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 March 31, 1999
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 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 shares US$.0005 par value 50,231,987
- -------------------------------- ----------------------------------------
Class Outstanding at March 31, 1999
XOMA Ltd.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998...................................................1
Condensed Consolidated Statements of Operations
for the Three Months Ended
March 31, 1999 and 1998................................................................2
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1999 and 1998................................................................3
Notes to Condensed Consolidated
Financial Statements ..................................................................4
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................................................................6
PART II OTHER INFORMATION
Items 1 through 5 are either inapplicable or nonexistent
and therefore are omitted from this report
Item 6 Exhibits and Reports on Form 8-K..................................................... 10
Signatures.......................................................................................................12
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 December 31
1999 1998
(Unaudited) (Audited)
Assets:
Cash and cash equivalents $ 16,315 $ 11,857
Short-term investments 11,952 16,430
Related party receivables 246 246
Other receivables 90 144
Prepaid expenses and other 303 159
---------- ----------
Total current assets 28,906 28,836
----------- -----------
Property and equipment, net 3,804 3,895
Assets held for sale 4,442 4,442
Deposits and other 131 131
---------- ----------
$ 37,283 $ 37,304
========== ==========
Liabilities and Stockholders' Equity:
Accounts payable $ 3,213 $ 3,515
Accrued liabilities 8,520 6,740
Capital lease obligations due
within one year 181 286
---------- ----------
Total current liabilities 11,914 10,541
Convertible subordinated notes 26,911 26,513
---------- ----------
Total liabilities 38,825 37,054
---------- ----------
Redeemable convertible
preference shares 3,600 6,440
---------- ----------
Shareholders' equity (net capital
deficiency) (5,142) (6,190)
---------- ----------
$ 37,283 $ 37,304
========== ==========
The accompanying notes are an integral part of these financial statements.
1
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended
March 31
1999 1998
---- ----
Revenues:
License fees $ 17 $ 25
Product sales and royalties 3 21
----------- -------
20 46
----------- -------
Expenses:
Research and development 12,273 9,172
General and administrative 1,380 1,442
----------- -------
13,653 10,614
----------- -------
Loss from operations (13,633) (10,568)
Other income (expense):
Investment income 369 693
Interest and other expense (394) (432)
----------- ------
Net loss (13,658) (10,307)
Preference share dividends (55) (549)
----------- ------
Net loss available to common
shareholders $ (13,713) $ (10,856)
============ =============
Basic and Diluted Net Loss
per Common Share $ (0.28) $ (0.27)
Weighted Average Common
Shares Outstanding 49,163 40,531
See accompanying notes to financial statements.
2
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
March 31
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ (11,096) $ (9,045)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 18,854 95,969
Payments for purchase of short-term investments (14,376) (100,478)
Capital expenditures (210) (279)
---------- ------------
Net cash provided by (used in) investing activities 4,268 (4,788)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net 11,391 12
Capital lease principal payments (105) (137)
--------- ------------
Net cash provided by (used in) financing activities 11,286 (125)
--------- ------------
Net increase (decrease) in cash and cash equivalents 4,458 (13,958)
Cash and cash equivalents at beginning of period 11,857 37,225
--------- ------------
Cash and cash equivalents at end of period $ 16,315 $ 23,267
========= ============
See accompanying notes to financial statements.
3
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 which are
necessary for a fair presentation of results for the periods presented. Interim
results do not necessarily indicate of results to be expected for the full year.
The financial statements should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1998.
2. Supplemental Cash Flow Information
In the first quarter of 1999, the Company contributed $0.4 million to the
Company's deferred savings and management incentive compensation programs by
issuing 118,516 common shares and paid dividends of $0.1 million on convertible
preference shares by issuing 29,618 common shares upon conversion.
3. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
----------------------------
March 31, December 31,
-------- -----------
1999 1998
---- ----
Accrued dividends $ 669 $ 754
Accrued payroll costs 1,751 2,217
Costs related to change in domicile 605 1,457
Clinical trial costs 4,481 1,746
Other 1,014 566
------- --------
$8,520 $6,740
====== ======
Activities through March 31, 1999 affecting the provision for change in
legal domicile established in 1998 are as follows (in millions):
Original amount $2.5
Charges against the accrual 1.9
Adjustment to the accrual --
4
4. Private Placement
In February 1999, the Company issued 2,051,254 common shares to two
institutional investors for net proceeds of $11.4 million. The price represented
approximately a 60% premium over the current market price for XOMA shares. Under
certain circumstances the number of shares may be adjusted in the future. The
common shares will be held in an escrow account until sold by the investors (up
to a maximum of three years). Beginning August 31, 1999, the number of shares
remaining in the escrow account may be adjusted at 90-day intervals based on an
11% discount from a prevailing market price at that time. The investors also
received five-year warrants to purchase up to 240,000 common shares for $5.85
per share.
5. 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 have not been
included because they are antidilutive.
6. Subsequent Event
In April 1999, the Company and Genentech, Inc. agreed to collaborative
development of the hu1124 (anti-CD11a) monoclonal antibody product through Phase
III, intended for the treatment of moderate to severe plaque psoriasis. Under
terms of the agreement, XOMA and Genentech will continue to collaborate on the
remaining clinical development and regulatory filings for the product in
psoriasis. XOMA will share future development costs, as well as future U.S.
profits, with Genentech on a 25%/75% basis. XOMA will receive a royalty on sales
outside the United States. Genentech will fund XOMA's share of development costs
via long-term convertible loans.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
First quarter revenues were not significant in either 1999 or 1998.
Research & development expenses increased to $12.3 million in the first three
months of 1999, compared with $9.2 million in the 1998 period. The increase was
due primarily to spending on clinical trials and preparation of regulatory
filings for the Neuprex (R) and hu1124 products. General and administrative
spending was $1.4 million in the first three months of 1999 and 1998.
Investment income was lower in the first three months of 1999 compared to 1998
due to a lower average investment balance.
Liquidity and Capital Resources:
The Company's cash, cash equivalents and short-term investments totaled $28.3
million as of both March 31, 1999 and December 31, 1998. Net cash used in
operating activities plus lease payments and capital expenditures were offset by
the net proceeds from common shares issued in January 1999. Net cash used in
operating activities was $11.1 million in the first three months of 1999,
compared with $9.0 million in the 1998 period. The increase was primarily due to
payments for clinical trials and preparation of regulatory filings. 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 Company's currently anticipated levels of
spending through at least the end of 1999. 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. Without additional funding,
the Company would have to decrease or eliminate the development of some of its
products.
Year 2000 Exposure:
Year 2000 ("Y2K") exposure is the result of computer programs using two instead
of four digits to represent the year. These computer programs may erroneously
interpret dates beyond the year 1999, which could cause system failures or other
computer errors, leading to disruptions in operations.
The Company is developing a three-phase program to limit or eliminate Y2K
exposures. Phase I is to identify those systems, applications and third-party
relationships from which the Company has
6
exposure to Y2K disruptions in operations. Phase II is to develop and implement
action plans to achieve Y2K compliance in all areas before the end of 1999. Also
included in Phase II is the development of contingency plans to be implemented
should Y2K compliance not be achieved when required to avoid disruptions in
operations. Phase III is the final testing or equivalent certification of each
major area of exposure to ensure compliance. The Company believes it will
complete all phases before the end of 1999.
The Company has identified three major areas as critical for successful Y2K
compliance: Area 1, which includes company-wide information systems applications
that rely on computer software; Area 2, which includes manufacturing, quality,
and research applications that rely on computer programs embedded in
microprocessors; and Area 3, which includes third-party relationships which may
be affected by Area 1, 2 or 3 exposures that exist in other companies.
The Company, in accordance with Phase I of the program, is conducting an
internal review and contacting all software suppliers to determine major areas
of Y2K exposure in Area 1. In manufacturing, quality and research (Area 2), the
Company has engaged a consultant to help identify its exposures. With respect to
Area 3, the Company is evaluating its reliance on third parties for its
operations, and contacting these third parties in order to determine whether
their Y2K compliance will adequately assure the Company's uninterrupted
operations.
Although the Company has yet to complete Phase I of its Y2K program with respect
to all three of the major areas, the Company believes that it relies on systems,
applications and third-party relationships which, if not Y2K compliant prior to
the end of 1999, could have a material adverse impact on its operations. Because
the Company has not completed Phase II contingency planning, it can not describe
what action it would take should Y2K compliance not be achievable in time.
As of March 31, 1999, the Company has identified costs of approximately $0.6
million to replace or remediate and test its Area 1 computer information systems
and its Area 2 manufacturing, quality and research applications, of which $0.3
million has been expended. Not having completed its Phase I and II evaluations
of all three areas, the Company can not at this time estimate the total
potential cost of its Y2K compliance programs. The funds for these costs will be
part of the Company's cash flow from operations and capital expenditures.
Assuming that the Company's efforts to mitigate its Y2K exposure in any of the
three areas referred to above are unsuccessful, the most reasonably likely worst
case scenario is an interruption of ongoing clinical trials, including delays in
gathering and evaluating clinical data, and a disruption of the Company's
manufacturing and research operations.
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 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 or short-term
investments as fixed rate if the rate of return on an instrument remains fixed
7
over its term. As of March 31, 1999, all the Company's cash equivalents and
short-term investments 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 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 March 31, 1999:
Fair Value Average
Maturity (in $ millions) Interest Rate
------------------ ---------------
Cash equivalents, fixed rate daily 16.3 5.2%
Short-term investments, fixed rate 0 - 1 year 12.0 4.9%
Long-term convertible note, variable rate 2005 26.9 6.0%
Other Market Risk. At March 31, 1999 the Company had Series C Preference Shares
and a long-term convertible note outstanding , both of which are 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%.
8
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.
9
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. None.
Item 5 Other Information. None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibit 10.1 Form of Subscription Agreement dated as of January 28,
1999 by and between XOMA Ltd. and the purchasers of
Common Shares in the 1999 Private Placement (Exhibit
2).(1)
Exhibit 10.2 Form of Registration Rights Agreement dated as of
January 28, 1999 by and between XOMA Ltd. and the
purchasers of Common Shares in the 1999 Private
Placement (Exhibit 3).(1)
Exhibit 10.3 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 1999
Private Placement (Exhibit 4).(1)
Exhibit 10.4 Form of Common Share Purchase Warrant (Exhibit 5).(1)
Exhibit 10.5 Amendment to Collaboration Agreement, dated as of April
14, 1999, between 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 10.6 Amendment to Common Stock and Convertible Note Purchase
Agreement, dated as of April 14, 1999, between XOMA Ltd.
and Genentech, Inc.
Exhibit 10.7 Second Amendment to Convertible Subordinated Note
Agreement,
- ----------------
(1) 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 by Amendment No. 1 thereto on Form 8-K/A dated and filed
February 18, 1999 (File No. 0-014710)
10
dated as of April 14, 1999, between 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 27.1 Financial Data Schedule
(b) Current Report on Form 8-K dated January 28, 1999 filed January 29,
1999, as amended by Amendment No. 1 thereto on Form 8-K/A dated
February 18, 1999 (File No. 0-14710), Items 5 (Other Events) and 7
(Exhibits).
Current Report on Form 8-K dated January 5, 1999 filed January 6, 1999
(File No. 0-14710), Item 5 (Other Events) and 7 (Exhibits).
11
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: May 17, 1999 By: /s/ JOHN L. CASTELLO
------------------------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
12
Date: May 17, 1999 By: /s/ PETER B. DAVIS
-------------------------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
12