<PAGE> 1
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 the quarterly period ended September 30, 1998, 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 NO.: 0-25978
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THERAPEUTIC ANTIBODIES INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 62-1212485
------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1207 17TH AVENUE SOUTH, SUITE 103
NASHVILLE, TENNESSEE 37212
------------------------------ -------------------
(Address of Principal Executive Offices) (Zip Code)
(615) 327-1027
------------------------------
(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
----- -----
As of November 14, 1998, 52,057,219 shares of the registrant's
Common Stock were outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Balance Sheets -- September 30, 1998
and December 31, 1997............................................... 1
Condensed Consolidated Statements of Operations -- Nine
months ended September 30, 1998 and 1997............................ 2
Condensed Consolidated Statements of Operations -- Three
months ended September 30, 1998 and 1997............................ 2
Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1998 and 1997............................ 3
Notes to Condensed Consolidated Financial Statements .................... 4
<PAGE> 3
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,027,360 $ 4,915,077
Restricted cash 727,376 --
Short-term investments -- 1,997,240
Trade receivables 357,026 594,267
Value added tax receivable 219,319 179,629
Inventories 262,330 489,138
Other current assets 169,645 409,929
------------ ------------
Total current assets 3,763,056 8,585,280
Property and equipment, net 11,125,845 11,456,690
Patent and trademark costs, net 641,489 598,924
Other assets, net 109,112 159,171
------------ ------------
Total assets $ 15,639,502 $ 20,800,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,457,947 $ 1,457,121
Accrued interest 177,624 146,326
Current portion of notes payable 6,276,392 2,545,701
------------ ------------
Total current liabilities 7,911,963 4,149,148
Notes payable, net of current portion 5,323,798 6,059,072
Deferred revenue 359,120 559,467
Other liabilities 282,200 274,033
------------ ------------
Total liabilities 13,877,081 11,041,720
------------ ------------
Convertible redeemable preferred stock 2,000,000 --
Stockholders' equity:
Common stock - par value $.001 per share; 39,000,000 shares authorized,
23,366,658 issued and outstanding September 30, 1998; 30,000,000 shares authorized, -- --
23,252,825 issued and outstanding December 31, 1997 23,366 23,253
Additional paid-in capital 69,231,395 68,927,203
Deficit accumulated during the development stage (1984-1998) (69,853,718) (59,412,383)
Cumulative translation adjustment 361,378 220,272
------------ ------------
Total stockholders' equity (237,579) 9,758,345
------------ ------------
Total liabilities and stockholders' equity $ 15,639,502 $ 20,800,065
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
<PAGE> 4
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Cumulative
Development Stage
For the Nine Months Ended For the Three Months Ended from August 10, 1984
September 30, September 30, (inception) through
----------------------------- ----------------------------- September 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales and contract revenue $ 664,241 $ 329,805 $ 174,473 $ 110,610 $ 3,455,358
Licensing revenue 2,543,925 81,405 1,000,000 19,100 3,900,380
Interest income 170,208 733,464 25,913 245,234 2,092,894
Grant income 30,960 30,593 10,337 10,161 763,479
Foreign currency gains 13,372 -- -- -- 1,799,356
Value-added tax and insurance
recoveries -- -- -- -- 577,170
Other 61,280 46,410 29,522 14,558 282,094
------------ ------------ ------------ ------------ -----------
3,483,986 1,221,677 1,240,245 399,663 12,870,731
------------ ------------ ------------ ------------ -----------
Expenses:
Cost of sales and contract revenue 425,699 94,207 41,667 20,754 970,856
Research and development 8,095,376 8,250,487 2,543,950 2,775,553 50,137,833
General and administrative 2,817,892 2,520,279 795,012 890,039 15,761,059
Marketing and distribution 443,349 386,453 184,113 139,518 2,419,902
Depreciation and amortization 1,191,948 1,236,566 390,297 465,152 6,703,619
Interest 951,056 804,883 480,932 269,524 4,681,639
Foreign currency losses -- 961,056 10,743 245,365 913,118
Debt conversion expense -- -- -- -- 801,597
Other -- 9,712 -- -- 334,825
------------ ------------ ------------ ------------ -----------
13,925,320 14,263,643 4,446,714 4,805,905 82,724,448
------------ ------------ ------------ ------------ ------------
Net loss $(10,441,334) $(13,041,966) $ (3,206,469) $ (4,406,242) $(69,853,717)
============ ============ ============ ============ ============
Basic and diluted net loss per share $ (0.45) $ (0.57) $ (0.14) $ (0.19) $ (6.56)
============ ============ ============ ============ ============
Weighted average shares used in
computing basic and diluted
net loss per share 23,309,742 22,775,892 23,366,658 22,779,226 10,645,599
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE> 5
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Cumulative
Development Stage
For the Nine Months Ended From August 10, 1984
September 30, (Inception) through
------------------------------ September 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $(10,441,334) $(13,041,966) $(69,853,717)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,191,948 1,236,566 6,703,618
Disposal of property and equipment -- -- 927,238
Foreign currency (gain) loss (13,372) 961,056 (886,237)
Warrant expense 195,280 -- 389,274
Stock-based compensation expense 81,558 57,388 631,957
Debt conversion expense -- -- 801,597
Changes in:
Restricted cash (727,376) -- (727,376)
Trade receivable 187,307 63,456 (321,925)
Inventories 226,807 (57,029) (148,157)
Other current assets 243,550 6,272 (164,557)
Accounts payable and accrued expenses 31,241 64,987 1,584,623
Accrued interest 34,141 (84,543) 810,366
Deferred revenue (208,048) (49,211) 21,559
Other -- -- (43,489)
------------ ------------ ------------
Net cash used in operating activities (9,198,298) (10,843,024) (60,275,226)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (704,566) (975,017) (14,592,889)
Patent and trademark costs (73,166) (141,766) (734,163)
Purchase of short-term investments -- (9,865,277) (13,933,294)
Maturity of short-term investments 2,094,508 5,800,412 13,933,293
Other -- -- 69,750
------------ ------------ ------------
Net cash provided by (used in)
investing activities 1,316,776 (5,181,648) (15,257,303)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from notes payable 4,397,100 208,892 20,206,105
Payments on notes payable (1,083,519) (1,024,919) (7,260,990)
Proceeds from line of credit 141,324 8,129 3,512,602
Payments on line of credit (62,377) (108,573) (3,389,819)
Proceeds from convertible debt, net -- -- 9,655,000
Payments on convertible debt -- -- (4,320,325)
Proceeds from issuance of stock, net 1,929,827 1,167,611 58,941,407
Proceeds from issuance of warrants -- -- 65,000
Other (1,881) -- (149,479)
------------ ------------ ------------
Net cash provided by financing activities 5,320,474 251,140 77,259,501
------------ ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (326,669) (644,209) 300,388
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,887,717) (16,417,741) 2,027,360
Cash and cash equivalents, beginning of period 4,915,077 20,502,536 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,027,360 $ 4,084,795 $ 2,027,360
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 6
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are
unaudited, but include all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary for a fair statement of the
results for such periods.
The unaudited interim consolidated financial statements should be read in
conjunction with the audited December 31, 1997 consolidated financial statements
of Therapeutic Antibodies Inc. (the "Company"). The December 31, 1997 condensed
consolidated balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year ending December 31, 1998.
Since its inception, the Company has been in the development stage, devoting its
efforts and resources to drug discovery and development programs relating to the
development of highly purified, polyclonal antibodies for the treatment of
disease. Since inception, the Company's revenues have been from licensing
agreements with corporate partners, contract agreements, product sales, grant
income, interest income, and insurance and value added tax recoveries. Net
losses have been incurred each year since its inception and the Company expects
to continue to incur operating losses during at least the next year due to
continued spending on product development, process development, preclinical and
clinical testing, regulatory affairs, initial manufacturing activities and
administration. In November 1998 additional financing was secured to allow the
Company to fund operations for at least the next 18 months. The terms of the
additional financing are described under the "Liquidity and Capital Resources"
section.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Company will adopt
SFAS No. 131 in 1998 as required. Because this standard requires only disclosure
of certain additional information, the effect of adoption will not have a
significant impact on the Company's financial position and results of
operations.
During 1998, Statement of Position No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1") and
Statement of Position No. 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP No. 98-5") were issued. The Company will adopt SOP No. 98-1 and SOP No.
98-5 in 1999 as required. However, the effect of the adoption will not have a
significant impact on the Company's financial position and results of
operations.
4
<PAGE> 7
NOTE 3 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in the financial
statements. Adoption of SFAS No. 130 did not impact the Company's consolidated
financial position, results of operations or cash flows. The reconciliation of
net loss to comprehensive net loss is as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss ($10,441,334) ($13,041,965) ($3,206,469) ($4,406,242)
Other comprehensive income (loss):
Change in equity due to foreign currency
translation adjustments (141,107) 481,388 (106,236) 207,080
------------ ------------ ----------- -----------
Total comprehensive loss ($10,582,441) ($12,560,577) ($3,312,705) ($4,199,162)
============ ============ =========== ===========
</TABLE>
NOTE 4 - BASIC AND DILUTED EARNINGS PER COMMON SHARE
The basic and diluted earnings per common share calculation was based on
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"), which the Company adopted during the fourth quarter of 1997.
Application of SFAS No. 128 to previous periods did not change the previously
disclosed per share amounts.
The calculations are based upon the weighted average number of shares of common
stock outstanding during each period as disclosed in the condensed consolidated
statements of operation. Common equivalent shares from stock options, warrants
and other dilutive securities are excluded from the computations as their effect
is antidilutive.
As further described in Note 6, the Company issued 28,690,561 shares of Common
Stock after September 30, 1998. The effects of those shares have not been
included in the calculations of basic and diluted earnings per Common Share.
NOTE 5 - FINANCING ACTIVITIES
At September 30, 1998, the Company completed a private placement of the
Company's 15% Subordinated Promissory Notes (the "15% Notes") in which a total
of $4,025,000 was raised. The notes mature in the fourth quarter of 1998 and
interest is payable quarterly. Detachable warrants to purchase a total of
402,500 shares of the Company's Common Stock were issued to purchasers of the
15% Notes. In November 1998, as part of the refinancing (as described in Note
6), certain holders of the 15% Notes converted an aggregate of $2,375,000 of
principal plus accrued interest of $107,000 into 3,658,058 shares of the
Company's Common Stock. The Company will repay the balance of the outstanding
15% Notes plus accrued interest at or before maturity from the proceeds of the
Company's November refinancing.
In September 1998, the Company issued 100 shares of its Series A Convertible
Redeemable Preferred Stock at $.01 per share receiving total proceeds of
$2,000,000. In November 1998, the holders of the Series A
5
<PAGE> 8
Preferred Stock, as part of the refinancing (as described in Note 6), converted
the Preferred Stock and $32,876 of accrued dividends into 2,995,692 shares of
the Company's Common Stock.
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to the third quarter on November 9, 1998, the Company completed an
(pound)11,500,000 ($19,500,000) capital refinancing involving the issuance of
28,690,561 new shares of the Company's Common Stock on the London Stock Exchange
at 40 pence ($.68) per share. This refinancing included the private placement of
21,300,000 new shares of Common Stock. It also included the conversion of all
outstanding shares of Series A Convertible Redeemable Preferred Stock issued by
the Company in September 1998 and (pound)1,700,000 ($2,900,000) principal and
interest amount of certain loan notes into a total of 7,390,561 shares of Common
Stock. Included in the loans converted was $500,000 principal amount of an
outstanding $750,000 promissory note issued in 1996 to an officer of the
Company. The $500,000 principal amount was converted into 736,811 shares of
Common Stock. Approximately (pound)7,500,000 ($12,600,000) in cash was raised in
the private placement, net of expenses, which will be used to fund the ongoing
development of the Company's products and to repay the balance of the
outstanding 15% Notes (see Note 5).
Concurrent with the issuance of the new shares, a substantial portion of the
Company's US net operating loss carryforwards may no longer be available to
offset any taxable income in future years. The Company has always recorded in
its financial statements a full valuation allowance against its deferred tax
assets relating to tax loss carryforwards.
6
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
THERAPEUTIC ANTIBODIES INC.
We have reviewed the condensed consolidated balance sheet of Therapeutic
Antibodies Inc. and Subsidiaries at September 30, 1998 and the related condensed
consolidated statements of operations and condensed consolidated statements of
cash flows for the three-month and nine-month periods ended September 30, 1998
and September 30, 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted accounting standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet at December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated March 5,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
November 12, 1998
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Therapeutic Antibodies Inc. (the "Company") should be
read in conjunction with the condensed consolidated financial statements and
notes thereto. Statements made in this Quarterly Report on Form 10-Q which are
not historical fact are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
are necessarily estimates reflecting the Company's best judgment based on
current information and involve a number of risks and uncertainties, and there
can be no assurance that other factors will not affect the accuracy of such
forward-looking statements. While it is impossible to identify all such factors,
factors which could cause actual results to differ materially from those
estimated by the Company include but are not limited to, changes in the
regulation of the pharmaceutical industry, both in the United States and
internationally, changes in pharmaceutical product testing or approval
standards, both in the United States and internationally, competitive pressures
on the pharmaceutical industry and the Company's response thereto, the results
of clinical tests of the Company's products currently in development, the
receipt of FDA and other regulatory approvals of the Company's products, the
ability of the Company's competitors to develop and manufacture products that
compete with the Company's products, the Company's ability to appropriately
address the Year 2000 computer system issue, general conditions in the economy
and capital markets, and other factors which may be identified from time to time
in the Company's Securities and Exchange Commission filings and other public
announcements.
GENERAL
Since its inception, the Company has been in the development stage,
devoting its efforts and resources to drug discovery and development programs
relating to the development of highly purified, polyclonal antibodies for the
treatment of disease. Since inception, the Company's revenues have been from
licensing agreements with corporate partners, contract agreements, product
sales, grant income, interest income, and insurance and value added tax
recoveries. Net losses have been incurred each year since its inception and the
Company expects to continue to incur operating losses during at least the next
year due to continued spending on research, product development, process
development, preclinical and clinical testing, regulatory affairs, initial
manufacturing activities and administration. Additional financing may be
necessary to fund the Company's operations until product sales are of sufficient
volume to generate positive cash flows from operations. In November 1998, the
Company completed a US$19.5 million capital refinancing, which included a
private placement of the Company's Common Stock, the issuance of shares of the
Company's Series A Preferred Stock and the subsequent conversion of those shares
into Common Stock, and the conversion of certain loan notes into Common Stock.
See "Liquidity and Capital Resources."
The Company conducts its operations from its headquarters in the United
States and through subsidiaries located in the United Kingdom and Australia.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
The Company's total revenues for the third quarter of 1998 increased by
210% to $1,240,000 from $400,000 for the same period in 1997 due primarily to
increases in licensing revenue and in sales and
8
<PAGE> 11
contract revenue. Licensing revenue for the quarter ended September 30, 1998
consisted of a $1,000,000 milestone payment received under an agreement with
Altana, Inc. triggered by the FDA's acceptance of the Company's licensing
applications for its CroTAb(R) product. See "Liquidity and Capital Resources."
Sales and contract revenue increased 58% during the three months ended September
30, 1998 to $174,000 from $111,000 during the same period in 1997 due to
increased sales of ViperaTAb(R). Interest income during the third quarter of
1998 was $26,000, a decrease of 89% from $245,000 in the third quarter of 1997
reflecting lower cash reserves in 1998.
Total expenses for the quarter ended September 30, 1998 decreased by 7%
to $4,447,000 from $4,806,000 for the same period in 1997 due to the Company's
cost cutting measures, particularly in the areas of research and development and
general and administrative expenses. Research and development expenses during
the same periods decreased by 8% to $2,544,000 from $2,776,000 due to
discontinuation of certain research and clinical projects that were determined
not to meet the Company's goal of near-term commercial success.
General and administrative expenses for the quarter ended September 30,
1998 decreased by 11% to $795,000 from $890,000 for the quarter ended September
30, 1997. This decrease reflects the Company's efforts to reduce costs. In
addition, certain positions in the corporate office were vacant in 1998 causing
further reductions in costs.
Marketing and distribution expenses increased for the three months
ended September 30, 1998 by 32% to $184,000 from $140,000 for the three months
ended September 30, 1997, reflecting increased market research and product
distribution activity as a result of higher product sales.
Depreciation and amortization expense for the quarter ended September
30, 1998 decreased by 16% to $390,000 from $465,000 for the quarter ended
September 30, 1997.
Interest expense in the three months ending September 30, 1998,
increased by 78% to $481,000 from $270,000 in the three months ending September
30, 1997 due to issuance of $4,025,000 principal amount of the Company's 15%
Subordinated Promissory Notes (the "15% Notes") in the third quarter of 1998.
The Company's net loss for the quarter ended September 30, 1998, was
$3,206,000 compared to a net loss of $4,406,000 for the quarter ended September
30, 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
The Company's revenues for the first nine months of 1998 increased by
185% to $3,484,000 from $1,222,000 for the same period of 1997. The increase in
revenues in the first nine months of 1998 is attributable to increases in
licensing fees and product sales. These increases were partially offset by a
decrease in interest income to $170,000 in the first nine months of 1998 from
$733,000 in the first nine months of 1997. The Company received milestone
payments totaling $1,000,000 in the first nine months of 1998 from G. D. Searle
& Co. for the signing of a research collaboration agreement. The Company also
received milestone payments of $1,500,000 in the first nine months of 1998 for
the submission and acceptance of its Product License Application and
Establishment License Application for the Company's North American snake
antivenom, CroTAb(R), to the United States Food and Drug Administration. Sales
and contract revenue increased 101% to $664,000 for the nine months ended
September 30, 1998 from $330,000 for the nine months ended September 30, 1997.
This increase resulted from higher 1998 sales of EchiTAb(TM) in Nigeria and
ViperaTAb(R) in Scandinavia.
9
<PAGE> 12
Total expenses for the nine months ended September 30, 1998 remained
relatively unchanged compared to the same period in 1997. In the first quarter
of 1998, management implemented a plan to conserve cash and to streamline and
sharpen the focus of the Company's research and development efforts. Research
and development expenses, the largest component of the Company's expenses,
decreased only slightly in the first nine months of 1998 as compared to the
first nine months of 1997, but have begun to decrease more sharply in recent
months. Research and development costs are related to manufacturing the
Company's products for clinical trials, conducting clinical trials and ensuring
that the necessary quality control and assurance procedures are in place, as
well as costs associated with regulatory compliance.
General and administrative expenses for the first nine months of 1998
increased by 12% to $2,818,000 from $2,520,000 for the first nine months of
1997. This increase relates to one-time staffing costs incurred in early 1998
and the development of a new information systems department in 1998.
Marketing and distribution expenses increased by 15% to $443,000 in the
first nine months of 1998 from $386,000 in the first nine months of 1997,
reflecting increased market research and distribution activity related to higher
product sales.
Interest expense in the nine months ending September 30, 1998,
increased by 18% to $951,000 from $805,000 in the first nine months of 1997 due
to issuance of the Company's 15% Notes in the third quarter of 1998.
In the nine months ended September 30, 1998, the Company recorded
foreign currency gains of $13,000. In the nine months ended September 30, 1997,
the Company recorded foreign currency losses of $961,000. These gains and losses
were the result of changes in the UK and Australian exchange rates from December
31, 1997 to September 30, 1998 on the Company's holdings of cash in British
pounds sterling and Australian dollars.
The Company's net loss for the nine months ended September 30, 1998
decreased 20% to $10.4 million compared to a net loss of $13.0 million for the
nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has been in the development stage,
devoting its efforts and resources to drug discovery and development programs.
Capital resources have been used for the establishment and expansion of
production facilities, for product research and development activities, for
clinical testing and to meet the Company's overall increased working capital
requirements. Although revenue from initial product sales has increased,
management does not expect revenues from product sales to be a significant
source of funding until additional products receive regulatory approval. Future
capital requirements will depend on numerous factors, including the progress of
its research programs and clinical trials, the development of regulatory
submissions, the commercial viability of the Company's products, the development
of sales, distribution and marketing capabilities, and the terms of any new
licensing arrangements. Funds for the Company's operating and capital
requirements historically have been provided by the sale of equity and debt and
from collaboration agreements and other financing arrangements. With the arrival
of Dr. Andrew Heath as Chief Executive Officer in early 1998, management began
to implement measures to conserve cash resources while at the same time
sustaining the progress of clinical trials for products with the greatest
likelihood of near-term commercial success. In November 1998, additional
financing was secured to allow the Company to fund operations for an additional
18 months. The terms of the additional financing are described below.
10
<PAGE> 13
At September 30, 1998, the Company had cash and cash equivalents
totaling $2,027,000. The Company's net cash used in operating activities during
the nine months ended September 30, 1998, totaled $9,198,000, a decrease of 15%
from the nine months ended September 30, 1997. Capital expenditures decreased
28% to $705,000 in the first nine months of 1998 from $975,000 in the first nine
months of 1997. The Company anticipates that total capital expenditures for 1998
will be approximately $1,300,000. During the remainder of 1998, the Company
intends to replace certain equipment at its production facilities in Wales to
attain greater efficiencies in the production process.
During the third quarter of 1998 the Company received a milestone
payment of $1,000,000 from Altana, Inc. upon the United States Food and Drug
Administration's ("FDA") acceptance of filing of the Company's Product License
Application and Establishment License Application for the Company's North
American antivenom, CroTAb(R). The Company received $500,000 during the second
quarter of 1998 for the submission of the Company's Product License Application
and Establishment License Application for CroTAb(R). The Company is entitled to
receive additional payments under the agreement based on achievement of certain
milestones relating to CroTAb(R) and the Company's DigiTAb(R) and TriTAb(R)
products, culminating with FDA approvals of these product lines. In addition,
the Company will receive bonus payments tied to the first three years of each
product's sales.
In May of 1998, the Company entered into an agreement with G. D. Searle
& Co. ("Searle") for the identification, development and commercialization of a
new antibody based drug specified by Searle. Searle forecasts it will pay the
Company up to $8,000,000 under the agreement for research and development and
product supplies based on achieving certain milestones. The Company received a
milestone payment of $1,000,000 upon execution of the agreement in May 1998. The
Company anticipates continuing to use these milestone payments from Altana and
Searle to reduce financing costs until product sales generate sufficient cash
flows.
In April 1998, the Company received a loan of $162,000 from the
Department of Primary Industries and Resources of the South Australian
Government. The loan is for the construction of transportable buildings at the
Company's Australian location. The interest rate on the loan is currently 6.5%
annually and is variable at the discretion of the Minister for Primary
Industries. Principal on the loan is payable in 20 equal semi-annual
installments, together with interest accrued thereon, beginning October 1998
through April 2008.
In June 1998, the Company received the final installment on a loan from
the Department of Industry and Trade ("DIT") of the South Australian Government.
In April, 1996, the DIT agreed to loan the Company up to $62,000 based upon the
number of local citizens employed by the Company through April 1998. Borrowing
on the loan totaled $50,000 at September 30, 1998. The loan is provided
interest-free and is due in full on April 29, 2006.
At September 30, 1998, the Company had raised $4,025,000 in a private
placement of 15% Notes. The 15% Notes mature in the fourth quarter of 1998 and
interest is payable quarterly. Warrants to purchase 25,000 shares of the
Company's Common Stock were issued to each purchaser of $250,000 principal
amount of 15% Notes. Holders of $2,375,000 of the 15% Notes elected to convert
principal plus accrued interest of $107,000 into 3,658,058 shares of the
Company's Common Stock as part of the refinancing plan. A portion of the
proceeds of the Company's November 1998 refinancing will be used to repay the
outstanding balance of the 15% Notes at or before maturity.
In September 1998, the Company issued 100 shares of its Series A
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock")
receiving total proceeds of $2,000,000. In November 1998,
11
<PAGE> 14
the holders of the Series A Preferred Stock elected to convert all outstanding
shares of the Series A Preferred Stock and $32,876 of accrued dividends into
2,995,692 shares of the Company's Common Stock.
Subsequent to the third quarter on November 9, 1998, the Company
completed an (pound)11,500,000 ($19,500,000) capital refinancing involving the
issuance of 28,690,561 new shares of the Company's Common Stock on the London
Stock Exchange at 40 pence ($.68) per share. The effects of those additional
shares on basic and diluted earnings per share have not been included in the
condensed consolidated statements of operations included elsewhere in this
report. The refinancing included the private placement of 21,300,000 new shares
of Common Stock. It also included the conversion of all outstanding shares of
Series A Convertible Redeemable Preferred Stock issued by the Company in
September 1998 and (pound)1,700,000 ($2,900,000) principal and interest amount
of certain loan notes into a total of 7,390,561 shares of Common Stock. Included
in the loans converted was $500,000 principal amount of an outstanding $750,000
Note issued in 1996 from an officer of the Company. The $500,000 principal
amount was converted into 736,811 shares of Common Stock. Approximately
(pound)7,500,000 ($12,600,000) in cash was raised in the private placement, net
of expenses, which will be used to fund the ongoing development of the Company's
products and to repay the balance of the outstanding 15% Notes.
YEAR 2000 READINESS
General
The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues. During 1998, the Company
implemented a plan ("the Y2K project") to ensure that its systems would be Year
2000 compliant. The Y2K project is addressing the issue of Programmable Logic
Controllers (PLC) and computer programs being able to distinguish between dates
in the 20th century and dates in the 21st century. The Y2K project is expected
to make all of the Company's business systems Year 2000 compliant, or they will
be retired.
Y2K Project
Therapeutic Antibodies' Y2K project is divided into five phases. The
project phases are: 1) compile an inventory of all equipment; 2) assign
priorities to the equipment identified as being at risk for Year 2000; 3) assess
the Year 2000 compliance of items identified as being significant to the
operational activities of the Company; 4) repair or replace material items that
are determined not to be Year 2000 compliant; and 5) test and validate material
items. A task force has been established to carry out these tasks which includes
subgroups at each of the Company's four locations, Nashville, USA; Adelaide,
Australia; London, UK; and Llandysul, UK.
As of September 30, 1998, the Company had completed the inventory and
priority assignment phases (phases 1 and 2) for each location.
The assessment of Year 2000 compliance (phase 3) includes the
identification and prioritization of critical external suppliers. The Company
will undertake a detailed evaluation of critical suppliers by communicating with
them about their commitment, plans and progress in addressing their Year 2000
issues. Detailed plans for this evaluation of material items and suppliers are
in place and have been initiated. Based on the results of these evaluations the
Company will develop contingency plans in the first quarter of 1999. Phase 3 is
due for completion by mid-1999.
12
<PAGE> 15
Phase 4, the repair and replacement of equipment and application
software that is not Year 2000 compliant, includes conversion, where available
from the supplier, or replacement. The testing phase will be undertaken as the
hardware and software is converted or replaced.
As of September 30, 1998, the Y2K task force had identified the
Accounting software used in Australia as not being Year 2000 compliant. The
software vendor has scheduled release of an upgrade that will be Year 2000
compliant during the first quarter of 1999. In addition, TAb has identified a
possible risk to Year 2000 compliance posed by some of the PLC or embedded
systems controlling the Air Handling units at each of the production sites
(Wales and Australia). The extent of this risk and the optimal solution are
currently being researched.
All phases of the Y2K project are expected to be complete before the
end of 1999. The phases are concurrent rather than consecutive; therefore, more
than one phase may be in progress at the same time.
Costs
The total estimated cost associated with the required modifications to
become Year 2000 compliant is not expected to be material to the Company's
financial position. The total capital cost is estimated to be no more than
$150,000. This figure will depend on the cost of the replacements needed after
completion of the assessment phase of the Y2K project. The total operating cost
attributable to staff time and effort devoted to the Y2K project to date is
$30,000. The estimated future operating cost of completing the project is
$60,000.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of normal business activities or operations. Due
to the inherent uncertainty when dealing with the Year 2000 issues, and from the
uncertainty of the Year 2000 readiness of suppliers, the Company is unable at
this time to determine whether or not any Year 2000 failures will have a
material effect on the Company, its operations or its financial condition. This
Year 2000 project is expected to significantly reduce the level of uncertainty
about any Year 2000 problem posed to the Company by its compliance, or by the
compliance of its material suppliers. The Company believes that with the
implementation and completion of its Year 2000 project as scheduled the
possibility of significant interruptions of normal operations should be minimal.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). The Company will
adopt SFAS No. 131 in 1998 as required. Because this standard requires only
disclosure of certain additional information, the effect of adoption will not
have a significant impact on the Company's financial position.
During 1998, Statement of Position No. 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1")
and Statement of Position No. 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP No. 98-5") were issued. The Company will adopt SOP No. 98-1
and SOP No. 98-5 in 1999 as required. However, the effect of the adoption will
not have a significant impact on the Company's financial position.
13
<PAGE> 16
OTHER FINANCIAL INFORMATION
PricewaterhouseCoopers, LLP, the Company's independent accountants,
performed a limited review of the financial data presented on pages 2 through 6
inclusive. The review was performed in accordance with standards for such
reviews established by the American Institute of Certified Public Accountants.
The review did not constitute an audit; accordingly, PricewaterhouseCoopers, LLP
did not express an opinion on the aforementioned data.
14
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1998, a former director of the Company exercised
outstanding employee stock options to purchase 197,500 shares of the Company's
Common Stock. The shares were issued in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) of the Securities Act. The options
provided for an exercise price of $1.25 per share, which exercise price was paid
by the tender to the Company of 104,167 outstanding shares of Common Stock held
by the former director. The Company received no cash proceeds from such
exercise.
Between June and August 1998, the Company issued to investors
$4,025,000 aggregate principal amount of its 15% Subordinated Promissory Notes
(the "15% Notes"). The 15% Notes were issued solely to accredited investors in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act. The notes bear interest at an annual rate of 15% and mature at December 31,
1998. Warrants to purchase 25,000 shares of the Company's Common Stock were
issued to each purchaser of $250,000 principal amount of 15% Notes. Holders of
$2,375,000 principal amount of the 15% Notes elected to convert their notes,
plus accrued interest of $107,000, into an aggregate of 3,658,058 shares of
Common Stock in the Company's November 1998 refinancing described elsewhere in
this report. The shares of Common Stock issued to holders of the 15% Notes in
the November 1998 refinancing were issued in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act. Cash proceeds from
the sale of the 15% Notes were used for working capital purposes.
On September 28, 1998, the Company's Board of Directors approved the
designation of a new series of preferred stock, which was designated as Series A
Convertible Redeemable Preferred Stock ("Series A Preferred Stock"). On
September 30, 1998, the Company sold 100 shares of the Series A Preferred Stock
to an investor at a purchase price of $20,000 per share. The shares were issued
to a non-United States person in an "offshore transaction" pursuant to the
requirements of Regulation S under the Securities Act. Cash proceeds from the
sale of the Series A Preferred Stock were used for working capital purposes. In
November 1998, the investor elected to convert all outstanding shares of the
Series A Preferred Stock into 2,995,692 shares of Common Stock in connection
with the November 1998 refinancing. As of November 14, 1998, there were no
shares of Series A Preferred Stock outstanding and the Company had no plans to
issue any additional shares of Series A Preferred Stock.
The principal rights of the Series A Preferred Stock as contained in
the Certificate of Designation of Rights and Preferences of Series A Convertible
Preferred Stock, filed with the Secretary of State of the State of Delaware on
September 28, 1998, are summarized as follows. The holders of Series A Preferred
Stock are entitled to dividends at the rate of 15% per annum payable annually.
Dividends are cumulative and accrue cumulatively, whether or not declared, from
and after the date of the original issuance of such stock. In the event any
shares of Series A Preferred Stock remain outstanding after the date that is 90
days from the date of issuance of such shares, then the rate at which dividends
accrue shall increase by 1% per month for each month such shares remain
outstanding, up to a maximum dividend rate of 30% per annum. In the event that
there are accrued but unpaid dividends on any shares of Series A Preferred
Stock, no dividends may be declared or paid upon any share of any other class of
stock of the Company. In the event of the liquidation, dissolution or winding up
of the Company, the holders of Series A Preferred Stock are entitled to a
preferential distribution equal to $20,000 per share plus the amount of any
accrued but unpaid dividends.
15
<PAGE> 18
The holders of Series A Preferred Stock are not entitled to vote on any
matter submitted to a vote of stockholders, except as required by law and except
with respect to changes in the capital stock of the Company, the dissolution,
liquidation or winding up of the Company or the merger or sale of substantially
all of the assets of the Company. The holders of Series A Preferred Stock are
entitled to convert all or any portion of their shares into shares of Common
Stock at any time prior to redemption. The price at which the shares may be
converted shall be the lower of the price at which the Company's Common Stock is
traded on the London Stock Exchange or the price at which the Company sells
shares of Common Stock in any placement consummated after the date of issuance
of the Series A Preferred Stock. The Company is required to redeem all
outstanding shares of Series A Preferred Stock upon the earliest to occur of the
date that is 90 days from the date of issuance or the closing of the Company's
issuance of any debt or equity securities after the Closing Date, for an amount
equal to $20,000 per share plus accrued but unpaid dividends on such shares.
ITEM 5. OTHER INFORMATION
The deadline for delivering to the Company notice of shareholder
proposals, other than proposals to be included in the proxy statement, for the
1999 Annual Meeting of Shareholders will be February 15,1999, pursuant to Rule
14a-4 under the Securities Exchange Act of 1934. The persons named as proxies in
the proxy statement may exercise discretionary authority to vote on any
proposals received after such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibits
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of Therapeutic
Antibodies Inc., filed July 15, 1996. (1)
3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation, filed May 13, 1998. (2)
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation, filed November 6, 1998. *
3.4 Amended and Restated Bylaws of Therapeutic Antibodies Inc. (1)
4.1 Certificate of Designation of Rights and Preferences of Series A
Convertible Redeemable Preferred Stock, filed September 28, 1998. *
27 Financial Data Schedule (SEC use only)
- ---------------------
(1) Incorporated by reference to appendices filed with the Company's Proxy
Statement on Schedule 14A relating to the Special Meeting of
Shareholders held on July 5, 1996.
(2) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998,
filed August 14, 1998.
* Filed herewith.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 2, 1998 relating
to the completion of a private placement of the Company's 15% Notes on
June 29, 1998 and the announcement of a new development strategy for
its CytoTAb(R) product. On September 8,
16
<PAGE> 19
1998, the Company filed a Current Report on Form 8-K relating to the
Company's announcement, on September 1, 1998, of the appointment of
Stuart M. Wallis as the Company's new Chairman of the Board of
Directors and a restructuring of the Board of Directors.
17
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1998 /s/ Andrew J. Heath
--------------------------------------
Andrew J. Heath
Chief Executive Officer
(interim financial officer)
18
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THERAPEUTIC ANTIBODIES INC.
In accordance with the provisions of Sections 103 and 242 of
the Delaware General Corporation Law (the "Act"), Therapeutic Antibodies Inc., a
Delaware corporation (the "Corporation"), organized and existing under and by
virtue of the provisions of the Act and all amendments thereto, does hereby
certify as follows:
1. The Amended and Restated Certificate of Incorporation of
the Corporation, as heretofore filed and as previously amended (the "Amended and
Restated Certificate of Incorporation"), shall, upon the filing and recording of
this Certificate of Amendment, be further amended as follows:
Paragraph THIRD, subsection 4(a), of the Amended and
Restated Certificate of Incorporation is deleted in its entirety, and
the following text is substituted in its place and stead:
"4. (a) The Corporation shall have authority, acting by its
Board of Directors, to issue not more than sixty million (60,000,000)
shares of capital stock, consisting of fifty-nine million (59,000,000)
shares of common stock, par value one tenth of one cent ($.001) per
share ("Common Stock") and one million (1,000,000) shares of preferred
stock, par value one cent ($.01) per share ("Preferred Stock")."
2. Except as otherwise set forth in paragraph 1 above, all
other provisions of the Corporation's Amended and Restated Certificate of
Incorporation shall remain as set forth in the Amended and Restated Certificate
of Incorporation as it now exists.
3. The foregoing amendment has been duly adopted in accordance
with the provisions of Section 242 of the Act.
IN WITNESS WHEREOF, Therapeutic Antibodies Inc. has caused
this Certificate to be signed by its Chief Executive Officer and Secretary this
6th day of November, 1998.
THERAPEUTIC ANTIBODIES INC.
By: /s/ Andrew J. Heath
-------------------------------------
Andrew J. Heath, M.D., Ph.D.,
Chief Executive Officer
ATTEST:
By: /s/ Martin S. Brown
---------------------------------
Martin S. Brown, Secretary
<PAGE> 1
EXHIBIT 4.1
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
THERAPEUTIC ANTIBODIES INC.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is
Therapeutic Antibodies Inc., a Delaware corporation.
2. The Certificate of Incorporation of the Company authorizes the
issuance of 1,000,000 shares of Preferred Stock, and expressly vests in the
Board of Directors of the Company the authority provided therein to issue any or
all of said shares in one or more series and by resolution or resolutions to
establish the designation, number, full or limited voting powers, or the denial
of voting powers, preferences and relative, participating, optional, and other
special rights and the qualifications, limitations, restrictions, and other
distinguishing characteristics of each series to be issued.
3. The Company has, as of the date hereof, no authorized or issued
shares of Preferred Stock.
4. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating a Series A Convertible Redeemable Preferred Stock:
RESOLVED, that 100 shares of the 1,000,000 authorized shares of
Preferred Stock of the Corporation shall be designated Series A Convertible
Redeemable Preferred Stock, $.01 par value per share, and shall possess the
rights and privileges set forth below:
SECTION I. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Series A Convertible
Redeemable Preferred Stock" (the "Series A Preferred Stock") and the number of
shares constituting the Series A Preferred Stock shall be one hundred (100).
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, that no decrease shall reduce the number of shares of
Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Company convertible into Series A Preferred Stock.
SECTION II. VOTING POWER.
(1) Except as otherwise expressly provided in this Section II, or as
required by the Delaware General Corporation Law, the holders of Series A
Preferred Stock shall not be entitled
<PAGE> 2
to any voting rights, except in the event of any failure to redeem the Series A
Preferred Stock in accordance with Section VI hereof whereupon the Series A
Preferred Stock shall be entitled to one vote per share for so long as such
default persists.
(2) Notwithstanding the foregoing, so long as any shares of Series A
Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote (with each share of Series A Preferred Stock being entitled to
one vote) or consent of the holders of at least three-fourths (3/4) of the
outstanding shares of Series A Preferred Stock, voting as a class, given in
writing or by resolution adopted at a meeting called for such purpose:
(a) Amend its Charter or Bylaws so as to alter or change the
rights, preferences or privileges of the Series A Preferred Stock;
(b) Merge or consolidate with or sell substantially all of its
assets to, or permit any of its Subsidiaries to merge or consolidate with or
sell substantially all of its assets to, any entity, except any Subsidiary may
be merged into the Company or another Subsidiary;
(c) Create a new class or series, or change a class or series
of shares, or issue any other shares or effect an exchange or reclassification
of shares into a class or series of shares having rights, preferences or
privileges prior, superior or substantially equal to the shares of Series A
Preferred Stock, or increase the rights, preferences or number of authorized or
issued shares of any class or series having rights or preferences with respect
to distributions, redemption, conversion or to dissolution that are prior,
superior or substantially equal to those of the Series A Preferred Stock;
(d) Increase or decrease the aggregate number of authorized
shares of Series A Preferred Stock;
(e) Effect an exchange or reclassification of all or part of
the shares of Series A Preferred Stock into shares of another class;
(f) Effect an exchange or reclassification, or create a right
of exchange, of all or part of the shares of another class or series into the
shares of Series A Preferred Stock;
(g) Change the designation, rights, preferences, or
limitations of all or part of the Series A Preferred Stock;
(h) Change the shares of all or part of the Series A Preferred
Stock into a different number of shares of Series A Preferred Stock;
(i) declare or pay any dividend in respect of its Common
Stock;
(j) Cancel or otherwise affect rights to distributions for
dividends that have accumulated but have not yet been declared on all or part of
the Series A Preferred Stock; or
(k) effect any reorganization or reclassification referred to
in Section V(7) or any merger referred to in Section V(6).
(3) For purposes of this Section II, a "Subsidiary" shall mean any
corporation or partnership more than 50% of the stock or partnership interests
of which is owned by the Company or by a Subsidiary.
2
<PAGE> 3
SECTION III. DIVIDENDS.
(1) General Dividend Obligation. The Company shall pay, when and as
declared by the Board of Directors, to the holders of the Series A Preferred
Stock preferential dividends before any distribution is made to the holders of
Common Stock at the times and in the amounts provided for in this part.
(2) Accrual of Dividends. Dividends on each share of Series A Preferred
Stock shall be cumulative from the Date of Issuance (as defined in this Section
III(2)), whether or not declared (at the rate and in the manner prescribed by
Sections III(3) and III(4)) from and including the Date of Issuance to and
including the date on which such shares of Series A Preferred Stock are
converted pursuant to this Certificate of Designation or, redeemed pursuant to
Section VI hereof. For the purposes of this Section III, the date on which the
Company shall initially issue any share of Series A Preferred Stock shall be
deemed to be the "Date of Issuance" of such share of Series A Preferred Stock
regardless of how many times transfer of such Series A Preferred Stock shall be
made on stock records maintained by or for the Company and regardless of the
number of certificates which may be issued to evidence such Series A Preferred
Stock (whether by reason of transfers of such Series A Preferred Stock or for
any other reason).
(3) Payment of Dividends. Dividends shall accrue on each share of
Series A Preferred Stock on a daily basis at the rate of fifteen percent (15%)
per annum (on the basis of a 365 day year) of the Preference Amount (as defined
in Section IV(1)(b)) of each such share of Series A Preferred Stock. In the
event any shares of Series A Preferred Stock continue to be outstanding after
the date that is 90 days following the Closing Date (as hereinafter defined in
Section V(15) below), then the rate at which dividends accrue shall increase by
one percent (1%) per month for each month such shares remain outstanding, up to
a maximum dividend rate of thirty percent (30%) per annum. Dividends shall be
payable in cash on each anniversary of the Closing Date; provided that all
outstanding accrued dividends shall be payable on the Conversion Date (as
defined in Section V(3) below) or the date of redemption of the Series A
Preferred Stock as provided in Section VI(1) below. The holders of the Series A
Preferred Stock shall be entitled, together with the holders of the Company's
Common Stock, to receive their pro rata share of dividends paid to holders of
Common Stock, as if their shares of Series A Preferred Stock had been converted
into shares of Common Stock as provided in Section V hereof. If any dividend on
any Series A Preferred Stock shall for any reason not be paid at the time such
dividend accrues, then such dividend in arrears shall accrue cumulatively and
will be paid as soon as payments of same shall be permissible under the
provisions of the Delaware General Corporation Law. Any dividends paid by the
Company shall first be applied in payment of accumulated dividends which are
most in arrears.
(4) Distribution of Partial Dividend Payments. If at any time the
Company shall pay less than the total amount of dividends due on outstanding
Series A Preferred Stock at the time of such payment, such payment shall be
distributed among the holders of the Series A Preferred Stock so that an equal
amount shall be paid with respect to each outstanding share of the Series A
Preferred Stock.
3
<PAGE> 4
SECTION IV. PREFERENCES ON LIQUIDATION, ETC.
(1) In the event of any
(a) Consolidation, share exchange or merger of the Company
with or into, or transfer of all or substantially all of the Company's property,
assets or business to any other person or entity or similar transaction; or
(b) The voluntary or involuntary dissolution, liquidation, or
winding up of the affairs of the Company and after payment or provision for
payment of the debts and other liabilities of the Company,
the holders of shares of the Series A Preferred Stock shall be entitled to
receive, for each share, an aggregate amount of $20,000 (as such amount is
adjusted for stock splits, stock combinations and stock dividends), plus any
accrued but unpaid dividends that have fallen due for payment (such aggregate
amount referred to as the "Preference Amount"), prior to any payment or
distribution to the holders of stock ranking junior to the Series A Preferred
Stock. If an asset balance remains after payment to the holders of the Series A
Preferred Stock of the amount to which such holders are entitled as above set
forth, the holders of shares of Series A Preferred Stock shall be entitled,
together with the holders of the Company's Common Stock, to receive their pro
rata share of the remaining assets of the Company as if the Series A Preferred
Stock had been converted into Common Stock as provided in Section V hereof
immediately prior to such merger, consolidation, dissolution, liquidation or
winding up.
(2) If upon any such consolidation, merger, transfer, dissolution,
liquidation, or winding up of the affairs of the Company, the assets of the
Company distributable as aforesaid among the holders of the Series A Preferred
Stock shall be insufficient to permit the payment to them of the full Preference
Amount to which they are entitled, then the entire assets of the Company so to
be distributed shall be distributed pro rata among the holders of the Series A
Preferred Stock in proportion to the Preference Amount payable to such security
holders.
(3) In case outstanding shares of Series A Preferred Stock shall be
subdivided into a greater number of shares of Series A Preferred Stock, the
Preference Amount in effect immediately prior to each such subdivision shall,
simultaneously with the effectiveness of such subdivision, be proportionately
reduced, and, conversely, in case outstanding shares of Series A Preferred Stock
shall be combined into a smaller number of shares of Series A Preferred Stock,
the Preference Amount in effect immediately prior to each such combination,
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
SECTION V. CONVERSION.
The holders of shares of Series A Preferred Stock shall have the
following conversion rights:
(1) Right to Convert. Subject to the terms and conditions of this
Section V, the holder of any share or shares of Series A Preferred Stock shall
have the right, at its option at any time prior to redemption, to convert such
Series A Preferred Stock, or any part thereof, (except that upon any liquidation
of the Company the right of conversion shall terminate at the close of business
on the last full business day next preceding the date fixed for payment of the
amount distributable on the Series A Preferred Stock) into such number of fully
paid and nonassessable whole shares
4
<PAGE> 5
of Common Stock as is obtained by dividing the aggregate of $20,000 multiplied
by the number of shares of Series A Preferred Stock to be so converted, plus any
accrued and unpaid dividends thereon, by the Conversion Price (as defined in
Section V(2) below). Such rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Series A Preferred Stock into Common Stock and by surrender
of a certificate or certificates for the shares so to be converted to the
Company at its principal office (or such other office or agency of the Company
as the Company may designate by notice in writing to the holders of the Series A
Preferred Stock) at any time during its usual business hours on the date set
forth in such notice, together with a statement of the name or names (with
address) in which the certificate or certificates for shares of Common Stock
shall be issued.
(2) Conversion Price. For purposes of this Section V, the term
Conversion Price shall mean the price per share that is the lower of (a) the
average middle market quotation of one share of the Company's Common Stock on
the Daily Official List of the London Stock Exchange for the five trading days
immediately preceding the Conversion Date (as defined below) or (b) the price at
which the Company issues shares of Common Stock in any placement consummated
after the Closing Date (as hereinafter defined) and prior to or on the same date
as the Conversion Date.
(3) Issuance of Certificates; Time Conversion Effected. Promptly after
the receipt of the written notice referred to in paragraph V(1) and surrender of
the certificate or certificates for the share or shares of Series A Preferred
Stock to be converted, the Company shall issue and deliver, or cause to be
issued and delivered, to the holder, registered in such name or names as such
holder may direct a certificate or certificates for the number of shares of
Common Stock issuable upon the conversion of such share or shares of Series A
Preferred Stock. If the shares are to be issued in a name other than the name in
which the Series A Preferred Stock is issued, then the Company may request the
holder to cause to be delivered to the Company, an opinion of counsel to the
effect that the transfer may be effected without registration under the
Securities Act of 1933 and state securities laws. To the extent permitted by
law, such conversion shall be deemed to have been effected and the Conversion
Price shall be determined as of the close of business on the date on which such
written notice shall have been received by the Company and the certificate or
certificates for such share or shares shall have been surrendered as aforesaid
(the "Conversion Date"), and at such time the rights of the holder of such
shares or shares of Series A Preferred Stock shall cease, and the person or
persons in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby.
(4) Fractional Shares; Dividends; Partial Conversion. No fractional
shares shall be issued upon conversion of Series A Preferred Stock into Common
Stock and no payment or adjustment shall be made upon any conversion on account
of any cash dividends on the Common Stock issued upon such conversion. At the
time of each conversion, the Company shall pay in cash an amount equal to all
dividends accrued and unpaid on the shares surrendered for conversion to the
date upon which such conversion is deemed to take place as provided in
subparagraph (3). In case the number of shares of Series A Preferred Stock
represented by the certificate or certificates surrendered pursuant to
subparagraph (1) exceeds the number of shares converted, the Company shall, upon
such conversion, execute and deliver to the holder thereof, at the expense of
the Company, a new certificate or certificates for the number of shares of
Series A Preferred Stock represented by the certificate or certificates
surrendered which are not to be converted. If any fractional interest in a share
of Common Stock would, except for the provisions of the first sentence of this
subparagraph (4), be delivered upon any such conversion, the Company, in lieu of
delivering the fractional share thereof, shall pay to the holder
5
<PAGE> 6
surrendering the Series A Preferred Stock for conversion an amount in cash equal
to the current market price of such fractional interest as determined in good
faith by the Board of Directors of the Company.
(5) Notices. In case at any time:
(i) the Company shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or a consolidation or
merger of the Company with, or a sale of all or substantially all its assets to,
another corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give, by first class
certified or registered mail, postage prepaid, addressed to each holder of
Series A Preferred Stock at the last registered address of such holder as shown
on the books of the Company, (a) at least 30 days' prior written notice of the
date on which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining right
to vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (b) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 30 days' prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
(6) Effect of Merger or Share Exchange. Notwithstanding the provisions
of Section IV hereof, a holder of Series A Preferred Stock may elect by notice
given to the Company on or before the later of (x) the day on which the holders
of the Common Stock of the Company approve the transaction governed by
subsections (6) or (7), and (y) the twentieth day following the date of delivery
or mailing to such holder of the last proxy statement relating to the vote on
the transaction by the holders of the Common Stock of the Company, to be
governed by the provisions of this subsection (6) in transactions to which this
subsection applies. In case the Company shall enter into any mandatory share
exchange with or merge into any other corporation wherein the Company is not the
surviving corporation, or sell or convey its property as an entirety or
substantially as an entirety, then, as a part of such share exchange, merger,
sale or conveyance, provision shall be made so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock, the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
share exchange, merger, sale or conveyance, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such share exchange,
merger, sale or conveyance. In any such case, appropriate provision (as
determined by resolution of the
6
<PAGE> 7
Board of Directors of the Company) shall be made with respect to the rights and
interests thereafter of the holders of the Series A Preferred Stock, to the end
that all the provisions hereof (including adjustment provisions) shall
thereafter be applicable, as nearly as reasonably practicable, in relation to
such stock or other securities or property.
(7) Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company
(except as provided in subsection (6)), the holders of the Series A Preferred
Stock shall thereafter be entitled to obtain (in lieu of the number of shares of
Common Stock which such holders would have been entitled to receive upon
conversion immediately prior to such reorganization or reclassification) the
shares of stock of any class or classes or other securities or property to which
such number of shares of Common Stock would have been entitled at the time of
such reorganization or reclassification had such conversion occurred immediately
prior thereto. In case of any such capital reorganization or reclassification,
appropriate provision (as determined by resolution of the Board of Directors of
the Company) shall be made with respect to the rights and interests thereafter
of the holders of the Series A Preferred Stock, to the end that all the
provisions hereof (including adjustment provisions) shall thereafter be
applicable, as nearly as reasonably practicable, in relation to such stock or
other securities or property.
(8) Determination by the Board of Directors. All determinations by the
Board of Directors of the Company under the provisions of this Section V shall
be made in good faith with due regard to the interests of the holders of Series
A Preferred Stock and the other holders of securities of the Company and in
accordance with good financial practice, and all valuations made by the Board of
Directors of the Company under the terms of this Section V must be made with due
regard to any market quotations of securities involved in, or related to, the
subject of such valuation.
(9) No Dilution or Impairment. The Company will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of Section
V and in taking of all such action as may be necessary or appropriate in order
to protect the conversion privilege of the holders of the Series A Preferred
Stock. Without limiting the generality of the foregoing, the Company (a) will
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the conversion of the Series A Preferred Stock, (b) will not
take any action which results in any adjustment of the Conversion Price if the
total number of shares of Common Stock issuable after the action upon conversion
of the Series A Preferred Stock would exceed the total number of shares of
Common Stock then authorized by the Company's Charter and available for the
purpose of issue upon such exercise, and (c) shall not at any time authorize or
issue any security which under the definition given in subsection (15)
constitutes "Common Stock" and which grants to its registered holders rights to
share in dividends or any other distributions of any kind at any time made by
the Company (including but not limited to liquidating distributions) which have
the right to the distribution of a greater amount per share than the amount per
share distributable on the Company's Common Stock on the date hereof or which
are in any respect more favorable than the corresponding rights attributable to
Common Stock on the date hereof.
(10) Listing on Securities Exchanges, etc. The Company will cause all
shares of Common Stock from time to time issued upon the conversion of the
Series A Preferred Stock
7
<PAGE> 8
pursuant to this Section V to be included on the Official List of the London
Stock Exchange and any other stock exchange on which the Common Stock is listed
from time to time and will maintain such listings as long as any Common Stock is
so listed.
(11) Stock to be Reserved. The Company will at all times reserve and
keep available out of its authorized Common Stock or its treasury shares, solely
for the purpose of issuance upon the conversion of the Series A Preferred Stock
as herein provided, such number of shares of Common Stock as shall then be
issuable upon the conversion of all outstanding Series A Preferred Stock. The
Company covenants that all shares of Common Stock which shall be so issued shall
be duly and validly issued and fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Company covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share, if any, of the Common Stock is at all times equal to or
less than the effective Conversion Price. The Company will take all such action
as may be necessary to assure that all such shares of Common Stock may be so
issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the Common Stock of
the Company may be listed.
(12) No Reissuance of Series A Preferred Stock. Shares of Series A
Preferred Stock which are converted into shares of Common Stock or redeemed as
provided herein shall be cancelled, shall not be reissued, and shall return to
the status of authorized but undesignated preferred stock of the Company.
(13) Issue Tax. The issuance of certificates for shares of Common Stock
upon conversion of Series A Preferred Stock shall be made without charge to the
holders thereof for any issuance tax in respect thereof, provided that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Series A Preferred Stock which is being
converted.
(14) Closing of Books. The Company will at no time close its transfer
books against the transfer of any Series A Preferred Stock or of any shares of
Common Stock issued or issuable upon the conversion of any Series A Preferred
Stock in any manner which interferes with the timely conversion of such Series A
Preferred Stock.
(15) Definition of Common Stock. As used in this Section V and the
remainder of this Certificate, the term "Common Stock" shall mean and include
the Company's authorized Common Stock, $.001 par value, as constituted on the
date that the sale of the Series A Preferred Stock is consummated pursuant to
that certain Purchase Agreement between the Company and Panmure Gordon & Co.
Limited (the "Closing Date"), and shall also include any capital stock of any
class of the Company thereafter authorized which shall not be limited to a fixed
sum or percentage of such fixed sum in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company;
provided that the shares of Common Stock receivable upon conversion of Series A
Preferred Stock or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subsection (7), shall include only shares designated as Common Stock of the
Company on the day immediately following the Closing Date.
8
<PAGE> 9
SECTION VI. REDEMPTION.
(1) Mandatory Redemption. Upon the earliest to occur of (a) the closing
of the Company's issuance of any debt or equity securities after the Closing
Date (other than in connection with the exercise of any option or warrant
outstanding on the Closing Date) (such event a "Refinancing") or (b) the date
that is 90 days following the Closing Date, the Company, upon prior written
notice to the holders of Series A Preferred Stock and at its expense out of
funds legally available therefor, shall redeem all outstanding Series A
Preferred Stock, or in the event of a Refinancing, all outstanding Series A
Preferred Stock or such lesser proportion of the Series A Preferred Stock as may
be redeemed out of the net proceeds of the Refinancing (provided always that all
outstanding Series A Preferred Stock shall be redeemed no later than 90 days
following the Closing Date), such redemption to be effected at the time
specified in such notice by wire transfer of same day funds to such account as
the holder shall have specified to the Company; provided, however, that each
holder of Series A Preferred Stock, upon receipt of such notice, may, at its
option, elect to convert all or any portion of such holder's outstanding shares
of Series A Preferred Stock into Common Stock pursuant to the provisions of
Section V hereof.
(2) Price. The redemption price of the Series A Preferred Stock shall
be $20,000 per share (adjusted for any stock splits, stock dividends and similar
changes in outstanding shares subsequent to the Closing Date), plus any accrued
and unpaid dividends.
(3) Limitation. In the event that the Company lacks sufficient funds to
redeem lawfully all of the shares of Series A Preferred Stock which the Company
is, at any such time, obligated to redeem pursuant to this Section VI, then
redemption of less than all of such shares shall be pro rata among the holders
thereof in accordance with the number of such shares of Series A Preferred Stock
and Conversion Shares tendered for redemption.
(4) Failure to Redeem. In the event the Company (i) fails to redeem any
shares tendered by holders for redemption that are required to be redeemed in
accordance with this Section VI or (ii) fails to pay the redemption price when
due, then the holders of the Series A Preferred Stock, voting separately as a
class, shall have the sole right, to the exclusion of any other class of stock,
to nominate and appoint one member of the Company's Board of Directors forthwith
and thereafter at all annual or special meetings of the stockholders of the
Company at which directors are to be elected, to nominate and elect one member
of the Company's Board of Directors until all defaults shall have been cured. At
all annual or special meetings for election of directors so long as such right
to elect directors shall continue, the holders of the Series A Preferred Stock,
voting separately as a class, shall vote for and elect the director that they
are entitled to elect as aforesaid, and thereafter the holders of the Common
Stock and of any other stock of the Company having voting powers, in accordance
with their respective rights, shall vote for and elect the remaining directors.
At any meeting of the stockholders at which the holders of the Series A
Preferred Stock shall have the right to vote as a class, they shall have one
vote for each share of Series A Convertible Preferred Stock registered on the
record date for such meeting in their name on the stock registry books.
9
<PAGE> 10
FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said Series A Preferred Stock and
fixing the number, powers, preferences and relative, optional, participating,
and other special rights and the qualifications, limitations, restrictions, and
other distinguishing characteristics thereof shall, upon the effective date of
said series, be deemed to be included in and be a part of the Amended and
Restated Certificate of Incorporation of the Corporation pursuant to the laws of
the State of Delaware.
Signed on September 28, 1998.
/s/ Martin S. Brown
-----------------------------------
Martin S. Brown, Secretary
10
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