UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
on
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1997 Commission File No. 0-14710
XOMA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2756657
(State of Incorporation) (I.R.S. Employer Identification No.)
2910 Seventh Street,
Berkeley, California 94710
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(510) 644-1170
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0005 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, as of October 30, 1998: $156,215,105.
Number of shares of Common Stock outstanding as of October 30, 1998:
46,439,316.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
PART IV
Item 1. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of this Report.
(1) Financial Statements:
All financial statements of the registrant referred to in Item 8 of this
Report on Form 10-K.
(2) Financial Statement Schedules:
All financial statements schedules have been omitted because the required
information is included in the financial statements or the notes thereto or
is not applicable or required.
(3) Exhibits:
See "Index to Exhibits" included in Amendment No. 1 on Form 10-K/A dated
March 26, 1998 to the Company's Annual Report for the fiscal year ended
December 31, 1997 (File No. 0-14710).
(b) Reports on Form 8-K.
Current Report on Form 8-K dated August 13, 1997 filed with the SEC on
August 18, 1997 File No. 0-14710).
Current Report on Form 8-K dated December 30, 1997 filed on January 9, 1998
(File No. 0-14710).
Current Report on Form 8-K dated June 26, 1998 filed on June 29, 1998, as
amended by Amendment No. 1 thereto on Form 8-K/A dated June 26, 1998 filed
on June 29, 1998 (File No. 0-14710).
Current Report on Form 8-K dated July 9, 1998 filed on July 16, 1998 (File
No. 0-14710).
-2-
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, on this 27th day of
November, 1998.
XOMA CORPORATION
By /s/ JOHN L. CASTELLO
--------------------------------------
John L. Castello,
Chairman of the Board, President and
Chief Executive Officer
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.
Signature Title Date
- - --------- ----- ----
/s/ JOHN L. CASTELLO Chairman of the Board, President November 27, 1998
- - -------------------------------- and Chief Executive Officer
(John L. Castello)
/s/ PATRICK J. SCANNON Chief Scientific and Medical November 27, 1998
- - -------------------------------- Officer and Director
(Patrick J. Scannon)
/s/ PETER B. DAVIS Vice President, Finance and Chief November 27, 1998
- - -------------------------------- Financial Officer (Principal
(Peter B. Davis) Financial and Accounting Officer)
/s/ JAMES G. ANDRESS Director November 27, 1998
- - --------------------------------
(James G. Andress)
/s/ WILLIAM K. BOWES, JR. Director November 27, 1998
- - --------------------------------
(William K. Bowes, Jr.)
/s/ ARTHUR KORNBERG Director November 27, 1998
- - --------------------------------
(Arthur Kornberg)
/s/ STEVEN C. MENDELL Director November 27, 1998
- - --------------------------------
(Steven C. Mendell)
/s/ W. DENMAN VAN NESS Director November 27, 1998
- - --------------------------------
(W. Denman Van Ness)
-3-
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants............................... 5
Balance Sheets......................................................... 6
Statements of Operations............................................... 7
Statements of Stockholders' Equity..................................... 8
Statements of Cash Flows............................................... 9
Notes to Financial Statements.......................................... 10
-4-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To XOMA Corporation:
We have audited the accompanying balance sheets of XOMA Corporation (a
Delaware corporation) as of December 31, 1997 and 1996 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XOMA Corporation as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 3, 1998
-5-
XOMA CORPORATION
BALANCE SHEETS
(In thousands, except par and share amounts)
ASSETS
December 31
-----------
1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 37,225 $ 1,213
Short-term investments 17,921 45,769
Related party receivables 263 253
Other receivables 88 548
Prepaid expenses and other 142 219
------ ------
Total current assets 55,639 48,002
NON-CURRENT ASSETS:
Property and equipment, net 4,564 5,098
Assets held for sale 4,442 4,442
Deposits and other 131 133
--------- --------
$ 64,776 $ 57,675
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,644 $ 1,778
Accrued liabilities 6,412 6,144
Capital lease obligations due within one year 707 489
--------- ---------
Total current liabilities 8,763 8,411
--------- ---------
NON-CURRENT LIABILITIES:
Capital lease obligations due after one year -- 703
Convertible notes 24,773 13,813
--------- ---------
Total non-current liabilities 24,773 14,516
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value, 1,000,000 shares author-
ized, 1,167 and 0 outstanding (liquidation preference
$11,670 and $0) at December 31, 1997 and 1996, re-
spectively -- --
Common stock, $.0005 par value, 70,000,000 shares
authorized, 39,891,104 and 39,609,275 outstanding at
December 31, 1997 and 1996, respectively 20 20
Paid-in capital 385,746 371,923
Accumulated deficit (354,526) (337,195)
--------- ---------
Total stockholders' equity 31,240 34,748
--------- ---------
$ 64,776 $ 57,675
========= =========
The accompanying notes are an integral part of these financial statements.
-6-
XOMA CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years ended December 31
--------------------------------------------------------
1997 1996 1995
---- ---- ----
REVENUES:
Product sales and royalties $ 56 $ 61 $ 87
Research and development fees
Collaborative agreements 250 -- --
License fees 18,077 3,543 1,078
--------- --------- -----------
Total revenues 18,383 3,604 1,165
--------- --------- -----------
OPERATING COSTS AND EXPENSES:
Research and development 29,878 26,371 22,086
General and administrative 5,674 5,455 5,383
--------- --------- -----------
Total operating costs and expenses 35,552 31,826 27,469
--------- ------ -----------
Loss from operations (17,169) (28,222) (26,304)
OTHER INCOME (EXPENSE):
Investment income 2,120 2,011 1,934
Litigation settlement -- (2,500) --
Other income(expense) (716) (399) 1,898
---------- -----------
Net loss $ (15,765) $ (29,110) $ (22,472)
========== ========== ===========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE $ (0.44) $ (0.90) $ (0.97)
========== ========= ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 39,679 32,493 23,671
=+======== ========= ===========
The accompanying notes are an integral part of these financial statements.
-7-
XOMA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Total
Paid-in Accumulated Stockholders'
Common Stock Preferred Stock Capital Deficit Equity
Shares Amount Shares Amount
------ ------ ------ ------ ------- ----------- -------------
BALANCE, DECEMBER 31, 1994 22,174 $ 11 16 $ 1 $328,296 $ (284,847) $ 43,461
Exercise of stock options 25 -- -- -- 11 -- 11
Contributions to 401(k) and
management incentive plans 149 -- -- -- 434 -- 434
Sale of common stock 471 1 -- -- 717 -- 718
Amortization of deferred -- -- -- -- 214 -- 214
compensation
Sale of preferred stock -- -- 5 -- 4,143 -- 4,143
Conversion of preferred stock 4,230 2 (13) (1) (1) -- --
Exercise of warrants 1 -- -- -- 7 -- 7
Unrealized gain (loss) on -- -- -- -- 125 -- 125
investments
Dividends on preferred stock 253 -- -- -- 781 (586) 195
Net loss -- -- -- -- -- (22,472) (22,472)
--------- ------ ------ ------ ----------- ---------- ---------
BALANCE, DECEMBER 31, 1995 27,303 14 8 -- 334,727 (307,905) 26,836
Exercise of stock options 72 -- -- -- 207 -- 207
Contributions to 401(k) and
management incentive plans 90 -- -- -- 395 -- 395
Sale of common stock 2,123 1 -- -- 10,651 -- 10,652
Amortization of deferred -- -- -- -- 37 -- 37
compensation
Sale of preferred stock -- -- 7 -- 18,966 -- 18,966
Issuance of warrants -- -- -- -- 800 -- 800
Conversion of preferred stock 7,914 4 (15) -- (4) -- --
Conversion of debentures 2,054 1 -- -- 5,919 -- 5,920
Unrealized gain (loss) on -- -- -- -- 45 -- 45
investments
Dividends on preferred stock 53 -- -- -- 180 (180) --
Net loss -- -- -- -- -- (29,110) (29,110)
--------- ------ ------ ------ ----------- ---------- ---------
BALANCE, DECEMBER 31, 1996 39,609 20 -- -- 371,923 (337,195) 34,748
Exercise of stock options 53 -- -- -- 143 -- 143
Contributions to 401(k) and
management incentive plans 57 -- -- -- 319 -- 319
Sale of preferred stock -- -- 1 -- 10,936 -- 10,936
Conversion of preferred stock 169 -- -- -- -- -- --
Issuance of warrants -- -- -- -- 1,125 -- 1,125
Unrealized gain (loss) on -- -- -- -- (42) -- (42)
investments
Dividends on preferred stock 3 -- -- -- 1,342 (1,566) (224)
Net loss -- -- -- -- -- (15,765) (15,765)
--------- ------ ------ ------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1997 39,891 $ 20 1 $ -- $ 385,746 $ (354,526) $ 31,240
========= ====== ====== ======= ========== ========== =========
The accompanying notes are an integral part of these financial statements.
-8-
XOMA CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,765) $(29,110) $(22,472)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,032 2,131 2,920
Inventory reserve -- -- 4,170
Write-down of assets held for sale -- -- 2,400
Deferred compensation expense -- 37 214
Loss (gain) on retirement of property and 21 2 (145)
equipment
Changes in assets and liabilities:
Decrease (increase) in related party and 450 1,742 (2,116)
other receivables
Decrease (increase) in prepaid expenses 77 (9) 612
Decrease (increase) in deposits and other 2 -- 1,350
assets
Increase (decrease) in accounts payable (134) (342) 705
Increase (decrease) in accrued liabilities 1,331 3,124 (3,921)
Increase (decrease) in non-current liabilities -- -- (8,465)
-------- -------- --------
Total adjustments 3,779 6,685 (2,276)
-------- -------- --------
Net cash used in operating activities (11,986) (22,425) (24,748)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 105,195 89,675 61,942
Payments for purchase of short-term (77,389) (129,073) (31,641)
investments
Purchase of property and equipment, net of
proceeds (1,519) (1,050) (350)
-------- -------- --------
Net cash provided by (used in) investing 26,287 (40,448) 29,951
-------- -------- --------
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback -- -- 1,800
Principal payments under capital lease (485) (546) (488)
obligations
Proceeds from issuance of debentures 9,992 13,545 5,858
Proceeds from issuance of common or preferred
stock 12,204 30,687 4,451
-------- -------- --------
Net cash provided by financing activities 21,711 43,686 11,621
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 36,012 (19,187) 16,824
Cash and cash equivalents at beginning of year 1,213 20,400 3,576
-------- -------- --------
Cash and cash equivalents at end of year $ 37,225 $ 1,213 $ 20,400
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-9-
XOMA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Corporation ("XOMA" or the "Company") is a biopharmaceutical company
developing products to treat infections, infectious complications of traumatic
injury and surgery, and immunologic and inflammatory disorders. The Company's
products are presently in various stages of development and all are subject to
regulatory approval before the Company can commercially introduce any products.
There can be no assurance that any of the products under development by the
Company will be developed successfully, obtain the requisite regulatory approval
or be successfully manufactured or marketed.
The Company's cash position and resulting investment income are sufficient
to finance the Company's currently anticipated needs for operating expenses,
working capital, equipment and current research projects for in excess of one
year. The Company continues to evaluate strategic alliances, potential
partnerships, and financing arrangements which would further strengthen its
competitive position and provide additional funding. The Company cannot predict
whether or when any such alliance(s), partnership(s) or financing(s) will be
consummated or whether additional funding will be available when required.
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding in accordance with Financial Accounting Standard No. 128.
-10-
Reconciliation of the numerator and the denominator of basic and
diluted net loss per share was derived as follows (in thousands, except per
share amounts):
Amount per
Year ended December 31 Loss Shares share
- - ---------------------- ---- ------ ----------
1997
Net loss $(15,765)
Preferred stock dividends (1,566)
--------
Basic and diluted loss available to common
shareholders $(17,331) 39,679 $(0.44)
========
1996
Net loss $(29,110)
Preferred stock dividends (180)
Basic and diluted loss available to common
shareholders $(29,290) 32,493 $(0.90)
========
1995
Net loss $(22,472)
Preferred stock dividends (586)
--------
Basic and diluted loss available to common
shareholders $(23,058) 23,671 $(0.97)
========
The following potentially dilutive outstanding securities were not
considered in the computation of basic and diluted loss per share because they
would be antidilutive for each of the years ended December 31:
Amount (in thousands): 1997 1996 1995
- - --------------------- ---- ---- ----
Weighted average options for shares of common
stock 3,627 3,162 2,992
Weighted average warrants for shares of
common stock 295 29 983
Common shares issuable to satisfy obligations 344 -- --
Shares of convertible preferred stock 1,167 -- 7,807
Convertible notes, debentures, and related
interest $24,773 $13,813 $6,500
Subsequent to December 31, 1997 the Company issued 344,168 shares of common
stock in settlement of a securities class action lawsuit(see Note 6).
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments with maturities of three months or less at the
time the Company acquires them to be cash equivalents,
-11-
except when such debt instruments are part of a portfolio of investments managed
by an independent, outside investment manager, in which case these instruments
are classified as short-term investments.
Supplemental Cash Flow Information
Cash paid for interest was $0.1 million, $0.2 million, and $0.1 million
during the years ended December 31, 1997, 1996, and 1995, respectively.
In addition, during the years ended December 31, 1997, 1996 and 1995, the
Company had the following non-cash financing and investing activities (in
thousands):
1997 1996 1995
---- ---- ----
Stock contribution to the 401(k) and management $ 319 $ 395 $ 434
incentive plans (Notes 4 and 9)
Stock issuance cost paid with common or preferred stock -- -- 8
(Note 4)
Unrealized loss(gain) on investments (42) (45) 125
Conversion of debentures to common stock -- 5,861 --
Interest paid in common stock -- 59 --
Conversion of preferred stock to common stock 830 28,807 12,607
Dividends paid in common stock 15 180 781
Property and Equipment
Property and equipment, including equipment under capital leases, are
stated at cost. Equipment depreciation is calculated using the straight-line
method over the estimated useful lives of the assets (five to seven years).
Leasehold improvements, buildings, and building improvements are amortized and
depreciated using the straight-line method over the shorter of the lease terms
or the useful lives (one to seven years).
Property and equipment consist of the following (in thousands):
December 31
1997 1996
---- ----
Equipment $15,545 $14,500
Leasehold and building improvements 14,836 14,483
Construction-in-progress 97 208
------ -------
30,478 29,191
Less accumulated depreciation and amortization 25,914 24,093
------- -------
Property and equipment, net $ 4,564 $ 5,098
======= =======
Assets held for sale $ 4,442 $ 4,442
======= =======
Long-lived Assets
In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
-12-
In 1994, the Company discontinued development of its CD5 Plus(TM) product
and began to evaluate the related production facility for alternative uses,
including a possible sale of the facility. During 1995, the Company determined
that the events and circumstances indicated that the value of the facility had
become impaired. As a result, it recorded a charge of $2.4 million in "Other
income and expense," reflecting the difference between the then current carrying
value of the facility and its estimated realizable value.
At that time, the estimated realizable value was determined based on the
sales price that management had estimated it could receive from a potential
buyer of the facility. The Company does not currently believe that the carrying
amount is in excess of net realizable value, as it continues to reflect the
estimated price that could be received from a buyer. While the facility has not
been sold, it continues to be available for sale and there is no indication the
current carrying value is inappropriate. If the Company sells the facility, the
amount the Company will ultimately realize could differ materially from the
carrying amount.
The Company is also considering adapting the facility to expand production
of its NEUPREX(R) product. This adaptation, if pursued, is estimated to cost
significantly less than a new facility. The Company's current estimate of net
cash flows from NEUPREX(R) that would be manufactured in the facility exceeds
the current carrying value of the facility plus anticipated costs to renovate it
for NEUPREX(R) production. If the Company pursues this alternative, the actual
net cash flows that the Company will ultimately realize as well as the estimated
costs to renovate the facility could differ materially from the estimated
amounts.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31
1997 1996
---- ----
Accrued legal costs $ 198 $ 661
Accrued dividends 810 586
Accrued payroll costs 1,986 1,573
Provision for litigation settlement 2,028 2,500
Clinical trial costs 1,203 521
Other 187 303
------ ------
$6,412 $6,144
====== ======
Activities through December 31, 1997 affecting the provision for litigation
settlement established in 1996 are as follows (in millions):
Original amount $2.5
Charges against the accrual 0.2
Adjustment to the accrual 0.3
In December 1997, the Company elected to settle the claim through the
issuance of 344,168 shares of common stock which resulted in a $0.3 million
reduction in the accrual. The liability was eliminated in January 1998 upon
issuance of the shares.
Revenue Recognition
Revenue related to collaborative agreements is recognized when earned under
the terms of the agreement and when performance obligations have been met and
related payments are receivable and non-refundable. Non-refundable licenses and
milestone fees are recognized as revenue when the payments are receivable and
the Company has no future obligations to perform. In both cases, receivable
amounts are rec-
-13-
ognized when collection is assured. The excess of total research and development
expense over revenues recognized under collaborative agreements amounted to
$29.9 million, $26.4 million, and $22.1 million for the years 1997, 1996, and
1995, respectively.
Reclassifications
Certain reclassifications have been made to conform the prior years to the
1997 presentation.
-14-
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued a final
statement on reporting comprehensive income. The adoption of the standard as
required on January 1, 1998 will not have a material impact on the Company's
financial statements.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
On December 31, 1997 and 1996, cash and cash equivalents consisted mostly
of money market mutual funds.
The Company follows a policy of investing only in marketable debt
securities and holding them to maturity; however, since the Company has from
time to time sold certain securities to meet cash requirements or improve
investment diversification, the Company's short-term investments have been
categorized as available-for-sale.
The aggregate fair values, amortized cost, gross unrealized holding gain,
and gross unrealized holding loss of the major types of debt securities at
December 31, 1997 were as follows (in millions):
Gross Unrealized Holding
------------------------
Fair Amortized
Value Cost Gain Loss
----- ---- ---- ----
U.S. Treasury Securities $9.5 $9.5 $ -- $ --
Corporate Bonds and Other 8.4 8.4 -- --
The contractual maturities of the Company's debt securities as of December
31, 1997 were as follows (in millions):
Less than 1 year $11.4
From 1 to 2 years 4.0
More than 2 years 2.5
During the year ended December 31, 1997, gross realized losses on
available-for-sale securities were negligible and the net change in the
unrealized gain or loss was negligible. Gross realized gains were negligible.
Gains and losses are determined on a specific identification basis. As of
December 31, 1997, short-term investments included $0.1 million in certificates
of deposit which guaranteed a standby letter of credit.
3. RESEARCH AND DEVELOPMENT AGREEMENTS
In April 1996, the Company entered into a collaborative agreement with
Genentech, Inc. ("Genentech") to jointly develop hull24 (anti-CD11a), for
treatment of psoriasis and for organ transplant rejection. In connection
therewith, Genentech purchased 1.5 million shares of common stock for
approximately $9 million and has agreed to fund the Company's development costs
for hull24 until the completion of Phase II clinical trials through a series of
convertible subordinated notes. During 1996, Genentech made loans totaling $13.5
million ($5.0 and $8.5 million, respectively, for funding 1996 and 1997 clinical
trials and development costs) to XOMA under this arrangement. An additional loan
of $10.0 million was made in December 1997 to fund 1998 costs. Under the terms
of the agreement, the Company will scale up and develop hull24 and bring it
through Phase II clinical trials. After completion of Phase II trials, Genentech
will determine the product's future development strategy.
-15-
In May 1996, the Company announced the granting of an exclusive license to
Genentech, including a sublicense to IDEC Pharmaceuticals Corporation, to
intellectual property covering the therapeutic use of chimeric IgG1 antibodies
specific to the CD20 antigen on the surface of human B-cells. The Company
received an initial cash payment of $3.0 million and the right to receive
royalties on the sale of products employing the anti-CD20 technology that are
sold in the United States and in other countries where the Company held relevant
patents. In December 1997, the Company assigned the related patents and royalty
rights to Pharmaceutical Partners, LLC for $17.0 million and recognized this
amount as license fee revenue.
In June 1994, the Company assigned its exclusive worldwide rights in T cell
receptor ("TCR") peptide technology to Connetics. The Company received a
promissory note in the amount of $1.4 million and warrants to purchase 450,000
shares of Connetics. stock, and will receive milestone payments and royalties on
product sales. In 1995, the Company received an additional note in the amount of
$0.8 million pursuant to the terms of the original assignment. The notes were
paid in full in February 1996 and the warrants cancelled.
In 1995, XOMA and Pfizer modified the funding arrangement of the then
current E5(R) clinical trial and of certain patent litigation costs. As a
result, the Company recorded a $4.3 million gain in Other income. In June 1997,
the Company announced that Pfizer had ended its agreements with the Company
relating to monoclonal antibody-based products for the treatment of
gram-negative sepsis, which resulted in the elimination of the contingent $22.4
million liability to Pfizer.
XOMA has granted licenses to a number of biotechnology and pharmaceutical
companies for use of patented and proprietary technologies relating to a
bacterial expression system used to manufacture recombinant pharmaceutical
products. Licensees include: Affymax Research Institute, Cantab Pharmaceuticals
Research Ltd, Eli Lilly and Company, Enzon, Inc., the Hoechst Group, ICOS
Corporation, Pasteur Merieux Serums & Vaccins, and The Pharmacia & Upjohn Group.
4. CAPITAL STOCK
Common Stock
In April 1996, Genentech purchased 1.5 million shares of common stock for
approximately $5.90 per share in connection with the collaborative agreement to
develop jointly Genentech's anti-CD11a monoclonal antibody product, hull24.
In March 1996, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Regulation D
thereunder, issuing 606,061 shares of Common Stock for net proceeds of $1.9
million.
In June and July 1995, the Company issued 470,859 shares of Common Stock in
reliance on Regulation S for net proceeds of $0.7 million.
Preferred Stock
In August 1997, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2)
thereof, issuing 1,250 shares in the form of 5% Convertible Preferred Stock,
Series G ("Series G Preferred") for proceeds of approximately $12.1 million net
of cash issuance costs. The same investors have also committed to provide
additional financing of up to $12.5 million at XOMA's option, subject to certain
conditions.
Conversions of Series G Preferred will be based on the price of Common
Stock at the time of conversion. There is no initial discount on the conversion
price, but a discount of 2% will be added for each month
-16-
the Series G Preferred is held, up to a maximum discount of 14%, for which an
additional $1.3 million has been added to dividends and charged to Paid-in
capital as of December 31, 1997. No conversions were permitted below a price of
$7.80 for the first 60 days. The maximum conversion price for the first six
months was $9.10. There are certain restrictions on the volume of sales of
underlying Common Stock by the investors. The investors also received three-year
warrants to purchase up to a total of 432,000 common shares at a price of $10.00
per share. The additional funding commitment also provides for limits on
conversion price and trading, and additional warrants, all based on the market
price of Common Stock at the time such funding is provided. Additional warrants
to purchase 54,000 common shares at the $10.00 price were issued to the
placement agents.
In September 1996, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Regulation D
thereunder, issuing 1,600 shares of its Convertible Preferred Stock, Series F
("Series F Preferred") for proceeds of approximately $15.0 million net of
issuance costs. As of December 31, 1996, all of the Series F Preferred, plus
accrued dividends, had been converted into 5,269,870 shares of Common Stock.
In March 1996, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Regulation D
thereunder, issuing 5,000 shares of its Convertible Preferred Stock, Series D
("Series D Preferred") for proceeds of $4.8 million net of issuance costs. As of
September 30, 1996, all of the Series D Preferred, plus accrued dividends, had
been converted into 1,048,610 shares of Common Stock.
In August 1995, the Company issued 4,799 shares of its Convertible
Preferred Stock, Series C ("Series C Preferred") to foreign investors in an
offering exempt from registration under the Securities Act of 1933 in reliance
on Regulation S thereunder. The offering yielded proceeds to the Company of $4.1
million net of issuance costs. As of December 31, 1995, all of the Series C
Preferred, plus accrued dividends, had been converted into 2,728,190 shares of
Common Stock.
In December 1993, the Company issued 18,775 shares of Senior Convertible
Preferred Stock, Series B ("Series B Preferred") to two investors for proceeds
of $17.7 million net of issuance costs. Costs of the issue were approximately
$1.1 million. An additional 250 shares of Series B Preferred were issued to the
placement agent as part of the fee for investment banking services.
In May 1994, the placement agent converted all 250 of its shares of
preferred stock into 47,595 shares of Common Stock. The amounts payable as
dividends at December 31, 1994 were paid with 252,745 shares of common stock in
January of 1995. During 1995, 7,808 shares of the Series B Preferred had been
converted into 1,501,731 shares of Common Stock. The remaining 7,807 shares were
converted into 1,648,115 shares of Common Stock in 1996 prior to the June 1996
dividend date.
The Company has authorized 650,000 shares of Series A Cumulative Preferred
Stock of which none were outstanding at December 31, 1997, 1996 and 1995. (See
"Stockholder Rights Plan", below.)
Convertible Notes and Debentures
Under the arrangement with Genentech (see Note 3) the Company receives
funding for development of hull24 in the form of convertible subordinated notes
due 2005 at interest rates of LIBOR plus 1% compounded and reset at the end of
June and December each year. Interest is payable at maturity. The Company has
received $5.0 million and $8.5 million of these loans, respectively, in April
and December of 1996, and a further $10.0 million in December 1997. The notes
are convertible into one share of Series E Preferred Stock (7,500 shares are so
designated) for each $10,000 in notes. The Series E Preferred Stock is
convertible into
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common stock. The cumulative amount of interest accrued was $1.2 million and
$0.3 million as of December 31, 1997 and 1996, respectively.
In November 1995, the Company issued $6.5 million aggregate principal
amount of 4% Convertible Subordinated Debentures due in 1998 to foreign
investors in an offering exempt from registration under the Securities Act of
1933 in reliance on Regulation S thereunder. The offering yielded net proceeds
to the Company of $5.9 million net of issuance costs. During the first quarter
of 1996 all of the Debentures, plus accrued interest, were converted into
2,054,224 shares of Common Stock. Unamortized issuance costs of $0.6 million
were charged to Paid-in capital in connection with the conversions of the
Debentures.
Management Incentive Compensation Plan
The Board of Directors of the Company established a Management Incentive
Compensation Plan effective July 1, 1993 (as amended, the "Incentive Plan"), in
which management employees (other than the Chief Executive Officer), as well as
certain additional discretionary participants chosen by the Chief Executive
Officer, are eligible to participate.
Awards under the Incentive Plan vest over a three-year period with 50% of
each award payable on a date to be determined, expected to be in the first
quarter of the following fiscal year, and 25% payable on each of the next two
annual distribution dates, so long as the participant continues to participate
in the Incentive Plan.
The amounts charged to expense under the Incentive Plan were $0.8 million,
$0.7 million and $0.6 million for the plan years 1997, 1996 and 1995
respectively.
Stockholder Rights Plan
In October 1993, the Company's Board of Directors unanimously adopted a
Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, Preferred
Stock Purchase Rights ("Rights") were distributed as a dividend at the rate of
one Right for each share of the Company's Common Stock held of record as of the
close of business on November 12, 1993. Each Right entitles the registered
holder of Common Stock to buy a fraction of a share of the new series of
Preferred Stock (the "Series A Preferred Stock") at an exercise price of $30.00,
subject to adjustment. The Rights will be exercisable, and will detach from the
Common Stock, only if a person or group acquires 20 percent or more of the
Common Stock, announces a tender or exchange offer that if consummated will
result in a person or group beneficially owning 20 percent or more of the Common
Stock, or if the Board of Directors declares a person or group owning 10 percent
or more of the outstanding shares of Common Stock to be an Adverse Person (as
defined in the Rights Plan). Once exercisable, each Right will entitle the
holder (other than the acquiring person) to purchase units of Series A Preferred
Stock (or, in certain circumstances, common stock of the acquiring person) with
a value of twice the Rights exercise price. The Company will generally be
entitled to redeem the Rights at $.001 per Right at any time until the close of
business on the tenth day after the Rights become exercisable. The Rights will
expire at the close of business on December 31, 2002.
5. STOCK OPTIONS AND WARRANTS
At December 31, 1997, the Company had three stock-based compensation plans,
which are described below. The aggregate number of shares of Common Stock that
may be issued under these plans is 5,300,000 shares.
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Stock Option Plan
Under the Company's amended 1981 Stock Option Plan (the "Option Plan"),
qualified and non-qualified options of the Company's Common Stock may be granted
to certain employees and other individuals as determined by the Board of
Directors at not less than the fair market value of the stock at the date of
grant. Options granted under the Option Plan may be exercised when vested and
expire five years and two months to ten years from the date of grant or three
months from the date of termination of employment. Options granted generally
vest over five years. The Option Plan will terminate on November 15, 2001. As of
December 31, 1997, options covering 3,132,386 shares of Common Stock were
outstanding under the Option Plan.
Restricted Stock Plan
The Company also has a Restricted Stock Plan (the "Restricted Plan") which
provides for the issuance of options or the direct sale of Common Stock to
certain employees and other individuals as determined by the Board of Directors
at not less than 85% of fair market value of the Common Stock on the grant date.
Each option issued under the Restricted Plan will be a non-statutory option
under the federal tax laws and will have a term not in excess of ten years from
the grant date. Options granted generally vest over five years. The Restricted
Plan will terminate on December 15, 2003.
The Company has granted options with exercise prices at 85% of fair market
value on the date of grant. Up to 1,200,000 shares are authorized for issuance
under the Restricted Plan. As of December 31, 1997, options covering 537,479
shares of Common Stock were outstanding under the Restricted Plan.
The Company amortizes deferred compensation, which is the difference
between the issuance price or exercise price and the fair market value of the
shares as determined by the Board of Directors at the date of sale or grant over
the period benefited.
Directors Stock Option Plan
In 1992, the stockholders approved a Directors Stock Option Plan (the
"Directors Plan") which provides for the issuance of options to purchase shares
of Common Stock to non-employee directors of the Company at 100% of the fair
market value of the stock on the date of the grant. Up to 150,000 shares are
authorized for issuance during the term of the Directors Plan. Options vest on
the date of grant and have a term of up to ten years. As of December 31, 1997,
options for 50,000 shares of Common Stock were outstanding under the Directors
Plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, the financial statements reflect
amortization of compensation resulting from options granted at exercise prices
which were below market price at the grant date. Had compensation cost for the
Company's stock-based compensation plans been based on the fair value at the
grant dates for awards under these plans consistent with the provisions of FASB
Statement 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below for the years ended December
31 (in thousands except per share amounts):
1997 1996 1995
---- ---- ----
Net loss As reported $(15,765) $(29,110) $(22,472)
Pro forma $(17,639) $(30,213) $(23,953)
Net loss per share As reported $ (0.44) $ (0.90) $ (0.97)
Pro forma $ (0.48) $ (0.94) $ (1.04)
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The fair value of each option grant under these plans is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the years indicated below:
1997 1996 1995
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 71% 73% 73%
Risk-free interest rate 6.3% 5.2% 7.6%
Expected life 7 years 7 years 6 years
A summary of the status of the Company's stock option plans as of December
31, 1997, 1996, and 1995, and changes during years ending on those dates is
presented below:
1997 1996 1995
---- ---- ----
OPTIONS: Shares Price* Shares** Price* Shares Price*
------ ------ -------- ------ ------ ------
Outstanding at
beginning of year 3,196,150 $ 4.50 2,847,017 $ 4.50 3,000,692 $ 10.33
Granted
(1) 1,750 5.36 2,500 4.84 34,000 2.29
(2) 671,000 6.68 499,750 4.97 2,204,605 2.53
(3) -- -- 145,333 5.00 1,250 2.94
Exercised (52,422) 2.72 (67,132) 2.68 (5,315) 2.40
Forfeited, Expired or
Canceled (96,613) 4.33 (231,318) 6.40 (2,388,215) 9.97
------ ------- ---------
Outstanding at end of
year 3,719,865 4.92 3,196,150 4.50 2,847,017 4.50
========= ========= =========
Exercisable at end of
year 2,317,321 1,816,185 1,310,938
========= ========= =========
Weighted average fair
value of options
granted
(1) 3.89 2.71 1.92
(2) 4.78 3.09 1.51
(3) -- 1.59 0.99
* Weighted-average exercise price
** Includes cancellation and granting of 1,820,385 new options
(1) Option price less than market price on date of grant
(2) Option price equal to market price on date of grant
(3) Option price greater than market price on date of grant
The Company adjusts for forfeitures as they occur.
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The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Number
-------- ------ ------
Exercise Prices Outstanding Life* Price** Exercisable Price**
--------------- ----------- ----- ------- ----------- -------
$ 1.70 - 2.38 329,646 7.1 $ 2.36 184,472 $ 2.36
2.55 - 3.81 1,561,058 7.0 2.57 1,193,839 2.57
4.06 - 5.94 620,413 6.6 4.79 281,273 4.80
6.06 - 7.50 976,083 5.9 7.09 472,739 7.38
7.56 -13.25 75,700 7.9 8.92 28,033 10.98
16.36 - 22.75 154,965 2.8 18.68 154,965 18.68
26.50 - 26.50 2,000 3.3 26.50 2,000 26.50
-------------- - ---------- --- - ------ - ---------- ------
$ 1.70 - 26.50 3,719,865 6.5 $ 4.92 2,317,321 $ 5.01
* Weighted-average Remaining Contractual Life
** Weighted-average Exercise Price
Warrants
Warrants to purchase 486,000 shares of Common Stock were issued in
conjunction with the issuance of the Series G Preferred in August 1997, all of
which expire in August 2000, at an exercise price of $10.00 per share. These
warrants were valued at $1.1 million in paid-in capital.
The Company issued warrants valued at $0.8 million in Paid-in capital to
purchase 109,739 shares of Common Stock in conjunction with the issuance of the
Series F Preferred, one-half of which expire on March 24, 1998 and the remainder
expiring on September 24, 1999, at an exercise price of $7.29 per share.
Warrants to purchase 1,810,980 shares of Common Stock issued in conjunction
with the issuance of the Series B Preferred Stock in December 1993 expired on
December 19, 1995. These warrants were valued at $3.0 million in paid-in
capital.
Warrants with an aggregate value of $3.0 million at the time of issuance
were issued during the second quarter of 1993 to conclude the settlement of
certain stockholder and derivative litigation brought in 1991. A total of
2,214,633 warrants were issued, and warrants for 2,213,476 shares of Common
Stock expired unexercised in June of 1995.
6. COMMITMENTS AND CONTINGENCIES
Clinical Trial
Due to the termination of E5(R)development in mid-1997, the contingent
$22.4 million in future reduced royalties from Pfizer has been eliminated.
Collaborative Agreements and Royalties
As of December 31, 1997, the Company has commitments under research
agreements with universities and other research institutions that require the
Company to fund research in the amount of $0.1 million through August 1998.
Research and development expenses include research agreement expenses of
approximately $0.2 million, $0.3 million, and $0.4 million for the years ended
December 31, 1997, 1996 and 1995,
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respectively. The Company is also obligated to pay royalties, ranging generally
from 1.5% to 5% of the selling price of the licensed component and up to 25% of
sublicense fee income, to various universities and other research institutions
based on future sales or licensing of products that incorporate certain products
and technologies developed by those institutions.
Leases
As of December 31, 1997, the Company leased administrative, research
facilities, certain laboratory and office equipment under operating and capital
leases expiring on various dates through 2008.
Future minimum lease commitments are as follows (in thousands):
Capital Leases Operating Leases
-------------- ----------------
1998 $ 753 $ 2,427
1999 -- 2,413
2000 -- 2,439
2001 -- 2,239
2002 -- 2,239
Thereafter -- 12,378
----- -------
Net minimum lease payments 753 $24,135
=======
Less--Amount representing interest expense 46
-----
Present value of net minimum lease payments 707
Less--Current maturities 707
-----
Long-term capital lease obligations $ --
=====
Total rental expense was approximately $2.0 million, $2.0 million, and $2.3
million for the years ended December 31, 1997, 1996, and 1995, respectively.
Legal Proceedings
In the securities class action lawsuit Warshaw, et al. v. XOMA Corporation,
et al., the defendants and plaintiffs reached an agreement on March 14, 1997 to
settle all claims for $3.75 million in cash and $2.25 million in Common Stock.
By order entered September 8, 1997, the United States District Court for the
Northern District of California approved the settlement. All of the cash portion
of the settlement has been paid by insurance into a settlement fund administered
by an escrow agent. The claims administration process was deemed complete as of
December 16, 1997, and on January 7, 1998, XOMA directed its stock transfer
agent to issue and distribute to authorized claimants 344,168 shares of Common
Stock in accordance with the terms of the court-approved settlement agreement.
Liability Insurance
The testing and marketing of medical and food additive products entails an
inherent risk of allegations of product liability. XOMA believes that its
product liability insurance levels are adequate for its clinical trial activity.
XOMA will seek to obtain additional insurance, if needed, if and when the
Company's products are commercialized; however, there can be no assurance that
adequate insurance coverage will be available or be available at acceptable
costs or that a product liability claim would not materially adversely affect
the business or financial condition of the Company.
The Company insures and indemnifies its directors and officers against
actions brought against them as a result of their management of the Company's
operations. There can be no assurance that adequate direct-
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ors and officers insurance coverage will be available or be available at
acceptable costs or that a claim against the directors and officers would not
materially adversely affect the business or financial condition of the Company.
7. INCOME TAXES
The significant components of net deferred tax assets and liabilities as of
December 31, are as follows (in millions):
1997 1996
---- ----
Property and equipment $ 2.3 $ 2.3
Purchased technology 5.0 5.7
Capitalized R&D expense 62.8 50.8
Accrued liabilities and other 2.3 1.4
Net operating loss carryforwards 61.7 66.8
R&D and other credit carryforwards 14.1 13.0
Valuation allowance (148.2) (140.0)
------- -------
Total deferred tax asset $ -- $ --
======== ========
The net change in the valuation allowance was a $8.2 million and a $13.1
million increase for the years ended December 31, 1997 and 1996, respectively.
XOMA's accumulated federal and state tax net operating losses ("NOLs")
and credits as of December 31, 1997 are as follows:
Amounts Expiration
(in millions) Dates
------------- -----
Federal
NOLs $ 186.4 2001-2013
Credits 10.3 1998-2013
State
NOLs 26.5 1998-2003
Credits 3.8 2005-2013
For the year ended December 31, 1997 the Company had taxable income of
$12.5 million and $11.1 million for Federal income tax and State tax,
respectively. Except for the impact of Federal alternative minimum tax, which
was not material, these taxable income amounts were offset by NOL and tax credit
carryforwards. These amounts are subject to audit by federal and state tax
authorities and could change.
Certain future changes in the ownership of significant shareholders could
limit utilization of the Company's tax NOLs and credits.
8. RELATED PARTY TRANSACTIONS
In 1993, the Company granted a short-term, secured loan to an officer,
director and stockholder of the Company.
9. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, the Board of
Directors adopted, effective June 1, 1987, a tax-qualified deferred compensation
plan for employees of the Company. Participants may
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make contributions which defer up to 14% of their total salary, up to a maximum
for 1997 of $9,500. The Company may, at its sole discretion, make contributions
each plan year, in cash or in shares of the Company's Common Stock in amounts
which match up to 50% of the salary deferred by the participants. The expense of
these contributions was $233,000, $243,000, and $326,000, for the years ended
December 31, 1997, 1996 and 1995, respectively.
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INDEX TO EXHIBITS
Exhibit
Number
23.1 Consent of Independent Public Accountants.
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