UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Transition Period from __________ to __________
Commission File No. 0-14710
XOMA Ltd.
(Exact Name of Registrant as specified in its charter)
Bermuda 52-2154066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2910 Seventh Street, Berkeley, CA 94710
(Address of principal executive offices) (Zip Code)
(510) 644-1170
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common shares US$.0005 par value 69,964,135
Class Outstanding at June 30, 2001
XOMA Ltd.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 .........................................1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000..............2
Condensed Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 2001 and 2000..............3
Notes to Condensed Consolidated Financial Statements ..........4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................7
PART II OTHER INFORMATION
Item 1 Legal Proceedings.............................................10
Item 2 Changes in Securities and Use of Proceeds.....................10
Items 3 and 5 are either inapplicable or nonexistent and therefore
are omitted from this report
Item 4 Submission of Matters to a Vote of Security Holders...........10
Item 6 Exhibits and Reports on Form 8-K..............................11
Signatures ........................................................13
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2001 2000
(Unaudited) (Note 1)
Assets:
Cash and cash equivalents $ 71,808 $ 35,043
Short-term investments 40 172
Related party receivable 417 237
Receivables (net) 2,381 1,008
Prepaid expenses and other 113 162
----------- ------------
Total current assets 74,759 36,622
Property and equipment, net 11,440 8,421
Deposits and other 169 169
----------- ------------
$ 86,368 $ 45,212
=========== ============
Liabilities and Shareholders' Equity (Net Capital Deficiency):
Accounts payable $ 4,085 $ 2,515
Accrued liabilities 3,848 4,311
Capital lease obligations - current 292 185
Deferred revenue - current 3,733 3,333
----------- ------------
Total current liabilities 11,958 10,344
Capital lease obligations - long term 812 361
Deferred revenue - long term 4,008 3,609
Convertible subordinated notes 42,965 39,488
----------- ------------
Total liabilities 59,743 53,802
Shareholders' equity (net capital deficiency) 26,625 (8,590)
----------- ------------
$ 86,368 $ 45,212
=========== ============
Note 1 - Amounts derived from the Company's audited financial statements
appearing in the Annual Report on Form 10-K for the year ended December 31, 2000
as filed with the Securities and Exchange Commission.
See accompanying notes to condensed consolidated financial statements.
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -------------
Revenues:
License fees and contract revenue $ 5,212 $2,283 $8,068 $4,855
Operating Costs and Expenses:
Research and development 9,465 7,390 17,935 14,584
General and administrative 2,095 1,589 3,705 3,115
----------- ----------- ----------- -------------
11,560 8,979 21,640 17,699
----------- ----------- ----------- -------------
Loss from operations (6,348) (6,696) (13,572) (12,844)
Other Income (Expense):
Investment and other income 580 985 979 1,475
Interest and other expense (880) (615) (1,630) (1,241)
----------- ----------- ----------- -------------
Net loss available to common shareholders
$ (6,648) $ (6,326) $ (14,223) $ (12,610)
=========== =========== =========== =============
Basic and diluted net loss per share $ (0.10) $ (0.10) $ (0.21) $ (0.20)
Shares used in computing basic and diluted net
loss per common share 66,280 65,391 66,227 63,531
See accompanying notes to condensed consolidated financial statements.
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XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
---------------------------
2001 2000
------------ -------------
Cash Flows From Operating Activities:
Net cash used in operating activities $ (11,534) $ (7,265)
------------ -------------
Cash Flows From Investing Activities:
Proceeds from sale of short-term investments 253 506
Capital expenditures (3,079) (395)
------------ -------------
Net cash provided by (used in) investing activities (2,826) 111
------------ -------------
Cash Flows From Financing Activities:
Proceeds from issuance of common shares, net 47,734 33,266
Proceeds/(payments) related to convertible notes 3,496 (2,318)
Payments under capital leases (105) --
------------ -------------
Net cash provided by financing activities 51,125 30,948
Net increase in cash and cash equivalents 36,765 23,794
Cash and cash equivalents at beginning of period 35,043 18,539
------------ -------------
Cash and cash equivalents at end of period $ 71,808 $ 42,333
============ =============
See accompanying notes to condensed consolidated financial statements.
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XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim information contained in this report is unaudited but, in
management's opinion, includes all normal recurring adjustments necessary for a
fair presentation of results for the periods presented. Interim results may not
be indicative of results to be expected for the full year. The consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 2000 included
in its Annual Report on Form 10-K. 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.
2. Recent Accounting Prounouncements
On June 29, 2001, the Financial Accounting Standards Board, or FASB,
approved the final standards resulting from its deliberations on the business
combinations project. The FASB is expected to issue two statements in late July
2001, Statement of Financial Accounting Standards No. 141, or FAS 141, on
Business Combinations and FAS 142 on Goodwill and Other Intangible Assets. FAS
141 will be effective for any business combinations initiated after June 30,
2001 and also includes the criteria for recognition of intangible assets
separately from goodwill. FAS 142 will be effective for fiscal years beginning
after December 15, 2001 and will require that goodwill not be amortized, but
rather be subject to an impairment test at least annually. Separately identified
and recognized intangible assets resulting from business combinations completed
before July 1, 2001 that do not meet the new criteria for separate recognition
of intangible assets will be subsumed into goodwill upon adoption. In addition,
the useful lives of recognized intangible assets acquired in transactions
completed before July 2001 will be reassessed and the remaining amortization
periods adjusted accordingly. The adoption of FAS 141 and 142 is not expected
have a significant impact on our financial position at transition.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). XOMA adopted SFAS 133 on January
1, 2001. Because the Company currently holds no derivative financial instruments
and does not
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currently engage in hedging activities, adoption of SFAS 133 had no impact on
the Company's financial position or results of operations.
3. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
June 30, December 31,
2001 2000
------------ ---------------
Accrued payroll costs $ 1,961 $ 2,255
Accrued clinical trial costs 1,026 1,151
Other 861 905
------------ --------------
$ 3,848 $ 4,311
============ ==============
4. Revenue Recognition
Research payments under collaborative arrangements and grants are
recognized as revenue based on research expenses incurred as provided for under
the terms of the arrangements.
The Company previously recognized non-refundable license fees as revenue
when received and when all significant contractual obligations of the Company
relating to the fees had been met. Effective January 1, 2000, the Company
changed its method of accounting for non-refundable initial fees to recognize
such fees over the period of continuing involvement by the Company such as the
research and development period or the manufacturing period of the agreement, as
applicable. The Company believes this accounting policy is appropriate based on
guidance provided in SEC Staff Accounting Bulletin No. 101 - Revenue Recognition
in Financial Statements (SAB 101). As of January 1, 2000, there was no
cumulative effect of an accounting change as a result of the adoption of SAB 101
and there was no pro forma effect of the adoption of SAB 101 in any year
presented. In connection with the license and supply and development agreements
with Baxter Healthcare Corporation ("Baxter") on January 25, 2000, the Company
received $10.0 million as an initial, non-refundable fee. This initial fee was
deferred and is being amortized over the period of continuing involvement, which
period is estimated to be 36 months.
In January of 2001, the Company entered into a strategic process
development and manufacturing agreement with Onyx Pharmaceuticals, Inc. ("Onyx")
which calls for the Company to scale-up production to commercial volume and
manufacture Onyx's CI-1042 product. The initial term of the agreement is five
years, with options to extend for additional
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periods. Terms of the agreement include an initial payment of $2.0 million,
payments for development work and material produced, and payments upon achieving
key milestones. XOMA's objectives are to increase the fermentation volume to
commercial scale, to improve the purification process, to seek FDA licensure of
its manufacturing facility for CI-1042, and to produce material for use in
clinical testing and for commercial sale upon approval. The initial payment was
deferred and is being amortized over five years.
Milestone payments under collaborative arrangements are recognized as
revenue upon achievement of the incentive milestone events if it represents the
culmination of the earnings process and the Company has no future performance
obligations related to the milestone payment. Milestone payments are triggered
either by the results of our research efforts or by events external to the
Company, such as regulatory approval to market a product. Milestone payments and
amounts that are received in advance which are tied to future service
performance by the Company are recorded as deferred revenue and are amortized
over the period of continuing involvement.
5. Comprehensive Loss
Comprehensive loss includes certain changes in equity that are excluded
from net loss. Specifically, unrealized holding gains and losses in available
for sale investments, which were reported separately in shareholders' equity,
are included in accumulated other comprehensive income (loss). Comprehensive
loss and its components for the quarters ended June 30, 2001 and 2000 are as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Net loss $ (6,648) $ (6,326) $ (14,223) $ (12,610)
Unrealized gain (loss)
on marketable securities
available-for-sale -- (41) -- 441
-------------- ------------- -------------- --------------
Comprehensive loss $ (6,648) $ (6,367) $ (14,223) $ (12,169)
============== ============= ============== ==============
6. 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. Common share equivalents were not
included because they are antidilutive in all periods presented.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Revenues in the second quarter of 2001 increased to $5.2 million, from $2.3
million in the second quarter of 2000. For the six-month periods ending June 30,
2001, revenuers were $8.1 million, compared with $4.9 million in the comparable
prior year period. Licensing revenue, primarily reflecting the amortization into
revenue of certain license fees and other payments received from Baxter
Healthcare Corporation and Onyx Pharmaceuticals, Inc., increased to $1.0 million
and $2.1 million in the three- and six-month periods ended June 30, 2001,
respectively, compared to $0.8 million and $1.4 million in the comparable prior
year periods. Contract revenue increased to $4.1 million and $6.0 million in the
three- and six-month periods ended June 30, 2001 from $1.4 million and $3.4
million in the comparable 2000 periods.
Operating expenses increased to $11.6 million in the second quarter of 2001
from $9.0 million in the second quarter of 2000. For the six-month period ending
June 30, 2001, operating expenses were $21.6 million, compared with $17.7
million in the comparable 2000 period. This reflected increased spending on
Xanelim(TM) and XOMA's internal antibody programs, as well as expenses related
to litigation with Biosite Incorporated.
Research and development expenses increased to $9.5 million and $17.9
million, respectively in the three and six-month periods ending June 30, 2001,
from $7.4 million and $14.6 million in the comparable prior year periods.
Spending in 2001 reflected increased development costs associated with
Xanelim(TM), ING-1, GENIMUNE(TM) and the Onyx CI-1042 product. This was
partially offset by reduced spending on NEUPREX(R).
General and administrative expenses increased from $1.6 million and $3.1
million in the in the three- and six-month periods ending June 30, 2000, to $2.1
million and $3.7 million in the same 2001 periods.
Interest expense was higher in the second quarter first six months of 2001
compared to 2000 due to higher interest rates and the higher average note
balance of the convertible subordinated notes due Genentech, Inc.
Liquidity and Capital Resources:
XOMA ended the quarter with $71.8 million in cash, cash equivalents and
short-term investments, compared with $35.2 million at December 31, 2000. Net
cash used in
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operations in the first six months of 2001 was $11.5 million, compared with net
cash used in operations of $7.3 million in the second quarter of 2000. The prior
year cash flow benefited from $10.0 million in licensing fees received from
Baxter in January 2000, which is being recognized as revenue over a 36 month
period. See footnote 4, "Revenue Recognition," to the Consolidated Financial
Statements.
Capital expenditures increased from $0.4 million in the first six months of
2000 to a net of $3.1 million in the current year period. Current year spending
included expenses related to the transfer of XOMA's technical development
operations from Santa Monica to Berkeley, as well as investments related to our
collaborative arrangement with Onyx.
For the full year 2001, the Company currently expects its loss to be
somewhat lower than in 2000, with increased expense levels being more than
offset by higher revenues.
Proceeds from the issuance of common shares, net, were $47.7 million for
the six months ended June 30, 2001, compared to $33.3 million for the comparable
period of the prior year. The amount for the first six months of 2001 resulted
primarily from a registered offering of 3,000,000 of the Company's common shares
in June 2001 for net proceeds of $43.3 million.
The Company has been able to control its operating cash consumption by
carefully monitoring its costs. As a result, based on current spending levels
and taking into account the Onyx transaction, the Company believes its cash
position and resulting investment income are sufficient to finance the Company's
currently anticipated levels of spending through approximately the middle of
2004. Strategic arrangements with Onyx, Baxter and Genentech have reduced
Company spending levels by paying certain product development costs. The Company
continues to evaluate a variety of arrangements that would further strengthen
its competitive position and provide additional funding, but cannot predict
whether or when any such arrangement or additional funding will be consummated
or whether additional funding will be available. Without additional funding, the
Company will have to decrease or eliminate the development of some of its
products.
Quantitative and Qualitative Disclosures About Market Risk:
Interest Rate Risk. The Company's exposure to market rate risk due to
changes in interest rates relates primarily to the Company's investment
portfolio. The Company 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 as
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fixed rate if the rate of return on an instrument remains fixed over its term.
As of June 30, 2001, all the Company's cash equivalents are classified as fixed
rate.
The Company 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 is therefore variable.
The table below presents the amounts and related weighted interest rates of
the Company's cash equivalents and long-term convertible note at June 30, 2001:
Fair Value Average
Maturity ($ in millions) Interest Rate
------------- ------------------- -----------------
Cash equivalents, fixed rate Daily $ 71.8 4.3%
Long-term convertible note, variable rate 2005 43.0 7.1%
Other Market Risk. At June 30, 2001, 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%.
Forward Looking Statements:
Statements made herein related to the estimated size of the Company's loss
for 2001, the estimated levels of its expenses and revenues for the balance of
2001, the sufficiency of its cash resources, present or future collaborative
arrangements and current plans for product development, or that otherwise relate
to future periods, are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements are based on assumptions that may not prove accurate.
Actual results could differ materially from those anticipated due to certain
risks inherent in the biotechnology industry and for companies engaged in the
development of new products in a regulated market. These risks, including those
related to size and timing of expenditures, unanticipated expenditures,
availability of funds, changes in the status of the existing collaborative
relationships, availability of additional collaboration opportunities, the time
or results of pending and future clinical trials, the ability of collaborators
and other partners to meet their obligations, market demand for products,
actions by the Food and Drug Administration of the U.S. Patent and Trademark
Office, and uncertainties regarding the status of biotechnology patents, are
discussed in the Company's most recent annual report on Form 10-K and in other
SEC filings.
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PART II - OTHER INFORMATION
Item 1 Legal Proceedings. On July 5, 2001, XOMA filed a complaint in the United
States District Court for the Northern District of California, San
Francisco Division, against Biosite Diagnostics Incorporated (since renamed
Biosite Incorporated). The complaint seeks monetary damages, injunctive and
other relief for infringement of XOMA's bacterial cell expression
technology patents in connection with certain Biosite technologies and
collaborations. The suit also seeks relief for fraud and misrepresentation,
breach of contract, misappropriation and unfair business practices in
connection with three limited, non-exclusive licenses granted to Biosite
under XOMA's bacterial cell expression technology.
Item 2 Changes in Securities and Use of Proceeds. On June 29, 2001, the Company
completed a registered offering of 3,000,000 common shares. The managing
underwriters in the offering were U.S. Bancorp Piper Jaffray, CIBC World
Market Corp., Adams, Harkness & Hill and Arnhold & S. Bleichroeder, Inc.
The common shares sold in the offering were registered under the Securities
Act of 1933, as amended, on a Registration Statement on Form S-3 (Reg. No.
333-50134) that was declared effective by the SEC on November 28, 2000.
After deducting the underwriting discounts and offering expenses, the
Company received net proceeds from the offering of approximately $43.3
million. None of the net proceeds of the offering were paid directly or
indirectly to any director, officer, general partner of ours or our
associates, persons owning 10% or more of any class of equity securities of
ours, or an affiliate of ours.
The Company intends to use the net proceeds from this offering for general
corporate purposes, including current research and development projects,
the development of new products or technologies, equipment acquisitions,
general working capital and operating expenses. Pending application of the
net proceeds as described above, the Company has invested the net proceeds
of the offering in short-term, investment-grade, interest-bearing
securities.
Item 3 Defaults Upon Senior Securities. None.
Item 4 Submission of Matters to a Vote of Security Holders. On May 30, 2001, the
Company held its annual general meeting of shareholders. The following
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persons (the only nominees) were elected as the Company's directors, having
received the indicated votes:
Name Votes For Votes Withheld
- - ---- --------- --------------
James G. Andress 54,003,894 480,199
William K. Bowes, Jr. 54,008,879 475,214
John L. Castello 54,007,248 476,845
Arthur Kornberg, M.D. 54,002,361 481,732
Steven C. Mendell 54,010,227 473,866
Patrick J. Scannon, M.D., Ph.D. 54,015,144 468,949
W. Denman Van Ness 54,010,111 473,982
The appointment of Ernst & Young LLP to act as the Company's independent
auditors for the 2001 fiscal year was ratified and the authorization of the
Board to agree to such auditors' fee was approved, having received
54,120,611 votes for, 266,007 votes against, 97,475 abstentions and no
broker non-votes. In addition, (1) the amendment to the Company's 1981
Share Option Plan to extend its term by ten years until November 15, 2011
and the amendment to the Company's Restricted Share Plan to extend its term
by eight years until November 15, 2011 were approved, having received
19,802,132 votes for, 9,801,124 votes against, 355,130 abstentions and
24,525,707 broker non-votes; and (2) the amendment to the Company's 1981
Share Option Plan to increase the number of shares issuable over the term
of the plan by 2,000,000 shares to 8,650,000 in the aggregate was approved,
having received 19,971,470 votes for, 9,609,686 votes against, 378,230
abstentions and 24,524,707 broker non-votes.
Item 5 Other Information. None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibit 10.1 Underwriting Agreement dated as of June 26, 2001 by and
between XOMA Ltd. and the several underwriters named therein
(incorporated herein by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated June 27, 2001, File No. 000-26169).
(b) Current Report on Form 8-K dated and filed on June 27, 2001 (File No.
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000-26169), Item 5 (Other Events) and 7 (Exhibits).
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XOMA Ltd.
SIGNATURES
Pursuant to the requirements 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.
XOMA LTD.
Date: August 9, 2001 By: /s/ JOHN L. CASTELLO
------------------------------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: August 9, 2001 By: /s/ PETER B. DAVIS
------------------------------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
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