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
<PAGE>
XOMA Ltd.
TABLE OF CONTENTS
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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
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PART II OTHER INFORMATION
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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
</TABLE>
<PAGE>
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
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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
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XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
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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
========= ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Fair Value Average
Maturity (in $ millions) Interest Rate
------------------ ---------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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: 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
EXHIBIT 10.5
[*] indicates that a confidential portion of the text of this agreement has been
omitted and filed separately with the Securities and Exchange Commission
AMENDMENT
TO
COLLABORATION AGREEMENT
April 14, 1999
This Amendment is made and entered into as of the date first
written above by and between Genentech, Inc., a Delaware corporation having its
principal executive office at 1 DNA Way, South San Francisco, California 94080
("Genentech"), and XOMA Ltd., a Bermuda company having its principal office at
2910 Seventh Street, Berkeley, California 94710 ("XOMA"), to amend that certain
Collaboration Agreement, dated as of April 22, 1996 (the "Collaboration
Agreement"), by and between Genentech and XOMA.
Genentech and XOMA agree to amend the Collaboration Agreement
as follows:
1. To delete the fourth sentence of Section 5.1(b) in its
entirely.
2. To delete from the last paragraph of Section 5.1(b) the
words "within thirty (30) days after the successful completion of a Phase II
Clinical Trial for one of the Initial Indications" and replace them with the
words "by April 15, 1999".
3. To insert into the second sentence of Section 7.2 an open
parenthesis after the words "set forth in Section 5.1(a)" and before the words
"or Genentech selects", and a closed parenthesis followed by "or 5.1(b)" after
the words "under Section 5.2(c)(2)" and before the comma and the words
"Genentech will loan", and to add to the end of the sentence the clause
"provided that the amount so loaned to XOMA pursuant to this sentence shall not
exceed $[*] million in the aggregate without the prior approval of Genentech's
Board of Directors, which approval Genentech management will seek in good faith
upon the request of the Project Core Team", such that the sentence reads in its
entirety as follows:
"In addition, if XOMA selects the option set forth in Section
5.1(a) (or Genentech selects such option for XOMA under
Section 5.2(c)(2)) or 5.1(b), Genentech will loan XOMA the
amount necessary to fund its development obligations under the
Development Plan based on the annual budget in a similar
fashion each year until the receipt of Regulatory Approval
(unless Genentech earlier terminates this Agreement) under the
terms and conditions of the Note Purchase Agreement, provided
that the amount so loaned to XOMA pursuant to this sentence
shall not exceed $[*] million in the aggregate without the
prior approval of Genentech's Board of Directors, which
approval Genentech management will seek in good faith upon the
request of the Project Core Team."
4. To replace the notice provisions with respect to Genentech
and XOMA in Section 18.8 in their entirety with the following:
<PAGE>
-2-
"If to Genentech, addressed to:
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080-4990
Attention: Corporate Secretary
Telephone: (650) 225-1000
Facsimile: (650) 952-9881
If to XOMA, addressed to:
XOMA Ltd.
2910 Seventh Street
Berkeley, CA 94710
Attention: Corporate Secretary
Telephone: (510) 644-1170
Telecopy: (510) 649-7571
With a copy to: C.L. Dellio"
5. To replace all references to "XOMA Corporation" with
references to "XOMA Ltd.", which is a Bermuda company that is the successor in
interest to XOMA Corporation, a Delaware company.
6. To replace all references to "Series E Preferred Stock"
with references to "Series B Preference Shares."
7. To replace all references to "Common Stock" with references
to "Common Shares."
All other terms and conditions of the Agreement shall remain
unchanged by this Amendment.
This Collaboration Agreement may be executed in two
counterparts, each of which will be deemed an original, but both of which
together will constitute one and the same instrument.
[signature page follows]
<PAGE>
-3-
IN WITNESS WHEREOF, this Collaboration Agreement has been
executed and delivered on the date first written above by duly authorized
representatives of the parties hereto.
GENENTECH INC. XOMA LTD.
By: /s/ Louis J. Lavigne, Jr. By: /s/ Christopher J. Margolin
---------------------------- -------------------------------
Name: Louis J. Lavigne, Jr. Name: Christopher J. Margolin
Title: Executive Vice President and Title: Vice President,
Chief Financial Officer General Counsel
and Secretary
EXHIBIT 10.6
AMENDMENT
TO
COMMON STOCK AND CONVERTIBLE NOTE PURCHASE AGREEMENT
April 14, 1999
This Amendment is made and entered into as of the date first
written above by and between Genentech, Inc., a Delaware corporation having its
principal executive office at 1 DNA Way, South San Francisco, California 94080
("Genentech"), and XOMA Ltd., a Bermuda company having its principal office at
2910 Seventh Street, Berkeley, California 94710 ("XOMA"), to amend that certain
Common Stock and Convertible Note Purchase Agreement, dated as of April 22, 1996
(the "Purchase Agreement"), by and between Genentech and XOMA.
Genentech and XOMA agree to amend the Purchase Agreement as
follows:
1. To replace the words "State of Delaware" in Section
4(a) with the words "Commonwealth of Bermuda."
2. To insert the words "and each amendment thereto" after
the words "this Agreement, the Collaboration Agreement and the Convertible Note"
in the first and second sentences of Section 4(b).
3. To delete the words "federal and state" from the first
and second sentences of Section 4(c) and to replace them with the words "Bermuda
Companies Act and Bermuda", and to delete the words "after giving effect to the
filing of the Certificate of Designation with the Secretary of State of the
State of Delaware as contemplated by Section 8" from the third sentence of
Section 4(c).
4. To insert the words "and each amendment thereto" after
the words "this Agreement, the Collaboration Agreement and the Convertible Note"
in Section 4(d), and to delete clause (i) from Section 4(d) and renumber clauses
(ii), (iii) and (iv) as (i), (ii) and (iii).
5. To delete the words "the SEC Reports (as defined in
Section 4(j) below)" in Section 4(e) and replace them with the words "the
Company's most recent report filed with the Securities and Exchange Commission
pursuant to the Exchange Act (as defined below) that calls for such disclosure".
6. In Section 4(h), (i) to delete the words "SEC Reports
and except for the issuance of the Company's Non-Voting Cumulative Convertible
Preferred Stock, Series D," and to replace them with the words "the Company's
most recent report filed with the Securities and Exchange Commission pursuant to
the Exchange Act (as defined below) that calls for such disclosure"; (ii) to
delete the words "the SEC Reports" and replace them with the words "such
report"; and (iii) to delete the word "hereof" and replace it with the word
"thereof."
7. To delete the words "Amended and Restated Certificate
of Incorporation or Bylaws" in Section 4(i) and replace them with the words
"Memorandum of Continuance or Bye-Laws", and to insert at the end of Section
4(i) the words "together with each amendment thereto".
<PAGE>
-2-
8. To add the following sentence to the end of Section
6(d):
"Any stop-transfer instructions with respect to the
Securities shall be removed by the Company promptly
upon the request of the Holder if the Holder shall have
obtained an opinion of counsel in form and in substance
satisfactory to the Company to the effect that such
instructions are no longer required."
9. To delete the words "upon any such assignment, sale or
transfer of such shares" from the last sentence of Section 7(a) and replace them
with the words "as set forth therein."
10. To add the following as new Sections 8(c) and 8(d):
"(c) The Company shall use its commercially reasonable
efforts to remain qualified to use Form S-3 under the
Securities Act or another appropriate form (including
but not limited to Form A or Form B proposed by the
staff of the Securities and Exchange Commission in
Securities Act Release No. 33-7606, if adopted)
permitting registration of the Conversion Shares and
any Registrable Securities issued in respect of such
Conversion Shares for resale by the Holder in the
manner or manners reasonably designated by the Holder.
(d) The Company shall not issue any Series B Preference
Shares to any other party without the prior written
consent of the Holder."
11. To insert the words "as amended" into Section 9(a)(i)
after the words "Convertible Note."
12. To insert the words "and each amendment thereto" after
the words the "Collaboration Agreement and the Convertible Note" in Section
9(a)(v) and after the words "this Agreement, the Collaboration Agreement and the
Convertible Note" in Section 9(a)(vi).
13. To insert the words "and each subsequent loan as of
their respective Closing Dates" into Section 9(a)(viii) after the words "Initial
Loan."
14. To add a new Section 10(b)(iii) that reads in full as
follows:
"(iii) The Company agrees to file with the
Commission,promptly following the execution of the
Amendment to this Agreement, but in no event later than
45 days thereafter, a Shelf Registration Statement
covering not less than that number of Conversion Shares
that would be issued upon the conversion of the
Preferred Stock that would be issued if $2 million of
the principal amount of the Convertible Note were to be
converted into Preferred Stock as of the filing date.
Such Shelf Registration Statement shall be on Form S-3
under the Securities Act or another appropriate form
(including but not limited to Form A or Form B proposed
by the staff of the Securities and Exchange Commission
in Securities Act Release No. 33-7606, if adopted)
permitting registration of such Conversion Shares and
any Regis-
<PAGE>
-3-
trable Securities issued in respect of such Conversion
Shares for resale by the Holder in the manner or
manners reasonably designated by the Holder. The
Company shall use its commercially reasonable efforts
to cause such Shelf Registration Statement to be
declared effective pursuant to the Securities Act as
promptly as practicable following the filing thereof
and to keep continuously effective under the Securities
Act until termination of such obligation pursuant to
Section 10(f)(iii).
15. To add a new Section 10(b)(iv) that reads in full as
follows:
"(iv) At such time (if any) that, as a result of
the Purchaser's sales of Conversion Shares covered by
the Shelf Registration Statement referred to in Section
10(b)(iii), such Shelf Registration Statement is
available to cover sales of a maximum number of
Conversion Shares then issued or issuable upon
conversion of Preferred Stock issued or issuable upon
conversion of $1 million of the principal amount of the
Convertible Note or less, then the Company shall
promptly file an amendment or supplement to such
Registration Statement, such that such Registration
Statement will be available for sales of Conversion
Shares then issued or issuable upon conversion of
Preferred Stock issued or issuable upon conversion of
not less than $2 mi1lion of the principal amount of the
Convertible Note. The Company shall use its
commercially reasonable efforts to cause such
amendments or supplements to such Shelf Registration
Statement to be declared effective pursuant to the
Securities Act as promptly as practicable following the
filing thereof and to keep the same continuously
effective under the Securities Act until termination of
such obligation pursuant to Section 10(f)(iii)."
To add a new Section 10(f)(iii) that reads in full as follows:
"(iii) The registration obligations of the
Company pursuant to Sections 10(b) through (d) of
this Agreement shall terminate with respect to the
Shelf Registration Statement contemplated by Section
10(b)(iii) and any amendments or supplements thereto
contemplated by Section 10(b)(iv) at the time at
which (A) the Purchaser has no obligation to make
additional loans to the Company under the Convertible
Note, and (B) all of the Conversion Shares that could
be issued upon the conversion of the Preferred Stock
that could be issued if the entire principal amount
of the Initial Loan and each Tranche may be sold
within a given three-month period without compliance
with the registration requirements of the Securities
Act pursuant to Rule 144 or other applicable
exemption supported by a written opinion of legal
counsel for the Company which shall be reasonably
satisfactory in form and substance to legal counsel
for the Holder."
<PAGE>
-4-
17. To replace the notice provisions in Section 11(a) and
(b) in their entirety with the following:
"(a) If to the Purchaser, to:
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080-4990
Telephone: (650) 225-1000
Facsimile: (650) 952-9881
Attention: Corporate Secretary
(b) If to the Company, to:
XOMA Ltd
2910 Seventh Street
Berkeley, CA 94710
Telephone: (510) 664-1170
Facsimile: (510) 649-7571
Attention: Corporate Secretary"
18. To replace all references to "XOMA Corporation" with
references to "XOMA Ltd.", which is a Bermuda company that is the successor in
interest to XOMA Corporation, a Delaware company.
19. To replace all references to "Series E Preferred Stock"
and "Preferred Stock" with references to "Series B Preference Shares."
20. To replace all references to "Common Stock" with
references to "Common Shares."
All other terms and conditions of the Agreement shall remain
unchanged by this Amendment. The parties have agreed that this Amendment will be
governed by and construed in accordance with the laws of the State of Delaware.
This Purchase Agreement may be executed in two counterparts,
each of which will be deemed an original, but both of which together will
constitute one and the same instrument.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, this Purchase Agreement has been executed
and delivered on the date first written above by duly authorized representatives
of the parties hereto.
GENENTECH, INC. XOMA LTD.
By: /s/ Louis J. Lavigne, Jr By: /s/ Christopher J. Margolin
----------------------------------- -------------------------------
Name: Louis J. Lavigne, Jr. Name: Christopher J. Margolin
Title: Executive Vice President and Title: Vice President,
Chief Financial Officer General Counsel and
Secretary
[*] indicates that a confidential portion of the text of this agreement has been
omitted and filed separately with the Securities and Exchange Commission
SECOND AMENDMENT
TO
CONVERTIBLE SUBORDINATED NOTE AGREEMENT
April 14, 1999
This amendment (this "Second Amendment") is made and entered
into as of the date first written above by and between Genentech, Inc., a
Delaware corporation having its principal executive office at 1 DNA Way, South
San Francisco, California 94080 ("Genentech"), and XOMA Ltd., a Bermuda company
having its principal office at 2910 Seventh Street, Berkeley, California 94710
("XOMA"), to amend that certain Convertible Subordinated Note Agreement, dated
as of April 22, 1996 (the "Note Agreement"), by and between Genentech and XOMA,
as amended by that certain amendment, dated June 13, 1996 (the "First
Amendment"), to the Note Agreement.
Genentech and XOMA agree to amend the Note Agreement as
follows:
1. To replace Schedule A attached thereto with Schedule A
attached hereto.
2. To add the following sentence to the end of Section
1(c):
"In addition, as a condition to the Lender's obligation
to extend to the Company the first additional loan
after April 14, 1999 pursuant to Section 7.2 of the
Collaboration Agreement, the Lender shall have received
an opinion dated as of the Closing Date of such loan,
in form and substance reasonably satisfactory to the
Lender, from Conyers Dill & Pearman, Bermuda counsel to
the Company, covering the topics covered in paragraphs
1 (with reference to Bermuda law and the business of
the Company as described in its most recent Annual
Report on Form 10-K), 2 (other than the provisions
thereof relating to enforceability), 3 (with reference
to the current capitalization of the Company), 5, 6, 7
(with reference to Bermuda law) and 8 (with reference
to Bermuda law) of the previously delivered opinion of
Cahill Gordon & Reindel dated April 22, 1996.
3. To delete Section 1(h), which was added by the
First Amendment, and replace it with a new Section 1(h) that reads in full as
follows:
"(h) Conversion of Excess Borrowings. In the event
that the Lender's Ownership Interest on any particular
date exceeds the Threshold Percentage of the Company's
Market Capitalization on such date, an amount of the
Company's borrowings (together with accrued and unpaid
interest) under this Note equal to such excess (any
such amount is referred to herein as "Excess
Borrowings") shall, at the option of the Lender, be
converted into Series B Preference Shares pursuant to
the conversion procedures and other
<PAGE>
-2-
provisions of Section 4 hereof, such option to be
exercisable by prior written notice to the Company
delivered not more than 15 trading days after such
date. The following terms as used in this Note shall
have the following meanings:
"Ownership Interest" means, on a particular date,
the sum of the principal amount of the Company's
borrowings outstanding under this Note, plus all
accrued and unpaid interest, plus the aggregate Market
Value of that number, up to 50,000 shares, of Common
Shares of the Company owned by the Lender on such date.
"Threshold Percentage" means [*] percent
([*] %), or such lower percentage as may be required
in order for the Lender to comply with the test for
loan impairment under U.S. generally accepted
accounting principles (as applied by the Lender) as
in effect from time to time.
"Market Capitalization" means on a
particular date, the sum of (i) the product of (A)
the per share Market Value of the Company's voting
Common Shares multiplied by (B) the sum of (1) the
number (to be provided by the Company upon request of
the Lender) of the Company's voting Common Shares
then outstanding plus (2) the number (to be provided
by the Company upon the request of the Lender) of
voting Common Shares issuable upon the exercise of
outstanding options issued by the Company for the
purchase thereof to the extent that the exercise
price thereof is at or below the per share Market
Value of the Common Shares on such date plus (3) the
number (to be provided by the Company upon the
request of the Lender) of voting Common Shares
issuable upon conversion on such date of any
outstanding Series B Preference Shares, Series C
Preference Shares and other Convertible Securities,
plus (ii) the entire principal amount of the
Company's borrowings outstanding under this Note,
together with all accrued and unpaid interest. For
purposes of this definition, no security of the
Company will be counted more than once.
"Market Value" means, on a particular date,
with respect to the Company's Common Shares, the
average of the closing sale prices for the Company's
Common Shares on the principal exchange or market on
which such shares are registered, listed or admitted
for trading, as reported in The Wall Street Journal
(Western Edition), for the immediately preceding
fifteen (15) trading days.
"Convertible Securities" means any other
securities of the Company that are, by their terms as
in effect on such date, directly or indirectly
convertible into voting Common Shares of the Company;
provided that the per share conversion price of such
securities is at or below the current Market Value of
the Common Shares into which such securities are
convertible on such date."
<PAGE>
-3-
4. To reverse the amendment to Section 3(d) made by the
First Amendment, and return to the original language of the Note Agreement.
5. To reverse the amendment to Section 4(a) made by the
First Amendment, and to return to the original language of the Note Agreement as
amended by this Second Amendment.
6. To insert, after clause (iii) of the first sentence of
Section 4(a) (but before the defined term at the end thereof), a new clause (iv)
that reads in full as follows:
"(iv) with respect to any Excess Borrowings, as
determined pursuant to Section 1(h) of this Note (but
only with respect to such Excess Borrowings), upon
receipt by the Company of the notice provided for in
Section 1(h)."
7. To insert into the third sentence (after giving effect
to this Second Amendment) of Section 4(a) the words "or any Excess Borrowings"
and a comma after each of the three occurrences of the words "or the applicable
Tranche," and before each of the three occurrences of the words "as the case may
be", such that the sentence reads as follows:
"The number of Series B Preference Shares into which
this Note or the applicable Tranche, or any Excess
Borrowing, as the case may be, shall be converted (the
"Conversion Shares") shall be determined by dividing
the sum of the aggregate unpaid principal amount of
this Note or the applicable Tranche, or any Excess
Borrowings, as the case may be, and the unpaid accrued
interest on this Note or the applicable Tranche, or any
Excess Borrowings, as the case may be, by the
Conversion Price (as defined below) and rounding the
result to the nearest whole integer."
8. To add two new sentences to the end of Section 4(a)
that read in full as follows:
"The conversion of any Excess Borrowings hereunder
shall first be applied against the most recently
extended Tranche, and then against each preceding
Tranche through to Tranche A. Each such conversion and
the reduction in the amounts of each Tranche shall be
recorded on Schedule B attached hereto at the time of
such conversion."
9. To insert the parenthetical words "(or any portion
thereof)" immediately after each of the three occurrences of the word "Tranche"
in Section 4(b).
10. To replace the notice provisions with respect to
Genentech and XOMA in Section 7(a) in their entirety with the following:
"If to the Lender, to:
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080-4990
Telephone: (650) 225-1000
Facsimile: (650) 952-9881
<PAGE>
-4-
Attention: Corporate Secretary
If to the Company, addressed to:
XOMA Ltd.
2910 7th Street
Berkeley, CA 94710
Telephone: (510) 644-1170
Facsimile: (510) 649-7571
Attention: Corporate Secretary"
11. To replace all references to "XOMA Corporation" with
references to "XOMA Ltd.", which is a Bermuda company that is the successor in
interest to XOMA Corporation, a Delaware company.
12. To replace all references to "Series E Preferred Stock"
with references to "Series B Preference Shares."
13. To replace all references to "Common Stock" with
references to "Common Shares."
All other terms and conditions of the Note Agreement and the
First Amendment shall remain unchanged by this Second Amendment. The parties
have agreed that this Second Amendment will be governed by and construed in
accordance with the laws of the State of Delaware.
This Note Agreement may be executed in two counterparts, each
of which will be deemed an original, but both of which together will constitute
one and the same instrument.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, this Note Agreement has been executed and
delivered on the date first written above by duly authorized representatives of
the parties hereto.
GENENTECH INC. XOMA LTD.
By: /s/ Louis J. Lavigne, Jr. By: /s/ Christopher J. Margolin
-------------------------- ---------------------------
Name: Louis J. Lavigne, Jr. Name: Christopher J. Margolin
Title: Executive Vice President and Title: Vice President,
Chief Financial Officer General Counsel and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001074404
<NAME> Xoma Limited
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 16,315
<SECURITIES> 11,952
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,906
<PP&E> 31,336
<DEPRECIATION> 27,532
<TOTAL-ASSETS> 37,283
<CURRENT-LIABILITIES> 11,914
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (5,167)
<TOTAL-LIABILITY-AND-EQUITY> 37,283
<SALES> 0
<TOTAL-REVENUES> 20
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404
<INCOME-PRETAX> (13,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,658)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
