EXHIBIT 99.1
Xenotech, L.P.
(a development stage enterprise)
Financial Statements
Years ended December 31, 1996, 1995, and 1994 and
period from inception (June 12, 1991)
to December 31, 1996
with Report of Ernst & Young LLP, Independent Auditors
Xenotech, L.P.
(a development stage enterprise)
Financial Statements
Years ended December 31, 1996, 1995, and 1994 and
period from inception (June 12, 1991)
to December 31, 1996
CONTENTS
Report of Ernst & Young LLP, Independent Auditors.................... 1
Audited Financial Statements
Balance Sheets....................................................... 2
Statements of Operations............................................. 3
Statement of Partners' Capital....................................... 4
Statements of Cash Flows............................................. 5
Notes to Financial Statements........................................ 6
Report of Ernst & Young LLP, Independent Auditors
The Partners
Xenotech, L.P.
We have audited the accompanying balance sheets of Xenotech, L.P. (a development
stage enterprise) as of December 31, 1996 and 1995, and the related statements
of operations, partners' capital and cash flows for the years ended December 31,
1996, 1995, and 1994 and the period from inception (June 12, 1991) to December
31, 1996. These financial statements are the responsibility of the Partnership'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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Xenotech, L.P. (a development
stage enterprise) at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994 and the period from inception (June 12, 1991) to December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 27, 1997
Xenotech, L.P.
(a development stage enterprise)
Balance Sheets
DECEMBER 31,
1996 1995
---------------------
ASSETS
Cash $292,592 $ 949,931
Prepaid expenses and other current assets 199,857 148,997
---------------------
Total current assets 492,449 1,098,928
Equipment at cost - 324,274
Accumulated depreciation - (96,097)
---------------------
Equipment, net - 228,177
Note receivable - 30,000
---------------------
$492,449 1,357,105
=====================
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 58,629 $ 351,224
Deferred revenue received from partners - 250,000
---------------------
Total current liabilities 58,629 601,224
Partners' capital:
Paid - in capital 36,486,391 30,194,570
0
Deficit accumulated during the development stage (36,052,571) (29,438,689)
-----------------------------
Total partners' capital 433,820 755,881
-----------------------------
$ 492,449 $ 1,357,105
=============================
See accompanying notes.
Xenotech, L.P.
(a development stage enterprise)
Statements of Operations
PERIOD FROM
INCEPTION
(JUNE 12, 1991) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1996 1995 1994
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Research revenues from partners $10,031,572 $1,912,500 $ 4,746,606 $ 3,372,466
Expenses:
Research and development 44,711,706 8,239,497 11,270,109 7,710,411
General and administrative 1,541,194 307,532 656,363 316,193
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Total expenses 46,252,900 8,547,029 11,926,472 8,026,604
Interest income 168,757 20,647 50,518 48,704
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Net loss $36,052,571 $6,613,882 $ 7,129,348 4,605,434
==================================================================
XENOTECH, L.P.
(a development stage enterprise)
Statement of Partners' Capital
GENERAL LIMITED PARTNERS TOTAL PARTNERS
PARTNER JT CG CAPITAL
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Capital contribution at inception $ 60,000 $ 4,750,000 $ - $ 4,810,000
Capital distribution of interest
income - - (33,660) (33,660)
Net loss (47,203) (4,705,222) 32,149 (4,720,276)
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Balance at December 31, 1991 12,797 44,778 (1,511) 56,064
Capital contribution 130,000 5,500,000 - 5,630,000
Capital distribution of interest
income - - (1,211) (1,211)
Net loss (55,317) (5,480,576) 4,223 (5,531,670)
----------------------------------------------------------------
Balance at December 31, 1992 87,480 64,202 1,501 153,183
Capital contribution 12,000 6,800,000 700,000 7,512,000
Net loss (74,520) (6,770,071) (607,370) (7,451,961)
----------------------------------------------------------------
Balance at December 31, 1993 24,960 94,131 94,131 213,222
Capital contribution 40,072 5,000,000 - 5,040,072
Net loss (46,054) (4,779,690) 220,310 (4,605,434)
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Balance at December 31, 1994 $ 18,978 $ 314,441 $ 314,441 $ 647,860
Capital contribution 72,369 4,832,500 2,332,500 7,237,369
Net loss (71,294) (4,779,027) (2,279,027) (7,129,348)
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Balance at December 31, 1995 $ 20,053 $ 367,914 $ 367,914 $ 755,881
Capital contribution 63,027 3,114,397 3,114,397 6,291,821
Net loss (66,139) (3,273,872) (3,273,872) (6,613,882)
----------------------------------------------------------------
Balance at December 31, 1996 16,941 208,439 208,439 433,820
================================================================
See accompanying notes.
XENOTECH, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS
Xenotech, L.P., a California limited partnership and a development stage
enterprise, (the "Partnership"), was organized on June 12, 1991 pursuant to a
Limited Partnership Agreement between Xenotech, Inc. (the "General Partner"),
Cell Genesys, Inc., ("Cell Genesys") and JTI Immunotech USA Inc. ("JTI"), (the
"Limited Partners"), to develop genetically modified strains of mice which can
produce human monoclonal antibodies, and to commercialize products generated
therefrom. On July 15, 1996, CG transferred its partnership interest to Abgenix
Inc. ("Abgenix"), its wholly-owned subsidiary. Together, Cell Genesys and
Abgenix are referred to as ("CG").
The General Partner made an initial capital contribution of $60,000 to the
Partnership, JTI made an initial capital contribution of $2.5 million to the
Partnership and CG contributed a license to certain technology. In connection
with its organization, the Partnership paid $1,250,000 to CG as a license fee
for such technology and $1,250,000 was paid to CG for benchmarks achieved in
1991. From July 1991 through June 1993, eight quarterly capital contributions
of $1,125,000 each were made by JTI to the Partnership and from July 1993
through June 1995, additional research support capital contributions were made
by JTI to the Partnership in eight quarterly installments of $1,250,000 each.
JTI has also contributed $2 million to the Partnership to fund benchmark
payments to CG by the Partnership under a collaboration agreement. From July
1995 to December 1996, JTI and CG each made capital contributions of $5.4
million to the Partnership to support ongoing research activities.
The General Partner must make cash contributions as necessary to maintain a
minimum capital balance of 1% of the total positive capital account balances for
the Partnership. Since July 1995, net losses are allocated 49.5% to CG , 49.5%
to JTI and 1% to the General Partner. Prior to July 1995, operating expenses
were allocated 99% to JTI and 1% to the General Partner until JTI had been
allocated, on a cumulative basis, partnership losses and deductions in an amount
equal to the sum of JTI's total research support capital contributions and 50%
of JTIs initial capital contribution. Since 1992 interest income has been
allocated 49.5% to CG, 49.5% to JTI and 1% to the General Partner. No
allocation of expenses and losses shall create a deficit in the Limited Partners
capital accounts. Such item, to the extent it would increase or create such a
deficit, shall be allocated 100% to the General Partner. Cash distributions are
generally to be made in accordance with the percentage interests.
See related discussion in footnote 3 Related Party Transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Research revenues from partners or their affiliates are recorded when earned as
defined under the terms of the respective collaboration agreements. Payments
received in advance under these agreements are recorded as deferred revenue
until earned (see Notes 3 and 4).
DEPRECIATION
The Partnership depreciates equipment using the straight-line method over the
estimated useful lives of the asset, generally four years.
INCOME TAXES
The financial statements include no provision for income taxes as Partnership
income or loss is reported in the Partners' separate income tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
CG provides contract research and development services to the Partnership to
develop genetically modified strains of mice which can produce human monoclonal
antibodies pursuant to a collaboration agreement under which CG receives certain
minimum payments. During 1996, 1995, and 1994, the Partnership paid CG $1.2
million, $5.3 million, and $5.0 million, respectively ($23.4 million for the
period from inception to December 31, 1996) to perform research. Also, in both
1993 and 1992 the Partnership paid CG $1.0 million for milestone payments and in
1993 paid $1.14 million for a one-time license fee, in addition to assuming
certain contingent payments in connection with the license.
In January 1994, the Partnership, CG and JTI executed an agreement creating the
Xenotech Division within CG to conduct ongoing preclinical research of human
monoclonal antibodies derived from the genetically modified strains of mice.
CG and Japan Tobacco Inc. ("JT"), the indirect parent company of JTI, are
providing significant funding to the Partnership for research funding and in
consideration of the Partnership granting marketing rights for specified
products in certain territories to CG and
JT (see Note 4). The Partnership reimbursed CG for the costs of the operation of
the Xenotech Division. During 1996, 1995, and 1994, the Partnership recognized
expenses of $5.5 million, $5.5 million, and $2.3 million, respectively, ($13.3
million for the period from inception to December 31, 1996) which were paid to
CG for the costs of operating the Xenotech Division.
Pursuant to an agreement dated June 28, 1996, the Xenotech Division was
terminated as of December 31, 1996. In conjunction with this agreement, Xenotech
paid Abgenix $1.2 million to satisfy Xenotech's obligations under the Xenotech
Division Research Agreement. In addition, Abgenix purchased Xenotech's capital
equipment at net book value, and was assigned Xenotech's note receivable, which
was reflected as a reduction of capital contributions.
4. RESEARCH REVENUES
The Partnership recorded research revenues of $1.9 million, $4.7 million, and
$3.4 million for the years ended December 31, 1996, 1995, and 1994,
respectively. The research revenues were derived from research payments made by
JT and CG. Of research payments made by JT and CG, $250,000 and $1.9 million was
deferred revenue at December 31, 1995 and 1994, respectively.
5. SUBSEQUENT EVENT (UNAUDITED)
Cross License and Litigation Settlement
On March 27, 1997, Cell Genesys announced that, along with Abgenix and JTI, it
had signed a comprehensive patent cross-license and settlement agreement with
GenPharm International for human monoclonal antibody technology and resolving
all related litigation and claims between the parties. The cross-license
agreement includes a worldwide royalty free cross-license to all issued and
related patent applications pertaining to the generation of fully human
monoclonal antibody technologies in genetically modified strains of mice. As
consideration for the settlement and cross-license agreement, Cell Genesys
agreed to issue a note due September 30, 1998 for $15 million, convertible into
shares of Cell Genesys common stock at $9.00 per share. The conversion price is
subject to adjustment in twelve months. In addition, JTI agreed to make a cash
payment to GenPharm. The agreement also calls for the Partnership to pay two
potential milestone payments of $7.5 million each based on the issuance of
certain foreign patents in the future.