ITEM 1. BUSINESS
GENERAL
Therapeutic Antibodies Inc. ("TAb" or the "Company"), is a development stage biopharmaceutical company specializing in the preparation of polyclonal antibodies for the treatment of disease. Headquartered in Nashville, Tennessee, with operations in the United States, the United Kingdom, Australia and New Zealand, TAb is developing and producing a line of antibody products designed primarily to treat life-threatening medical conditions for which there currently are no satisfactory therapies.
The Company was incorporated in Delaware in 1984. The Company was co-founded in 1984 by Professors John Landon and Tim Chard and Dr. Harry Browne. Both Professors Landon and Chard have been active in the development of antibodies for diagnostic purposes and the development of immunoassays. Each formerly chaired a department at St. Bartholomew's and the Royal London School of Medicine and Dentistry in London, and both have published numerous articles relating to antibody/antigen interaction and detection. Since 1984, the Company has affiliated itself with scientists at academic institutions in the United States, Europe, Australia, New Zealand and Africa, to assist in the research, testing and development of new antibody products. See "Item 1 - Principal Licensing and Other Collaborative Arrangements."
TAb has developed systems for the production and purification of a new generation of polyclonal antibodies that management believes can produce suitable therapies for neutralizing a variety of toxins, including certain venoms, cytokines and drugs. Some of TAb's innovations include the preparation of unique immunogens, the purification of specific antibodies and the digestion of antibodies into fragments. Management believes that these capabilities enable TAb to produce a broad range of specific antibodies that are safer and more effective than the antibody products currently available. The Company's antibody products are in various stages of development, ranging from preclinical testing to manufacturing and distribution.
TAb's executive offices are located in Nashville, Tennessee, in the vicinity of the Vanderbilt University Medical Center. Research, production and testing operations are conducted through the Company's subsidiaries. The Company operates its research and development laboratories through TAb London Ltd. ("TAb London"), one of its United Kingdom subsidiaries, including pilot production facilities at St. Bartholomew's and the Royal London School of Medicine and Dentistry in London, England. The Company's antibody production operations are situated in both Dyfed, Wales and Adelaide, Australia. These operations are conducted through TAb Wales Ltd.("TAb Wales"), Polyclonal Antibodies Ltd. ("PAL"), which the Company acquired in 1992, and TAb Australia Pty. Ltd. See "Item 2
ITEM 2. PROPERTIES
The Company's physical properties are primarily owned or leased through its subsidiaries. TAb London Ltd. operates the Company's research and development laboratories and its pilot manufacturing facility at St. Bartholomew's and the Royal London School of Medicine and Dentistry in London. TAb London leases 3,400 square feet of laboratory space from St. Bartholomew's. The lease has an expiration date of September 30, 1997, but permits TAb to renew the lease for an additional six year term. This option has been exercised and the landlord's response is awaited. TAb London also leases 4,000 square feet of office space at 14-15 Newbury Street in Central London, which lease expires in 1999.
TAb Wales Ltd. owns and operates production offices, quality control laboratories and a new manufacturing facility in Dyfed, Wales. In 1992, TAb acquired Polyclonal Antibodies Ltd. ("PAL"), which owned the initial Welsh facilities, including approximately 250 acres of pasture land, animal stock, and production and ancillary facilities. The Welsh facilities were established with financial support of the Welsh government in the form of grants and investments. In 1995, TAb Wales completed construction of a new 20,000 square foot manufacturing plant within its existing Welsh facilities.
In 1994, TAb organized a production subsidiary, TAb Australia Pty. Ltd., in Adelaide, Australia, which produces additional antisera. In 1995, TAb Australia leased offices and laboratories and acquired grazing rights over 250 hectares of land at the Turretfield Research Center. The flocks of sheep were moved to this location and a bleeding shed constructed. In the fourth quarter of 1996, TAb Australia Pty. Ltd. completed construction of new facilities on the property. The new facilities include offices, a cleanroom and a manufacturing plant, located adjacent to the Company's existing facilities. The lease of the Turretfield Research Center property will expire in 2015.
The Company's corporate headquarters is located in 7,941 square feet of leased office space in the vicinity of Vanderbilt University Medical Center in Nashville, Tennessee. The lease expires on January 31, 2001.
All of the Company's laboratories, production facilities and farms are suitably equipped for their intended purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Company or any of its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading publicly on the London Stock Exchange (under the symbol TAb) effective July 23, 1996. Prior to that date there was no public market for the Company's Common Stock. There is no public trading market for the Company's Common Stock within the United States.
The following table presents quarterly information on the price range of the Company's Common Stock. This information indicates the high and low sale prices reported by the London Stock Exchange.
As of March 14, 1997, there were approximately 900 holders of record of the Company's Common Stock. On March 14, 1997, the last sale prices reported on the London Stock Exchange for the Company's Common Stock was L.3.85 ($6.17).
The Company to date has paid no dividends on its Common Stock. The declaration and payment of future dividends will be determined by the Board of Directors in light of conditions existing in the future and are expected to depend upon earnings, financial condition, capital requirements, and other relevant factors not presently determinable. The Company does not expect to pay dividends in the foreseeable future.
- -------------------- (1) Currency translations were calculated based upon the currency exchange rates in effect on the date the price disclosed was reported on the London Stock Exchange.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data at and for each of the five years in the period ended December 31, 1996 have been derived from the Company's consolidated financial statements. The data set forth below should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein and also with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Notes:
(1) At December 31, 1996, the Company had cash and cash equivalents totaling $20,503,000 of which approximately $17,300,000 was denominated in British pounds. As a result of improvement in the exchange rate between the British pound and the U.S. dollar, the Company experienced a foreign currency transaction gain of $1,730,000 for the year ended December 31, 1996.
(2) In 1994 and 1995, the Company constructed a pilot production facility in London and a manufacturing facility in Wales. These facilities were funded through financing arrangements provided by Aberlyn Capital Management Company, Inc. and the Welsh Development Agency. See Note 4 to the consolidated financial statements for further information.
(3) On July 23, 1996, the Company completed an initial public offering of 4,190,477 shares of its common stock on the London Stock Exchange at L.5.25 ($8.14) per share. See Note 1 to the consolidated financial statements for further information.
ITEM 7.
ITEM 7. 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 the Company should be read in conjunction with the financial statements and notes thereto. Statements made in this Annual Report on Form 10-K 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 on 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, 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, Therapeutic Antibodies Inc. ("TAb" or 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 contract agreements with corporate partners, 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 and increasing requirements for process development, preclinical and clinical testing, regulatory affairs, initial manufacturing activities and administration. To fund these activities, the Company conducted additional financings in the first nine months of 1996. 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, Australia and New Zealand. For a discussion of the Company's international operations for the past three fiscal years, see Note 9 to the Company's financial statements.
RESULTS OF OPERATIONS
Year ended December 31, 1996 Compared to Year ended December 31, 1995
TAb's revenues for 1996 increased by 335% to $3,268,000 from $750,000 for 1995. During the year ended December 31, 1996, the Company received approximately $97,000 more in contract revenue over the amount received in the year ended December 31, 1995, which was attributable primarily to the Company's Nigerian EchiTAb(TM) contract. Grant revenue increased $79,000 due to a grant received from the Economic Development Authority of the Government of South Australia for expansion of the Company's Australian operations. Interest income in the year ended December 31, 1996, increased 527% to $607,000 from $97,000 due to additional cash and short term investment holdings from the proceeds of the UK Placement (defined below). See "Liquidity and Capital Resources". As a result of improvement in the
exchange rate between the British pound and the U.S. dollar, the Company experienced a foreign currency transaction gain of $1,730,000 for the year ended December 31, 1996. See Note 2b to the Company's financial statements included as Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS the years ended December 31, 1996, 1995 and 1994 and the cumulative development stage from August 10, 1984 (inception) through December 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors Therapeutic Antibodies Inc.
We have audited the accompanying consolidated balance sheets of Therapeutic Antibodies Inc. and Subsidiaries (A Development Stage Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 and for the period from August 10, 1984 (inception) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company has been in the development stage with its primary activities being research and development and has not yet commenced planned principal operations.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Therapeutic Antibodies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 and for the period from August 10, 1984 (inception) through December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Louisville, Kentucky March 7, 1997
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
The accompanying notes are an integral part of the financial statements.
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1996, 1995 and 1994 and for the Cumulative Development Stage from August 10, 1984 (inception) through December 31, 1996
The accompanying notes are an integral part of the financial statements.
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Therapeutic Antibodies Inc. (the Company) was incorporated on August 10, 1984 for the purpose of engaging in the research, development, production and marketing of therapeutic antibodies that provide protection against venoms, drugs, toxins and infectious diseases. The Company is a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises, and is devoting substantially all of its present efforts to research and development, including pre-production activities. Certain of the Company's research and development and product testing activities are carried out through affiliations with scientists at academic institutions around the world. These affiliations include preclinical and clinical research agreements, consulting agreements, patent and royalty agreements and facility leases. Inherent in the development stage is a range of risks including the need for, and uncertainty of, future financing. The Company also faces risks stemming from the nature of the biopharmaceutical industry, such as the risk of competition, the risk of regulatory change, including potential changes in health care coverage, uncertainties associated with obtaining and enforcing patents and proprietary technology, uncertainty of the approval of products by governmental agencies and risks related to fluctuations in interest rates and foreign currencies.
Net losses have been incurred each year since its inception and the Company expects to incur operating losses during at least the next year due to continued spending on research, product development and increasing requirements for process development, preclinical and clinical testing, regulatory affairs, initial manufacturing activities, and administration. The Company will require additional financing until product sales or licensing fees are sufficient to generate positive cash flows from operations.
On July 23, 1996, the Company completed an initial public offering of 4,190,477 shares of its Common Stock on the London Stock Exchange at L.5.25 ($8.14) per share raising total gross and net proceeds of approximately $34,100,000 and $30,400,000, respectively. Approximately $4,750,000 was used to repay the Company's 15% Notes and certain other indebtedness. The remainder of the net proceeds is being utilized to fund working capital, operations and capital expenditures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign subsidiaries denominated in foreign currencies are translated to U.S. dollars at period-end exchange rates. Revenues and expenses denominated in foreign currencies are translated at average exchange rates for the period. Translation adjustments are reported as a separate component of stockholders' equity. The effects of translation of intercompany loans to international subsidiaries which have been designated as long-term investments are also included in the separate component of stockholders' equity. The Company's initial public offering on the London Stock Exchange raised total proceeds of L.22,000,000 of which L.8,000,000 was converted to U.S. dollars and the balance was left in sterling. At December 31, 1996, the Company had approximately L.10,000,000 which were translated to U.S. dollars at the year end currency rate of 1.71, therefore, significantly increasing foreign currency gains for 1996. At March 7, 1997, the exchange rate had fallen to 1.60. Foreign currency transaction gains for the years ended December 31, 1996, 1995 and 1994 were $1,733,357, $3,054, and $509, respectively.
c. CASH EQUIVALENTS AND SHORT TERM INVESTMENTS: All highly-liquid investments with an original maturity of three months or less when purchased are classified as cash equivalents.
Financial instruments which potentially subject the Company to concentrations of credit risk consists principally of cash and temporary cash investments. The Company places substantially all of its cash and temporary cash investments with one major financial institution. As of December 31, 1996, and at times throughout the period, cash balances were in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. The Company has not experienced any losses in such accounts and believes no significant exposure from this concentration exists with respect to cash and temporary cash investments. The Company also maintains balances at a U.S. institution denominated in British sterling pounds.
Short term investments consists of debt instruments. The carrying values of these short term investments approximates fair value at December 31, 1996.
d. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market.
e. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful life of the asset ranging from 5 to 20 years. Leasehold improvements are amortized over the shorter of their estimated life or the period of the related leases, including anticipated renewals for which the Company has an option.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
f. CARRYING VALUE OF LONG LIVED ASSETS: The carrying value of long lived assets is reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value will not be recoverable, the carrying value is reduced to fair value.
g. PATENT COSTS: Patent costs consist of legal fees associated with patent applications and filings. Once a patent is granted, costs are amortized using the straight-line method over 17 years from the patent grant date. Accumulated amortization was $22,059, $10,539 and $1,987 as of December 31, 1996, 1995 and 1994, respectively.
h. REVENUE RECOGNITION: Revenues from sales of products are recognized at the time of shipment.
The Company has received grants from the United Kingdom and Australia as a result of reaching certain employment levels and constructing production facilities. Grants related to employment levels and conducting clinical trials are recognized as income at the point in time that the conditions of the grant are satisfied. Grants related to construction of production facilities are recognized over the life of the facility.
i. RESEARCH AND DEVELOPMENT COSTS: Research and development costs, costs for developing and improving manufacturing processes, pilot plant operations and inventories of products not yet approved for sale by governmental regulatory authorities are expensed when incurred.
j. NET LOSS PER SHARE: The Company's net loss per share calculations for the years ended December 31, 1996, 1995 and 1994, and from inception through December 31, 1996, are based upon the weighted average number of shares of common stock outstanding during each period. Common equivalent shares from stock options, warrants and other dilutive securities are excluded from the computations as their effect is antidilutive.
k. VALUE-ADDED TAX RECEIVABLE: The Company's operations in the United Kingdom (U.K.) are subject to value-added tax (VAT) whereby the Company pays tax at a rate of 17.5% on most goods and services purchased. These VAT taxes are subject to refund based on returns which are filed quarterly with U.K. taxing authorities. In 1994, the Company determined it could file refunds for VAT paid in prior years in the amount of $475,760 which was recorded as revenue in 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
l. FINANCIAL STATEMENTS ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 consists of the following:
Buildings and improvements includes $38,288 of capitalized interest associated with the construction of a building in Australia in 1996 and $491,408 with the construction of buildings in the United Kingdom in 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE: Notes payable at December 31 consist of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
In August 1995, the Company initiated a private placement of its 6% Convertible Notes due October 1, 2000 (the "6% Notes"). Interest on the 6% Notes is payable semi-annually and the notes are convertible into shares of the Company's common stock at $8.00 per share at any time prior to maturity upon the election of the holder. The 6% Notes are not collateralized. In January 1996, the Company offered each holder of the 6% Notes the opportunity to exchange all or a portion of their 6% Notes for shares of the Company's common stock at the rate of $5.50 per share until February 9, 1996. Pursuant to this offer, the holders of $2,565,105 aggregate amount of principal and accrued interest on the 6% Notes elected to tender their 6% Notes to the Company in exchange for 466,383 shares of common stock. This exchange conversion resulted in a non-cash debt conversion expense of $801,597.
The Company has entered into capital lease agreements with Aberlyn Capital Management Limited Partnership under which it has financed $1,000,000 at 18% and $3,203,573 at 14.5%. Principal amounts mature from October 1998 through January 2000. Payments of $113,000 are due monthly. In connection with the agreement, the Company issued warrants in 1995 and 1994 to purchase a total of 102,514 shares of the Company's common stock at $5.00 per share. In addition, if the Company chooses to retire early any of the $1,000,000 financed under the agreements, the Company is required to issue warrants to Aberlyn to purchase up to 12,500 shares at $8.00 per share.
In 1995, the Company obtained the proceeds of an $800,000 loan from Equitas LP. The loan agreement provides for interest at an annual rate of 11.5% to be paid quarterly. Principal is due in full at maturity on July 24, 2000. The lender received warrants to purchase 22,198 shares of the Company's common stock at $8.00 per share. The loan is collateralized by accounts receivable, antisera inventory, and livestock from certain of the Company's subsidiaries as well as limited guarantees from those subsidiaries. This loan is additionally collateralized by the common shares of the Company's subsidiary, Polyclonal Antibodies, Limited (PAL).
In 1995 the Company executed a $500,000 promissory note with Lakewood Partners, a Tennessee general partnership. In connection with the financing, the Company issued warrants to purchase a total of 25,000 shares of the Company's common stock at $8.00 per share. On September 3, 1996, the Company repaid the $500,000 principal amount along with accrued interest to date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
The Company had a 150,000 British pounds sterling note payable to Welsh Development Agency. The Welsh Development Agency had the right to convert 90,000 warrants into the Company's common stock at 1.11 British pounds sterling per share in lieu of repayment of L.100,000 of the outstanding balance. In October 1996, the Company repaid L.50,000 and accrued interest thereon and issued 90,000 shares of the Company's common stock as payment in full for the outstanding loan.
During 1995, TAb Wales, Ltd. obtained additional funds of 150,000 British pounds sterling from the Welsh Development Agency in the form of a note payable which was repayable by conversion of warrants to purchase 60,000 shares of the Company's common stock at 2.50 British pounds sterling per share. In October 1996, the Company issued 60,000 shares of its common stock as repayment in full for the note.
In January 1995, financing of $465,900 was obtained from Bank of Wales PLC collateralized by certain property in the United Kingdom. The note is repayable over 10 years beginning in February 1995. Interest is paid at 2.5% over Bank of Wales base lending rate (effective rate of 8.5% at December 31, 1996).
The Company's subsidiary, TAb Australia Pty. Ltd., has a loan agreement with the South Australian Minister for Primary Industries. The agreement allows TAb Australia Pty. Ltd. to draw up to $2,000,000 Australian dollars ($1,589,400 U.S. dollars) to assist with construction and equipment of buildings at its Turretfield location in South Australia. The loan is to be repaid over ten years in equal annual installments of principal. Interest is due annually at 11% per annum. The loan is collateralized by a mortgage on the building and equipment purchased. As of December 31, 1996, the Company had drawn approximately $1,576,000 U.S. dollars on this loan.
In June 1996, the Company completed a private placement of $5,000,000 principal amount of the Company's 15% Subordinated Promissory Notes due May 1, 1997, of which $4,250,000 were issued for cash and $750,000 were issued upon conversion of existing indebtedness. Each $250,000 unit of the 15% Notes was accompanied by a Stock Purchase Warrant to purchase 18,000 shares of Common Stock at $8.00 per share. Warrants to purchase 360,000 shares of Common Stock were issued in connection with the 15% Notes. On August 24, 1996, the Company redeemed, for cash, $4,250,000 principal amount of the 15% Notes and accrued interest thereon.
In April 1996, an officer of the Company made a short-term unsecured loan to the Company of $1,000,000. Interest was charged at 12%. In May, the officer converted $750,000 principal amount of the 12% Note into an equal amount of the Company's 15% Notes. The $250,000 principal balance on the 12% Note is payable in full together with accrued interest in December 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
The Company has available lines of credit at December 31, 1996 totaling 100,000 British pounds sterling with the Bank of Scotland and its subsidiary, Bank of Wales PLC, in the United Kingdom. These lines of credit are collateralized by the guarantee of the Company and are due on demand. Interest is paid at 2.5% over the relevant bank's base lending rate (effective rate of 8.5% at December 31, 1996). At December 31, 1996, there were no outstanding borrowings on these lines of credit.
The weighted average interest rate on all short-term borrowings outstanding at December 31, 1996 and 1995 was 11.6% and 9.7%, respectively.
Aggregate maturities of fixed payment on notes payable for the next five years follow:
At December 31, 1996 and 1995, $2,250,896 and $1,345,408, respectively, of the Company's debt obligations were denominated in British pounds sterling or Australian dollars and were translated to U.S. dollars at year-end exchange rates. The Company is subject to foreign currency risk to the extent that exchange rates between the U.S. dollar and the foreign currencies change. For accounting purposes, changes in exchange rates for the debt obligations result in translation adjustments which are reported as part of the separate component of stockholders' equity. At December 31, 1996 and 1995, the amount included in the cumulative translation adjustment related to the Company's debt obligations was $97,019 of loss and $16,547 of gain, respectively. The Company does not hedge its exposure to foreign currency risks. The Company estimates that the fair value of its long-term debt is not substantially different from its book value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES:
Under SFAS No. 109, Accounting for Income Taxes, deferred income taxes are recognized for future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company determined that at December 31, 1996 and 1995 its ability to realize future benefits of deferred tax assets did not meet the "more likely than not" criteria in SFAS No. 109. The components of the net deferred tax liability recognized in the accompanying consolidated balance sheet are as follows:
The deferred tax liability arose due to tax differences in the bases of assets and liabilities relative to the acquisition of Polyclonal Antibodies, Ltd. The deferred tax asset arises primarily from the Company's net operating loss carryforwards of approximately $39,315,000. The Company has approximately $207,000 of research and development tax credits available to offset future federal income tax. United States net operating losses carryforwards (NOLs) and research and development tax credits (R&D credits) expire as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. INCOME TAXES, CONTINUED:
United Kingdom NOLs of $10,467,000, Australian NOLs of $562,000 and New Zealand NOLs of $97,000, which are not included in the table above, may be carried forward indefinitely.
6. STOCK WARRANTS AND STOCK OPTIONS:
At December 31, 1996 there were warrants outstanding to purchase 1,726,738 shares of the Company's common stock at prices ranging from $.60 to $8.00 (average price of $3.59) per share. All outstanding warrants expire from 1997 to 2000.
Activity in stock warrants is as follows:
On April 26, 1996, the Board of Directors of the Company amended the Therapeutic Antibodies Inc. 1990 Stock Incentive Plan (the Plan). Up to 1,650,000 shares of the Company's common stock may be subject to incentives under the Plan. The Plan provides for the grant to key employees, advisors, officers and directors of the Company of stock options complying with Section 422A of the Internal Revenue Code (qualified options) or options not qualifying under such provision (nonqualified options) as well as stock appreciation rights (SARs). The Plan provides for adjustment of the number of shares available
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. STOCK WARRANTS AND STOCK OPTIONS, CONTINUED:
under the Plan in the event of stock splits, stock dividends and certain other events. The Plan also provides that if the Company shall not be the surviving corporation in a business combination, the holder of an outstanding option will be entitled to purchase stock in the surviving corporation on the same terms and conditions as the options. Options are nontransferable, and options and SARs are subject to any restrictions contained in the grant and applicable securities laws. Options to purchase 1,612,376 shares of the Company's common stock were outstanding at December 31, 1996 at prices ranging from $1.25 to $8.18 under the Plan (average price of $4.12). All options granted since 1992 have a five year contractual life. The average contractual life of all the options at December 31, 1996 is approximately 3.9 years. Generally, the Company grants options with a graded vesting requirement which typically vests ratably over one to five years. The options are issued at or above the fair value of the underlying stock at date of grant. At December 31, 1996, 927,426 options were exercisable at a weighted average price of $2.81. All options expire from 1997 to 2002.
Activity in stock options is as follows:
As permitted by SFAS No. 123, Accounting for Stock Based Compensation, the Company follows the provisions of APB Opinion 25 and related interpretations in accounting for its stock option grants. Compensation cost has not been recognized for options issued under the plan. If compensation cost had been determined based on the fair value of the awards at the grant date consistent with the provisions of SFAS No. 123 there would not have been a material impact on the reported amount of the Company's net income and net income per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS:
ROYALTY COMMITMENT: In 1992, the Company entered into a patent sale and royalty agreement with scientists who at the time worked at the University of Arizona. Under the agreement, the Company purchased the scientists' rights under their U.S. patent and certain U.S. patent applications. The Company agreed to pay royalties to the sellers with respect to products developed and sold under the patents. Currently, no royalty payments have yet been required under this agreement.
LEASES: The Company leases laboratory and office space under operating leases. Aggregate rent expense incurred under these leases was approximately $190,248 in 1996, $126,000 in 1995 and $62,000 in 1994. Future minimum rental commitments under noncancelable operating leases as of December 31, 1996 are as follows:
8. RELATED PARTY TRANSACTIONS:
The Company incurred interest expense and loan guarantee fees of $115,241, $17,380 and $50,695 in the years ended December 31, 1996, 1995 and 1994, respectively, on notes payable to certain directors of the Company and loan guarantees made by certain directors on behalf of the Company in order to obtain short-term loan financing.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INTERNATIONAL OPERATIONS:
The Company conducts its activities in the U.S., the United Kingdom, New Zealand and Australia. International operations are primarily located in the United Kingdom. Intercompany sales between regions are made at cost plus markup. Summarized financial data by region are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INTERNATIONAL OPERATIONS, CONTINUED:
(a) Intercompany revenues include interest income earned by the U.S. parent company on loans made to international subsidiaries and sales of product to, and the performance of contract research and development for, the U.S. parent company by international subsidiaries on a cost plus markup basis. The intercompany account associated with this activity is eliminated in consolidation.
10. NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1994, the Company issued 95,901 shares of the Company's common stock in settlement of notes payable by the Company in the amounts of $383,604.
On February 9, 1996, the Company issued 466,383 shares of common stock in exchange for $2,500,000 of principal and $65,105 of accrued interest on the 6% Notes.
In May, 1996 an officer of the Company converted $750,000 principal of the 12% Note into an equal principal amount of the Company's 15% Notes.
On October 21, 1996 the Company issued 150,000 shares of common stock in exchange for L.250,000 of principal on the two notes payable to the Welsh Development Agency.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of the Company is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of the Company's executive officers is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997, except that the Comparative Performance Graph and the Compensation Committee Report on Executive Compensation included in the Proxy Statement are expressly not incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial owners of the Company's common stock and management is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a). The following documents are being filed as part of this Report.
1. Financial Statements.
See Item 8 herein.
2. Financial Statement Schedules
Independent Auditors Report (see Item 8 herein).
All schedules are omitted, because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits.
(1) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form 10, filed on May 1, 1995, File No. 0-25978.
(2) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended September 30, 1995, File No. 0-25978.
(3) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended March 31, 1996, File No. 0-25978.
(4) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended June 30, 1996, File No. 0-25978.
(5) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended September 30, 1996, File No. 0-25978.
(6) Incorporated by reference to appendices filed with the Company's Proxy Statement relating to the Special Meeting of Shareholders held on July 5, 1996. File No. 0-25978.
(b). Reports on Form 8-K. None.
(c). Compensatory Plans or Arrangements.
The following is a list of all executive compensation plans and arrangements filed as exhibits to this Annual Report on Form 10-K.
(6) Incorporated by reference to appendices filed with the Company's Proxy Statement relating to the Special Meeting of Shareholders held on July 5, 1996. File No. 0-25978.
(d). Financial Statement Schedules Excluded from Annual Report to Shareholders.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THERAPEUTIC ANTIBODIES INC.
By: /s/ Martin S. Brown ----------------------------------- Martin S. Brown Chairman of the Board and Chief Executive Officer Date: MARCH 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.