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 September 30, 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 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 55,553,426
- ------------------------------------------ ---------------------------------
Class Outstanding at September 30, 1999
<PAGE>
XOMA Ltd.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 .......................1
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 1999
and 1998........................................................2
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 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 ............................7
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...............................12
SIGNATURES ...................................................................13
<PAGE>
1
<TABLE>
<CAPTION>
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------- ------------
Assets:
<S> <C> <C>
Cash and cash equivalents $ 2,653 $ 11,857
Short-term investments 19,643 16,430
Related party receivables 206 246
Other receivables 61 144
Prepaid expenses and other 262 159
--------- ---------
Total current assets 22,825 28,836
--------- ---------
Property and equipment, net 3,786 3,895
Assets held for sale 4,442 4,442
Deposits and other 124 131
--------- ---------
$ 31,177 $ 37,304
========= =========
Liabilities and Shareholders' Equity:
Accounts payable $ 2,220 $ 3,515
Accrued liabilities 7,401 6,740
Capital lease obligations due within one year -- 286
--------- ---------
Total current liabilities 9,621 10,541
Convertible subordinated notes 30,274 26,513
--------- ---------
Total liabilities 39,895 37,054
--------- ---------
Redeemable convertible preference shares -- 6,440
--------- ---------
Shareholders' equity (net capital deficiency) (8,718) (6,190)
--------- ---------
$31,177 $37,304
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
2
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- -------------- ------------ -------------
Revenues:
<S> <C> <C> <C> <C>
License fees $ 3 $ 757 $ 531 $ 818
Product sales and royalties 29 -- 68 21
-------------- -------------- ------------ -------------
32 757 599 839
-------------- -------------- ------------ -------------
Operating costs and expenses:
Research and development 9,895 12,747 33,304 32,585
General and administrative 1,545 1,246 4,556 3,996
Non-recurring licensing fee -- -- -- 2,400
-------------- -------------- ------------ -------------
11,440 13,993 37,860 38,981
-------------- -------------- ------------ -------------
Loss from operations (11,408) (13,236) (37,261) (38,142)
Other income (expense):
Investment and other income 293 581 922 1,848
Interest and other expense (511) (454) (1,308) (1,285)
-------------- -------------- ------------ -------------
Net loss (11,626) (13,109) (37,647) (37,579)
Preference share dividends -- (947) (55) (1,568)
-------------- -------------- ------------ -------------
Net loss available to common shareholders $(11,626) $(14,056) $(37,702) $(39,147)
============== ============== ============
Basic and diluted net loss per common share $(0.21) $(0.33) $(0.73) $(0.94)
Weighted average common
shares outstanding 54,260 42,765 51,451 41,729
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
3
<TABLE>
<CAPTION>
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
1999 1998
---------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net cash used in operating activities $ (35,573) $ (29,939)
---------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
39,938 114,013
Proceeds from sale of short-term investments
Payments for purchase of short-term investments (43,151) (112,323)
Capital expenditures (836) (904)
---------------- --------------------
Net cash provided by (used in) investing activities (4,049) 786
---------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net 28,204 90
Proceeds from issuance of preference shares, net -- 12,094
Proceeds from issuance of convertible notes 5,500 --
Payments on convertible notes (3,000) --
Capital lease principal payments (286) (321)
---------------- --------------------
Net cash provided by (used in) financing activities 30,418 11,863
---------------- --------------------
Net increase (decrease) in cash and cash equivalents (9,204) (17,290)
Cash and cash equivalents at beginning of period 11,857 37,225
---------------- --------------------
Cash and cash equivalents at end of period $ 2,653 $ 19,935
================ ====================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
4
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED 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 do not
necessarily indicate 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. Comprehensive Loss
Statement of Financial Accounting Standards No. 130, entitled "Reporting
Comprehensive Income," requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
During the three and nine months ended September 30, 1999 and 1998, these
unrealized gains and losses were not material, and total comprehensive loss
closely approximated net loss in each of the respective periods.
3. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Accrued payroll costs $ 2,533 $ 2,217
Clinical trial costs 3,360 1,746
Costs related to change in domicile -- 1,457
Accrued dividends and other 1,508 1,320
------------- ------------
$ 7,401 $ 6,740
============= ============
4. Financing
In January 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 then current market price for XOMA shares.
The common shares will be held in an escrow account until sold by the investors
(for as long as three years). Under certain circumstances the number of shares
may be adjusted in the future. 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
<PAGE>
5
account. The number of shares remaining in the escrow account are subject to
further adjustments at 90-day intervals based on an 11% discount from the
prevailing market price at such times. At the time of the initial issuance, the
investors received five-year warrants to purchase up to 240,000 common shares
for $5.85 per share. The Company also issued five-year warrants to purchase up
to 64,000 common shares for $5.85 per share to a placement agent in connection
with this transaction.
In July 1999, the Company issued 3,024,086 common shares to 33 investors
for net proceeds of $16.4 million. The Company also issued five-year warrants to
purchase up to 75,000 common shares for $5.75 per share to each of the two
placement agents in this transaction.
The Company's cash position and resulting investment income are sufficient
to finance the Company's currently anticipated levels of spending through at
least the first quarter of 2000. 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 and
significantly curtail its operations.
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 anti-dilutive during the periods presented.
6. Collaborative Transactions
In April 1999, the Company and Genentech, Inc. agreed to extend their
collaboration to develop the anti-CD11 (hu1124) a monoclonal antibody product
through Phase III of the clinical trials 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 . XOMA will share future development costs, as well as future U.S.
profits, with Genentech on a 25%/75% basis. XOMA will also receive a royalty on
sales outside the United States. Genentech will fund XOMA's share of development
costs through the issuance by Genentech of long-term convertible loans. In
August 1999, the Company announced the expansion of this collaboration to
include organ transplant rejection.
In June 1999, the Company concluded a licensing agreement with Allergan,
Inc. under which Allergan will have exclusive worldwide rights to use XOMA's
rBPI in combination with other anti-infectives in products to treat ophthalmic
infections. Under the agreement, Allergan will pay the Company up to $11.0
million in upfront and milestone payments, as well as a royalty on future sales
<PAGE>
6
of the combination products. Allergan will pay all future development costs for
products covered by this agreement.
<PAGE>
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Revenues for the nine months ended September 30, 1999 and 1998 of $0.6
million and $0.8 million, respectively, consisted primarily of licensing income.
Research and development costs for the quarter ended September 30, 1999
decreased to $9.9 million from $12.7 million, or 22%, as compared to the same
quarter of 1998, due primarily to the completion in May 1999 of the Phase III
clinical trial of NEUPREX(R) in pediatric patients suffering from severe
meningococcemia as well as the implementation in the second quarter of 1999 of a
development cost sharing arrangement between XOMA and Genentech related to
anti-CD11a (hu1124). For the nine months ended September 30, 1999, research and
development costs were $33.3 million as compared to $32.6 million for the same
period in 1998. Higher research and development spending in the first two
quarters of 1999 were almost entirely offset by the significant reduction in
research and development spending in the third quarter of 1999.
General and administrative expenses were $1.6 million and $4.6 million for
the three and nine months ended September 30, 1999, respectively, compared with
$1.2 million and $4.0 million for the comparable periods of 1998. Increased
costs in 1999 reflect expenses related to collaborative arrangements.
Expenses for the second quarter of 1998 included a non-recurring charge of
$2.4 million related to an exclusive license with Incyte Pharmaceuticals, Inc.
for the acquisition of patent rights related to all of Incyte's patents and
patent applications related to bactericidal/permeability-increasing protein.
Investment income was lower for both the three and nine months ended
September 30, 1999 compared with the same periods in 1998 due to a lower average
investment balance.
Liquidity and Capital Resources:
The Company's cash, cash equivalents and short-term investments totaled
$22.3 million as of September 30, 1999, compared with $28.3 million at December
31, 1998. Net cash used in operations was $35.6 million for the nine months
ended September 30, 1999, compared with $29.9 million in the comparable 1998
period, and this increase in cash used was primarily due to payments for
clinical trials and preparations for regulatory filings.
The Company's cash, cash equivalents and short-term investments are
expected to continue to decrease while the Company pursues FDA licensure. The
Company has been able to control its operating cash consumption by carefully
monitoring its costs. As a result, its cash position and
<PAGE>
8
resulting investment income are sufficient to finance the Company's currently
anticipated levels of spending through at least the first quarter of 2000. 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 and significantly curtail its
operations.
In September 1999, the Company announced its Phase III clinical trial
testing the NEUPREX(R) product in trauma patients with severe blood loss had
been discontinued. The decision was based on an interim safety and efficacy
analysis of data by an independent Data Safety Monitoring Board ("DSMB").
Although the DSMB raised no safety concerns, they indicated that the interim
results were not sufficient to meet the predetermined efficacy criteria for
continuing the trial and recommended stopping patient accrual.
In May 1999, the Company concluded patient accrual in a Phase III clinical
trial testing the NEUPREX(R) product in pediatric patients suffering from severe
meningococcemia. Because this is a rare and life-threatening systemic infection
that primarily affects children, the trial was conducted under Subpart E
designation and the indication has also received "orphan drug" status. XOMA has
recently sent a detailed analysis of data from this trial to the U.S. Food and
Drug Administration ("FDA"). The analysis confirms the previously-observed
finding of clinical benefits in mortality and morbidities and reconfirms the
product's safety profile. The Company has requested a meeting with the FDA to
discuss plans for submission of a BLA (biologics license application). The
Company cannot predict the outcome of the FDA's review.
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.
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 has developed 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 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
<PAGE>
9
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 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, has conducted an
internal review and contacted all software suppliers to determine major areas of
Y2K exposure in Area 1. In manufacturing, quality and research (Area 2), the
Company engaged a consultant to help identify its exposures. With respect to
Area 3, the Company has evaluated its reliance on third parties for its
operations, and has contacted material third parties in writing with respect to
their state of Y2K readiness. In those cases where Y2K readiness could not be
confirmed, we have developed contingency plans involving increased levels of
inventory stocking and/or alternate suppliers.
As of September 30, 1999, the Company has substantially completed Phases I,
II and III of its Y2K program with respect to all three of the major areas. 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 $0.5 million has been
expended. The Company does not anticipate any material additional costs. The
funds for these costs are 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. The duration and costs of any
such delays are expected to be minimal. The contingency plans to handle this
reasonably likely worst case scenario involve appropriate build-up of key raw
material and supply inventories, provision for temporary power generation and
scheduling of critical work over the year-end period.
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
<PAGE>
10
return on an instrument remains fixed over its term. As of September 30, 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 is 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 September 30, 1999:
<TABLE>
<CAPTION>
Fair Value Average
Maturity (in $ millions) Interest Rate
------------------- ------------------ -------------------
<S> <C> <C> <C>
Cash equivalents, fixed rate daily 2.7 4.5%
Short-term investments, fixed rate 0 - 1 year 19.6 5.2%
Long-term convertible note, variable rate 2005 30.3 6.0%
</TABLE>
Other Market Risk. At September 30, 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 by approximately 11%. A 10% increase
in the market price of Company common shares would decrease the shares issuable
by approximately 9%.
At the same date, the Company had issued a total of 2,820,005 common shares
into an escrow account related to the January 1999 equity financing. The number
of shares remaining in the escrow account are subject to further adjustments at
90-day intervals based on the prevailing market price at such times. A 10%
decrease in the market price of the Company's common shares at the time of such
adjustments would cause the Company to issue additional shares equal to
approximately 11% of the shares then in the escrow account. An increase in the
market price of the Company's common shares at the time of such adjustments of
10% would cause the escrow agent to return approximately 9% of the shares then
in the escrow account to the Company.
Forward Looking Statements:
Certain statements contained herein related to the sufficiency of the
Company's cash position, FDA regulatory process, timing and results of clinical
trials, indications being pursued and other aspects of product development,
strategic collaborative relationships, 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 which 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
<PAGE>
11
the development of new products in a regulated market. These risks, including
those related to the timing or results of pending or future clinical trials,
actions by the FDA or the U.S. Patent and Trademark Office, changes in the
status of the Company's collaborative relationships, uncertainties regarding the
legal standards applicable to biotechnology patents, the Company's financing
needs and opportunities, scale-up and marketing capabilities, competition, share
price volatility and the Y2K issue, are discussed herein and in other of the
Company's Securities and Exchange Commission filings. Investors should consider
carefully these risks in evaluating XOMA's prospects.
<PAGE>
12
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 27.1 Financial Data Schedule
(b) Current Report on Form 8-K dated and filed September 27, 1999
(File No. 0-14710), Items 5 (Other Events) and 7 (Exhibits).
<PAGE>
13
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: November 12, 1999 By: /s/ JOHN L. CASTELLO
-------------------------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ PETER B. DAVIS
-------------------------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1999
<CASH> 2,653
<SECURITIES> 19,643
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,825
<PP&E> 31,910
<DEPRECIATION> 28,124
<TOTAL-ASSETS> 31,177
<CURRENT-LIABILITIES> 9,621
<BONDS> 0
<COMMON> 28
0
0
<OTHER-SE> (8,746)
<TOTAL-LIABILITY-AND-EQUITY> 31,177
<SALES> 0
<TOTAL-REVENUES> 32
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504
<INCOME-PRETAX> (11,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,626)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
