NDA by the end of the
second quarter of 1998.
(13) SUBSEQUENT EVENTS
Common Stock Reserved
During October 1997, upon acceptance of the filing of the NDA for
NOVASTAN(R) by the FDA, the Company issued 214,286 shares of Common
Stock and a warrant to purchase an additional 142,858 shares of Common
Stock at an exercise price of $14.00 per share, subject to adjustment,
to the Former Licensor of NOVASTAN(R). The Company will record a
non-cash accounting change of $1,075,000 to in process research and
development during the fourth quarter of 1997.
Public Offering
During October 1997, the Company sold 5,750,000 shares of Common Stock
for $5.00 per share pursuant to an underwritten public offering. The
net proceeds to the Company for the 5,750,000 shares sold were
approximately $26.6 million after deducting selling commissions and
expenses of approximately $2.2 million related to the offering.
FORM 10-Q Page 14
<PAGE> 17
ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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. On an annual
basis, 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 $70.1
million from inception to September 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, a private placement of the 5%
Preferred on March 14, 1997, which raised approximately $6.0 million in net
proceeds, and a secondary public offering which closed during October 1997
and raised approximately $26.6 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 September 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 work with TBC in the development
and commercialization of NOVASTAN(R) in the U.S. and Canada for specified
indications. Upon execution of the agreement, SmithKline paid an $8.5
million license fee and during October 1997, paid a $5 million milestone
payment to TBC and has committed to pay up to $15.0 million in additional
milestone payments based on the clinical development and FDA approval of
NOVASTAN(R) for the indications of HIT, HITTS and AMI. In connection with
the SmithKline Agreement, SmithKline purchased 176,922 shares of Common
Stock for $1.0 million and an additional 400,000 shares of Common Stock for
$2.0 million in conjunction with the Company's public offering which closed
during October 1997.
FORM 10-Q Page 15
<PAGE> 18
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 SEPTEMBER 30, 1997 AND 1996
Revenues increased from $1,102,500 in the three month period ended
September 30, 1996 to $9,690,002 in the same period of 1997, an increase of
779%. Revenues were primarily composed of earned revenues under
commercialization agreements and research collaborations. Such revenue
increased primarily because of the $8.5 million license fee paid by
SmithKline in August, 1997.
Total operating expenses decreased 21% from $6,932,395 in the three month
period ended September 30, 1996 to $5,464,698 in the same period of 1997
due primarily to the decrease in research and development expenses.
Research and development expenses decreased 28% from $5,980,096 in the
three month period ended September 30, 1996 to $4,287,056 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 24% from $952,299 in the three month
period ended September 30, 1996 to $1,177,642 in the same period of 1997
primarily because of payments made in connection with the SmithKline
Agreement.
Other income and expense is composed of investment income on invested funds
and foreign currency exchange gains and losses. The decrease is caused by
an 8% decrease in investment income from $199,811 in the three month period
ended September 30, 1996 to $183,494 in the same period of 1997 and an
increase in foreign currency exchange gains. Investment income decreased
due to lower balances of cash available for investment.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues increased from $4,303,276 in the nine month period ended September
30, 1996 to $11,180,002 in the same period of 1997, an increase of 160%.
Revenues were primarily composed of earned revenues under commercialization
agreements and research collaborations. Such revenue increased primarily
because of the $8.5 million license fee paid by SmithKline in August, 1997.
Total operating expenses decreased 17% from $20,982,742 in the nine month
period ended September 30, 1996 to $17,366,371 in the same period of 1997
primarily because of the decrease in research and development expenses.
Research and development expenses decreased 25% from $17,484,641 in the
nine month period ended September 30, 1996 to $13,117,421 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 38% from $3,076,936 in the nine month
period ended September 30, 1996 to $4,248,950 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 and payments made in
connection with the SmithKline Agreement. Restructuring and impairment
charges during 1996 related to the consolidation of the IPI operations into
TBC did not reoccur in 1997.
Other income and expense is composed of investment income on invested funds
and foreign currency exchange gains and losses. The decrease is caused by a
27% decrease in investment income from $697,089 in the nine month period
ended September 30, 1996 to $506,970 in the same period of 1997, attributed
primarily to lower balances of cash available for investment.
FORM 10-Q Page 16
<PAGE> 19
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 nine months of 1997, the Company utilized net
cash of $6,371,366 in operating activities. The use of cash in operations
was caused primarily by the Company's net loss of $5,677,146. 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 September 30, 1997, the
Company had cash, cash equivalents and short-term investments of
$14,308,542. During October 1997, the Company received net proceeds of
approximately $26.6 million from a completed public offering of Common
Stock and $5 million for attainment of a milestone related to the
SmithKline Agreement.
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 TBC 11251 and TBC 1269. 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 through
the end of 1999. 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). The
outcome of certain lawsuits that have been filed against the Company could
also have an impact on liquidity. See Part II, Item 1. Legal Proceedings.
The Company anticipates that it may need to raise substantial funds for
future operations, which may be raised through collaborative arrangements,
public or private issuance of debt and equity, or other arrangements. The
Company expects that additional expenditures will be required if additional
product candidates enter clinical trials which may require additional
expenditures for laboratory space, scientific and administrative personnel,
and services of contract research organizations. There can be no assurance
that the Company will be able to obtain 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.
PENDING LITIGATION
As of September 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
FORM 10-Q Page 17
<PAGE> 20
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) Commercialization
Agreement regarding TBC's expectations for future development and
commercialization of NOVASTAN(R), (d) Capital Stock 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
FORM 10-Q Page 18
<PAGE> 21
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
Preferred Stock Conversions
On May 19, 1997, May 22, 1997, May 28, 1997, June 11, 1997, July 25, 1997,
September 5, 1997 and September 9, 1997, the Company issued an aggregate of
596,546 shares of Common Stock to certain institutions pursuant to the
conversion of its 5% Preferred Stock. The issuance of the Common Stock was
FORM 10-Q Page 19
<PAGE> 22
exempt from registration under Section 4 (2) of the Securities Act of 1933,
as amended, and Regulation D promulgated thereunder.
Common Stock Transactions
On March 5, 1997, March 13, 1997, March 20, 1997, March 21, 1997, April 8,
1997, June 3, 1997, June 13, 1997, June 18, 1997, July 23, 1997, August 1,
1997, August 7, 1997 and August 12, 1997, the Company issued an aggregate
of 175,292 shares of its Common Stock to a certain institution and
individuals, pursuant to the exercise of outstanding warrants for an
aggregate purchase price of $702,437. The issuance of the Common Stock was
exempt from registration under Section 4 (2) of the Securities Act of 1933,
as amended. The warrants and the Common Stock underlying the warrants may
not be sold in the United States absent registration or an applicable
exemption from registration requirements.
On August 5, 1997, in conjunction with the SmithKline Agreement, the
Company issued 176,992 shares of Common Stock to an affiliate of SmithKline
for a total purchase price of $1 million. The Company has granted limited
piggyback registration rights with respect to such shares. The Common Stock
may not be sold in the United States absent registration or an applicable
exemption from registration requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During August 1997, the Company filed a new drug application with the
United States Food and Drug Administration for its 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 the
injectable form of TBC 11251 (TBC's lead compound for
vasospasm/hypertension) in congestive heart failure. The Company has also
initiated Phase I clinical trial work with the oral form of TBC 11251.
During October 1997, the Company initiated Phase IIa clinical trials for
TBC 1269, a novel non-steroid anti-inflammatory medication for the
treatment and prevention of asthma.
During October 1997, the Company was notified by the FDA that the NDA filed
for NOVASTAN(R)was accepted. The Company anticipates a decision on the
approval of the filed NDA by the end of the second quarter of 1998.
Synthelabo, the European licensee for NOVASTAN(R), and the Company have
been jointly evaluating NOVASTAN(R) in conjunction with thrombolytic
therapy for treating acute myocardial infarction ("AMI") in a Phase II
clinical trial program which encompassed a total of 2,400 patients with
each party responsible for 1,200 patients. In the Company's ARG-230 trial,
a trend toward improvement in clinical outcomes (death, recurrent
myocardial infarction, new onset congestive heart failure/shock, need for
urgent PTCA or bypass surgery) was observed at the 3.0 mcg/kg/minute dose
of NOVASTAN(R) for patients treated within the first three hours. Due to
the small sample size of the trial, the positive trends did not achieve
statistical significance. The Company has been notified by Synthelabo that
the results of the Synthelabo 1,200 patient ARGAMI-2 trial demonstrated the
safety of NOVASTAN(R) in the therapy of acute myocardial infarction with
effectiveness comparable to heparin. The Company and SmithKline Beecham plc
are conducting an evaluation of AMI and additional indications for
NOVASTAN(R), beyond the first indication of heparin-induced
thrombocytopenia, in order to maximize the commercial value of the
compound.
FORM 10-Q Page 20
<PAGE> 23
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 (2) Amendment to the 1995 Stock Option Plan of Texas
Biotechnology Corporation dated March 4, 1997
10.63 (2) Amendment to the 1995 Non-Employee Director Stock
Option Plan of Texas Biotechnology Corporation
dated March 4, 1997
11 Computation of net income (loss) per share
99.1 (3) Agreement between Mitsubishi Chemical Corporation,
Texas Biotechnology Corporation and SmithKline
Beecham plc dated August 5, 1997
99.2 (3) Product Development License and Co-Promotion
Agreement between Texas Biotechnology Corporation
and SmithKline Beecham plc dated August 5, 1997
99.3 (3) Common Stock Purchase Agreement between Texas
Biotechnology Corporation and SmithKline Beecham
plc dated August 5, 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.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) with the
Commission on August 14, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the
Commission on August 25, 1997 and incorporated herein by reference.
REPORTS ON FORM 8-K
One report on Form 8-K was filed during the quarter ended September 30,
1997. The report was dated August 5, 1997 and filed August 25, 1997, and
reported that the Company had entered into certain agreements with
Mitsubishi Chemical Corporation and SmithKline Beecham plc.
FORM 10-Q Page 21
<PAGE> 24
TEXAS BIOTECHNOLOGY CORPORATION
SEPTEMBER 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 7th day of November, 1997.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ DAVID B. MCWILLIAMS
--------------------------------------
David B. McWilliams
President and Chief Executive Officer
By: /s/ STEPHEN L. MUELLER
--------------------------------------
Stephen L. Mueller
Vice President of Administration
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
FORM 10-Q Page 22
<PAGE> 25
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
4.8 (1) Certificate of Designations of 5% Cumulative
Convertible Preferred Stock for Texas Biotechnology
Corporation
10.60 (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 (2) Amendment to the 1995 Stock Option Plan of Texas
Biotechnology Corporation dated March 4, 1997
10.63 (2) Amendment to the 1995 Non-Employee Director Stock
Option Plan of Texas Biotechnology Corporation
dated March 4, 1997
11 Computation of net income (loss) per share
99.1 (3) Agreement between Mitsubishi Chemical Corporation,
Texas Biotechnology Corporation and SmithKline
Beecham plc dated August 5, 1997
99.2 (3) Product Development License and Co-Promotion
Agreement between Texas Biotechnology Corporation
and SmithKline Beecham plc dated August 5, 1997
99.3 (3) Common Stock Purchase Agreement between Texas
Biotechnology Corporation and SmithKline Beecham
plc dated August 5, 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.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) with the
Commission on August 14, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the
Commission on August 25, 1997 and incorporated herein by reference.
REPORTS ON FORM 8-K
One report on Form 8-K was filed during the quarter ended September 30,
1997. The report was dated August 5, 1997 and filed August 25, 1997, and
reported that the Company had entered into certain agreements with
Mitsubishi Chemical Corporation and SmithKline Beecham plc.
FORM 10-Q Page 23
<PAGE> 1
EXHIBIT 11
TEXAS BIOTECHNOLOGY CORPORATION
COMPUTATION OF PER SHARE EARNINGS (LOSS)
PRIMARY COMPUTATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,119,662 $ (5,630,084) $ (6,821,769) $ (15,982,377)
Applicable common and common stock equivalent shares:
Weighted average shares of common stock
outstanding during the period 26,261,020 24,188,708 25,853,961 23,053,607
Incremental number of shares outstanding during
the period resulting from the assumed exercises
of stock options 678,573 -- -- --
Incremental number of shares outstanding during
the period resulting from the assumed exercises
of warrants 366,362 -- -- --
----------- ------------ ------------ -------------
Weighted average shares of common stock
and common stock equivalents outstanding
during the period 27,305,955 24,188,708 25,853,961 23,053,607
=========== ============ ============ ============
Net income (loss) per common share, primary $ 0.15 $ (0.23) $ (0.26) $ (0.69)
=========== ============ ============ ============
</TABLE>
Note: For the three months ended September 30, 1996 and the nine months ended
September 30, 1996 and 1997, shares related to the exercise of stock
options and warrants are not considered as their effect would be
antidilutive.
<PAGE> 2
EXHIBIT 11
TEXAS BIOTECHNOLOGY CORPORATION
COMPUTATION OF PER SHARE EARNINGS
FULLY DILUTED COMPUTATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income before preferred dividend requirement $ 4,416,891 N/A N/A N/A
Applicable common and common stock equivalent shares:
Weighted average shares of common stock
outstanding during the period 26,261,020
Incremental number of shares outstanding during
the period resulting from the assumed exercises
of stock options 769,469
Incremental number of shares outstanding during
the period resulting from the assumed exercises
of warrants 438,318
Incremental number of shares outstanding during
the period resulting from the assumed conversion
of preferred stock 1,008,351
Incremental number of shares outstanding during
the period resulting from the assumed issuance
of contingent stock 285,715
----------- ----------- ----------- -----------
Weighted average shares of common stock
and common stock equivalents outstanding
during the period 28,762,873 -- -- --
=========== =========== =========== ===========
Net income per common share, fully diluted $ 0.15 N/A N/A N/A
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 816,615
<SECURITIES> 13,491,927
<RECEIVABLES> 1,384,955
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,340,729
<PP&E> 8,150,503
<DEPRECIATION> 4,884,584
<TOTAL-ASSETS> 19,666,239
<CURRENT-LIABILITIES> 2,843,264
<BONDS> 0
0
18
<COMMON> 132,319
<OTHER-SE> 16,690,638
<TOTAL-LIABILITY-AND-EQUITY> 16,822,975
<SALES> 0
<TOTAL-REVENUES> 11,180,002
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,366,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,416,891
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,416,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,416,891<F1>
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<FN>
<F1>Net income shown is before preferred dividends of $297,229 with net income
after dividends equal to $4,119,662.
</FN>
</TABLE>
