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, 1998
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 CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 94-2756657
(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 stock $.0005 par value 42,517,621
- - ----------------------------- ------------------------------
Class Outstanding at June 30, 1998
XOMA CORPORATION
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets as of
June 30, 1998 and December 31, 1997 ..........................1
Condensed Statements of Operations
for the Three and Six Months Ended
June 30, 1998 and 1997 .......................................2
Condensed Statements of
Cash Flows for the Six Months Ended
June 30, 1998 and 1997........................................3
Notes to Condensed
Financial Statements .........................................4
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations ...................................................6
PART II OTHER INFORMATION
Items 1, 2, 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.......................................................8
Item 6 Exhibits and Reports on Form 8-K..............................9
Signatures..................................................................11
XOMA CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
June 30, December 31,
1998 1997
(Unaudited) (Unaudited)
Assets:
Cash and Cash Equivalents $ 25,010 $ 37,225
Short-term Investments 22,740 17,921
Other Receivables 336 351
Other Current Assets 236 142
--------- ---------
Total Current Assets 48,322 55,639
Property and Equipment 30,786 30,478
Accumulated Depreciation (26,715) (25,914)
Assets Held for Sale 4,442 4,442
Other Assets 131 131
--------- ---------
$ 56,966 $ 64,776
========= =========
Liabilities and Stockholders' Equity:
Accounts Payable $ 2,198 $ 1,644
Other Current Liabilities 7,810 7,119
--------- ---------
Total Current Liabilities 10,008 8,763
Convertible Notes 25,634 24,773
Stockholders' Equity 21,324 31,240
--------- ---------
$ 56,966 $ 64,776
========= =========
See accompanying notes to financial statements.
1
XOMA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
License Fees $ 36 $ 281 $ 61 $ 938
Product Sales and Royalties 1 12 21 29
----------- ----------- ----------- -----------
37 293 82 967
----------- ----------- ----------- -----------
Expenses:
Research and Development 10,666 7,776 19,838 15,246
General and Administrative 1,308 1,449 2,750 3,027
Non-recurring Licensing Fee 2,400 -- 2,400 --
----------- ----------- ----------- -----------
14,374 9,225 24,988 18,273
----------- ----------- ----------- -----------
Loss from Operations (14,337) (8,932) (24,906) (17,306)
Other Income (Expense):
Investment Income 574 530 1,267 1,122
Interest Expense and Other (400) (263) (831) (495)
----------- ----------- ----------- -----------
Net Loss $ (14,163) $ 8,665) $ (24,470) $ (16,679)
=========== =========== =========== ===========
Basic and Diluted Net Loss per Share $ (0.34) $ (0.22) $ (0.61) $ (0.42)
Weighted Average Common
Shares Outstanding 41,812 39,672 41,179 39,645
See accompanying notes to financial statements.
2
XOMA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (18,693) $ (14,432)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Short-term Investments 102,398 68,111
Payments for purchase of Short-term Investments (107,217) (53,930)
Capital expenditures (624) (600)
--------- ---------
Net cash provided by (used in) investing activities (5,443) 13,581
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 71 58
Proceeds from issuance of Preferred Stock, net 12,094 --
Capital Lease principal payments (244) (237)
--------- ---------
Net cash provided by (used in) financing activities 11,921 (179)
--------- ---------
Net increase (decrease) in Cash and Cash Equivalents (12,215) (1,030)
Cash and Cash Equivalents at beginning of period 37,225 1,213
--------- ---------
Cash and Cash Equivalents at end of period $ 25,010 $ 183
========= =========
See accompanying notes to financial statements.
3
XOMA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim information contained herein is unaudited but, in management's
opinion, includes all normal recurring adjustments which are necessary for a
fair presentation of results for the periods presented. Interim results are not
necessarily indicative of results to be expected for the full year. The
financial statements should be read in conjunction with the Company's financial
statements for the year ended December 31, 1997.
2. Supplemental Cash Flow Information
In the first quarter of 1998, the Company satisfied an obligation valued at $1.9
million under the terms of a litigation settlement by issuing 344,168 shares of
common stock, contributed $0.1 million to the Company's management incentive
compensation program by issuing 26,710 shares of common stock, and paid
dividends of $0.1 million on convertible preferred stock by issuing 12,567
shares of common stock upon conversion. Tax payments were $0.3 million.
3. New Accounting Standards
In 1998, the Company must report its results of operations and financial
position based upon the recently issued Statement of Financial Accounting
Standards (SFAS) No. 130 "Reporting Comprehensive Income," SFAS No. 131
"Disclosures about Segments of an Enterprise", and SFAS No. 132 "Employers'
Disclosures about Pension and Other Postretirement Benefits." None of these
statements has had a material effect on the Company's financial statements for
the periods ended June 30, 1998 and June 30 and December 31, 1997.
4. Financing
In June, 1998, XOMA drew down the remaining $12.5 million of a $25 million
private financing arranged in August, 1997 in the form of 5% convertible
preferred stock. The principal investors include an affiliate of Credit Suisse
First Boston, Southbrook International Investments, Ltd, and HBK Investments,
LP.
Conversions to common stock will be based on the market price of XOMA common
stock at the time of conversion. There is no initial discount on the conversion
price, but a 2% discount will be added for each month the preferred stock is
held to a maximum of 12%. No conversions will be permitted below a price of
approximately $5.35 per share for the first 60 days; the maximum conversion
price for the first six months is approximately $6.24 per share. There are
certain restrictions on the volume of sales of underlying common
4
stock by the investors. The investors also receive three-year warrants to
purchase up to 550,000 shares of XOMA common stock at $7.00 per share.
5. Non-recurring Licensing Fee
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 $1.5 million advance royalty payment consisting of $750,000 in cash and
158,103 shares of XOMA common stock and Incyte also received warrants to
purchase 250,000 shares of XOMA common stock at $6.00 per share. The value of
the warrants and the prepaid royalties have been included in a $2.4 million
non-recurring charge recorded in the second quarter of 1998.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Revenues in the first six months and the second quarter of 1997 were $1.0
million and $0.3 million, respectively, primarily related to licensing income.
Revenues in the first six months and the second quarter of 1998 were not
significant.
Research and development expenses in the first six months of 1998 were $4.6
million (30%) higher than for the same period in 1997, reflecting increased
spending on clinical trials and manufacturing of the Company's Neuprex(TM) and
hu1124 products. The increase was $2.9 million (37%) for the second quarter of
1998 compared to the same period in 1997. The Company anticipates R&D
expenditures to continue at similar or somewhat higher levels throughout the
rest of 1998, as patient accruals in clinical efficacy trials accelerate
further.
For the first six months of 1998, general and administrative expenses were $0.3
million lower compared with the same period in 1997. General and administrative
expenses were $0.1 million lower in the second quarter of 1998 compared to the
1997 period.
The second quarter 1998 results also include a non-recurring provision of $2.4
million related to an exclusive license with Incyte for all of Incyte's patents
and patent applications relating to BPI. (See Footnote 5 - Non-recurring License
Fee.)
Investment income was slightly higher in the first six months of 1998 compared
to the same period in 1997 due to a higher average investment balance. The
increase in interest expense and other in the first six months of 1998 over the
same period in 1997 was primarily due to interest on a $11.0 million higher
balance of the convertible note payable to Genentech on which interest accrues
at six-month LIBOR plus 1%.
Liquidity and Capital Resources:
The Company's cash, cash equivalents and short-term investments totaled $47.8
million as of June 30, 1998 compared with $55.1 million as of December 31, 1997.
Net cash used in operating activities was $18.7 million in the first six months
of 1998, compared with $14.4 million in the 1997 period. The Company's cash,
cash equivalents and short-term investments are expected to continue to decrease
while the Company pursues U.S. Food and Drug Administration licensure except to
the extent the Company secures additional funding.
The Company has been able to control its operating cash consumption by carefully
monitoring its costs. As a result, its cash position and resulting investment
income are sufficient to finance the
6
Company's currently anticipated levels of spending for at least one year. The
Company continues to evaluate a variety of arrangements which would further
strengthen its competitive position and provide additional funding, but cannot
predict when or whether any such arrangement or additional funding will be
secured.
Forward Looking Statements:
Certain statements contained herein that are not related to historical facts may
constitute "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 which may not prove to be accurate. The
forward looking statements involve risks and uncertainties including, but not
limited to, risks and uncertainties related to regulatory approvals, product
efficacy and development, the Company's financing needs and opportunities,
scale-up and marketing capabilities, intellectual property protection,
competition, stock price volatility and other risk factors referred to herein
and in other of the Company's Securities and Exchange Commission filings.
7
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. None.
Item 2 Changes in Securities. None.
Item 3 Defaults Upon Senior Securities. None.
Item 4 Submission of Matters to a Vote of Security Holders. On May
20, 1998, the Company held its annual meeting of stockholders.
The following persons (the only nominees) were elected as the
Company's directors, having received the indicated votes:
Name Votes Votes Broker
- - ---- For Withheld Non-Votes
--- -------- ---------
James G. Andress 35,522,781 1,469,331 0
William K. Bowes, Jr. 35,508,764 1,483,348 0
John L. Castello 35,542,132 1,449,980 0
Arthur Kornberg 35,514,250 1,477,862 0
Steven C. Mendell 35,556,944 1,435,168 0
Patrick J. Scannon 35,551,832 1,440,280 0
W. Denman Van Ness 35,533,715 1,458,397 0
In addition, (1) the amendment to the Company's 1981 Stock Option Plan to
increase the number of shares issuable over the term of the plan by 1,500,000
shares to 6,650,000 shares in the aggregate was approved, having received
9,648,755 votes for, 4,313,197 votes against, no votes withheld, 388,203
abstentions and 22,641,957 broker non-votes; (2) the adoption of the Company's
1998 Employee Stock Purchase Plan was approved, having received 12,070,682 votes
for, 1,755,934 votes against, no votes withheld, 523,539 abstentions and
22,641,957 broker non-votes; and (3) the amendments to the Company's 1992
Directors Stock Option Plan to (i) increase the number of shares for which
options will be granted to newly elected non-employee directors from 10,000
shares to 15,000 shares, subject to adjustment, (ii) increase the number of
shares for which options will be granted annually to reelected non-employee
directors from 1,000 shares to 7,500 shares, (iii) increase the maximum number
of shares issuable over the term of the plan by 150,000 shares to 300,000 shares
in the aggregate and (iv) increase the maximum number of shares which may be
granted to an individual director under the plan by 50,000 shares to 75,000
shares were approved, having received 10,656,141 votes for, 3,092,916 votes
against, no votes withheld, 601,098 abstentions and 22,641,957 broker non-votes.
8
The appointment of Ernst & Young LLP to act as the Company's independent public
accountants for the 1998 fiscal year was ratified, having received 36,518,883
votes for, 234,120 votes against, no votes withheld, 239,109 abstentions and no
broker non-votes.
Item 5 Other Information. None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibit 10.1 Certificate of Designation of Convertible Preferred
Stock, Series H (Exhibit 2).(1)
Exhibit 10.2 Form of Common Stock Purchase Warrant (Series H Warrants)
(Exhibit 3).(1)
Exhibit 10.3 Form of Convertible Preferred Stock Purchase Agreement by
and between XOMA Corporation and the purchasers of Series
G Preferred Stock and Series H Preferred Stock
(Exhibit 4).(2)
Exhibit 10.4 Form of Registration Rights Agreement by and between XOMA
Corporation and the purchasers of Series G Preferred
Stock and Series H Preferred Stock (Exhibit 5).(2)
Exhibit 10.5 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).(3)
Exhibit 10.6 Form of Common Stock Purchase Warrant (Incyte Warrants)
(Exhibit 2).(3)
Exhibit 10.7 Registration Rights Agreement dated as of July 9, 1998 by
and among XOMA Corporation and Incyte Pharmaceuticals,
Inc. (Exhibit 3).(3)
Exhibit 27.1 Financial Data Schedule
9
(b) Current Report on Form 8-K dated June 29, 1998, as
amended by Amendment No. 1 thereto on Form 8-K/A
dated June 29, 1998 (File No. 0-14710), Items 5
(Other Events) and 7 (Exhibits).
Current Report on Form 8-K dated July 16, 1998
(File No. 0-14710), Items 5 (Other Events) and 7
(Exhibits).
- - ----------
1 Incorporated herein by reference to the indicated exhibit to the Company's
Current Report in Form 8-K dated June 29, 1998 (File No. 0-14710).
2 Incorporated herein by reference to the indicated exhibit to the Company's
Current Report on Form 8-K dated August 18, 1997 (File No. 0-14710).
3 Incorporated herein by reference to the indicated exhibit to the Company's
Current Report on Form 8-K dated July 16, 1998 (File No. 0-14710).
10
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 CORPORATION
Date: August 3, 1998 By: /s/ JOHN L. CASTELLO
--------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: August 3, 1998 By: /s/ PETER B. DAVIS
------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
11