<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): April 24, 2000
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-30235 04-3257395
(State of jurisdiction) (Commission File No.) (IRS Employer
Identification No.)
260 Littlefield Avenue
South San Francisco, California 94080
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 825-2200
<PAGE>
Item 5. Other Events
On April 23, 2000, Exelixis, Inc., a Delaware corporation (the "Company"),
announced that revised net loss per share, basic and diluted, for the years
ended December 31, 1997, 1998 and 1999 were $9.97, $7.88 and $4.60,
respectively, compared to previously reported amounts of $8.76, $3.83 and $3.47,
respectively. Further, revised pro forma net loss per share, basic and diluted,
for the year ended December 31, 1999 was $0.70 per share, compared to a
previously reported amount of $0.67 per share. See the Company's press release,
attached hereto as Exhibit 99.1, and the updated Financial Statements, attached
hereto as Exhibit 99.2.
Item 7. Exhibits
Exhibit 99.1 Press Release, dated April 23, 2000, entitled "Exelixis
Announces Adjustment to Weighting of Shares and Resulting
Calculations of Net Loss Per Share."
Exhibit 99.2 Financial Statements and Notes to Financial Statements.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EXELIXIS, INC.
Dated: April 24, 2000 By: /s/ Glen Y. Sato
---------------------------
Glen Y. Sato
Chief Financial Officer and Vice
President, Legal Affairs
3
<PAGE>
Exhibit 99.1
Contact: Glen Y. Sato
Chief Financial Officer
Exelixis, Inc.
(650) 825-1565
[email protected]
EXELIXIS ANNOUNCES ADJUSTMENT TO WEIGHTING OF SHARES AND
RESULTING CALCULATIONS OF NET LOSS PER SHARE
SOUTH SAN FRANCISCO, Calif. -- April 23, 2000 - Exelixis, Inc. (Nasdaq: EXEL)
today announced that revised net loss per share, basic and diluted, for the
years ended December 31, 1997, 1998 and 1999 were $9.97, $7.88 and $4.60,
respectively, compared to previously reported amounts of $8.76, $3.83 and $3.47,
respectively. Further, revised pro forma net loss per share, basic and diluted,
for the year ended December 31, 1999 was $0.70 per share, compared to a
previously reported amount of $0.67 per share. These net loss per share amounts
have been revised to reflect a change in the mathematical calculation of the
weighted average number of shares used to calculate net loss per share. Because
the revisions related only to the weighting of the shares, all of the
information in the company's prospectus dated April 10, 2000 regarding the
actual number of shares outstanding at the time of the initial public offering
is correct and the number of shares used for calculating market capitalization
of the company remains unaffected. Such changes also had no impact on Exelixis'
previously reported revenues, net loss, cash flows or balance sheets for any
period.
Exelixis, Inc. is a leader in comparative genomics and model system genetics.
These technologies provide a rapid, efficient and cost-effective way to move
from DNA sequence data to knowledge about the function of genes and the proteins
that they encode. The company's technologies focus on the identification and
validation of novel screening targets and proteins and their function for the
pharmaceutical, diagnostic, agricultural and animal health industries. Exelixis'
research programs include the areas of the central nervous system, inflammation,
metabolic disease, oncology and agricultural biotechnology. For more
information, please visit the company's web site at www.exelixis.com.
<PAGE>
Exhibit 99.2
EXELIXIS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
EXELIXIS, INC.
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
METAXEN, LLC
Report of Independent Accountants.......................................... F-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Members' Equity (Deficit).................................... F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28
EXELIXIS, INC.
Unaudited Pro Forma Combined Financial Statement........................... F-36
Unaudited Pro Forma Combined Statement of Operations....................... F-37
Notes to Unaudited Pro Forma Combined Financial Statement.................. F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Exelixis, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Exelixis, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 31, 2000, except as to the
fifth paragraph of Note 1 which
is as of April 7, 2000
F-2
<PAGE>
EXELIXIS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
------------------ December 31,
1998 1999 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 2,058 $ 5,400
Short-term investments..................... -- 1,504
Other receivables.......................... 150 185
Other current assets....................... 423 943
-------- --------
Total current assets..................... 2,631 8,032
Property and equipment, net.................. 5,744 9,498
Related party receivables.................... 458 619
Other assets................................. 148 752
-------- --------
Total assets............................. $ 8,981 $ 18,901
======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...... $ 584 $ 3,648
Current portion of capital lease
obligations............................... 924 735
Current portion of notes payable........... 504 1,554
Deferred revenue........................... 437 2,767
-------- --------
Total current liabilities................ 2,449 8,704
Capital lease obligations.................... 973 229
Notes payable................................ 1,583 3,299
Convertible promissory note.................. -- 7,500
Other long-term liability.................... -- 104
Deferred revenue............................. 903 1,890
-------- --------
Total liabilities........................ 5,908 21,726
-------- --------
Commitments (Note 11)
Mandatorily redeemable convertible preferred
stock,
$0.001 par value; 35,000,000 shares
authorized; issued and outstanding:
27,623,110 shares in 1998, 30,503,571
shares in 1999 and none pro forma
(aggregate liquidation preference $46,780)
........................................... 38,138 46,780 $ --
-------- -------- --------
Stockholders' deficit:
Common stock, $0.001 par value; 50,000,000
shares authorized; issued and outstanding:
4,001,505 shares in 1998, 6,258,805 shares
in 1999 and 29,136,461 pro forma.......... 4 6 29
Class B common stock, $0.001 par value;
526,819 shares authorized; shares issued
and outstanding: 526,819 shares in 1998,
none in 1999 and pro forma................ 1 -- --
Additional paid-in-capital................. 2,979 19,523 66,280
Notes receivable from stockholders......... (240) (240) (240)
Deferred stock compensation................ (1,803) (14,167) (14,167)
Accumulated deficit........................ (36,006) (54,727) (54,727)
-------- -------- --------
Total stockholders' deficit.............. (35,065) (49,605) $ (2,825)
-------- -------- ========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' deficit................... $ 8,981 $ 18,901
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EXELIXIS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License......................................... $ -- $ 139 $ 1,046
Contract........................................ -- 2,133 9,464
-------- -------- --------
Total revenues................................ -- 2,272 10,510
-------- -------- --------
Operating expenses:
Research and development (including stock
compensation expense of $25, $557 and $2,241
in 1997, 1998 and 1999, respectively) ......... 8,223 12,096 21,653
General and administrative (including stock
compensation expense of $0, $168 and $1,281 in
1997, 1998 and 1999, respectively) ............ 3,743 5,472 7,624
-------- -------- --------
Total operating expenses...................... 11,966 17,568 29,277
-------- -------- --------
Loss from operations.............................. (11,966) (15,296) (18,767)
Interest income................................... 689 266 571
Interest expense.................................. (219) (316) (525)
-------- -------- --------
Loss before equity in net loss of affiliated
company.......................................... (11,496) (15,346) (18,721)
Equity in net loss of affiliated company.......... -- (320) --
-------- -------- --------
Net loss.......................................... $(11,496) $(15,666) $(18,721)
======== ======== ========
Restated per share data:
Net loss per share, basic and diluted........... $ (9.97) $ (7.88) $ (4.60)
Shares used in computing net loss per share,
basic and diluted.............................. 1,154 1,988 4,068
Pro forma net loss per share, basic and diluted. -- -- $ (0.70)
Shares used in computing pro forma net loss per
share........................................ -- -- 26,676
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EXELIXIS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)
<TABLE>
<CAPTION>
Class B Common Notes
Common Stock Stock Additional Receivable Deferred Total
---------------- ---------------- Paid-in from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Deficit
--------- ------ -------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997.................. 1,239,912 $ 1 526,819 $ 1 $ 147 $ -- $ (59) $ (8,844) $ (8,754)
Exercise of stock
options............... 246,695 -- -- -- 7 -- -- -- 7
Deferred stock
compensation.......... -- -- -- -- 68 -- (68) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 25 -- 25
Net loss.............. -- -- -- -- -- -- -- (11,496) (11,496)
--------- ----- -------- ----- -------- ------ --------- --------- ---------
Balance at
December 31, 1997..... 1,486,607 1 526,819 1 222 -- (102) (20,340) (20,218)
Exercise of stock
options............... 2,514,898 3 -- -- 331 -- -- -- 334
Issuance of notes to
stockholders for the
exercise of stock
options............... -- -- -- -- -- (240) -- -- (240)
Deferred stock
compensation.......... -- -- -- -- 2,426 -- (2,426) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 725 -- 725
Net loss.............. -- -- -- -- -- -- -- (15,666) (15,666)
--------- ----- -------- ----- -------- ------ --------- --------- ---------
Balance at
December 31, 1998..... 4,001,505 4 526,819 1 2,979 (240) (1,803) (36,006) (35,065)
Exercise of stock
options............... 1,057,300 1 -- -- 267 -- -- -- 268
Issuance of stock
purchase warrants..... -- -- -- -- 391 -- -- -- 391
Deferred stock
compensation.......... -- -- -- -- 15,886 -- (15,886) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 3,522 -- 3,522
Conversion of Class B
common stock into
common stock.......... 1,200,000 1 (526,819) (1) -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- (18,721) (18,721)
--------- ----- -------- ----- -------- ------ --------- --------- ---------
Balance at December
31, 1999.............. 6,258,805 $ 6 -- $ -- $ 19,523 $ (240) $ (14,167) $ (54,727) $ (49,605)
========= ===== ======== ===== ======== ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EXELIXIS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(11,496) $(15,666) $(18,721)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 731 1,529 2,166
Loss on disposal of property and equipment... 19 -- --
Amortization of deferred stock compensation.. 25 725 3,522
Changes in assets and liabilities:
Other receivables............................ (52) (98) (35)
Other current assets......................... 40 (397) (497)
Other assets................................. (103) (6) (81)
Related party receivables.................... (635) 177 (161)
Accounts payable and accrued expenses........ 706 (334) 3,064
Deferred revenue............................. -- 1,340 3,317
Other long-term liabilities.................. -- -- 104
-------- -------- --------
Net cash used in operating activities...... (10,765) (12,730) (7,322)
-------- -------- --------
Cash flows used in investing activities:
Acquisition, net............................... -- -- (870)
Purchases of property and equipment............ (3,973) (2,494) (4,100)
Proceeds from short-term investments........... -- 1,997 --
Purchase of short-term investments............. (1,997) -- (1,504)
-------- -------- --------
Net cash used in investing activities...... (5,970) (497) (6,474)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable
convertible preferred stock................... 15,703 6,333 8,642
Proceeds from exercise of stock options........ 7 94 268
Proceeds from capital lease financing.......... 1,838 179 --
Principal payments on capital lease
obligations................................... (461) (899) (933)
Proceeds from issuance of notes payable........ -- 2,315 10,066
Principal payments on note payable............. (720) (455) (905)
-------- -------- --------
Net cash provided by financing activities.. 16,367 7,567 17,138
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (368) (5,660) 3,342
Cash and cash equivalents, at beginning of year.. 8,086 7,718 2,058
-------- -------- --------
Cash and cash equivalents, at end of year........ $ 7,718 $ 2,058 $ 5,400
======== ======== ========
Supplemental cash flow disclosure:
Property and equipment acquired under capital
leases........................................ $ 1,169 $ -- $ --
Cash paid for interest......................... 219 316 525
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 The Company and a Summary of Significant Accounting Policies
The Company
Exelixis, Inc. ("Exelixis" or the "Company"), formerly Exelixis
Pharmaceuticals, Inc., is a model system genetics and comparative genomics
company that uses model systems to identify critical genes in disease pathways
and to determine functional relationships of genes and functionality of
potential targets for the pharmaceutical and agriculture industries. The
Company operates in one business segment in the U.S. and exited the development
stage during the year ended December 31, 1998.
Equity in Affiliated Companies
The Company reports its minority ownership interests in GenOptera LLC and
Artemis Pharmaceuticals, GmbH using the equity method of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Initial Public Offering
In January 2000, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission to
sell shares of its common stock to the public. If the initial public offering
is completed under the terms presently anticipated, all outstanding shares of
mandatorily redeemable convertible preferred stock will automatically convert
into 22,877,656 shares of common stock. Unaudited pro forma stockholders'
equity adjusted for the assumed conversion of the preferred stock is set forth
on the balance sheets.
In February 2000, the Company's Board of Directors authorized a 4-for-3
reverse split of its common stock. The reverse stock split became effective on
April 7, 2000. The accompanying financial statements have been adjusted
retroactively to reflect the stock split.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents and short-term
investments. The Company's cash equivalents and short-term investments are held
by three financial institutions. Deposits held with financial institutions may
exceed the amount of insurance provided on such deposits. The Company has not
experienced any losses on its deposits of cash and cash equivalents. See Note 3
for a discussion of notes and other receivables.
F-7
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash in high grade short-term commercial paper and money
market funds which invest in U.S. Treasury securities that are subject to
minimal credit and market risk. The Company had $1.8 million and $1.0 million
of high grade short-term commercial paper which was included in cash and cash
equivalents at December 31, 1998 and 1999, respectively. These investments are
carried at cost, which approximates fair market value.
Short-term Investments
The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's short-term investments consist of high grade corporate securities
maturing one year or less from the date of purchase. Available-for-sale
securities are carried at fair value with unrealized gains or losses reported
in stockholders' deficit and included in other comprehensive loss. The cost of
securities sold is based on the specific identification method.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, generally four to ten
years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the remaining term of the lease. Equipment held under capital
leases is stated at the lower of the fair market value of the related asset or
the present value of the minimum lease payments and is amortized on a straight-
line basis over the shorter of the estimated useful life of the related asset
or the term of the lease. Repair and maintenance costs are charged to expense
as incurred.
Long-lived Assets
The Company accounts for its long-lived assets under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). Consistent with SFAS 121, the Company
identifies and records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. None of these events
have occurred with respect to the Company's long-lived assets, which consist
primarily of machinery and equipment and leasehold improvements.
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined on the basis of the
difference between the income tax bases of assets and liabilities and their
respective financial reporting amounts at enacted tax rates in effect for the
periods in which the differences are expected to reverse. A valuation allowance
is established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
F-8
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable and accounts payable,
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its debt obligations approximates fair value.
Revenue Recognition
License, research commitment and other non-refundable payments received in
connection with research collaboration agreements are deferred and recognized
on a straight-line basis over the relevant periods specified in the agreements,
generally the research term. The Company recognizes contract research revenues
as services are performed, pursuant to the terms of the agreements. Any amounts
received in advance of performance are recorded as deferred revenue.
Research and Development Expenses
Research and development costs are expensed as incurred and include costs
associated with research performed pursuant to collaborative agreements.
Research and development costs consist of direct and indirect internal costs
related to specific projects as well as fees paid to other entities which
conduct certain research activities on behalf of the Company. Research and
development expenses incurred in connection with collaborative agreements
approximated contract revenues for the years ended December 31, 1998 and 1999,
respectively.
Net Loss per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98. Basic and
diluted net loss per share are computed by dividing the net loss for the period
by the weighted average number of shares of common stock outstanding during the
period. The calculation of diluted net loss per share excludes potential common
stock if their effect is antidilutive. Potential common stock consists of
common stock subject to repurchase, incremental common shares issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
the preferred stock and note payable.
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share because to do so would be anti-
dilutive for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
Restated
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Preferred stock............................. 17,405,007 19,723,780 22,607,614
Options to purchase common stock............ 2,867,709 2,834,619 3,649,611
Common stock subject to repurchase.......... 176,109 1,679,073 988,126
Conversion of note payable.................. -- -- 1,718,750
Warrants.................................... 497,255 542,411 612,724
---------- ---------- ----------
20,946,080 24,779,883 29,576,825
========== ========== ==========
</TABLE>
Pro Forma Net Loss per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1999 was
computed using the weighted average number of shares of common stock
outstanding, including the pro forma effect of
F-9
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the automatic conversion of all of the Company's preferred stock into shares of
the Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on January 1, 1999, or at the
date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares used to compute pro forma
basic net loss per share for the year ended December 31, 1999. The calculation
of pro forma diluted net loss per share excludes potential common stock as
their effect would be anti-dilutive.
Revision of Net Loss per Share
On April 24, 2000, the Company revised its historical and pro forma net loss
per share amounts to reflect a change in the mathematical calculation of the
weighted average number of shares outstanding for 1997, 1998 and 1999. Such
revisions had no impact on previously reported revenues, net loss, cash flows
or balance sheets for any period. Amounts as previously reported, and as
restated, are as follows (shares in thousands):
<TABLE>
<CAPTION>
As
Previously As
Reported Restated
Year ended December 31, 1997 ---------- --------
<S> <C> <C>
Net loss per share, basic and diluted $(8.76) $(9.97)
Shares used in computing net loss per share, basic and
diluted 1,312 1,154
<CAPTION>
Year ended December 31, 1998
<S> <C> <C>
Net loss per share, basic and diluted $(3.83) $(7.88)
Shares used in computing net loss per share, basic and
diluted 4,088 1,988
<CAPTION>
Year ended December 31, 1999
<S> <C> <C>
Net loss per share, basic and diluted $(3.47) $(4.60)
Shares used in computing net loss per share, basic and
diluted 5,389 4,068
Pro forma net loss per share, basic and diluted $(0.67) $(0.70)
Shares used in computing pro forma net loss per share,
basic and diluted 27,996 26,676
</TABLE>
Stock-based Compensation
The Company has adopted the pro forma disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As permitted, the
Company continues to recognize employee stock-based compensation under the
intrinsic value method of accounting as prescribed by Accounting Principles
Board Opinion No. 25. The pro forma effects of applying SFAS 123 are shown in
Note 9 to the financial statements. The Company accounts for stock options
issued to non-employees in accordance with the provisions of SFAS 123 and EITF
96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with, Selling Goods or Services."
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from
accumulated deficit and additional paid-in capital in the equity section of the
balance sheet. For all periods presented, there were no material differences
between comprehensive loss and net loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments
F-10
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
embedded in other contracts, and for hedging activities. In July 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. To date, the Company has not engaged in derivative or
hedging activities.
Note 2 Research and Collaboration Agreements
Bayer
In May 1998, the Company entered into a six-year research collaboration
agreement with Bayer AG (including its affiliates, "Bayer") to identify novel
screening targets for the development of new pesticides for use in crop
protection. The Company will provide research services directed towards
identifying and investigating molecular targets in insects and nematodes that
may be useful in developing and commercializing pesticide products. The Company
received a $1.2 million license fee upon execution of the agreement which has
been deferred and will be recognized as revenue over the term of the agreement.
The Company will also receive annual research funding of approximately
$2.8 million. The Company can earn additional payments under the agreement upon
the achievement of certain milestones. The Company can also earn royalties on
the future sale by Bayer of pesticide products incorporating compounds
developed under the agreement. The agreement also provides Bayer an exclusive
royalty free option to use certain technology developed under the agreement in
the development of fungicides and herbicides.
In December 1999, the Company significantly expanded its relationship with
Bayer by forming a joint venture in the form of a new limited liability
company, GenOptera LLC ("GenOptera"). Under the terms of the GenOptera
operating agreement, Bayer will provide 100% of the capital necessary to fund
the operations of GenOptera and will control the entity with a 60% ownership
interest. The Company will own the other 40% interest in GenOptera without
making any capital contribution and will report its investment in GenOptera
using the equity method of accounting. Bayer's initial capital contribution to
GenOptera will be $10 million in January 2000 and another $10 million on
January 1, 2001. Bayer will also contribute cash to GenOptera in amounts
necessary to fund its ongoing operating expenses.
On January 1, 2000, the Company, Bayer and GenOptera entered into an
exclusive eight-year research collaboration agreement which superceded the 1998
agreement discussed above. The Company will provide GenOptera with
significantly expanded research services focused on developing insecticides and
nematicides for crop protection. Under the terms of the collaboration
agreement, GenOptera will pay the Company a $10 million license fee and a $10
million research commitment fee. One-half of these fees was received in January
2000, with the remaining amounts to be received in January 2001. Additionally,
GenOptera will also pay the Company approximately $10 million in annual
research funding. The Company can earn additional payments under the
collaboration agreement upon the achievement of certain milestones. The Company
can also earn royalties on the future sale by Bayer of pesticide products
incorporating compounds developed under the agreement. The agreement also
provides Bayer an exclusive royalty-free option to use certain technology
developed under the agreement in the development of fungicides and herbicides.
To the extent permitted under the collaboration agreement, if the Company were
to develop and sell certain human health or agrochemical products which
incorporate compounds developed under the agreement, it would be obligated to
pay royalties to GenOptera. No such activities are expected for the foreseeable
future.
F-11
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenues recognized under these agreements approximated $2.3 million and
$4.3 million during the years ended December 31, 1998 and 1999, respectively.
During 2000 and beyond, the Company will recognize license, contract
research and milestone payments received from GenOptera as revenues over the
term of the agreement and also record research and development expenses under
this collaboration, all as described in Note 1.
Artemis Pharmaceuticals
In June 1998, the Company purchased a minority interest in Artemis
Pharmaceuticals GmbH, a genetics company located in Cologne, Germany. The
Company also entered into certain non-exclusive license agreements providing
Artemis with access to the Company's technologies. In September 1998, the
Company entered into a five-year cooperation agreement with Artemis under which
the Company agreed to share technology and business opportunities as they
arise. While either party may terminate this agreement at any time, the Company
believes that it provides a significant opportunity to access complementary
genetic research. The Company has no financial obligation or current intention
to fund Artemis. As of December 31, 1999, the Company owns 24% of the
outstanding equity of Artemis. As a result of recording our portion of the 1998
Artemis loss, the carrying value of this investment was zero at December 31,
1998 and 1999.
Pharmacia & Upjohn
In February 1999, the Company entered into a five-year research
collaboration agreement with Pharmacia & Upjohn AB ("Pharmacia & Upjohn")
focused on the identification of novel targets that may be useful in the
development of pharmaceutical products in the areas of Alzheimer's disease and
metabolic syndrome. Pharmacia & Upjohn agreed to pay the Company a $5 million
non-refundable license fee which is being recognized as revenue over the term
of the agreement. Under the terms of the agreement, as expanded and amended in
October 1999, the Company will also receive future research funding during the
first three years of the agreement. The Company can also earn additional
amounts under the agreement upon the achievement of certain milestones. The
Company can also earn royalties on the future sales by Pharmacia & Upjohn of
human therapeutic products incorporating compounds developed under the
agreement. Revenues recognized under this agreement approximated $5.6 million
during the year ended December 31, 1999.
In connection with entering into this agreement, Pharmacia & Upjohn also
purchased 2,500,000 shares of Series D Preferred Stock at $3.00 per share,
resulting in net cash proceeds to the Company of $7.5 million. Further,
Pharmacia & Upjohn loaned the Company $7.5 million in exchange for a non-
interest bearing convertible promissory note (see Note 6).
Bristol-Myers Squibb
In September 1999, the Company entered into a three-year research and
technology transfer agreement with Bristol-Myers Squibb Company ("Bristol-Myers
Squibb") to identify the mechanisms of action of compounds delivered to the
Company by Bristol-Myers Squibb. Bristol-Myers Squibb agreed to pay the Company
a $250,000 technology access fee which is being recognized as revenue over the
term of the agreement. Under the terms of the agreement, the Company will
receive research funding ranging from $1.3 million in the first year to as much
as $2.5 million in later years. The Company can also earn additional amounts
under the agreement upon the achievement of certain milestones. The Company can
also earn royalties on the future sale by Bristol-Myers Squibb of human
products incorporating compounds developed under the agreement. The agreement
also includes technology transfer and licensing terms which call for Bristol-
Myers Squibb and the
F-12
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company to license and share certain core technologies in genomics and lead
optimization. Revenues recognized under this agreement approximated $372,000
during the year ended December 31, 1999.
Note 3 Related Party Receivables
The Company had outstanding loans aggregating $458,000 and $619,000 to
certain officers and employees of the Company at December 31, 1998 and 1999,
respectively. The notes are collateralized and bear interest at rates ranging
from 3.77% to 6.13% and have maturities through March 2003. The principal plus
accrued interest will be forgiven annually over three to four years from the
employees' date of employment with the Company. If an employee leaves the
Company, all unpaid and unforgiven principal and interest will be due and
payable within 60 days.
Note 4 Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Laboratory equipment....................................... $ 1,588 $ 4,301
Computer equipment and software............................ 1,667 2,837
Furniture and fixtures..................................... 525 1,018
Leasehold improvements..................................... 1,820 2,537
Equipment under capital leases............................. 2,773 2,773
Construction in-progress................................... -- 827
------- -------
8,373 14,293
Less accumulated depreciation and amortization............. (2,629) (4,795)
------- -------
$ 5,744 $ 9,498
======= =======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 included $460,000, $704,000 and $652,000, respectively, related
to equipment under capital leases. Accumulated depreciation and amortization
for equipment under capital leases was $1.5 million and $2.2 million at
December 31, 1998 and 1999, respectively. The equipment under capital leases
collateralizes the related lease obligations.
Note 5 Notes Payable
In July 1998, the Company entered into a $5.0 million equipment and tenant
improvements lending agreement. As of December 31, 1999, there was
approximately $3.9 million outstanding under the lending agreement. The
Company's ability to borrow additional amounts expired in January 2000.
Borrowings under the lending agreement bear interest at 7.0% per annum and are
collateralized by the financed equipment. Principal and interest are payable
monthly over 42 months, and the Company is required to make a final balloon
payment equal to 10% of the original principal amount of each drawdown.
In connection with the acquisition of MetaXen (see Note 12), the Company
assumed a loan agreement which provided for the financing of equipment
purchases. Borrowings under the agreement are collateralized by the assets
financed and are subject to repayment over thirty-six to forty-eight months,
depending on the type of asset financed. Borrowings under the agreement bear
interest at the U.S. Treasury note rate plus a number of basis points
determined by the type of asset financed (6.80% to 7.44% at December 31, 1999).
As of December 31, 1999, there was approximately $937,000 outstanding under
this loan agreement.
F-13
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future principal payments of notes payable at December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.............................................................. $ 1,554
2001.............................................................. 1,664
2002.............................................................. 1,209
2003.............................................................. 426
-------
4,853
Less current portion.............................................. (1,554)
-------
$ 3,299
=======
</TABLE>
Note 6 Convertible Promissory Note
In February 1999, the Company issued a $7.5 million convertible promissory
note to Pharmacia & Upjohn in connection with a collaboration agreement (see
Note 2). The non-interest bearing note automatically converts in March 2002,
unless converted earlier at the option of Pharmacia & Upjohn. The note must be
converted into shares of the Company's common stock during the two-year period
following the Company's initial public offering at a price per share equal to
120% of the price of common stock sold in the initial public offering, the
time of such conversion to be determined by Pharmacia & Upjohn. If the Company
has not completed an initial public offering by March 2002, the note will be
converted into a number of shares of convertible preferred stock equal to $7.5
million divided by the most recent price per share of such convertible
preferred stock. The note contains certain covenants including restrictions on
mergers and disposition of assets.
Note 7 Mandatorily Redeemable Convertible Preferred Stock
The Company has authorized 35,000,000 shares of preferred stock, designated
in series. A summary of mandatorily redeemable convertible preferred stock
("preferred stock") is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
----------- -----------
Liquidation
Shares Preference Issued and Issued and
Designated Per Share Outstanding Outstanding
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series A......................... 5,817,464 $ 0.70 5,328,571 5,328,571
Series B......................... 13,000,000 1.00 12,300,000 12,300,000
Series C......................... 7,875,000 2.00 7,875,000 7,875,000
Series D......................... 7,500,000 3.00 2,119,539 5,000,000
---------- ---------- ----------
34,192,464 27,623,110 30,503,571
========== ========== ==========
</TABLE>
The preferred stock has the following characteristics:
Conversion
Each share of Series A, B, C and D preferred stock is convertible at any
time at the option of the holder into shares of common stock based upon a one
to 0.75 conversion ratio. All Series A, B, C and D preferred stock will
automatically convert to common stock upon the earlier of (1) the closing of
an initial public offering of the Company's common stock resulting in net
proceeds of at least $15 million and a per share price of not less than $5.00,
or (2) the consent of the holders of at least 66 2/3% in voting power of the
then outstanding shares of Series A, B, C and D preferred stock.
F-14
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends
Holders of the Series D preferred stock are entitled to receive dividends
when and if declared by the Board of Directors.
Holders of the Series B and C preferred stock are entitled to receive
dividends when and if declared by the Board of Directors, provided however,
that no dividend shall be declared on the Series B or C preferred stock unless
the holders of the Series D preferred stock shall have first received, or the
Company shall simultaneously declare and pay, an equal dividend on each
outstanding share of Series D preferred stock.
Holders of the Series A preferred stock are entitled to receive dividends
when and if declared by the Board of Directors, provided however that with the
exception of the declaration and payment of the Special Series A Dividend (as
defined below), no dividend shall be declared or paid on the Series A preferred
stock unless the Company shall simultaneously declare and pay an equal dividend
on each outstanding share of Series B, C and D preferred stock. Through
December 31, 1999, no dividends have been declared or paid by the Company.
Holders of Series A preferred stock are entitled to receive a dividend of
one twentieth ( 1/20th) of one share of common stock (the "Special Series A
Dividend") under certain circumstances. If the consummation of either (1) the
consolidation, merger, liquidation or sale of all or substantially all of the
assets of the Company, or (2) the closing of an initial public offering of the
Company's common stock at a price at or above the Per Share Threshold Amount
($3.00 at December 31, 1999), as defined, occurs on or before March 31, 2000,
then the Special Series A Dividend shall be payable to holders of Series A
preferred stock immediately prior to such event.
Mandatory Redemption
On March 31, 2002, 2003 and 2004, each holder of Series A, B and C preferred
stock and on March 13, 2002, 2003 and 2004 each holder of Series D preferred
stock shall have the right to require the Company to redeem up to the number of
shares of such preferred stock held by each shareholder multiplied by a
percentage (33-1/3%, 50% and 100% at each respective redemption date) at a per
share price of $3.00 for Series D preferred stock, $2.00 for Series C preferred
stock, $1.00 for Series B preferred stock and $0.70 for Series A preferred
stock, plus all declared but unpaid dividends.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the affairs
of the Company, the holders of Series D preferred stock will be entitled to
receive in preference to the holders of the Series C, B and A preferred stock
and all classes of common stock an amount equal to $3.00 per share, subject to
certain adjustments, plus any accrued but unpaid dividends. The holders of
Series C preferred stock shall receive in preference to the holders of the
Series B and A preferred stock and all classes of common stock an amount equal
to $2.00 per share, subject to certain adjustments, plus any accrued and unpaid
dividends. The holders of Series B preferred stock shall receive, in preference
to the holders of the Series A preferred stock and all classes of common stock
an amount equal to $1.00 per share, subject to certain adjustments, plus any
accrued but unpaid dividends. The holders of Series A preferred stock shall
receive, prior and in preference to any other series of preferred stock (other
than the Series D, C and B preferred stock) and all classes of common stock, an
amount equal to $0.70 per share, subject to certain adjustments, plus any
accrued but unpaid dividends.
F-15
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Voting Rights
Each holder of Series A, B, C and D preferred stock is entitled to the
number of votes equal to the number of shares of common stock into which such
holder's shares are convertible.
Amended and Restated Securityholders' Agreement
In January 1999, the Company and the Series A, Series B, Series C and Series
D preferred stockholders entered into an amended and restated securityholders'
agreement. The agreement provides that in the event of an underwritten public
offering, the Company will use its best efforts to cause the underwriters to
reserve up to 10% of the shares included in the public offering for purchase by
individuals who hold Series C preferred stock and do not hold shares of any
other class of our capital stock.
Note 8 Common Stock and Warrants
Stock Repurchase Agreements
In January 1995, the Company sold to certain founders and members of its
Scientific Advisory Board (the "SAB") and to a consultant 1,327,500 shares of
common stock at a price of $0.001 per share. In June 1995, 1,200,000 of these
shares held by three founders of the Company were converted into 526,819 shares
of Class B common stock. Simultaneously, these founders entered into Restated
Stock Purchase and Repurchase Agreements (the "Restated Agreements"). In April
1999, 526,819 shares of Class B common stock were converted into 1,200,000
shares of common stock pursuant to the terms of the Restated Agreements.
Under the terms of the 1997 Equity Incentive Plan (the "1997 Plan"), options
are exercisable when granted and such shares are subject to repurchase upon
termination of employment. Repurchase rights lapse over the vesting periods
which are generally three to four years. Should the employment of the holders
of common stock subject to repurchase terminate prior to full vesting of the
outstanding shares, the Company may repurchase all unvested shares at a price
per share equal to the original exercise price. At December 31, 1999, 1,629,785
shares were subject to such repurchase terms.
Warrants
During 1995, the Company issued warrants to purchase 69,642 shares of the
Company's common stock at an exercise price of $0.93 per share to two
shareholders of the Company. During January 2000, warrants to purchase 16,071
shares were exercised. The warrants expire in January 2005. The fair value of
these warrants was determined using the Black-Scholes option pricing model and
was not material, accordingly, no value was ascribed to them for financial
reporting purposes.
In 1995, the Company also issued warrants to purchase 188,214 shares of the
Company's Series A preferred stock at an exercise price of $0.70 per share in
connection with a line of credit agreement. The warrants were immediately
exercisable upon issuance and expire ten years from the date of issuance or
five years from the date of an initial public offering, whichever is longer.
The fair value of these warrants was determined using the Black-Scholes option
pricing model and was not material, accordingly, no value has been ascribed to
them for financial reporting purposes.
In January 1996, the Company issued warrants to purchase 357,143 shares of
Series B preferred stock, at an exercise price of $0.85 per share, to a lender.
The warrants expire ten years from the date of issue or five years from the
effective date of an initial public offering, whichever is
F-16
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
longer. The fair value of these warrants was determined using the Black-Scholes
option pricing model and was not material, accordingly, no value was ascribed
to them for financial reporting purposes.
In September 1997, the Company issued warrants to purchase 63,750 shares of
common stock at an exercise price of $2.67 per share as part of a $2 million
equipment lease financing arrangement. These warrants expire upon the earlier
of September 2007 or five years from the effective date of an initial public
offering. The fair value of these warrants was determined using the Black-
Scholes option pricing model and was not material, accordingly, no value has
been ascribed to them for financial reporting purposes.
In May 1999, the Company issued warrants to purchase 112,500 shares of
common stock at an exercise price of $4.00 per share in connection with a
building lease. The Company determined the fair value of these warrants using
the Black-Scholes option pricing model with the following assumptions: expected
life of five years; a weighted average risk-free rate of 6.1%; expected
dividend yield of zero; volatility of 70% and a deemed value of the common
stock of $5.71 per share. The fair value of the warrants of $391,000 has been
capitalized and will be amortized as rent expense over the term of the lease.
All such warrants are currently exercisable.
Reserved Shares
At December 31, 1999, the Company has reserved 30,295,798 shares of common
stock for future issuance upon the conversion of its preferred stock, and the
convertible promissory note, as well as for use in the Company's stock plans
and exercise of outstanding warrants.
Note 9 Employee Benefit Plans
In January 1995, the Company adopted the 1994 Employee, Director and
Consultant Stock Option Plan (the "1994 Plan"). The 1994 Plan provides for the
issuance of incentive stock options, non-qualified stock options and stock
purchase rights to key employees, directors, consultants and members of the
SAB. In September 1997, the Company adopted the 1997 Plan. The 1997 Plan amends
and supercedes the 1994 Plan. At December 31, 1999, the total number of shares
which may be issued under the 1997 Plan, as amended, was 9,142,000. During
January 2000, the Company approved a 2,000,000 share increase to the authorized
shares available for issuance under the 1997 Plan. The Board of Directors is
responsible for administration of the Company's stock plans and determines the
term of each option, exercise price and the vesting terms. The Company may not
grant an employee incentive stock options that are exercisable during any one
year with an estimated fair value in excess of $100,000. Incentive stock
options may be granted at an exercise price per share at least equal to the
estimated fair value per underlying common share on the date of grant (not less
than 110% of the estimated fair value in the case of holders of more than 10%
of the Company's voting stock). Options granted under the 1997 Plan are
exercisable when granted and generally expire ten years from the date of grant
(five years for incentive stock options granted to holders of more than 10% of
the Company's voting stock).
F-17
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of all option activity is presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
---------- ---------
<S> <C> <C>
Options outstanding at December 31, 1996............... 1,924,365 $ 0.06
Granted.............................................. 2,092,215 0.21
Exercised............................................ (246,695) 0.03
Cancelled............................................ (48,363) 0.03
----------
Options outstanding at December 31, 1997............... 3,721,522 0.12
Granted.............................................. 1,949,255 0.27
Exercised............................................ (2,514,898) 0.13
Cancelled............................................ (354,702) 0.26
----------
Options outstanding at December 31, 1998............... 2,801,177 0.25
Granted.............................................. 2,892,202 0.32
Exercised............................................ (1,057,300) 0.26
Cancelled............................................ (169,552) 0.27
----------
Options outstanding at December 31, 1999............... 4,466,527 0.29
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------------------------
Weighted-
Average
Remaining Weighted-
Contractual Average
Exercise Life Exercise
Prices Number (Years) Price
-------- --------- ----------- ---------
<S> <C> <C> <C>
$ 0.01 29,625 6.34 $ 0.01
0.13 107,261 7.02 0.13
0.27 3,776,256 8.81 0.27
0.40 473,150 9.81 0.40
0.80 42,735 9.94 0.80
1.33 37,500 9.96 1.33
---------
4,466,527 8.95 0.29
=========
</TABLE>
At December 31, 1999, 1,106,880 shares (as restated) of common stock
purchased under the 1994 and 1997 Plans were subject to repurchase by the
Company at a weighted average price of $0.21 per share.
F-18
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had compensation cost been determined based on the fair value of the options
at the grant date consistent with the provisions of SFAS No. 123, the Company's
pro forma net loss would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
Restated
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported................................. $(11,496) $(15,666) $(18,721)
Pro forma................................... (11,505) (15,701) (18,776)
Net loss per share (basic and diluted):
As reported................................. $ (9.97) $ (7.88) $ (4.60)
Pro forma................................... (9.97) (7.90) (4.62)
</TABLE>
Since options vest over several years and additional option grants are
expected to be made in future years, the pro forma impact on the results of
operations for the three years ended December 31, 1999 is not representative of
the pro forma effects on the results of operations for future periods.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions for grants in 1997,
1998 and 1999: 0% dividend yield for all years; risk-free interest rates of
6.18% for 1997, 5.82% for 1998 and 5.59% for 1999 and expected lives of 5 years
for all years presented.
Deferred Stock Compensation
During the period from January 1, 1997 through December 31, 1999, the
Company recorded $18.4 million of deferred stock compensation in accordance
with APB 25, SFAS 123 and Emerging Issues Task Force 96-18, related to stock
options granted to consultants and employees. For options granted to
consultants, the Company determined the fair value of the options using the
Black-Scholes option pricing model with the following assumptions: expected
lives of four years; a weighted average risk-free rate of 5.75%; expected
dividend yield of zero percent; volatility of 70% and deemed values of common
stock between $0.40 and $8.35 per share. Stock compensation expense is being
recognized in accordance with FIN 28 over the vesting periods of the related
options, generally four years. The Company recognized stock compensation
expense of $25,000, $725,000 and $3.5 million for the years ended December 31,
1997, 1998 and 1999, respectively.
2000 Equity Incentive Plan
In January 2000, the Company adopted, subject to stockholder approval, the
2000 Equity Incentive Plan. A total of 3,000,000 shares of common stock have
been reserved for future issuance under this plan.
2000 Non-Employee Directors' Stock Option Plan
In January 2000, the Company adopted, subject to stockholder approval, the
2000 Non-Employees Directors' Stock Option Plan. This plan provides for the
automatic grant of options to purchase shares of common stock to non-employee
directors. A total of 500,000 shares of common stock were initially authorized
for issuance under this plan.
2000 Employee Stock Purchase Plan
In January 2000, the Company adopted, subject to stockholder approval, the
2000 Employee Stock Purchase Plan. A total of 300,000 shares of common stock
were initially authorized for issuance under this plan.
F-19
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 10 Income Taxes
The Company's deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 8,248 $ 12,430
Capitalized start-up and organizational costs............ 2,546 2,154
Tax credit carryforwards................................. 1,483 2,071
Capitalized research and development costs............... 2,239 1,966
Other.................................................... (842) (240)
-------- --------
Total deferred tax assets................................ (13,674) (18,381)
Valuation allowance...................................... 13,674 18,381
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $4.7 million and $5.7 million during
the years ended December 31, 1999 and 1998, respectively.
The Company has not recorded any provision or benefit for income taxes as it
continues to record operating losses. The Company has provided a full valuation
allowance for the deferred tax assets at December 31, 1999 since the
realization of these amounts is not considered more likely than not by
management.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $33.9 million and $25.6 million, respectively,
which expire at various dates beginning in the year 2005. Under the Internal
Revenue Code, certain substantial changes in the Company's ownership could
result in an annual limitation on the amount of net operating loss
carryforwards which can be utilized in future years to offset future taxable
income.
Note 11 Commitments
Leases
The Company leases office and research space and certain equipment under
operating and capital leases that expire at various dates through the year
2017. Certain operating leases contain renewal provisions and require the
Company to pay other expenses. Future minimum lease payments under operating
and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year ending December 31, Leases Leases
------------------------ --------- -------
<S> <C> <C>
2000....................................................... $ 3,061 $ 793
2001....................................................... 2,531 235
2002....................................................... 2,489 --
2003....................................................... 2,566 --
2004....................................................... 2,621 --
Thereafter................................................. 23,778 --
------- -----
37,046 1,028
Less amount representing interest.......................... -- (64)
------- -----
Present value of minimum lease payments.................... $37,046 964
======= -----
Less current portion....................................... (735)
-----
Long-term portion.......................................... $ 229
=====
</TABLE>
F-20
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense under noncancellable operating leases was $882,000, $920,000
and $1.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
The Company entered into a line of credit agreement (the "Agreement") during
1995. The term of each borrowing under the Agreement ranges from thirty-six to
forty-eight months and bears interest at rates ranging from 9.5% to 11.0%
depending on the type of equipment purchased under the Agreement. At December
31, 1999, $125,000 was outstanding under the Agreement. In connection with the
Agreement, the Company issued warrants to purchase 188,214 shares of the
Company's Series A preferred stock at an exercise price of $0.70 per share (see
Note 8).
In September 1997, the Company entered into a lease line of credit
arrangement (the "Arrangement") which allows the Company to purchase $2.0
million of equipment. The term of each borrowing under the Arrangement is 42
months and each bears interest at a minimum of 9.0%. At December 31, 1999,
$839,000 was outstanding under the Arrangement. In connection with the
Arrangement, the Company granted warrants to purchase 63,750 shares of its
common stock (see Note 8).
Licensing Agreements
The Company has entered into several licensing agreements with various
universities and institutions under which it obtained exclusive rights to
certain patent, patent applications, and other technology. Future payments
pursuant to these agreements are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000................................................................ $1,573
2001................................................................ 665
2002................................................................ 657
2003................................................................ 657
2004................................................................ 441
------
$3,993
======
</TABLE>
In addition to the payments summarized above, the Company is required to
make royalty payments based upon a percentage of net sales of any products or
services developed from certain of the licensed technologies and milestone
payments upon the occurrence of certain events as defined by the related
agreements. No such royalties or milestones have been paid through December 31,
1999.
Consulting agreements
The Company has entered into consulting agreements with certain members of
the SAB. Total consulting expense incurred under these agreements during the
years ended December 31, 1997, 1998 and 1999 was $236,000, $345,000 and
$352,000, respectively.
F-21
<PAGE>
EXELIXIS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 12 Acquisition
In July 1999, the Company acquired substantially all the assets of MetaXen,
LLC ("MetaXen"), a biotechnology company focusing on molecular genetics. In
addition to paying cash consideration of $870,000, the Company assumed a note
payable relating to certain acquired assets with a principal balance due of
$1.1 million (see Note 5). The Company also assumed responsibility for a
facility sub-lease relating to the office and laboratory space occupied by
MetaXen.
This transaction was recorded using the purchase method of accounting. The
fair value of the assets purchased, and debt assumed, was determined by
management to equal their respective historical net book values on the
transaction date, as follows (in thousands):
<TABLE>
<S> <C>
Laboratory and computer equipment................................... $ 1,645
Leasehold improvements.............................................. 175
Other tangible assets............................................... 155
Note payable........................................................ (1,105)
-------
$ 870
=======
</TABLE>
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisition had occurred at the
beginning of each period presented (in thousands, except per share data). This
pro forma financial information is not intended to be indicative of future
operating results.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Total revenues............................................. $ 7,022 $ 12,807
Net loss................................................... (19,129) (20,328)
Net loss per share, basic and diluted (restated)........... (9.62) (5.00)
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
MetaXen, LLC
In our opinion, the accompanying balance sheets and the related statements
of operations, of members' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of MetaXen, LLC (a majority
owned subsidiary of Xenova UK Limited) at December 31, 1997 and 1998, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred net losses since inception which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 10, 1999
F-23
<PAGE>
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
---------------------- -----------
1997 1998 1999
---------- ----------- -----------
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 124,000 $ 216,000 $ 30,000
Other current assets.................... 130,000 121,000 135,000
---------- ----------- -----------
Total current assets...................... 254,000 337,000 165,000
Property and equipment, net............... 1,487,000 3,132,000 2,837,000
Other assets.............................. 160,000 320,000 320,000
---------- ----------- -----------
$1,901,000 $ 3,789,000 $ 3,322,000
========== =========== ===========
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Accounts payable........................ $ 306,000 $ 369,000 $ 263,000
Accrued expenses........................ 244,000 1,415,000 1,227,000
Deferred revenue........................ -- 502,000 379,000
Intercompany payable.................... 3,000 227,000 1,965,000
Intercompany loan....................... -- 3,035,000 3,084,000
Current portion of long-term
liabilities............................ 250,000 380,000 417,000
---------- ----------- -----------
Total current liabilities................. 803,000 5,928,000 7,335,000
Long-term liabilities..................... 707,000 788,000 548,000
---------- ----------- -----------
Total liabilities......................... 1,510,000 6,716,000 7,883,000
---------- ----------- -----------
Commitments (Note 9)
Members' equity (deficit):
Preferred stock--Class A; 1,766,000
shares issued and outstanding at
December 31, 1997 and 1998............. 391,000 (3,068,000) (4,675,000)
Preferred stock--Class B; 120,000 shares
issued and outstanding at December 31,
1997 and 1998.......................... -- -- --
Preferred stock--Class C; 300,000 and
345,000 shares issued and outstanding
at December 31, 1997 and 1998,
respectively........................... -- 141,000 114,000
---------- ----------- -----------
Total members' equity (deficit)........... 391,000 (2,927,000) (4,561,000)
---------- ----------- -----------
$1,901,000 $ 3,789,000 $ 3,322,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Contract revenues.......... $ -- $ 4,750,000 $ 2,364,000 $ 2,297,000
----------- ----------- ----------- -----------
Operating expenses:
General and
administrative.......... 1,268,000 1,348,000 583,000 513,000
Research and
development............. 2,937,000 6,626,000 2,774,000 3,328,000
----------- ----------- ----------- -----------
Total operating expenses... 4,205,000 7,974,000 3,357,000 3,841,000
----------- ----------- ----------- -----------
Loss from operations....... (4,205,000) (3,224,000) (993,000) (1,544,000)
Interest income............ 46,000 35,000 16,000 9,000
Interest expense........... (30,000) (274,000) (70,000) (72,000)
----------- ----------- ----------- -----------
Net loss................... $(4,189,000) $(3,463,000) $(1,047,000) $(1,607,000)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (AUGUST 1996) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------------- ---------------- -----------------
Shares Amount Shares Amount Shares Amount Total
--------- ----------- ------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 280,000 $ 364,000 120,000 $216,000 320,000 $ 2,000 $ 582,000
Issuance of Class A
Preferred Stock at
$2.50 per share........ 1,200,000 3,000,000 -- -- -- -- 3,000,000
Issuance of Class A
Preferred Stock at
$3.50 per share........ 286,000 1,000,000 -- -- -- -- 1,000,000
Repurchase of Class C
Preferred Stock at
$0.10 per share........ -- -- -- -- (20,000) (2,000) (2,000)
Net loss................ -- (3,973,000) -- (216,000) -- -- (4,189,000)
--------- ----------- ------- -------- ------- -------- -----------
Balance at December 31,
1997................... 1,766,000 391,000 120,000 -- 300,000 -- 391,000
Issuance of Class C
Preferred Stock at
$0.005 per share....... -- -- -- -- 20,000 -- --
Issuance of Class C
Preferred Stock at
$0.10 per share........ -- -- -- -- 45,000 5,000 5,000
Stock compensation
expense................ -- -- -- -- -- 141,000 141,000
Repurchase of Class C
Preferred Stock at
$0.005 per share....... -- -- -- -- (10,000) -- --
Repurchase of Class C
Preferred Stock at
$0.10 per share........ -- -- -- -- (10,000) (1,000) (1,000)
Net loss................ -- (3,459,000) -- -- -- (4,000) (3,463,000)
--------- ----------- ------- -------- ------- -------- -----------
Balance at December 31,
1998................... 1,766,000 (3,068,000) 120,000 -- 345,000 141,000 (2,927,000)
Stock compensation
expense (unaudited).... -- -- -- -- -- (27,000) (27,000)
Net loss (unaudited).... -- (1,607,000) -- -- -- -- (1,607,000)
--------- ----------- ------- -------- ------- -------- -----------
Balance at June 30, 1999
(unaudited)............ 1,766,000 $(4,675,000) 120,000 $ -- 345,000 $114,000 $(4,561,000)
========= =========== ======= ======== ======= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flow used in
operating activities:
Net loss................ $(4,189,000) $(3,463,000) $(1,047,000) $(1,607,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 314,000 659,000 266,000 317,000
Loss on disposal of
property and
equipment............ -- 104,000 -- --
Stock compensation.... -- 141,000 -- (27,000)
Changes in assets and
liabilities:
Other current assets.. (95,000) 9,000 (47,000) (14,000)
Other assets.......... (160,000) (160,000) (160,000) --
Accounts payable...... 236,000 63,000 (182,000) (106,000)
Accrued expenses...... 212,000 1,171,000 -- (188,000)
Deferred revenue...... -- 502,000 366,000 (123,000)
Intercompany payable.. -- 224,000 -- 1,738,000
----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (3,682,000) (750,000) (804,000) (10,000)
----------- ----------- ----------- -----------
Cash flow used in
investing activities:
Purchases of property
and equipment.......... (1,731,000) (2,408,000) (376,000) (22,000)
----------- ----------- ----------- -----------
Cash flow provided by
financing activities:
Proceeds from issuance
of Class A Preferred
Stock.................. 4,000,000 -- (1,000) --
Proceeds from issuance
of Class C Preferred
Stock.................. -- 5,000 -- --
Repurchase of Class C
Preferred Stock........ (2,000) (1,000) -- --
Proceeds from equipment
line of credit......... 1,000,000 254,000 -- --
Repayments under
equipment line of
credit................. (43,000) (43,000) (110,000) (203,000)
Increase in intercompany
loan................... -- 3,035,000 2,100,000 49,000
----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities......... 4,955,000 3,250,000 1,989,000 (154,000)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. (458,000) 92,000 809,000 (186,000)
Cash and cash equivalents
at beginning of period... 582,000 124,000 124,000 216,000
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 124,000 $ 216,000 $ 933,000 $ 30,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)
NOTES TO FINANCIAL STATEMENTS
Note 1--The Company and Significant Accounting Policies:
Nature of business
MetaXen, LLC (the "Company") was incorporated in Delaware in August 1996 for
the purpose of performing research and development in the fields of
biotechnology and molecular genetics and to develop pharmaceutical products and
procedures on its own account and in collaboration with Xenova UK Limited, a
wholly owned subsidiary of Xenova Group plc (collectively referred to as
"Xenova" or the "Parent Company"). The Company is a majority owned subsidiary
of Xenova. The Company emerged from the development stage during 1997.
The Company was formed as a result of a merger in September 1996 between
RGH Founders, LLC, a Delaware corporation incorporated in August 1996, and
MetaXen, LLC, a Delaware corporation incorporated in September 1996 ("Merger
Corp."). At that time, Xenova exchanged its premerger interests in Merger Corp.
for 280,000 shares of Class A Preferred Stock in the Company; MJR Holdings,
Inc. exchanged its premerger interests in Merger Corp. for 100,000 shares of
Class B Preferred Stock in the Company. Also at this time, Ross Holdings, Inc.,
Giebel Holdings, Inc. and Hartmanis Holdings, Inc. exchanged their interests in
RGH Founders, LLC for 200,000, 100,000 and 20,000 shares of the Company's Class
C Preferred Stock, respectively. Upon the merger, the Company assumed the
assets and liabilities of Merger Corp. and RGH Founders, LLC. Merger Corp. and
RGH Founders, LLC were both nominally capitalized at that time and there was no
gain or loss arising from the merger. These financial statements include the
results of RGH Founders, LLC and Merger Corp. since their inception.
Need for additional financing
The Company has incurred a cumulative net loss of $8,072,000 since inception
and expects to incur additional losses in the future which raise substantial
doubt about the Company's ability to continue as a going concern. Xenova has
committed to provide sufficient funds to support the operations of MetaXen
until the earlier of 1) such time as Xenova Group plc has less then a 50%
controlling interest in MetaXen or 2) March 31, 1999. Therefore, in order to
continue operating and fully implement its business plan, the Company will need
to raise additional debt or equity financing. There can be no assurance that
such additional funds will be available to the Company, or if available, that
it will be on reasonable terms. The inability of the Company to obtain
additional financing beyond March 1999 will have a material adverse impact on
the Company's operations.
The Company funded its operations through June 1999 by amounts received
under a research and license agreement and additional amounts received from
Xenova.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the lesser of the estimated useful lives of the assets, which range
from three to seven years, or the lease terms.
F-28
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
Revenue recognized under research and development contracts is recorded as
earned pursuant to the terms of the contracts. Nonrefundable contract fees for
which no further performance obligations exist are recognized when the payments
are received or when collection is assured. In return for such payments,
contract partners may receive certain marketing and manufacturing rights,
products for clinical use and testing, and/or research and development
services.
Research and development expenses
Research and development costs are expensed as incurred.
Stock-based compensation
The Company has adopted the pro forma disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted, the Company continues to recognize
employee stock-based compensation under the intrinsic value method of
accounting pursuant to Accounting Principles Board Opinion No. 25.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could subsequently differ from those
estimates.
Note 2--Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Lab equipment...................................... $ 818,000 $ 1,305,000
Computer equipment................................. 449,000 676,000
Furniture and equipment............................ 184,000 357,000
Leasehold improvements............................. 353,000 1,366,000
----------- -----------
1,804,000 3,704,000
Less accumulated depreciation and amortization..... (317,000) (572,000)
----------- -----------
$ 1,487,000 $ 3,132,000
=========== ===========
</TABLE>
Depreciation and amortization expense was $659,000 and $314,000 for the
years ended December 31, 1998 and 1997, respectively.
Note 3--Other Assets:
At December 31, 1998, other assets of $320,000 consisted of a certificate of
deposit restricted as to withdrawal to secure an irrevocable letter of credit
issued in connection with the Company's non-cancellable facility operating
lease.
F-29
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4--Income Taxes:
No provision or benefit for federal income taxes is reported in the
financial statements because, as a limited liability company, the tax effects
of the Company's results accrue to its Members.
Note 5--Debt:
In July 1997, the Company entered into a loan agreement which provides for
the financing of up to $1,500,000 of equipment purchases made through December
31, 1998. Borrowings under this agreement are secured by the assets financed
and are to be repaid over thirty-six to forty-eight months, depending on the
type of asset financed. Borrowings under this agreement bear interest at the
U.S. Treasury note rate plus a number of basis points determined by the type of
asset financed (9.22% to 11.09% at December 31, 1998).
Future payments under this loan are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................ $ 500,000
2000............................................................ 500,000
2001............................................................ 367,000
2002............................................................ 148,000
---------
1,515,000
Less interest................................................... (347,000)
---------
1,168,000
Less current portion............................................ (380,000)
---------
Long-term portion............................................... $ 788,000
=========
</TABLE>
Note 6--Members' Equity:
The rights and preferences of the preferred stock are described below.
Allocations and distributions
In the event of cash distributions, amounts will first be distributed to the
holders of Class A and Class B Preferred Stock pro rata in accordance with the
balances in their respective Member equity accounts. Any amounts in excess of
the amounts in their Member equity accounts will be distributed (i) 80% to the
holders of Class A Preferred Stock; and (ii) 20% to the holders of Class B and
Class C Preferred Stock, pro rata in accordance with the number of such shares
held by such holders. No distributions have been made from inception through
December 31, 1998.
Net losses of the Company are first allocated (i) 80% to the holders of
Class A Preferred Stock; and (ii) 20% to the holders of the Class B and C
Preferred Stock, to the extent that cumulative net profits (if any) allocated
to the holders of Class B and C Preferred Stock in prior years exceeds the
cumulative net losses allocated to such holders in prior years. Any remaining
net losses of the Company are then allocated (i) to the holders of Class B
Preferred Stock to the extent that this would not cause such holders to have a
deficit in their Member equity at the end of the year; then (ii) to the holders
of Class A Preferred Stock to the extent that this would not cause such holders
to have a
F-30
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
deficit in their Members equity account at the end of the year; and then (a)
80% to the holders of Class A Preferred Stock; and (b) 20% to the holders of
Class B and C Preferred Stock. However, in the event of the members having
received a distribution of the type described below in connection with a
winding up of the Company, the Member equity accounts of the holders of Class B
and C Preferred Stock and Common Stock shall be adjusted to reflect the
aggregate net loss that would have been allocated to such holders if the
holders of Common Stock had participated with the holders of Class B and C
Preferred Stock under (b) above from the date of the acquisition of such Common
Stock.
Net profits of the Company are first allocated to the holders of Class A, B
and C Preferred Stock to the extent that cumulative net losses allocated to
such holders in prior years exceed the cumulative net profits allocated to such
holders in prior years. Any remaining net profits are then allocated (i) to the
holders of Class A Preferred Stock to the extent that cumulative net losses
allocated to such holders in provision (ii) on the allocation of losses above
exceed cumulative net profits allocated under this provision; then (ii) to the
holders of Class B Preferred Stock to the extent that cumulative net losses
allocated to such holders in provision (i) on the allocation of losses above
exceed cumulative net profits allocated under this provision; and then (a) 80%
to the holders of Class A Preferred Stock; and (b) 20% to the holders of Class
B and C Preferred Stock. However, in the event of the members having received a
distribution of the type described below in connection with a winding up of the
Company, the Member equity accounts of the holders of Class B and C Preferred
Stock and Common Stock shall be adjusted to reflect the aggregate net profit
that would have been allocated to such holders if the holders of Common Stock
had participated with the holders of Class B and C Preferred Stock under (b)
above from the date of the acquisition of such Common Stock. Furthermore, in
the event of the Members receiving a distribution of the type described below
describing distributions upon the winding up of the Company, the holders of
Common Stock shall be allocated the portion of net profit associated with the
remaining distributable assets distributed to the holders of such Common Stock.
In the event of there being distributable assets upon the winding up of the
Company, these assets will be distributed (i) to the holders of Class A and B
Preferred Stock pro rata in accordance with the balances in their respective
Member equity accounts for the return of their respective contributions; (ii)
to all members of the Company pro rata in accordance with their respective
Member equity accounts after giving effect to (i) above but without allocating
any net profit resulting from the liquidation of the Company's assets and the
dissolution of the Company; (iii) to the holders of Class A Preferred Stock to
the extent of 80% of the remaining distributable assets; and (iv) to the
holders of Class B and C Preferred Stock and Common Stock pro rata in
accordance with the number of such shares then held by such holders.
Class A Preferred Stock
Holders of Class A Preferred Stock are entitled to one vote per share and
are entitled to elect two-thirds of the members of the Board of Directors.
Class B Preferred Stock
Holders of Class B Preferred Stock are entitled to one vote per share and
are entitled to elect one-third of the number of members constituting the Board
of Directors subject to certain approvals from the holders of the Class A
Preferred Stock.
F-31
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
At any time following September 4, 2000 and prior to the close of business
on the 30th day thereafter, the holders of Class B Preferred Stock may exchange
their shares for ordinary shares of Xenova Group plc. The applicable exchange
ratio depends upon the Company and Xenova having achieved various milestones.
At any time prior to the close of business on the 60th day following
September 4, 2000, Xenova Group plc may exchange all of the then outstanding
Class B Preferred Stock for ordinary shares of Xenova Group plc. The applicable
exchange ratio depends upon the Company and Xenova having achieved various
milestones.
At any time prior to September 4, 2000, subject to the achievement of
specified milestones, the holders (other than Xenova Group plc and its
affiliates) of not less than one-third of the then outstanding shares and
options and warrants to purchase any class of stock may exchange the portion
requested for shares and options, respectively, of Xenova Group plc at the then
applicable exchange ratio. The applicable exchange ratio depends upon the
Company and Xenova having achieved various milestones.
Class C Preferred Stock
The holders of Class C Preferred Stock do not have any voting rights but
have the same exchange rights and obligations as the holders of Class B
Preferred Stock.
In the event that a holder of Class C Preferred Stock (i) terminates his or
her employment with the Company in certain circumstances; or (ii) in the case
of any person acquiring Class C Preferred Stock prior to commencing employment
with the Company, where the person failed to execute an employment agreement
and commence employment with the Company prior to September 4, 1997, the
Company has the option to repurchase all or a portion of that person's Class C
Preferred Stock. The portion of the person's Class C Preferred Stock that the
Company may purchase depends upon the length of time that has passed since the
September 1996 merger.
During 1998, the Company recorded $141,000 of stock compensation expense for
the excess deemed fair value over the issuance price of stock sold to
employees.
Class D Preferred Stock
At December 31, 1998, the Company had not designated or issued any Class D
Preferred Stock. The holders of Class D Preferred Stock would be entitled to a
percentage, prorata and in accordance with the number of shares then held by
such holders, of all cash profit or loss distributions which is equal to the
product of 0.000015 and the number of Class D Preferred Shares outstanding at
such time.
Class E Preferred Stock
At December 31, 1998, the Company had not designated or issued any shares of
Class E Preferred Stock. The holders of Class E Preferred Stock would be
entitled to a percentage, prorata and in accordance with the number of shares
then held by such holders, of all cash profit or loss distributions which is
equal to the product of 0.0000775 and the number of Class E Preferred Shares
outstanding at such time.
F-32
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock Warrants
In May 1997, the Company entered into a building lease agreement (the "Lease
Agreement"). As part of the Lease Agreement, the Company granted the lessor
warrants on November 5, 1997 to purchase 100,000 shares of the Company's Class
D Preferred Stock with an exercise price of $6.38 per share, which equalled the
fair market value of the Xenova common stock plus $2.00 per share, as of the
date of the issuance of such warrants. The warrants are exercisable from the
date of issuance through October 2002.
In July 1997, the Company entered into a loan agreement which provides for
the financing of certain equipment purchases (see Note 5). As part of the
agreement, the Company granted the lender warrants on July 31, 1997 to purchase
14,516 shares of the Company's Class E Preferred Stock with an exercise price
of $7.75 per share. The exercise price of $7.75 is based on the sum of the
Common Stock price of Xenova Group plc as of June 17, 1997 plus $2.00 per
share. The warrants are exercisable from the date of issuance through June
2002.
A nominal value was ascribed to the warrants outlined above.
Common Stock
At December 31, 1998, the Company had not issued any shares of Common Stock.
The Common Stock does not have any voting rights. The shares of Common Stock
are subject to the same exchange rights and obligations as the Class B
Preferred Stock but such shares will be exchanged for Xenova Group plc shares
on a one-for-one basis.
Note 7--Stock Option Plan:
In December 1996 the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"). The Company has reserved 300,000 shares of Common Stock for
issuance under the 1996 Plan relating to nonqualified options to be granted to
officers and employees. The exercise price, vesting requirements and maximum
term of each option issued under the 1996 Plan are determined by the Company's
Board of Directors.
Activity under the 1996 Plan is summarized as follows:
<TABLE>
<CAPTION>
Options
Available Options Exercise
for Grant Outstanding Price
--------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996............. 300,000 -- --
Granted................................ (216,000) 216,000 $2.88-$5.81
-------- -------
Balance at December 31, 1997............. 84,000 216,000 2.88-5.81
Granted................................ (94,000) 94,000 2.69-2.75
Cancelled.............................. 92,500 (92,500) 2.88-5.81
-------- -------
Balance at December 31, 1998............. 82,500 217,500 2.69-5.81
======== =======
</TABLE>
F-33
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding under
the 1996 Plan as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
---------- ----------- ----------- --------
<S> <C> <C> <C>
$2.69-2.88 166,500 4.2 years $2.80
3.63 20,000 3.0 years 3.63
4.38 16,000 3.6 years 4.38
5.81 15,000 3.3 years 5.81
-------
217,500 3.20
=======
</TABLE>
The Company believes that had employee stock-based compensation for options
granted under the 1996 Plan been determined based on the fair value at the
grant date using the minimum value model as prescribed by SFAS 123, there would
have been no material difference between the Company's pro forma net loss for
the years ended December 31, 1998 and 1997 and the actual net loss recorded in
the accompanying statement of operations. The fair value of each option was
estimated on the grant date using the minimum value method with the following
assumptions: annual dividend yield of 0.0%, risk-free annual interest rate of
5.82% to 6.57% and an expected option term of four years.
Note 8--Research and License Agreement:
The Company and Xenova signed a research and license agreement with Eli
Lilly and Company ("Eli Lilly") on February 16, 1998. The Company and Xenova
are providing research services to Eli Lilly in the form of screening certain
compounds for accelerated drug discovery and development. Eli Lilly will have
certain license rights to any compounds resulting from efforts completed under
the agreement. The Company and Xenova receive amounts quarterly under the
agreement which approximate cost reimbursement for amounts incurred pursuant to
the agreement. Milestone payments can also be earned by the Company and Xenova,
as defined in the agreement. For the year ended December 31, 1998, the Company
recorded total contract revenues of $4,750,000, consisting of a $1,000,000 non-
refundable license fee and $3,750,000 of research fees. Costs incurred by the
Company under the agreement in 1998 approximated $4,409,000.
F-34
<PAGE>
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 9--Commitments:
The Company leases its facility under a non-cancellable operating lease
which expires in September 2002. The Company subleases certain space in its
current facility to other tenants.
Rent expense for the years ended December 31, 1998 and 1997 was $762,000 and
$377,000, respectively. The Company recognizes rent expense on a straight line
basis over the lease period.
Future minimum lease payments under the non-cancellable operating lease and
minimum sublease rental receipts under non-cancellable operating sub-leases are
as follows:
<TABLE>
<CAPTION>
Operating Sublease
Year Ending December 31, Lease Income
------------------------ ----------- -----------
<S> <C> <C>
1999............................................... $ 1,966,000 $ 633,000
2000............................................... 1,997,000 429,000
2001............................................... 1,843,000 --
2002............................................... 1,814,000 --
2003............................................... 1,783,000 --
----------- -----------
$ 9,403,000 $ 1,062,000
=========== ===========
</TABLE>
Note 10--Related Party Transactions:
On September 4, 1996, the Company entered into a research and development
collaboration agreement with Xenova. The agreement specifies the rights of both
parties to intellectual property developed under the agreement. The agreement
will continue to be in force until the earlier of (i) the date that Xenova
provides the Company with notice that it will cease to provide funding for the
operations of the Company; (ii) the dissolution of the Company; or (iii) the
date of exchange of all shares of Class B and C Preferred Stock and Common
Stock of the Company for shares of Xenova common stock.
On December 17, 1997, the Company entered into a loan agreement with Xenova.
Under this agreement, Xenova agreed to make available to the Company a loan
facility of $1.1 million or such other amounts as the parties may agree to in
writing from time to time. The loan bears interest at the UK LIBOR plus 1%,
compounded quarterly. The loan will mature one year from the date on which
Xenova advances amounts to the Company or such other date as the parties hereto
may agree to in writing from time to time. On January 2, 1998, Xenova advanced
$1.1 million to the Company under this loan agreement.
During 1998 the loan agreement was amended and the total amount available
was increased to $2.92 million, all of which was borrowed and outstanding at
December 31, 1998. Interest due on the loan as of December 31, 1998 amounted to
$115,000.
F-35
