================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 10-K
[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, 1999 Commission File No. 0-14710
----------------------
XOMA LTD.
(Exact name of registrant as specified in its charter)
Bermuda 94-2756657
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2910 Seventh Street, Berkeley, California 94710
(Address of principal executive offices) (Zip Code)
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 Shares,
U.S. $.0005 par value Preference Share 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 common equity held by nonaffiliates of
the registrant, as of February 29, 2000: $595,197,559
Number of Common Shares outstanding as of February 29, 2000: 64,716,757
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
================================================================================
PART I
Item 1. Business
General
XOMA Ltd. ("XOMA" or the "Company") is a biopharmaceutical company
developing products to treat infectious diseases, immunologic and inflammatory
disorders and cancer. The Company's current product development programs
include:
o NEUPREX(R)(rBPI21), a recombinantly derived modified fragment of human
bactericidal/permeability-increasing protein ("BPI") and XOMA's lead BPI-derived
product. The product completed a Phase III efficacy clinical trial in 1999 in
one indication and has been in various clinical trials in four additional
indications. Further development of this product will continue under a licensing
agreement with Baxter Healthcare Corporation ("Baxter").
o Anti-CD11a, a humanized monoclonal antibody product being developed in
collaboration with Genentech, Inc. ("Genentech"). The anti-CD11a product has
completed several Phase I clinical studies, one Phase II study and has started a
Phase III trial in psoriasis patients.
Ophthalmic anti-infective products, including combinations of rBPI and
antibiotics that are being developed under a licensing agreement with Allergan,
Inc. ("Allergan").
Mycoprex(TM), a fungicidal compound derived from BPI that is currently in
preclinical product development. It is initially targeted at systemic fungal
infections. XOMA is seeking a partner for clinical development and
commercialization of this product.
ING-1, a high-affinity recombinant monoclonal antibody to an antigen
expressed on epithelial cell cancers (breast, colorectal, prostate and others)
that destroys cancer cells by recruiting the patient's own immune system. XOMA
has recently accelerated the development schedule for ING-1 and is currently
pursuing development of ING-1 internally.
Genimune(TM), a product developed using XOMA's proprietary targeted gelonin
fusion technology. The product delivers a proprietary recombinant cytotoxin
(rGelonin) specifically to CD5-positive cells. The CD5 antigen is expressed on
mature T cells and some B cells, but not on stem cells or other tissues. The
product may treat cancers such as T and B-cell lymphomas and chronic lymphocytic
leukemia, as well as autoimmune diseases such as rheumatoid arthritis. XOMA is
seeking a partner for clinical development and commercialization of the product
and plans to outlicense the technology.
In late 1998, XOMA completed a shareholder-approved corporate
reorganization, changing its legal domicile from Delaware to Bermuda and its
name to XOMA Ltd. When referring to a time or period before December 31, 1998,
or when the context so requires, the terms "Company" and "XOMA" refer to XOMA
Corporation, a Delaware corporation and the predecessor of XOMA Ltd.
Product Areas
The following describes XOMA's more significant product development and
clinical activities:
The BPI Product Platform
The Company is developing novel therapeutic products from recombinant
bactericidal/permeability-increasing protein ("rBPI"). rBPI is a genetically
engineered version of a human host-defense protein found in white blood cells.
rBPI kills gram-negative bacteria. It also binds to and neutralizes endotoxins,
molecular components of the cell walls of gram-negative bacteria that can
trigger severe complications in infected patients. rBPI also enhances the
activity of antibiotics, in many cases reversing bacterial resistance to the
antibiotic. Furthermore, rBPI inhibits angiogenesis (growth of new blood
vessels) by binding to and neutralizing heparin, a carbohydrate molecule
involved in blood vessel formation. Angiogenesis is an essential component of
inflammation and solid tumor growth.
Natural BPI was discovered in 1978 at New York University ("NYU") School of
Medicine by Peter Elsbach, M.D., Professor of Medicine, and Jerrold Weiss,
Ph.D., Professor of Microbiology. XOMA has collaborated with NYU since 1991 to
extend and apply BPI-related research to the commercial development of
pharmaceutical products. See "Patents and Trade Secrets" and "Research and
License Agreements"
XOMA has adopted the BPI molecule as a platform for developing
pharmaceutical products. In 1991 XOMA scientists developed a recombinant
modified fragment of the BPI molecule, called rBPI21, which is potent and stable
and can be manufactured at commercially viable yields. This modified fragment is
the basis for the Company's NEUPREX(R) and ophthalmic products. More recently, a
XOMA scientist discovered three functional domains in the BPI molecule with
desirable pharmacological activities. Based on this discovery, XOMA is
developing smaller compounds from these domains into additional therapeutic
products, including the Mycoprex(TM) antifungal product and anti-angiogenic
compounds.
NEUPREX(R)
In December 1992, XOMA submitted an investigational new drug application
("IND") to the U.S. Food and Drug Administration ("FDA") to begin human testing
of the NEUPREX(R) product. In March 1993, the Company began Phase I human safety
and pharmacokinetic testing under the IND. Beginning in 1995 the Company
initiated clinical efficacy studies evaluating NEUPREX(R) as a treatment for
primary infections and complications of infectious diseases, trauma and surgery.
The indications tested so far are:
o Severepediatric meningococcemia: This deadly systemic bacterial
infection usually afflicts children. In August 1996, following
favorable results in an open-label Phase I/II pilot study, the FDA
Center for Biologics Evaluation and Research ("CBER") granted
NEUPREX(R) a Subpart E designation for the treatment of severe
pediatric meningococcemia. This designation is intended to expedite
the development, evaluation and marketing of new therapies for
life-threatening and debilitating illnesses. The Company
-2-
subsequently began a Phase III pivotal trial for the indication in
October 1996 in the United States. Beginning in the first quarter of
1997, XOMA added trial sites in the United Kingdom to increase patient
enrollment in the trial. In June 1998, the Company announced that
NEUPREX(R) had been designated an "orphan drug" by the FDA under the
Orphan Drug Act for treatment of severe meningococcal disease. The
Orphan Drug Act generally entitles the first developer that receives
FDA marketing approval to a seven-year exclusive marketing period in
the United States for that product. The Phase III trial completed
enrollment at nearly 400 patients in May 1999. In August 1999, a
preliminary analysis of the data revealed a clinical benefit in
mortality and morbidities. A more detailed analysis was submitted to
the FDA in November 1999, and the Company is preparing to meet with
the FDA to discuss the trial results. The Company cannot predict the
outcome of the meeting.
o Hemorrhage due to trauma: Accidents or injuries that cause acute blood
loss can trigger serious infectious complications in up to 40% of
patients who survive the initial trauma and surgery. A
placebo-controlled, double-blinded Phase II study in 401 patients
began in June 1995 and was completed in October 1996. A follow-on
single-blinded Phase II pharmacokinetics study explored alternative
dosing regimens in 169 patients. Based on data from these two Phase II
studies, XOMA initiated a Phase III pivotal trial in the fourth
quarter of 1997, designed to enroll 1,650 patients in 40 centers,
testing NEUPREX(R) to prevent serious pulmonary complications
(pneumonia and/or acute respiratory distress syndrome (ARDS)) in
trauma patients. In September 1999, an independent Data Safety
Monitoring Board (DSMB) identified no safety issues but concluded that
the data did not support continuing the trial. Enrollment was halted
at approximately 1100 patients. An analysis of the trial is underway.
o Partial hepatectomy: This procedure, surgical removal of part of the
liver (usually to remove an isolated tumor), can result in temporarily
impaired liver function. Since the liver normally clears bacteria and
their endotoxins from the bloodstream, these patients are at risk for
infectious complications. The double-blinded, placebo-controlled Phase
II study in 35 patients began in mid-1995 and was concluded at the end
of 1997. The study showed a reduction in pulmonary complications in
patients treated with NEUPREX(R).
o Severeintra-abdominal infections: In 1996, the Company began a Phase
I/II open-label dose-ranging study testing NEUPREX(R) with
conventional antibiotics to treat patients with serious abdominal
infections that required surgery. Completed in 1998, the study showed
a dose-related improvement in patient outcome.
o Cysticfibrosis (CF): In the third quarter of 1997, XOMA initiated a
program to test NEUPREX(R) in CF patients, whose genetic disorder
predisposes them to recurring bacterial lung infections. With repeated
antibiotic treatments, the infecting bacteria often become resistant
to antibiotics. A natural history study in 1997 tested a formulation
of rBPI21, alone and in combination with antibiotics, in vitro against
bacterial cultures collected from CF patients. A Phase I safety and
pharmacokinetics study in CF patients was concluded in 1998.
-3-
There can be no assurance that any of the clinical trials will yield data
that will result in licensure of the NEUPREX(R) product.
BPI-related Ophthalmic Program
In June of 1999, XOMA entered into an agreement with Allergan to develop
ophthalmic anti-infectives that combine rBPI with antibiotics. Such combination
products have shown positive in vitro results against resistant strains of
bacteria that cause eye infections.
Mycoprex(TM)
XOMA scientists have discovered that certain compounds derived from BPI
display potent fungicidal activity. Further research demonstrated that many of
these compounds not only kill strains of Candida, the most common fungus to
cause systemic illness, but also show activity against other strains of fungi,
including those resistant to currently available drugs. Based on these findings,
the Company is developing compounds with a broad spectrum of fungicidal activity
and a better safety profile than currently available fungicidal drugs. In late
1998, the Company retained an advisor to assist in finding a development and
marketing partner for Mycoprex(TM). No assurance can be given regarding the
timing or likelihood of future collaborative arrangements or of product
licensure.
LBP Assay Program
In the first quarter of 1997, XOMA granted to Biosite Diagnostics
Incorporated ("Biosite") of San Diego, California, an exclusive U.S. license to
make, use and sell certain non-automated, point-of-care diagnostic and
prognostic products for measuring lipopolysaccharide binding protein ("LBP") to
detect bacterial endotoxin exposure in patients with endotoxemia or sepsis.
Later in 1997, a non-exclusive license was granted to SRL, Inc., a Japanese
company, to make, use and sell certain automated diagnostic and prognostic
products for centralized laboratory use in Japan. In August 1998, the Company
announced that it had granted to Diagnostics Products Corporation a worldwide
license to its patented technology that uses LBP as a biochemical marker of
systemic exposure to endotoxin.
Monoclonal Antibody Programs
Anti-CD11a Monoclonal Antibody Product
In April 1996, XOMA and Genentech entered into an agreement to co-develop
Genentech's anti-CD11a humanized monoclonal antibody product. In late 1996, XOMA
started a Phase I trial in moderate to severe psoriasis patients. In the second
quarter of 1997, the Company started additional Phase I studies at lower doses.
XOMA completed enrollment in a Phase II efficacy study in Canadian psoriasis
patients in October 1998. Following successful completion of that trial,
Genentech paid XOMA a $2 million milestone payment in December 1998. In April
1999, the companies announced an agreement to continue collaborative development
of the product through Phase III for the treatment of moderate to severe plaque
psoriasis. In August 1999, XOMA announced the expansion of the collaboration to
include organ transplant rejection, and has subsequently scheduled a Phase I/II
study in kidney transplant patients. In December 1999, a Phase III trial was
initiated in psoriasis patients.
-4-
Other Antibody-based Products and Technologies
XOMA has additional core capabilities in the recombinant antibody area,
including ING-1, (a therapeutic oncology antibody product candidate) targeted
gelonin fusion technology and a related product (Genimiune(TM)), and mammalian
and microbial expression systems for the manufacture of recombinant antibodies.
Various licenses and sublicenses have been entered into in some of these areas.
Discussions are ongoing with other entities that have expressed interest in
these products and technologies. No assurance can be given that any agreement or
agreements will be reached as a result of the ongoing discussions. XOMA may
choose to develop some of these products further on its own.
Genimune(TM) is XOMA's humanized gelonin fusion product that targets CD5
positive lymphocytes (T and B white blood cells) for autoimmune disease therapy.
For several years, the Company developed and evaluated several proprietary
variants of genetically engineered proteins and targeted immunofusions. In
mid-1993 the Company selected a lead compound designated Genimune(TM). In
December 1993, XOMA entered into cross-license agreements with Research
Development Foundation concerning recombinant DNA-derived gelonin ("r-gelonin"),
a plant-derived cytotoxic enzyme used as a fusion component. XOMA has engaged an
advisor to assist in seeking partners and is attempting to outlicense the
product and the targeted gelonin fusion technology, but no assurance can be
given that it will successfully do so.
XOMA has developed a patented technology for the human engineering of
antibodies. This Human Engineering (HE) technology represents a novel
alternative to the complementarity-determining region (CDR) grafting-based
humanization methods in widespread use today. The Company is using the HE
technology for internal development of ING-1 and Genimune(TM) and also plans to
outlicense it. No assurance can be given that the technology will be outlicensed
successfully.
Additional Product and Technology Areas
XOMA continues to seek opportunities to realize value from products and
technologies outside its core research efforts, including mammalian and
microbial cell expression technologies, osteoinductive proteins for bone repair,
and non-cariogenic proteins for low-calorie flavor enhancement. Various licenses
and sublicenses have been entered into in these areas. Discussions are ongoing
with other entities that have expressed interest in these products and
technologies. No assurance can be given that any agreement or agreements will be
reached as a result of the ongoing discussions.
In 1996 XOMA received a $2.2 million payment related to the sale of its
T-cell receptor ("TCR") technology to Connective Therapeutics, Inc., now named
Connetics Corporation ("Connetics"). In December 1999, Connetics and XOMA agreed
to assign their TCR intellectual property to The Immune Response Corporation
("IRC") in exchange for cash, common stock of IRC, and future royalties. IRC
owns additional TCR-related intellectual property and intends to carry forward
development of pharmaceutical products for the treatment of rheumatoid arthritis
and other autoimmune diseases using this technology.
In 1996 XOMA also received a $3.0 million payment for an exclusive license
to Genentech, including a sublicense to IDEC Pharmaceuticals Corporation
("IDEC"), for intellectual property covering the use of chimeric IgG1 antibodies
specific to the CD20 antigen on the surface of human B-cells. XOMA was entitled
to royalties on the sale of products employing the anti-CD20 technology
-5-
that are sold in the United States and in other countries where XOMA held
relevant patents. In December 1997, XOMA assigned these anti-CD20 antibody
patents and royalty rights to Pharmaceutical Partners, LLC for $17.0 million.
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, Biosite, Cantab
Pharmaceuticals Research Ltd, Celltech Ltd, Eli Lilly and Company, Enzon, Inc.,
Genentech, the Hoechst Group, ICOS Corporation, Invitrogen Corporation, Pasteur
Merieux Serums & Vaccins, The Pharmacia & Upjohn Group and ZymoGenetics, a
subsidiary of Novo Nordisk.
Thaumatin, a flavor-enhancing protein developed by XOMA, is classified as
generally recognized as safe ("GRAS") by the Flavor and Extract Manufacturer's
Association ("FEMA"). GRAS designation permits the use of this ingredient as a
flavor enhancer in food without additional regulatory approval. Thaumatin is the
first flavoring ingredient produced through biotechnology to be granted GRAS
status. The Company is seeking to outlicense this technology, but no assurance
can be given that it will successfully do so.
Manufacturing
XOMA is currently producing the rBPI21, anti-CD11a, and ING-1 products for
clinical trial and other testing needs at its Berkeley and Santa Monica
manufacturing facilities, pursuant to a drug manufacturing license obtained from
the State of California.
The Company's manufacturing capability is based on recombinant DNA
technology, with production of therapeutic proteins from either mammalian or
microbial cells. XOMA has fermentation capacity for up to 4,000 liters with
associated isolation and purification systems in place. The Company does its own
formulation for final sterile filling and finishing and has the capacity to do
its own small-scale filling.
Development and Marketing Arrangements
The Company's strategy is to enter into arrangements with established
pharmaceutical company partners in order to facilitate and finance the
development and marketing of its products. Assuming timely regulatory approval,
which cannot be assured, the successful commercialization of XOMA's products
will depend to a large extent upon the marketing capabilities of any
pharmaceutical partners.
NEUPREX(R)
In January 2000, XOMA entered into NEUPREX(R) licensing and supply
agreements with the Hyland Immuno division of Baxter for treatment of
meningococcemia and all future anti-bacterial and anti-endotoxin indications.
The agreements provide for upfront and other payments of up to $35 million for
meningococcemia. In addition, Baxter has committed to fund development of the
product in additional indications. Baxter will pay all future development costs,
and XOMA may receive additional payments related to additional indications. XOMA
will receive royalties from future NEUPREX(R) sales, and will supply initial
product needs from its Berkeley manufacturing facility.
-6-
BPI Related Ophthalmics
In June 1999, XOMA concluded licensing and supply agreements with Allergan.
for the use of rBPI in combination with antibiotics for the treatment of eye
infections. Allergan will fund all development costs and XOMA will receive up to
$11 million in milestone payments and a royalty on sales of future products.
XOMA will also manufacture rBPI21 for use in the licensed products.
XOMA is in discussion with potential partners regarding the licensing and
development of BPI-derived anti-angiogenic products for use in ophthalmic
indications, such as diabetic retinopathy. No assurance can be given regarding
the timing or likelihood of future arrangements.
Mycoprex(TM)
In late 1998, the Company retained an advisor to assist in finding a
development and marketing partner for Mycoprex(TM). No assurance can be given
regarding the timing or likelihood of future collaborative arrangements or of
product licensure.
Anti-CD11a
In April 1996, XOMA and Genentech entered into an agreement whereby XOMA
agreed to co-develop Genentech's humanized monoclonal antibody product
anti-CD11a. Under the terms of the agreement Genentech purchased 1.5 million
XOMA common shares at $5.90 per share and funded development through Phase II by
making a series of convertible subordinated loans. In April and December 1996,
respectively, Genentech loaned XOMA $5.0 million and $8.5 million to fund 1996
and 1997 development costs. In December 1997, Genentech loaned an additional
$10.0 million to fund 1998 development costs. In December 1998, the Company
received a $2.0 million milestone payment from Genentech based on successful
completion of its Phase II clinical study in psoriasis. In April 1999, the
companies extended and expanded the agreement. XOMA will now receive a royalty
of 25% of U.S. profits, if any, from anti-CD11a in all indications, and a
royalty on sales outside the United States. Genentech will continue to finance
XOMA's share of development costs via convertible subordinated loans, which are
due at the earlier of 2005 or first product approval. In 1999, the Company
received $6.5 million in funding from Genentech under the anti-CD11a development
agreement.
Other
From time to time, the Company reviews development opportunities with other
biotechnology companies with a view toward providing process scale-up,
regulatory and/or clinical services to them.
Competition
The biotechnology and pharmaceutical industries are subject to continuous
and substantial technological change. Competition in the areas of recombinant
DNA-based and antibody-based technologies is intense and expected to increase as
established biotechnology firms and large chemical and pharmaceutical companies
advance in the field. A number of these large pharmaceutical and chemical
companies have enhanced their capabilities by entering into arrangements with or
acquiring biotechnology companies or entering into business combinations with
other large pharmaceutical
-7-
companies. Many of these companies have significantly greater financial
resources, larger research and development and marketing staffs and larger
production facilities than those of XOMA. Moreover, certain of these companies
have extensive experience in undertaking preclinical testing and human clinical
trials. These factors may enable other companies to develop products and
processes competitive with or superior to those of the Company. In addition, a
significant amount of research in biotechnology is being carried out in
universities and other non-profit research organizations. These entities are
becoming increasingly interested in the commercial value of their work and may
become more aggressive in seeking patent protection and licensing arrangements.
There can be no assurance that developments by others will not render the
Company's products or technologies obsolete or uncompetitive.
Without limiting the foregoing, XOMA is aware that Biogen Inc. has
completed Phase II testing of a product in severe psoriasis, Immunex Corp. may
be testing its rheumatoid arthritis drug in psoriasis and Medarex, Inc. may be
developing a monoclonal antibody product for treatment of inflammatory skin
disorders. It is possible that other companies may be developing one or more
products based on BPI, and there can be no assurance that such product(s) will
not prove to be more effective than or receive regulatory approval prior to
NEUPREX(R) or any ophthalmic product developed by Allergan and XOMA.
Regulatory
XOMA's products are subject to comprehensive preclinical and clinical
testing requirements and to approval processes by the U.S. Food and Drug
Administration (FDA) and similar authorities in other countries. The Company's
products are primarily regulated on a product-by-product basis under the U.S.
Food, Drug and Cosmetic Act and Section 351(a) of the Public Health Service Act.
Most of the Company's human therapeutic products are or will be classified as
biologic products and would be subject to regulation by FDA's Center for
Biologics Evaluation and Research (CBER). Approval of a biologic for
commercialization requires licensure of the product and the manufacturing
facilities.
The FDA regulatory process is carried out in several phases. Prior to
beginning clinical testing of a proposed new biologic product, an IND is filed
with FDA. This document contains scientific information on the proposed product,
including results of testing of the product in animal and laboratory models.
Also included is information on manufacture of the product and studies on
toxicity in animals, and a clinical protocol outlining the initial investigation
in humans.
The initial stage of clinical testing, Phase I, ordinarily encompasses
safety, pharmacokinetics and pharmacodynamic evaluations. Phase II testing
encompasses investigation in specific disease states designed to provide
preliminary efficacy data and additional information on safety. Phase III
studies are designed to further establish clinical safety and efficacy and to
provide information allowing proper labeling of the product following approval.
Phase III studies are most commonly multi-center, randomized, placebo-controlled
trials in which rigorous statistical methodology is applied to clinical results.
Other designs may also be appropriate in specific circumstances.
Following completion of clinical trials, a Biologics License Application
("BLA") is submitted to FDA to request marketing approval. Internal FDA
committees are formed which evaluate the application, including scientific
background information, animal and laboratory efficacy studies, toxi-
-8-
cology, manufacturing facility and clinical data. During the review process, a
dialogue between FDA and the applicant is established in which FDA questions are
raised and additional information is submitted. During the final stages of the
approval process, FDA generally requests presentation of clinical or other data
before an FDA advisory committee. Also, during the later stages of review, FDA
conducts an inspection of the manufacturing facility to establish that the
product is made in conformity with good manufacturing practice (GMP). If all
outstanding issues are satisfactorily resolved and labeling established, FDA
issues a license for the product and for the manufacturing facility, thereby
authorizing commercial distribution.
The regulatory status of NEUPREX(R) and anti-CD11a is described above under
"Product Areas."
Other potential XOMA products will require significant additional
development, including extensive pre-clinical and clinical testing. 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.
FDA has substantial discretion in both the product approval process and the
manufacturing approval process, and it is not possible to predict at what point,
or whether, FDA will be satisfied with the Company's submissions or whether FDA
will raise questions which may delay or preclude product approval or
manufacturing facility approval. As additional clinical data are accumulated,
they will be submitted to FDA and may have a material impact on the FDA product
approval process. Given that regulatory review is an interactive and continuous
process, the Company has adopted a policy of limiting announcements and comments
upon the specific details of the ongoing regulatory review of its products,
subject to its obligations under the securities laws, until definitive action is
taken.
European Filing Process
In Europe, most of the Company's human therapeutic products are or will be
classified as biologic and would be subject to a single European registration
through a centralized procedure. The assessment of the Marketing Authorization
Application is carried out by a rapporteur and co-rapporteur appointed by the
Committee for Proprietary Medicinal Products (CPMP), which is the expert
scientific committee of the European Medicines Evaluation Agency (EMEA).
The rapporteur and co-rapporteur are drawn from the CPMP membership
representing member states of the European Union. They liase with the applicant
on behalf of the CPMP in an effort to provide answers to queries raised by the
CPMP. Their assessment report(s) is circulated to and considered by the full
CPMP membership leading to the production ultimately of a CPMP opinion which is
transmitted to the applicant and Commission. The final decision on an
application is issued by the Commission. When a positive decision is reached, a
Marketing Authorization or "MA" will be issued. Once approval is granted the
product can be marketed under the single European MA in all member states of the
European Union. Consistent with the single MA, the labeling for Europe is
identical throughout all member states except that all labeling must be
translated into the local language of the country of intended importation and in
relation to the content of the so called "blue box" on the outer packaging in
which locally required information may be inserted.
-9-
Patents and Trade Secrets
As a result of its ongoing activities, the Company holds and is in the
process of applying for a number of patents in the United States and abroad to
protect its products and important processes. The Company also has obtained or
has the right to obtain exclusive licenses to certain patents and applications
filed by others. However, the patent position of biotechnology companies
generally is highly uncertain and no consistent policy regarding the breadth of
allowed claims has emerged from the actions of the Patent Office with respect to
biotechnology patents. Accordingly, no assurance can be given that the Company's
patents will afford protection against competitors with similar technologies, or
that others will not obtain patents claiming aspects similar to those covered by
the Company's patent applications.
During the period from September 1994 to December 1999, the U.S. Patent and
Trademark Office (the "Patent Office") issued 44 patents to the Company related
to its BPI-related products, including novel compositions, their manufacture,
formulation assay, and use. U.S. Patent Nos. 5,420,019, 5,674,834, 5,827,816,
5,488,034, and 5,696,090 issued to the Company relate to novel recombinant amino
terminal fragments and fragment analogs of BPI, pharmaceutical compositions,
methods for their recombinant production and formulation. The Company believes
that these patents will provide comprehensive protection for the manufacture,
use and sale of its BPI-derived NEUPREX(R) and ophthalmic products in the U.S.
The Company has received Notices of Allowance from the Patent Office for five
additional U.S. patents and has more than 20 pending patent applications
worldwide related to its BPI-related products.
The Company is the exclusive licensee of BPI-related patents and
applications owned by NYU. These include five issued U.S. patents and one
additional U.S. Notice of Allowance, directed to novel BPI-related protein and
DNA compositions, as well as their production and uses. U.S. Patent Nos.
5,198,541 and 5,641,874, issued to NYU, relate to the recombinant production of
BPI. The Company believes that these patents have substantial value because they
cover certain production methodologies that allow production of commercial-scale
quantities of BPI for human use. In addition, the European Patent Office granted
to NYU, EP 375724, with claims to N-terminal BPI fragments and their use, alone
or in conjunction with antibiotics, for the treatment of conditions associated
with bacterial infections.
Between 1992 and 1999, six patents related to BPI were issued to Incyte
Pharmaceuticals, Inc. ("Incyte") by the Patent Office directed to
endotoxin-associated uses of BPI, uses of BPI with polymannuronic acid, and an
LBP-BPI protein. Effective July 1998, XOMA is the exclusive licensee of
BPI-related patents and applications owned by Incyte, including these six U.S.
patents, one granted European patent and pending applications worldwide.
From January 1996 to December 1999, XOMA was issued six patents and one
Notice of Allowance directed to its LBP-related assays and products, including
diagnostic and prognostic methods for measuring LBP levels in humans. XOMA has
also acquired from Johnson & Johnson an exclusive sublicense to their
LBP-related portfolio, including five U.S. patents issued to the discoverers of
LBP, Drs. Richard Ulevitch and Peter Tobias, at the Scripps Research Institute
in San Diego.
During the period from July 1991 to December 1999, the Patent Office issued
eight patents to the Company related to its bacterial expression technology,
including claims to novel promoter se-
-10-
quences, secretion signal sequences, compositions and methods for expression and
secretion of recombinant proteins from bacteria, including immunoglobulin gene
products. U.S. Patent No. 5,028,530, issued to the Company, is directed to
expression vehicles containing an AraB promoter, host cells and processes for
regulated expression of recombinant proteins. U.S. Patent Nos. 5,576,195 and
5,846,818 are related to DNA encoding a pectate lyase signal sequence,
recombinant vectors, host cells and methods for production and externalization
of recombinant proteins. U.S. Patent Nos. 5,595,898, 5,698,435 and 5,618,920
address secretable immunoglobulin chains, DNA encoding the chains and methods
for their recombinant production. U.S. Patent Nos. 5,693,493 and 5,698,417
relate to methods for recombinant production/secretion of functional
immunoglobulin fragments. Numerous foreign patents have been granted which,
along with additional pending foreign patent applications, correspond to the
patents issued and allowed in the U.S.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, the Company may require
certain licenses from others in order to develop and commercialize certain
potential products incorporating the Company's technology. There can be no
assurance that such licenses, if required, will be available on acceptable
terms.
Research and License Agreements
XOMA has contracted with a number of academic and institutional
collaborators to conduct certain research and development. Under these
agreements the Company generally funds either the research and development or
evaluation of products, technologies or both, will own or obtain an exclusive
license to products or technologies developed, and will pay royalties on sales
of products covered by the license. The rates and durations of such royalty
payments vary by product and institution, and range generally for periods from
five years to indefinite duration. Aggregate expenses of the Company under all
of its research agreements totaled $0.1 million, $0.1 million and $0.2 million
in 1999, 1998 and 1997, respectively. The Company has entered into certain
license agreements with respect to the following products:
Bactericidal/Permeability-Increasing Protein (BPI)
In August 1990, XOMA entered into a research collaboration and license
agreement with NYU whereby XOMA obtained an exclusive license to patent rights
for DNA materials and genetic engineering methods for the production of BPI and
fragments thereof. BPI is part of the body's natural defenses against infection
and XOMA is investigating the use of products based on BPI for various
indications. XOMA has obtained an exclusive, worldwide license for the
development, manufacture, sale and use of BPI products for all therapeutic and
diagnostic uses, and it has paid a license fee and will make milestone payments
and pay royalties to NYU on the sale of such products. The license becomes fully
paid upon the later of the expiration of the relevant patents or fifteen years
after the first commercial sale, subject to NYU's right to terminate for certain
events of default.
In July 1998, XOMA entered into a license agreement with Incyte whereby
XOMA obtained an exclusive license to all of Incyte's patent rights relating to
BPI. XOMA will pay Incyte a royalty on sales of BPI products covered by the
license, up to a maximum of $11.5 million, and made a $1.5 million advance
royalty payment, one-half in cash and one-half in XOMA common shares. XOMA also
issued warrants to Incyte to purchase 250,000 XOMA common shares at $6.00 per
share. Due to
-11-
offsets against other royalties, XOMA may not ultimately incur increased total
BPI royalty payments as a result of this license.
International Operations
The Company believes that, because the pharmaceutical industry is global in
nature, international activities will be a significant part of the Company's
future business activities and that, when and if it is able to generate income,
a substantial portion of that income will be derived from product sales and
other activities outside the United States.
A number of risks are inherent in international operations. Foreign
regulatory agencies often establish standards different from those in the United
States, and an inability to obtain foreign regulatory approvals on a timely
basis could have an adverse effect on the Company's international business and
its financial condition and results of operations. International operations may
be limited or disrupted by the imposition of government controls, export license
requirements, political or economic instability, trade restrictions, changes in
tariffs, restrictions on repatriating profits, taxation, or difficulties in
staffing and managing international operations. In addition, the Company's
business, financial condition and results of operations may be adversely
affected by fluctuations in currency exchange rates. There can be no assurance
that the Company will be able to successfully operate in any foreign market.
Employees
As of December 31, 1999 XOMA employed 175 full-time employees at its
Berkeley and Santa Monica, California facilities. The Company's employees are
engaged in clinical, manufacturing, quality assurance and control, research and
product development activities, and in executive, finance and administrative
positions. The Company considers its employee relations to be excellent.
The Company was incorporated in Delaware in 1981 and became a Bermuda
company effective December 31, 1998. The principal executive offices of XOMA are
located at 2910 Seventh Street, Berkeley, California 94710 U.S.A. (telephone
510-644-1170).
Item 2. Properties
XOMA's principal product development and manufacturing facilities are
located in Berkeley, California. The Company leases 83,000 square feet of space
in Berkeley including approximately 35,000 square feet of research and
development laboratories, 32,000 square feet of production and production
support facilities and 16,000 square feet of office space. An additional 3,000
square feet of office space has been subleased to a third party. Separately, a
16,500 square foot idle production facility in Berkeley is owned by XOMA.
XOMA also maintains offices, laboratories and a manufacturing and scale up
facility occupying approximately 15,000 square feet in leased space in Santa
Monica, California. The Company also owns an approximately 6,750 square foot
parking lot in Santa Monica.
-12-
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
Officers
The officers of the Company are as follows:
Name Age Title
John L. Castello 63 Chairman of the Board, President and
Chief Executive Officer
Patrick J. Scannon, M.D., Ph.D. 52 Chief Scientific and Medical Officer and
Director
Clarence L. Dellio 54 Senior Vice President, Operations
Daniel P. Cafaro 43 Vice President, Regulatory Affairs
Ronald H. Carlson, Ph.D. 47 Vice President, Quality Assurance/Control
Stephen F. Carroll, Ph.D. 48 Vice President, Preclinical Research
Peter B. Davis 53 Vice President, Finance and Chief Financial
Officer
Marvin R. Garovoy, M.D. 56 Vice President, Clinical and Medical Affairs
Christopher J. Margolin 53 Vice President, General Counsel and Secretary
W. C. McGregor, Ph.D. 58 Vice President, Technical Development and Santa
Monica Operations
Officers serve at the discretion of the Board of Directors. There is no family
relationship among any of the officers or directors.
-13-
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common shares trade on the Nasdaq National Market under the
symbol "XOMA". The following table sets forth the quarterly range of high and
low reported sale prices of the Company's common shares on the Nasdaq National
Market for the periods indicated.
Price Range
High Low
1998:
First Quarter $ 6-1/2 $ 4-5/16
Second Quarter 6 4-1/4
Third Quarter 5 1-27/32
Fourth Quarter 5 1-13/16
1999:
First Quarter $ 4-3/16 $ 2-13/16
Second Quarter 6-3/4 2-1/2
Third Quarter 8 2-1/32
Fourth Quarter 3-3/4 2
On March 15, 2000, there were approximately 3,938 record holders of XOMA's
common shares.
The Company has not paid dividends on its common shares. The Company
currently intends to retain any earnings for use in the development and
expansion of its business. The Company, therefore, does not anticipate paying
cash dividends on its common shares in the foreseeable future (see Note 4 to the
Consolidated Financial Statements, "SHARE CAPITAL").
-14-
Item 6. Selected Financial Data
The following table contains selected financial information including
statement of operations and balance sheet data of XOMA for the years 1995
through 1999. The selected financial information has been derived from the
audited Consolidated Financial Statements of XOMA. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in Item 8 of this report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 below. The data set forth below is not necessarily indicative
of the results of future operations.
Year Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Statement of
Operations Data
Total revenues (1) $2,361 $6,345 $18,383 $3,604 $1,165
Total operating costs and
expense (2) 47,534 54,184 35,552 31,826 27,469
Other income (expense), net (3) (606) 636 1,404 (888) 3,832
------------- ---------- ----------- --------- --------
Net loss $(45,779) $(47,203) $(15,765) $(29,110) $(22,472)
============= ========== =========== ========= ========
Net loss per common share $(0.87) $(1.16) $(0.44) $(0.90) $(0.97)
============= ========== =========== ========= ========
December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data
Cash (4) $18,539 $28,287 $55,146 $46,982 $26,633
Total assets 28,312 37,304 64,776 57,675 40,878
Long-term debt (5) 34,724 26,513 24,773 14,516 7,692
Redeemable convertible
preference shares -- 6,440 -- -- --
Accumulated deficit (450,177) (404,343) (354,526) (337,195) (307,905)
Shareholders' equity (net
capital deficiency) $(16,846) $(6,190) $31,240 $34,748 $26,836
(1) In 1999, includes non-refundable license fee and milestone payment from
Allergan and proceeds from the assignment of intellectual property rights
to IRC. In 1998, includes a $2.0 million milestone payment from Genentech
and $4.3 million in license fees. In 1997, includes $17.0 million from the
assignment of patent and royalty rights to Pharmaceutical Partners LLC.
(2) In 1998, includes non-recurring costs of $2.4 million to acquire rights to
Incyte's BPI related patents and $2.5 million of costs related to the
change in domicile.
-15-
(3) In 1996, includes a non-recurring expense of $2.5 million relating to a
securities class action lawsuit settlement. Other income in 1995 includes a
one-time gain of $4.3 million related to a modification of the funding
arrangement with Pfizer Inc. for the E5(R) clinical trial, and a $2.4
million loss related to the impairment in value of a company-owned
facility.
(4) Includes cash, cash equivalents, short-term investments, and interest
receivable.
(5) Excludes current portion. In 1999, 1998, 1997 and 1996, includes $30.0
million, $23.5 million, $23.5 million and $13.5 million, respectively,
aggregate principal amount of convertible subordinated notes due to
Genentech in 2005. In 1995, includes $6.5 million aggregate principal
amount of convertible debentures due 1998. As of December 31, 1996 all of
the convertible debentures had been converted into 2,054,224 common shares.
-16-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
XOMA is a biopharmaceutical company developing products to treat infectious
diseases, immunologic and inflammatory disorders and cancer. The Company's
primary infectious disease drug development platform is BPI
(bactericidal/permeability-increasing protein), a human host-defense protein.
The first BPI-derived product, NEUPREX(R), has completed a Phase III trial in
meningococcemia and has been in clinical trials in four additional indications.
XOMA has concluded license and supply agreements with Baxter for NEUPREX(R) and
with Allergan for BPI-derived products in combination with antibiotics for
ophthalmic infections. Other BPI-derived products in preclinical development
include Mycoprex(TM), a peptide-derived compound initially targeting systemic
fungal infections.
XOMA is also developing the anti-CD11a humanized monoclonal antibody
product under a collaboration agreement with Genentech. The product has
successfully concluded a Phase II and has started a Phase III clinical trial in
psoriasis patients. Genentech is providing funding for development and clinical
trials through a cost sharing arrangement and through a series of long-term
convertible loans. Future joint development plans include additional
indications, beginning with organ transplant rejection.
Additional human engineered antibody-related products being developed by
the Company include ING-1 which targets epithelial cell cancer indications, and
Genimune(TM), which targets B and T cell cancers and autoimmune diseases
In December 1998, the shareholders of the Company (formerly XOMA
Corporation) approved a proposal to change XOMA's legal domicile from Delaware
to Bermuda. The change was tax free to the shareholders, with little or no tax
cost to the Company, and did not affect operations.
In January 2000, the Company's shareholders approved an increase in
authorized share capital by 65,000,000 common shares.
The Company incurred a net loss in each of the past three years and is
expected to continue to operate at a loss until regulatory approval and
commencement of commercial sales of its products. The timing of product
approvals is uncertain, and there can be no assurance that approvals will be
granted or that revenues from product sales will be sufficient to attain
profitability.
Revenues
Total revenues were $2.4 million in 1999, compared with $6.3 million in
1998 and $18.4 million in 1997. Revenues for 1999 included a non-refundable
licensing fee and first milestone payment from Allergan, related to the use of
rBPI in combination with antibiotics for the treatment of ophthalmic infections,
and also proceeds from the assignment of T-cell receptor (TCR) intellectual
property to IRC. Revenues for 1998 included $2.0 million in non-refundable
milestone payments from Genentech for anti-CD11a development, and $4.3 million
in non-refundable license fees. Revenues for 1997 consisted of $17.0 million
from the assignment of anti-CD20 antibody patents and royalty
-17-
rights to Pharmaceutical Partners, LLC and $1.4 million for various licensing
transactions. In addition to milestones and royalties, future revenues will be
impacted by services and drug material provided by the Company for the
development of the NEUPREX(R) product.
Costs and Expenses
In 1999, research and development expenses decreased by $2.4 million (5%)
compared to 1998, following a $14.0 million (47%) increase from 1997 to 1998.
The decrease from 1998 to 1999 reflected the initiation of a cost sharing
arrangement with Genentech in April 1999 related to the development of the
anti-CD11a monoclonal antibody product. The increase from 1997 to 1998 reflected
higher spending on clinical trials and preparing for regulatory applications and
inspections for NEUPREX(R) and the expansion of development work and clinical
trials for anti-CD11a. The Company anticipates research and development
expenditures may vary considerably from year-to-year depending on development
plans for NEUPREX(R) and other products.
General and administrative expenses increased by $0.7 million (12%) from
1999 to 1998, following a decrease of $0.2 million (4%) from 1997 to 1998. The
increase was due primarily to costs related to licensing activities and the
Company's change in domicile to Bermuda at year-end 1998. The Company does not
foresee substantial near-term changes to general and administrative
expenditures.
Other expense in 1998 included costs of $2.4 million related to an
exclusive license for all of Incyte's BPI-related patents and patent
applications and $2.5 million for the expenses related to the change in the
Company's legal domicile from Delaware to Bermuda. A gain of $0.3 million was
realized in 1997 reflecting an adjustment to the value of a previously settled
class action law suit lawsuit.
Interest income was $1.1 million lower in 1999 than 1998, reflecting both
lower cash investment balances and lower prevailing interest rates. Interest and
other expense in 1997, 1998 and 1999 included interest on the convertible notes
due to Genentech in 2005, which compounds semi-annually and accrues interest at
a rate of LIBOR plus 1% (7.13% at December 31, 1999).
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased by $9.7 million
to $18.5 million at December 31, 1999. Financing activities of $34.3 million
includes $27.8 million of net proceeds from private placements in January and
July of 1999 and $6.5 million net funding from Genentech under the anti-CD11a
development agreement. The Company's cash, cash equivalents and short-term
investments are expected to continue to decrease while the Company pursues FDA
licensure, except to the extent the Company is able to secure additional
funding.
Net cash used in operating activities was $43.1 million in 1999, compared
with $37.7 million in 1998 and $12.0 million in 1997. The increase in cash used
in operating activities in 1999 compared to 1998 is due to higher spending on
clinical trials and preparing for regulatory applications and inspections for
NEUPREX(R). Approximately $1.5 million of the expenses accrued in 1998 for the
change in domicile were actually paid in 1999. The increase in cash usage in
1998 versus 1997 was primarily due to higher spending on NEUPREX(R) and
anti-CD11a, and to $17.0 million received in a
-18-
single non-recurring transaction in December 1977 was due primarily to cash from
the aforementioned non-recurring transaction. Net capital expenditures for 1999,
1998 and 1997 were $1.0 million, $0.9 million and $1.5 million, respectively. A
second 2,750-liter fermentor train was added to XOMA's Berkeley facility in 1997
to provide additional production capacity for NEUPREX(R) and anti-CD11a. The
Company intends to continue to fund capital spending from internal cash
resources supplemented by capital financing where appropriate and available.
Following a licensing and supply agreement with the Hyland Immuno division
of Baxter in January 2000, involving an initial payment of $10 million, and a
common share financing in February 2000, with net proceeds of $29.0 million,
management believes that the Company's cash position and resulting interest
income are sufficient to finance the Company's currently anticipated needs for
operating expenses, working capital, equipment acquisitions and research
projects, for approximately two years. The Company continues to evaluate
strategic alliances, potential partnerships and financing arrangements that
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 and on terms acceptable to the Company.
Although operations are influenced by general economic conditions, the
Company does not believe that inflation had a material impact on financial
results for the periods presented. The Company believes that it is not dependent
on materials or other resources that would be significantly impacted by
inflation or changing economic conditions in the foreseeable future.
Year 2000 Exposure
XOMA has not experienced any problems with its computer systems related to
such systems being unable to recognize appropriate dates related to the Year
2000. The Company is not aware that any clients or vendors have experienced any
material problems with this issue. Accordingly, XOMA does not anticipate
incurring material expenses or experiencing any material operational disruptions
as a result of any year 2000 issues.
Forward-Looking Statements
Certain statements contained herein related to the sufficiency of the
Company's cash position, existing and potential collaborative and licensing
relationships, timing of clinical trials, the regulatory process and other
aspects of clinical development, or that otherwise relate to future periods are
"forward-looking" information, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements are based on the Company's
current beliefs as to the outcome and timing of future events, and actual
results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events that may not prove accurate. The
forward-looking statements involve risks and uncertainties including, but not
limited to, timing of results of pending or future clinical trials, actions by
the FDA, changes in the Company's collaborative relationships, and future
actions by the Patent Office, as well as more general risks and uncertainties
related to regulatory approvals, product efficacy and development, the Company's
financing needs and opportunities, the legal standards applicable to
biotechnology patents, scale-up and marketing capabilities, intellectual
property protection, competition, inter-
-19-
national operations, the Company's ability to be Y2K compliant, stock price
volatility and other risk factors referred to herein and in other of the
Company's Securities and Exchange Commission filings.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Company's exposure to market rate risk for changes
in interest rates relates primarily to its investment portfolio. XOMA does not
use derivative financial instruments in its investment portfolio. By policy, the
Company places its investments with high quality debt security issuers, limits
the amount of credit exposure to any one issuer, limits duration by restricting
the term, and holds investments to maturity except under rare circumstances. The
Company classifies its cash equivalents or short-term investments as fixed rate
if the rate of return on an instrument remains fixed over its term. As of
December 31, 1999, all cash equivalents and short-term investments are
classified as fixed rate.
XOMA also has a long-term convertible note due to Genentech in 2005.
Interest on this note of LIBOR plus 1% is reset at the end of June and December
each year and therefore variable.
The table below presents the amounts and related weighted interest rates of
the Company's cash equivalents, short-term investments and long-term convertible
note at December 31, 1999:
Fair Value Average
Maturity (in $ millions) Interest Rate
----------------- -------------------- ---------------------
Cash equivalents, fixed rate daily $16.2 5.2%
Other Market Risk. At December 31, 1999 the Company had a long-term
convertible note outstanding, which is convertible into common shares based on
the market price of the Company's common shares at the time of conversion. A 10%
decrease in the market price of the Company's common shares would increase the
number of shares issuable upon conversion of either security by approximately
11%. An increase in the market price of Company common shares of 10% would
decrease the shares issuable by approximately 9%. (See Footnote 4 to the
Consolidated Financial Statements).
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant, related
notes, and reports of independent auditors are set forth beginning on page 23 of
this report.
Report of Ernst & Young LLP, Independent Auditors
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Redeemable Convertible
Preference Shares and Shareholders' Equity (Net Capital Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
-20-
Item 9. Change in Accountants
As previously reported, on March 19, 1998, the Company appointed Ernst &
Young, LLP ("Ernst & Young") to serve as the Company's independent auditors for
1998, the ratification of which appointment was submitted to the shareholders at
the Company's 1998 annual meeting.
From fiscal 1983 through fiscal 1997, Arthur Andersen, LLP ("Arthur
Andersen") acted as the Company's independent accountants. Arthur Andersen was
dismissed on March 19, 1998. The decision to change accountants was approved by
the audit committee of the Board of Directors. The report of Arthur Andersen on
the financial statements of the Company for the fiscal year ended December 31,
1997 did not contain any adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's fiscal year and all subsequent interim periods preceding
such dismissal, there were no disagreements with Arthur Andersen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Arthur Andersen, would have caused it to make a reference to the
subject matter of disagreements in connection with its report; nor has Arthur
Andersen ever presented a written report, or otherwise communicated in writing
to the Company or Board of Directors or the audit committee thereof the
existence of any "disagreement" or "reportable event" within the meaning of Item
304 of Regulation S-K.
The Company has authorized Arthur Andersen to respond fully to the
inquiries of Ernst & Young. The letter from Arthur Andersen addressed to the
Securities and Exchange Commission, as required by Item 304 (a) (3) of
Regulation S-K, was filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, as amended.
-21-
PART III
Item 10. Directors and Executive Officers of the Registrant
The section labeled "Proposal 1 -- Election of Directors" appearing in the
Company's proxy statement for the 2000 annual meeting of shareholders is
incorporated herein by reference. Information concerning the Company's executive
officers is set forth in Part I of this Report on Form 10-K.
Item 11. Executive Compensation
The section labeled "Compensation of Executive Officers" appearing in the
Company's proxy statement for the 2000 annual meeting of shareholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Share Ownership" appearing in the Company's proxy
statement for the 2000 annual meeting of shareholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The section labeled "Certain Transactions" appearing in the Company's proxy
statement for the 2000 annual meeting of shareholders is incorporated herein by
reference.
-22-
PART IV
Item 14. 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 consolidated financial
statements or the notes thereto or is not applicable or required.
(3) Exhibits:
See "Index to Exhibits".
(b) Reports on Form 8-K.
None.
-23-
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 23 day of
March, 2000.
XOMA Ltd.
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 March 23, 2000
and Chief Executive Officer
- ----------------------------------------
(John L. Castello)
/s/ Patrick J. Scannon Chief Scientific and Medical March 23, 2000
- ----------------------------------------
(Patrick J. Scannon) and Director
/s/ Peter B. Davis Vice President, Finance and March 23, 2000
- ----------------------------------------
(Peter B. Davis) Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ James G. Andress Director March 23, 2000
- ----------------------------------------
(James G. Andress)
/s/ William K. Bowes, Jr. Director March 23, 2000
- ----------------------------------------
(William K. Bowes, Jr.)
/s/ Arthur Kornberg Director March 23, 2000
- ----------------------------------------
(Arthur Kornberg)
/s/ Steven C. Mendell Director March 23, 2000
- ----------------------------------------
(Steven C. Mendell)
/s/ W. Denman Van Ness Director March 23, 2000
- ----------------------------------------
(W. Denman Van Ness)
-24-
INDEX TO FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors...........................
Report of Arthur Andersen LLP, Independent Public Accountants...............
Consolidated Balance Sheets.................................................
Consolidated Statements of Operations.......................................
Consolidated Statement of Changes in Redeemable Convertible Preference
Shares and Shareholders' Equity (Net Capital Deficiency)..................
Consolidated Statements of Cash Flows.......................................
Notes to Consolidated Financial Statements..................................
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of XOMA Ltd.
We have audited the accompanying consolidated balance sheets of XOMA Ltd.
and subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, changes in shareholders' equity (net capital
deficiency) and cash flows for each of the two years in the period ended
December 31, 1999. These consolidated 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of XOMA Ltd. and
subsidiaries as of December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Palo Alto, California ERNST & YOUNG LLP
February 18, 2000
F-2
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To XOMA Corporation (subsequently reincorporated as XOMA Ltd.):
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of XOMA Corporation (a Delaware corporation,
subsequently reincorporated as XOMA Ltd., a Bermuda corporation) for the year
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of XOMA Corporation, subsequently reincorporated as XOMA Ltd., for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 3, 1998
F-3
XOMA Ltd.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,539 $ 11,857
Short-term investments -- 16,430
Related party receivables 219 246
Other receivables 658 144
Prepaid expenses and other 679 159
--------- ---------
Total current assets 20,095 28,836
Property and equipment, net 3,651 3,895
Assets held for sale 4,442 4,442
Deposits and other 124 131
--------- ---------
$ 28,312 $ 37,304
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 3,915 $ 3,515
Accrued liabilities 6,519 6,740
Capital lease obligations -- 286
--------- ---------
Total current liabilities 10,434 10,541
Convertible subordinated notes 34,724 26,513
--------- ---------
Total liabilities 45,158 37,054
--------- ---------
Redeemable convertible preference shares, $0.05 par value,
644 shares issued and outstanding (liquidation preference $6,440) at
December 31, 1998; at amount paid in -- 6,440
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Preference shares, $.05 par value, 1,000,000 shares authorized, no shares
issued and outstanding -- --
--------- ---------
Common shares, $.0005 par value, 135,000,000 shares authorized, 58,324,058 and
47,029,620 outstanding at December 31, 1999 and 1998, respectively
29 24
Paid-in capital 433,302 398,129
Accumulated deficit (450,177) (404,343)
--------- ---------
Total shareholders' equity (net capital deficiency) (16,846) (6,190)
--------- ---------
$ 28,312 $ 37,304
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
XOMA Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31
--------------------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES:
License fees $2,281 $4,318 $18,077
Collaborative research agreements -- 2,000 250
Product sales and royalties 80 27 56
------------ ---------- -------
Total revenues 2,361 6,345 18,383
------------ ---------- -------
OPERATING COSTS AND EXPENSES:
Research and development 41,454 43,839 29,878
General and administrative 6,080 5,430 5,674
Other :
License fee -- 2,415 --
Change in domicile -- 2,500 --
Total operating costs and expenses 47,534 54,184 35,552
------------ ---------- -------
Loss from operations (45,173) (47,839) (17,169)
OTHER INCOME (EXPENSE):
Investment and other income 1,159 2,269 2,120
Interest and other expense (1,765) (1,633) (716)
------------ ---------- -------
Net loss (45,779) (47,203) (15,765)
Preference share dividends (55) (2,614) (1,566)
------------ ---------- -------
Net loss available to common shareholders $(45,834) $(49,817) $(17,331)
============ ========== =======
NET LOSS PER COMMON SHARE $(0.87) $(1.16) $(0.44)
============ ========== =======
SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE 52,705 42,895 39,679
============ ========== =======
The accompanying notes are an integral part of these consolidated financial statements.
F-5
XOMA Ltd.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(In thousands)
Shareholder's Equity (Net Capital Deficiency)
Preference Shares Common Shares
Shares Amount $ Shares Amount
BALANCE, DECEMBER 31, 1996 -- -- 39,609 $ 20
Exercise of share options, contributions to 401(k) and
incentive plans -- -- 110 --
Sale of preference shares 1 -- -- --
Conversion of preference shares -- -- 169 --
Issuance of warrants -- -- -- --
Unrealized loss on investments -- -- -- --
Dividends on preference shares -- -- 3 --
Net loss -- -- -- --
------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 1 -- 39,891 20
Exercise of share options, contributions to 401(k) and
incentive plans -- -- 111 --
Issuance of common shares for technology license -- -- 158 --
Issuance of common shares for legal settlement -- -- 344 1
Issuance of Series C redeemable convertible preference
shares, net of issuance costs 1,250 11,093 -- --
Conversion of Series C redeemable convertible
preference shares (606) (4,653) 2,678 1
Issuance of warrants -- -- -- --
Conversion of preference shares (1) -- 3,643 2
Unrealized gain (loss) on investments -- -- - --
Dividends on preference shares -- -- 204 --
Net loss -- -- -- --
------- -------- -------- -------
BALANCE, DECEMBER 31, 1998 644 6,440 47,029 4
Exercise of share options, contributions to 401(k) and
incentive plans -- -- 195 --
Sale of common shares -- -- 8,613 4
Conversion of Series C redeemable convertible
preference shares (644) (6,440) 2,394 1
Unrealized gain (loss) on investments -- -- -- --
Dividends on preference shares -- -- 93 --
Net loss -- -- -- --
------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 -- $ -- 58,324 $ 29
========= ========= ======== ========
F-6
Shareholder's Equity (Net Capital Deficiency)
Total Shareholder's
Paid-In Accumulated Equity (Net Capital
Capital Deficit Deficiency)
------------- ------------ ----------------------
BALANCE, DECEMBER 31, 1996 $ 371,923 $(337,195) $ 34,748
Exercise of share options, contributions to 401(k) and
incentive plans 462 -- 462
Sale of preference shares 10,936 -- 10,936
Conversion of preference shares -- -- --
Issuance of warrants 1,125 -- 1,125
Unrealized loss on investments (42) -- (42)
Dividends on preference shares 1,342 (1,566) (224)
Net loss -- (15,765) (15,765)
------- -------- --------
BALANCE, DECEMBER 31, 1997 385,746 (354,526) 31,240
Exercise of share options, contributions to 401(k) and
incentive plans 501 -- 501
Issuance of common shares for technology license 750 -- 750
Issuance of common shares for legal settlement 1,896 -- 1,897
Issuance of Series C redeemable convertible preference
shares, net of issuance costs -- -- --
Conversion of Series C redeemable convertible
preference shares 4,652 -- 4,653
Issuance of warrants 1,915 -- 1,915
Conversion of preference shares (2) -- --
Unrealized gain (loss) on investments 2 -- 2
Dividends on preference shares 2,669 (2,614) 55
Net loss -- (47,203) (47,203)
------- -------- --------
BALANCE, DECEMBER 31, 1998 398,129 (404,343) (6,190)
Exercise of share options, contributions to 401(k) and
incentive plans 661 -- 661
Sale of common shares 27,827 -- 27,831
Conversion of Series C redeemable convertible
preference shares 6,439 -- 6,440
Unrealized gain (loss) on investments (1) -- (1)
Dividends on preference shares 247 (55) 192
Net loss -- (45,779) (45,779)
------- -------- --------
BALANCE, DECEMBER 31, 1999 $ 433,302 $(450,177) $(16,846)
========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
XOMA Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(45,779) $(47,203) $(15,765)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,233 1,645 2,032
Common shares contributed to 401(k) and
management incentive plans 391 403 319
Issuance of common shares for legal settlement -- 1,897 --
Issuance of common shares and warrants for
technology license -- 1,415 --
Receipt of stock in exchange for technology license (500) -- --
Loss (gain) on retirement of property and equipment 2 (48) 21
Changes in assets and liabilities:
Related party and other receivables (487) (39) 450
Prepaid expenses (20) (17) 77
Deposits and other assets 7 -- 2
Accounts payable 400 1,871 (134)
Accrued liabilities (29) 633 44
Accrued interest on convertible subordinated note 1,711 1,740 968
-------- --------- ---------
Net cash used in operating activities (43,071) (37,703) (11,986)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 59,738 43,009 105,195
Payments for purchases of short-term investments (43,309) (41,518) (77,389)
Purchase of property and equipment, net of proceeds (928) (1,519)
(991)
-------- --------- ---------
Net cash provided by investing activities 15,438 563 26,287
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (286) (421) (485)
Proceeds from issuance of convertible note 11,000 -- 9,992
Payments on convertible note (4,500) -- --
Proceeds from issuance of common or redeemable
convertible preference shares and warrants 28,101 12,193 12,204
-------- --------- ---------
Net cash provided by financing activities 34,315 11,772 21,711
-------- --------- ---------
Net increase (decrease) in cash and cash 6,682 (25,368) 36,012
equivalents
Cash and cash equivalents at beginning of year 11,857 37,225 1,213
-------- --------- ---------
Cash and cash equivalents at end of year $ 18,539 $ 11,857 $ 37,225
======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-7
XOMA Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, formerly XOMA
Corporation a Delaware company, is a biopharmaceutical company developing
products to treat infectious diseases, immunologic and inflammatory disorders
and cancer. 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.
On December 31, 1998 XOMA completed a shareholder-approved corporate
reorganization, changing its legal domicile from Delaware to Bermuda. When
referring to an earlier time or period, or when the context so requires, the
terms "Company" and "XOMA" refer to XOMA Corporation, a Delaware corporation and
the predecessor of XOMA Ltd.
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, if any, 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.
Consolidation
The consolidated financial statements include the accounts of the Company,
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Net Loss Per Common Share
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding during the period in accordance with
Financial Accounting Standard No. 128.
F-8
The following potentially dilutive outstanding securities were not
considered in the computation of diluted net loss per share because they would
be antidilutive for each of the years ended December 31:
Amount (in thousands): 1999 1998 1997
- -------------------- ---- ---- ----
Options for common shares 4,231 4,006 3,720
Warrants for common shares 1,884 1,464 595
Common shares issuable to satisfy legal
settlement obligations -- -- 344
Shares of convertible preferred stock -- 1 1
Convertible notes, debentures, and related
interest $34,724 $26,513 $24,773
Convertible preference shares -- 644 --
Subsequent to December 31, 1999 the Company issued 6,145,000 common shares
and warrants to purchase 250,000 common shares, in connection with a private
placement financing (see Note 10).
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, 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 $0.0 million, $0.1 million, and $0.1 million
during the years ended December 31, 1999, 1998 and 1997, respectively. In
addition, dividends paid in common shares was $0.2 million, $0.6 million and
$0.0 million during the years ended December 31, 1999, 1998 and 1997,
respectively.
Fair Value of Financial Instruments
The fair value of marketable debt securities is based on quoted market
prices. The carrying value of those securities approximates their fair value.
The fair value of notes is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
carrying values of these obligations approximate their respective fair values.
F-9
The fair value of capital lease obligations is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities. The carrying values of these
obligations approximate their respective fair values.
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
1999 1998
---- ----
Equipment $ 16,854 $ 15,966
Leasehold and building improvements 15,095 14,902
Construction-in-progress 99 257
-------- -------
32,048 31,125
Less accumulated depreciation and amortization (28,397) (27,230)
------- --------
Property and equipment, net $3,651 $ 3,895
======= =======
Assets held for sale $ 4,442 $ 4,442
======= =======
At December 31, 1999 and 1998, property and equipment includes equipment
acquired under capital lease obligations which had cost and accumulated
depreciation of approximately $1.8 million.
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.
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 in excess of the
F-10
net realizable value. 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
1999 1998
---- ----
Accrued payroll costs $ 2,928 $ 2,217
Accrued dividends -- 754
Costs related to change in domicile -- 1,457
Accrued clinical trial costs 2,957 1,746
Other 634 566
--- ------
$ 6,519 $ 6,740
======= =======
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 recognized when collection is assured.
Reclassifications
Certain reclassifications have been made to conform the prior years to the
1999 presentation.
Comprehensive Income
In 1998, the Company began to report its results of operations and
financial position based upon the Statement of Financial Accounting Standards
(SFAS) No. 130 "Reporting Comprehensive Income". SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities to be included in
other comprehensive income. During the years ended December 31, 1999, 1998 and
1997 these unrealized gains and losses were not material and total comprehensive
loss closely equaled net loss in each period.
F-11
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently in the process of evaluating SAB 101 and
what effect it may have on the financial statements. Accordingly, the Company
has not determined whether SAB 101 will have a material impact on the financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." XOMA is required to adopt SFAS No. 133 for
the year ending December 31, 2002. Because the Company currently holds no
derivative financial instruments and does not currently engage in hedging
activities, adoption of SFAS No. 133 is expected to have no material impact on
the Company's financial position or results of operations.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires that entities capitalize certain costs related to
internal use software once certain criteria have been met. The adoption of the
provisions of SOP 98-1 for the year ended December 31, 1999 did not have a
significant impact on the Company's results of operations or financial
condition.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
On December 31, 1999 and 1998, cash and cash equivalents consisted of money
market mutual funds.
The Company follows a policy of investing mostly 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 in
short-term investments at December 31, (in millions):
1999 1998
---- ----
Fair Amortized Fair Amortized
Value Cost Value Cost
----- ---- ----- ----
e e
- -
U.S. Treasury Securities -- -- $ 15.5 $ 15.5
Corporate Bonds and Other -- -- 0.9 0.9
The contractual maturities of the Company's investments in debt securities
as of December 31, (in millions):
1999 1998
---- ----
Less than 1 year -- $ 11.9
From 1 to 2 years -- 2.0
More than 2 years -- 2.5
F-12
During the years ended December 31, 1999 and 1998, available-for-sale
securities incurred no significant gross realized gains or losses or net change
in unrealized gain or loss or had any significant gross unrealized holding gain
or loss at the end of the periods. Gains and losses are determined on a specific
identification basis.
3. RESEARCH AND DEVELOPMENT AGREEMENTS
In July 1998, XOMA signed an exclusive license with Incyte Pharmaceuticals,
Inc. ("Incyte") for all of Incyte's patents and patent applications relating to
bactericidal/permeability-increasing protein ("BPI"), a human host defense
protein from which XOMA is developing a pipeline of pharmaceutical products. The
license provides that XOMA will pay Incyte a royalty on sales of BPI products
covered by the license, up to a maximum of $11.5 million. In July 1998, XOMA
made a non-refundable $1.5 million advance royalty payment consisting of
$750,000 in cash and 158,103 XOMA common shares. Incyte also received warrants
(the "Incyte Warrants") to purchase 250,000 XOMA common shares at $6.00 per
share. The value of the warrants and the advance royalty payment have been
included in a $2.4 million charge recorded in the second quarter of 1998. The
entire value of the warrants has been recorded as a non-recurring charge in the
Company's statement of operations in 1998 since the technology rights received
relate to very early stage research which has no assurance of commercial
viability and no alternative future use.
In April 1996, the Company entered into a collaborative agreement with
Genentech, Inc. ("Genentech") to jointly develop anti-CD11a, for treatment of
psoriasis and for organ transplant rejection. In connection with the agreement,
Genentech purchased 1.5 million common shares for approximately $9.0 million and
has agreed to fund the Company's development costs for anti-CD11a 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 anti-CD11a and bring it
through Phase II clinical trials. In December 1998, Genentech made a $2.0
million milestone payment to XOMA for successful completion of a Phase II study.
In April 1999, the Companies extended and expanded the agreement. XOMA will now
receive a 25% interest in U.S. profits from anti-CD11a in all indications, and a
royalty on sales outside the U.S. Genentech will continue to finance XOMA's
share of development costs via a long-term convertible loan, which is due at the
earlier of 2005, or first product approval. In 1999, the Company received $6.5
million net funding from Genentech under the anti-CD11a development agreement.
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 antibodies
directed 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.
F-13
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 was entitled to 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 December
1999, Connetics and XOMA agreed to assign their TCR intellectual property to The
Immune Response Corporation (IRC) in exchange for cash, stock and future
royalties. IRC owns additional TCR-related intellectual property and intends to
carry forward development of pharmaceutical products using the technology.
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, Biosite Diagnostics
Incorporated, Cantab Pharmaceuticals Research Ltd, Eli Lilly and Company, Enzon,
Inc., Genentech, Inc., the Hoechst Group, ICOS Corporation, Invitrogen
Corporation, Pasteur Merieux Serums & Vaccins, The Pharmacia & Upjohn Group and
ZymoGenetics, a subsidiary of Novo Nordisk.
4. SHARE CAPITAL
Common Shares
In July 1999, the Company issued 3,024,086 common shares to for net
proceeds of $16.4 million. The Company also issued five-year warrants to
purchase up to 150,000 common shares for $5.75 per share to the placement agents
in this transaction.
In January 1999, the Company issued 2,051,254 common shares for net
proceeds of $11.4 million. The price represented approximately a 60% premium
over the then current market price for XOMA shares. The common shares were held
in an escrow account until sold by the investors. In the third quarter of 1999,
based on the then current market price of XOMA's shares, the Company contributed
768,751 additional common shares to the escrow account. The number of shares
remaining in the escrow account were subject to further adjustment based on an
11% discount from the prevailing market price at such time. In the fourth
quarter of 1999, the Company contributed 2,768,865 additional common shares to
the escrow account. All common shares have subsequently been withdrawn from the
escrow account and there will be no further adjustments.
In July 1998, the Company issued 158,103 common shares valued at $0.8
million to Incyte in partial payment of license fees.
In January 1998, the Company issued 344,168 common shares in connection
with the settlement of shareholder litigation valued at $1.9 million.
Preference Shares and Preferred Stock
In connection with the change in the Company's domicile to Bermuda from
Delaware, certain of the former series of preferred stock were re-designated as
new series of preference shares. Others of the former series of preferred stock
have already been fully converted into common shares and have not been
redesignated. The following table summarizes the share amounts as of December
31, 1999:
F-14
Former Preferred Stock Current Preference Share
Designation Designation at December 31, 1999
- --------------------------- ----------- --------------------
Series A Series A None issued to date
Series B -- None remaining
Series C -- None remaining
Series D -- None remaining
Series E Series B None issued to date
Series F -- None remaining
Series G -- None remaining
Series H Series C None remaining
Preference Shares (current designation)
Series A. Formerly Series A Preferred Stock. The Company has authorized 650,000
Series A Cumulative Preference Shares of which none were outstanding at December
31, 1999, 1998 and 1997. (See "Shareholder Rights Plan" below.)
Series B. Formerly Series E Preferred Stock. (See "Convertible Subordinated
Notes and Debentures" below).
Series C. Formerly Series H Preferred Stock. In June 1998, 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 of convertible preferred
stock (now designated the "Series C Preference Shares") for proceeds of
approximately $12.1 million net of cash issuance costs. Conversions of Series C
Preference Shares were based on the price of common shares at the time of
conversion. There was no initial discount on the conversion price, but a
discount of 2% was added for each month the Series C Preference Shares were
held, up to a maximum discount of 12%. A deemed dividend of $1.5 million was
recorded in Paid-in capital in fiscal 1998 that represented the value of this
conversion feature. No conversions were permitted below a price of $5.35 for the
first 60 days. There were certain restrictions on the volume of sales of
underlying common shares by the investors. The investors also received
three-year warrants to purchase up to a total of 550,000 common shares at a
price of $7.00 per share and additional warrants to purchase 69,000 common
shares at the $7.00 price were issued to the placement agents (collectively,
"1998 Warrants"). As of December 31, 1998, of the Series C Preference Shares,
plus accrued dividends, had been converted into common shares. As of December
31, 1998, $6,060,000 of the Series C Preference Shares, plus accrued dividends,
had been converted into 2,677,757 common shares. In 1999, the remaining
$6,440,000 of Series C Preference Shares were converted into 2,393,508 common
shares.
Preferred Stock (not redesignated as Preference Shares)
Series G. 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. Conversions of Series G Preferred were based on the
price of common shares at the time of conversion. There was no initial discount
on the conversion price, but a discount of 2% was added for each month the
Series G Preferred was held, up to a maximum discount of 14%. A deemed dividend
of $1.9 million has been recorded in Paid-in-capital in 1997 and 1998
F-15
that represented the value of this conversion feature. 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 were certain restrictions on the
volume of sales of underlying common shares 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 and additional warrants to purchase 54,000 common
shares at the $10.00 price were issued to the placement agents (collectively,
"1997 Warrants"). As of December 31, 1998, all of the Series G Preferred, plus
accrued dividends, had been converted into 4,019,581 common shares.
Convertible Subordinated Notes and Debentures
Under the arrangement with Genentech (see Note 3) the Company receives
funding for development of anti-CD11a in the form of convertible subordinated
notes due 2005 at interest rates of LIBOR plus 1% (7.13% at December 31, 1999)
compounded and reset at the end of June and December each year. Interest is
payable at maturity. The Company has received $10.0 million, $8.5 million and
$5.0 million of these loans in December 1997, in April 1996 and December 1996,
respectively. In April 1999, the arrangement was amended to reflect a profit
sharing arrangement. As a result, the loan balance will be increased by cash
advances from Genentech to XOMA, by interest accruing in the loan balance and by
XOMA's share of the combined development spending. The loan balance will be
reduced by XOMA's spending on anti-CD11a development. In 1999, the Company
received $6.5 million net funding from Genentech under the anti-CD11a
development agreement. The notes are convertible into one Series B Preference
Share at the market price of common shares at the time of conversion (7,500
shares are so designated) for each $10,000 in notes. The Series B Preference
Shares are convertible into common shares. The cumulative amount of interest
accrued was $4.7 million, $3.0 million and $1.2 million as of December 31, 1999,
1998 and 1997, respectively.
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,
$0.9 million and $0.8 million for the plan years 1999, 1998 and 1997
respectively.
Employee Share Purchase Plan
In 1998, the shareholders approved the 1998 Employee Share Purchase Plan
(the "Share Purchase Plan") which provides employees of the Company the
opportunity to purchase common shares through payroll deductions. The Company
has reserved 500,000 common shares for issuance under the Share Purchase Plan.
An employee may elect to have payroll deductions made under the Share Purchase
Plan for the purchase of common shares in an amount not to exceed 20% of the
employee's compensation. The purchase price per common share will be either (i)
an amount equal to 85% of the
F-16
fair market value of a common share on the first day of a 24-month offering
period or on the last day of such offering period, whichever is lower, or (ii)
such higher price as may be set by the Compensation Committee of the Board at
the beginning of such offering period. As of December 31, 1999, payroll
deductions under the Share Purchase Plan totaled $214,000.
Shareholder Rights Plan
In October 1993, the Company's Board of Directors unanimously adopted a
Shareholder Rights Plan (the "Rights Plan"). Under the Rights Plan, Preference
Share Purchase Rights ("Rights") were distributed as a dividend at the rate of
one Right for each common share held of record as of the close of business on
November 12, 1993. Each Right entitles the registered holder of common shares to
buy a fraction of a share of the new series of Preference Shares (the "Series A
Preference Shares") at an exercise price of $30.00, subject to adjustment. The
Rights will be exercisable, and will detach from the common share, only if a
person or group acquires 20 percent or more of the common shares, 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 shares, or if the Board of
Directors declares a person or group owning 10 percent or more of the
outstanding common shares 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 Preference Share (or, in certain
circumstances, common shares 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. SHARE OPTIONS AND WARRANTS
At December 31, 1999, the Company had three share-based compensation plans,
which are described below. The aggregate number of common shares that may be
issued under these plans is 6,950,000 shares.
Share Option Plan
Under the Company's amended 1981 Share Option Plan (the "Option Plan"),
qualified and non-qualified options of the Company's common shares 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 shares 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, 1999, options covering 3,544,132 common shares were outstanding
under the Option Plan.
Restricted Shares Plan
The Company also has a Restricted Share Plan (the "Restricted Plan") which
provides for the issuance of options or the direct sale of common shares 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 shares 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.
F-17
The Company has granted options with exercise prices at 85% of fair market
value on the date of grant. Up to 1,250,000 shares are authorized for issuance
under the Restricted Plan. As of December 31, 1999, options covering 561,752
common shares of were outstanding under the Restricted Plan.
The Company amortizes deferred compensation, which is the difference
between the issuance price or exercise price as determined by the Board of
Directors and the fair market value of the shares at the date of sale or grant
over the period benefited.
Directors Share Option Plan
In 1992, the shareholders approved a Directors Share Option Plan (the
"Directors Plan") which provides for the issuance of options to purchase common
shares to non-employee directors of the Company at 100% of the fair market value
of the shares on the date of the grant. Up to 300,000 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, 1999, options for
125,000 common shares 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 shares-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):
1999 1998 1997
---- ---- ----
Net loss As reported $(45,779) $(47,203) $(15,765)
Pro forma $(47,342) $(49,016) $(17,639)
Net loss per share As reported $ (0.87) $ (1.16) $ (0.44)
Pro forma $ (0.90) $ (1.20) $ (0.48)
F-18
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:
1999 1998 1997
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 84% 71% 71%
Risk-free interest rate 5.3% 5.7% 6.3%
Expected life 4.7 years 7 years 7 years
A summary of the status of the Company's share option plans as of December
31, 1999, 1998, and 1997, and changes during years ending on those dates is
presented below:
1999 1998 1997
---- ---- ----
OPTIONS: Shares Price* Shares Price* Shares** Price*
- -------- ------ ------ ------ ------ -------- ------
Outstanding at beginning of year 4,005,771 $4.78 3,719,865 $ 4.91 3,196,150 $ 4.50
Granted
(1) 663,500 3.97 7,750 3.91 1,750 5.36
(2) 20,500 6.16 551,450 4.84 671,000 6.68
(3) -- -- --
-- -- --
Exercised (76,652) 3.59 (36,845) 2.65 (52,422) 2.72
Forfeited, expired or canceled (382,235) 5.96 (236,449) 6.81 (96,613) 4.33
--------- --------- ---------
Outstanding at end of year 4,230,884 4.58 4,005,771 4.78 3,719,865 4.92
========= ========= =========
Exercisable at end of year 3,054,029 2,857,263 2,317,321
========= ========= =========
Weighted average fair value of
options granted
(1) 3.77 3.03 3.89
(2) 2.65 3.09 4.78
(3) -- --
--
* 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.
The following table summarizes information about share options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
Range of Number Number
Exercise Prices Outstanding Life * Price ** Exercisable Price **
--------------- ----------- ----- ------ ----------- ------
$ 1.70 - 2.56 1,778,064 5.04 $ 2.53 1,760,921 $ 2.53
2.60 - 5.00 1,422,912 8.06 4.23 570,127 4.44
5.13 - 7.88 889,908 5.62 6.97 582,981 7.07
16.36 - 26.50 140,000 .70 18.95 140,000 18.95
------------- ----------- --- ----- -------- - -----
$ 1.70 - 26.50 4,230,884 6.03 $ 4.58 3,054,029 $ 4.51
================ ========= ==== ====== ========= ======
* Weighted-average remaining contractual life
F-19
** Weighted-average exercise price
F-20
Warrants
In July 1999, warrants to purchase up to 150,000 common shares at $5.75 per
share and expiring in July 2004 were issued to the placement agents in
conjunction with a private placement of common shares.
In January 1999, warrants to purchase up to 240,000 common shares at $5.85
per share were issued to investors in a private placement of common shares.
Additional warrants to purchase up to 64,000 common shares at $5.85 were issued
to the placement agent and separately warrants for 75,000 common shares at $5.85
were issued to an advisor. All of these warrants expire in January 2004.
In July 1998, warrants to purchase 250,000 common shares at $6.00 per share
were issued to Incyte in partial payment of license fees. These warrants expire
in July 2008.
Warrants to purchase 550,000 common shares at $7.00 per share were issued
in conjunction with the issuance of the Series H Preferred in June 1998. These
warrants were valued at $1.0 million in paid-in capital. Additional warrants to
purchase 68,681 common shares at $7.00 per share were issued to placement
agents. All of these warrants expire in June 2001
Warrants to purchase 486,000 common shares 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 and were included in paid-in capital.
All of the above warrants were exercisable upon issuance.
6. COMMITMENTS AND CONTINGENCIES
Collaborative Agreements and Royalties
The Company is obligated to pay royalties, ranging generally from 1.5% to
5% of the selling price of the licensed component and up to 25% of any
sublicense fees 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, 1999, the Company leased administrative, research
facilities, certain laboratory and office equipment under operating leases
expiring on various dates through 2009.
F-21
Future minimum lease commitments are as follows (in thousands):
Operating Leases
----------------
2000 $ 3,048
2001 2,849
2002 2,498
2003 2,484
2004 2,483
Thereafter 7,187
-------
Net minimum lease payments $ 20,549
========
Total rental expense was approximately $2.7 million, $2.3 million, and $2.0
million for the years ended December 31, 1999, 1998 and 1997, 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 shares.
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 common shares 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.
The Company will seek to obtain additional insurance, if needed, if and when its
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 directors 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.
F-22
7. INCOME TAXES
The significant components of net deferred tax assets and liabilities as of
December 31, are as follows (in millions):
1999 1998
---- ----
Capitalized R&D expense $ 27.1 $ 23.9
Net operating loss carryforwards 73.6 73.0
R&D and other credit carryforwards 18.4 16.2
Other 4.5 9.3
Valuation allowance (123.6) (122.4)
------- -------
Total deferred tax asset $ -- $ --
========== ========
The net change in the valuation allowance was a $1.2 million increase and a
$25.7 million decrease for the years ended December 31, 1999 and 1998,
respectively. The 1998 decrease was due to the elimination of capitalized R&D
which is not expected to be useable for federal income tax purposes after the
change in the Company's domicile from Delaware to Bermuda.
XOMA's accumulated federal and state tax net operating loss carryforwards
("NOLs") and credit carryforwards as of December 31, 1999 are as follows:
Amounts Expiration
(in millions) Dates
------------- -----
Federal
NOLs $ 209.0 2000-2019
Credits 12.3 2000-2019
State
NOLs 13.6 2000-2004
Credits 4.9 2003-2014
For the year ended December 31, 1997 the Company had taxable income of
$12.8 million and $11.6 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 shareholder of the Company which has been renewed annually.
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 make contributions which
defer up to 14% of their total salary, up to a maximum for
F-23
1999 of $10,000. The Company may, at its sole discretion, make contributions
each plan year, in cash or in the Company's common shares in amounts which match
up to 50% of the salary deferred by the participants. The expense of these
contributions was $271,000, $329,000 and $233,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
10. SUBSEQUENT EVENTS
On January 31, 2000, the Company held a special meeting of shareholders at
which a proposal to approve the increase of the Company's authorized share
capital by 65,000,000 Common Shares was approved, having received 50,225,390
votes for the proposed increase in authorized shares, 3,374,183 votes against,
and 239,053 abstentions.
In January 2000, XOMA concluded NEUPREX(R) licensing and supply agreements
with the Hyland Immuno division of Baxter Healthcare Corporation. The agreement
provided for upfront and other payments of up to $35 million for
meningococcemia. In addition, Baxter has committed to testing the product in
multiple additional indications. Baxter will pay all future development costs,
and XOMA may receive additional payments related to additional indications. XOMA
will receive a royalty from future NEUPREX(R) sales, and will supply initial
product needs from its Berkeley manufacturing facility.
In February 2000, the Company issued 6,145,000 common shares for net
proceeds of $29.0 million. The Company also issued five-year warrants to
purchase up to 250,000 common shares for $5.00 per share to each of the two
placement agents in this transaction. These warrants were exercisable upon
issuance and expire in February 2005.
F-24
INDEX TO EXHIBITS
Exhibit
Number
3.1 Memorandum of Continuance of XOMA Ltd. (Exhibit 3.4).(1)
3.2 Bye-Laws of XOMA Ltd. (Exhibit 3.5).(1)
4.1 Amended and Restated Shareholder Rights Agreement dated as of October
27, 1993 and amended and restated December 31, 1998 by and among XOMA
Corporation (to be renamed XOMA Ltd.) and ChaseMellon Shareholder
Services L.L.C. (successor to First Interstate Bank of California) as
Rights Agent (Exhibit 4.1).(2)
4.2 Form of Resolution Regarding Preferences and Rights of Series A
Preference Shares (Exhibit 4.2).(1)
4.3 Form of Resolution Regarding Preferences and Rights of Series B
Preference Shares (Exhibit 4.3).(1)
4.4 Form of Resolution Regarding Preferences and Rights of Series C
Preference Shares (Exhibit 4.4).(1)
4.5 Form of Common Stock Purchase Warrant (1996 Warrants) (Exhibit
4.9).(3)
4.6 Form of Common Stock Purchase Warrant (1997 Warrants) (Exhibit 3).(4)
4.7 Form of Common Stock Purchase Warrant (1998 Warrants) (Exhibit 3).(5)
4.8 Form of Common Stock Purchase Warrant (Incyte Warrants) (Exhibit
2).(6)
4.9 Form of Common Share Purchase Warrant (January and March 1999
Warrants) (Exhibit 5).(7)
4.10 Form of Common Share Purchase Warrant (July 1999 Warrants) (Exhibit
4).(8)
4.11 Form of Common Share Purchase Warrant (2000 Warrants) (Exhibit 4).(9)
10.1 1981 Share Option Plan as amended and restated (Exhibit 10.1).(10)
10.1A Form of Share Option Agreement for 1981 Share Option Plan (Exhibit
10.1A).(10)
10.2 Restricted Share Plan as amended and restated (Exhibit 10.2).(10)
10.2A Form of Share Option Agreement for Restricted Share Plan (Exhibit
10.2A).(10)
10.2B Form of Restricted Share Purchase Agreement for Restricted Share Plan
(Exhibit 10.2B).(10)
10.3 1992 Directors Share Option Plan as amended and restated (Exhibit
10.4).(10)
10.3A Form of Share Option Agreement for 1992 Directors Share Option Plan
(initial grants) (Exhibit 10.4A).(10)
10.3B Form of Share Option Agreement for 1992 Directors Share Option Plan
(subsequent grants) (Exhibit 10.4B).(10)
10.4 Management Incentive Compensation Plan as amended and restated
(Exhibit 10.5).(10)
10.5 1998 Employee Share Purchase Plan (Exhibit 10.1).(11)
10.5A Amendment No. 1 to 1998 Employee Share Purchase Plan (Exhibit
10.2).(11)
10.6 Form of indemnification agreement for officers (Exhibit 10.6).(10)
10.7 Form of indemnification agreement for employee directors (Exhibit
10.7).10 10.8 Form of indemnification agreement for non-employee
directors (Exhibit 10.8).(10)
10.9 Employment Agreement dated April 29, 1992 between the Company and John
L. Castello (Exhibit 10.9).(10)
10.10 Employment Agreement dated April 1, 1994 between the Company and Peter
B. Davis (Exhibit 10.10).(12)
10.11 Employment Agreement dated March 25, 1999 between XOMA (US) LLC and
Patrick J. Scannon, M.D., Ph.D.
10.12 Lease of premises at 890 Heinz Street, Berkeley, California dated as
of July 22, 1987 (Exhibit 10.12).(10)
10.13 Lease of premises at Building E at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 and amendment thereto dated as of
April 21, 1988 (Exhibit 10.13).(10)
10.14 Lease of premises at Building C at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 and amendment thereto dated as of
August 26, 1987 (Exhibit 10.14).(10)
10.15 Letter of Agreement regarding CPI adjustment dates for leases of
premises at Buildings C, E and F at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 (Exhibit 10.15).(10)
10.16 Lease of premises at 2910 Seventh Street, Berkeley, California dated
March 25, 1992 (Exhibit 10.16).(10)
10.17 Lease dated June 22, 1992, between the Company and Richard B. Gomez,
Josephine L. Gomez, TTEE-U/A/D, 10,31-90, FBO Gomez Family Trust
(Exhibit 10.17).(10)
-2-
10.18 Sublease dated January 20, 1997, between the Company and UroGenesys,
Inc (Exhibit 10.18).(10)
10.19 Lease dated October 2, 1992, between the Company and Virginia Merritt,
as Trustee of the Bowman Merritt and Virginia Merritt Trust (Exhibit
10.19).(10)
10.19A First Extension of Lease dated April 23, 1997, between the Company and
Virginia Merritt and Kim Merritt Campot, as Trustees of the Bowman
Merritt and Virginia Merritt 1987 Trust (Exhibit 10.19A).(10)
10.20 License Agreement dated as of August 31, 1988 between the Company and
Sanofi (with certain confidential information deleted) (Exhibit
10.27).(10)
10.21 Amended and Restated Research and License Agreement dated September 1,
1993 between the Company and New York University (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit
10.28).(10)
10.21A Third Amendment to License Agreement dated June 12, 1997 between the
Company and New York University (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities
and Exchange Commission) (Exhibit 10.28A).(10)
10.21B Fourth Amendment to License Agreement dated December 23, 1998 between
the Company and New York University (Exhibit 10.22B).(13)
10.21C Fifth Amendment to License Agreement dated June 25, 1999 between the
Company and New York University (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities
and Exchange Commission).
10.22 Cross License Agreement dated December 15, 1993 between Research
Development Foundation and the Company (with certain confidential
information deleted) (Exhibit 10.23).(13)
10.23 Cross License Agreement dated December 15, 1993 between the Company
and Research Development Foundation (with certain confidential
information deleted) (Exhibit 10.24).(13)
10.24 Technology Acquisition Agreement dated June 3, 1994 between Connective
Therapeutics, Inc. (now called Connetics Corporation) and the Company
(with certain confidential information deleted) (Exhibit 10.46).(12)
10.24A Amendment Number One to Technology Acquisition Agreement dated
December 8, 1999 between Connetics Corporation and XOMA (US) LLC (with
certain confidential information omitted, which omitted information is
the subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission).
10.24B Agreement dated December 8, 1999 by and between The Immune Response
Corporation and XOMA (US) LLC (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities
and Exchange Commission).
-3-
10.25 Collaboration Agreement, dated as of April 22, 1996, between the
Company and Genentech, Inc. (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities
and Exchange Commission (Exhibit 10.1).(3)
10.25A Amendment to Collaboration Agreement, dated as of April 14, 1999,
between the Company and Genentech, Inc. (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission (Exhibit 10.5).(14)
10.26 Common Stock and Convertible Note Purchase Agreement, dated as of
April 22, 1996, between the Company and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit
10.2).(3)
10.26A Amendment to Common Stock and Convertible Note Purchase Agreement,
dated as of April 14, 1999, between XOMA Ltd. and Genentech, Inc.
(Exhibit 10.6).(14)
10.27 Convertible Subordinated Note Agreement, dated as of April 22, 1996,
between the Company and Genentech, Inc. (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 10.3).(3)
10.27A Amendment to Convertible Subordinated Note Agreement, dated as of June
13, 1996, between the Company and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit
10.4).(3)
10.27B Second Amendment to Convertible Subordinated Note Agreement, dated as
of April 14, 1999, between the XOMA Ltd. and Genentech, Inc. (with
certain confidential information omitted, which omitted information is
the subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit
10.7).(14)
10.28 Form of Registration Rights Agreement by and between the Company and
the holders of the 1996 Warrants (Exhibit 10.6).(3)
10.29 Form of Convertible Preferred Stock Purchase Agreement by and between
the Company and the purchasers of Series G and Series H Preferred
Stock (Exhibit 4).(4)
10.29A First Amendment to Convertible Preferred Stock Agreement, dated as of
January 1, 1998 (Exhibit 10.1).(15)
10.29B Second Amendment to Convertible Preferred Stock Agreement, dated as of
June 26, 1998 (Exhibit 10.3).(16)
10.30 Form of Registration Rights Agreement by and between the Company and
the purchasers of Series G and Series H Preferred Stock (Exhibit
5).(4)
-4-
10.31 License Agreement between Incyte Pharmaceuticals, Inc. and XOMA
Corporation effective as of July 9, 1998 (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 1).(6)
10.32 Registration Rights Agreement dated as of July 9, 1998 by and among
the Company and Incyte Pharmaceuticals, Inc. (Exhibit 3).(6)
10.33 Form of Subscription Agreement, dated as of January 28, 1999, by and
between XOMA Ltd. and the purchasers of Common Shares in the January
1999 Private Placement (Exhibit 2).(7)
10.34 Form of Registration Rights Agreement, dated as of January 28, 1999,
by and between XOMA Ltd. and the purchasers of Common Shares in the
January 1999 Private Placement (Exhibit 3).(7)
10.35 Form of Escrow Agreement, dated as of January 28, 1999, by and between
XOMA Ltd., Brian W. Pusch, as Escrow Agent and the purchasers of
Common Shares in the January 1999 Private Placement (Exhibit 4).(7)
10.36 License Agreement dated as of June 25, 1999 between XOMA Ireland
Limited and Allergan Sales, Inc. (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 2).(17)
10.37 Supply Agreement dated as of June 25, 1999 between XOMA (US) LLC and
Allergan Sales, Inc. (with certain confidential information omitted,
which omitted information is the subject of a confidential treatment
request and has been filed separately with the Securities and Exchange
Commission) (Exhibit 3).(17)
10.38 Form of Subscription Agreement, dated as of July 21, 1999, by and
between XOMA Ltd. and the purchasers of Common Shares in the July 1999
Private Placement (Exhibit 2).(7)
10.39 Form of Registration Rights Agreement dated as of July 21, 1999 by and
between XOMA Ltd. and the purchasers of Common Shares in the July 1999
Private Placement (Exhibit 3).(8)
10.40 Form of Registration Rights Agreement dated as of July 21, 1999 by and
between XOMA Ltd. and the placement agents of Common Shares in the
July 1999 Private Placement (Exhibit 5).(8)
10.41 License Agreement dated as of January 25, 2000 between XOMA Ireland
Limited and Baxter Healthcare Corporation (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 2).(18)
-5-
10.42 Supply and Development Agreement dated as of January 25, 2000 between
XOMA (US) LLC and Baxter Healthcare Corporation (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit
3).(18)
10.43 Form of Subscription Agreement, dated as of February 8, 2000 by and
between XOMA Ltd. and the purchasers of Common Shares in the February
2000 Private Placement (Exhibit 2).(9)
10.44 Form of Registration Rights Agreement, dated as of February 11, 2000
by and between XOMA Ltd. and the purchasers of Common Shares in
February 2000 Private Placement (Exhibit 3).(9)
10.45 Form of Registration Rights Agreement, dated as of February 11, 2000
by and between XOMA Ltd. and the placement agents in the February 2000
private placement (Exhibit 5).(9)
16.1 Letter re: change of certifying accountant.(10)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP as Independent Public Accountants.
27.1 Financial Data Schedule.
- -------------------------
Footnotes
1 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-4 filed November 17, 1998, as amended
(File No. 333-68045).
2 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form 8-A filed May 21, 1999 (File No. 0-14710).
3 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-3 filed June 28, 1996 (File No.
333-07263).
4 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated August 13, 1997 filed August 18, 1997
(File No. 0-14710).
5 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated June 28, 1998 filed June 29, 1998 (File
No. 0-14710).
6 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated July 9, 1998 filed July 16, 1998 (file No.
0-14710).
7 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated January 28, 1999 filed January 29, 1999,
as amended (File No. 0-14710).
8 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated July 23, 1999 filed July 26, 1999 (File
No. 0-14710).
9 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated February 11, 2000 filed February 14, 2000
(File No. 0-14710).
10 Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, as amended
(File No. 0-14710).
11 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-8 filed October 27, 1998 (File No.
333-66171).
-6-
12 Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 (File No.
0-14710).
13 Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (File No.
0-14710).
14 Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999
(File No. 0-14710).
15 Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998
(File No. 0-14710).
16 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-3 filed July 16, 1996 (File No.
333-59241).
17 Incorporated by reference to the referenced exhibit to the Company's
Amendment No. 1 to Current Report on Form 8-K/A dated and filed July 19,
1999 (File No. 0-14710).
18 Incorporated by reference to the referenced exhibit to the Company's
Amendment No. 2 to Current Report on Form 8-K/A dated and filed March 9,
2000 (File No. 0-14710).
-7-