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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 2002
Commission File No. 0-14710
XOMA Ltd.
(Exact Name of Registrant as specified in its charter)
Bermuda 52-2154066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2910 Seventh Street, Berkeley, CA 94710
(Address of principal executive offices) (Zip Code)
(510) 204-7200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common shares US$.0005 par value 70,321,322
Class Outstanding at June 30, 2002
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XOMA Ltd.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION..................................................1
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001...........................................1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and 2001...............2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001.........................3
Notes to Condensed Consolidated Financial Statements............4
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.....20
PART II OTHER INFORMATION
Item 1 Legal Proceedings..............................................21
Item 2 Changes in Securities and Use of Proceeds......................21
Items 3, 5 and 6 are either inapplicable or nonexistent and
therefore are omitted from this report
Item 4 Submission of Matters to a Vote of Security Holders............21
Signatures ...........................................................23
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PART I - FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2002 2001
(Unaudited) (Note 1)
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 49,148 $ 67,320
Short-term investments 320 320
Related party receivables 454 418
Receivables 6,795 1,662
Inventory 1,306 1,299
Prepaid expenses and other 709 249
Total current assets ------------------ ------------------
58,732 71,268
Property and equipment, net 19,671 14,645
Deposits and other 206 194
Total Assets ------------------ ------------------
$ 78,609 $ 86,107
================== ==================
LIABILITIES & SHAREHOLDERS' EQUITY (Net Capital Deficiency)
Current Liabilities:
Accounts payable $ 5,866 $ 3,520
Accrued liabilities 5,586 4,422
Capital lease obligations-- current 908 673
Deferred revenue-- current 2,894 5,017
Convertible subordinated note-- current 5,066 5,013
Total current liabilities 20,320 18,645
Capital lease obligations-- long term 1,785 1,393
Deferred revenue-- long term 1,000 1,470
Convertible subordinated notes-- long term 57,029 50,980
Total Liabilities ------------------ ------------------
80,134 72,488
Shareholders' Equity (Net Capital Deficiency) (1,525) 13,619
Total Liabilities & Shareholders' Equity (Net Capital ------------------ ------------------
Deficiency) $ 78,609 $ 86,107
================== ==================
Note 1 - Amounts derived from the Company's audited financial statements
appearing in the Annual Report on Form 10-K for the year ended December 31,
2001 as filed with the Securities and Exchange Commission.
See accompanying notes to condensed consolidated financial statements.
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ------------------------------------
2002 2001 2002 2001
------------- ------------------ -------------- ------------------
Revenues:
License and collaborative fees $ 1,340 $ 1,051 $ 7,653 $ 2,066
Contract and other revenue 3,384 4161 6,293 6,002
------------- ------------------ -------------- ------------------
Total revenues 4,724 5,212 13,946 8,068
------------- ------------------ -------------- ------------------
Operating Costs and Expenses:
Research and development 10,759 9,465 20,694 17,935
Marketing, general and administrative 3,849 2,095 8,698 3,705
------------- ------------------ -------------- ------------------
Total operating costs and expenses 14,608 11,560 29,392 21,640
------------- ------------------ -------------- ------------------
Loss from operations (9,884) (6,348) (15,446) (13,572)
Other Income (Expense):
Investment and other income 232 580 504 979
Interest and other expense (493) (880) (1,142) (1,630)
------------- ------------------ -------------- ------------------
Net loss $ (10,145) $ (6,648) (16,084) $(14,223)
============= ================== ============== ==================
Basic and diluted net loss per Common Share $ (0.14) $ (0.10) $ (0.23) $ (0.21)
============= ================== ============== ==================
Shares used in computing basic and diluted net 70,309 66,280 70,269 66,227
loss per Common Share ============= ================== ============== ==================
See accompanying notes to condensed consolidated financial statements.
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XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
----------------------------------
2002 2001
----------------------------------
Cash Flows From Operating Activities:
Net cash used in operating activities $ (17,366) $ (11,534)
---------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sale of short-term investments -- 253
Purchase of property and equipment (5,851) (3,741)
---------------- ---------------
Net cash used in investing activities (5,851) (3,488)
---------------- ---------------
Cash Flows From Financing Activities:
Proceeds from issuance of common shares, net 399 47,734
Proceeds related to convertible notes 4,020 3,496
Proceeds from capital leases 1,000 662
Payments under capital leases (374) (105)
---------------- ---------------
Net cash provided by financing activities 5,045 51,787
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (18,172) 36,765
Cash and cash equivalents at beginning of period 67,320 35,043
---------------- ---------------
Cash and cash equivalents at end of period $ 49,148 $ 71,808
================ ===============
See accompanying notes to condensed consolidated financial statements.
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XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 1 - Operations and Summary of Significant Accounting Policies
Business
XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a biopharmaceutical
company that develops and manufactures products to treat cancer, immunologic and
inflammatory disorders, and infectious diseases. The Company's products are
presently in various stages of development and all are subject to regulatory
approval before the Company or its collaborators can commercially introduce any
products. There can be no assurance that any of the products under development
by the Company will be developed successfully, obtain the requisite regulatory
approval or be successfully manufactured or marketed.
Basis of Presentation
The interim information contained in this report is unaudited but, in
management's opinion, includes all normal recurring adjustments necessary for a
fair presentation of results for the periods presented. Interim results may not
be indicative of results to be expected for the full year or future periods. The
unaudited consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 2001 included in its Annual Report on Form 10-K.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from those
estimates.
Concentration of Risk
Cash, cash equivalents, short-term investments and accounts receivable are
financial instruments which potentially subject the Company to concentrations of
credit risk. The Company maintains and invests excess cash in money market funds
and short-term investments which bear minimal risk. The Company has not
experienced any significant credit losses and does not generally require
collateral on receivables. For the six months ended June 30, 2002, three
customers represented 40%, 36% and 22% of total revenues and as of June 30, 2002
billed and unbilled receivables totaled $2,500, $4,000 and $0 for these
customers, respectively. For the six months ended June 30, 2001, two customers
represented 48% and 46% of total revenues.
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XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited, dollars in thousands)
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board, or FASB, issued
Statements of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations." SFAS 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. Specifically,
SFAS 141 requires that an intangible asset may be separately recognized only if
such an asset meets the contractual-legal criterion or the separability
criterion. The requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001 (i.e., the acquisition date is July 1, 2001 or after). The adoption of
SFAS 141 on January 1, 2002 had no material impact on the Company's financial
position or results of operations.
In July of 2001, the FASB issued Statements of Financial Accounting Standards
No. 142, or SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. For intangible assets with indefinite useful lives, the impairment
review will involve a comparison of fair value to carrying value, with any
excess of carrying value over fair value being recorded as an impairment loss.
For goodwill, the impairment test shall be a two-step process, consisting of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, the implied fair value of the reporting unit
goodwill is compared to the carrying amount of the reporting unit goodwill. Any
excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss. Separable intangible assets that are deemed to have a finite life will
continue to be amortized over their useful lives (but with no maximum life).
Intangible assets with finite useful lives will continue to be reviewed for
impairment in accordance with Statements of Financial Accounting Standards No.
121, or SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. The
adoption of SFAS 142 on January 1, 2002 had no material impact on the Company's
financial position or results of operations.
In August of 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The adoption of SFAS 143 on January 1, 2002 had no
material impact on the Company's financial position or results of operations.
In October of 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. However, SFAS 144
retains the fundamental provisions of SFAS 121 for: (1) recognition and
measurement of the impairment of long-lived assets to be held and used; and (2)
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS 144 on January 1, 2002 had no material effect on the Company's financial
position or results of operations.
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XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited, dollars in thousands)
Revenue Recognition
Revenue is recognized when the related costs are incurred and the four basic
criteria of revenue recognition are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgments
regarding the nature of the fee charged for products or services delivered and
the collectibility of those fees.
License and Collaborative Fees
Revenue from non-refundable, up-front license or technology access payments
under license and collaborative agreements where the Company has a continuing
obligation to perform is recognized as revenue over the period of the continuing
performance obligation. Revenue from such payments that are not dependent on
future performance by the Company under such agreements is recognized as revenue
when the amount thereof is fixed and determinable and collectibility is
reasonably assured.
Milestone payments under collaborative arrangements are recognized as revenue
upon achievement of the incentive milestone events, which represent the
culmination of the earnings process because the Company has no future
performance obligations related to the payment. Milestone payments that require
a continuing performance obligation on the part of the Company are recognized
over the period of the continuing performance obligation. Incentive milestone
payments are triggered either by the results of our research efforts or by
events external to the Company, such as regulatory approval to market a product
or the achievement of specified sales levels by a marketing partner. Amounts
received in advance are recorded as deferred revenue until the related milestone
is achieved.
Contract Revenue
Contract revenue for research and development involves the Company providing
research, development or manufacturing services on a best efforts basis to
collaborative partners. The Company recognizes revenue under these arrangements
as the related research and development costs are incurred and collectibility is
reasonably assured.
Product Sales
The Company recognizes product revenue upon shipment when there is persuasive
evidence that an arrangement exists, delivery has occurred, the price is fixed,
and determinable and collectibility is reasonably assured. Allowances are
established for estimated uncollectible amounts, product returns, and discounts,
if any.
Research and Development
The Company expenses research and development costs as incurred. Research and
development expenses consist of direct and research-related allocated overhead
costs such as facilities costs, salaries and related personnel
-6-
XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited, dollars in thousands)
costs and material and supply costs. In addition, research and development
expenses include costs related to clinical trials to validate the Company's
testing processes and procedures and related overhead expenses.
Comprehensive Income (Loss)
Unrealized gains or losses on the Company's available-for-sale securities are
included in other comprehensive income (loss). Comprehensive loss and its
components for the three and six months ended June 30, 2002 and 2001 are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
Net loss $ (10,145) $ (6,648) $ (16,084) $ (14,223)
Unrealized gain on securities
available-for-sale - - - -
------------ ------------ ------------ -----------
Comprehensive loss $ (10,145) $ (6,648) $ (16,084) $ (14,223)
============ ============ ============ ===========
Net Loss Per Common Share
Basic and diluted net loss per share is based on the weighted average number of
common shares outstanding during the period. Common share equivalents were not
included because they are antidilutive in all periods presented.
NOTE 2 - BALANCE SHEET COMPONENTS
Inventories
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Inventories, which relate principally to
the Company's agreement with Baxter Healthcare Corporation, consist of the
following:
June 30, December 31,
2002 2001
----------- ------------
Raw materials $ 202 $ 195
Finished goods 1,104 1,104
----------- ------------
$ 1,306 $ 1,299
=========== ============
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XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited, dollars in thousands)
Accrued Liabilities
Accrued liabilities consist of the following:
June 30, December 31,
2002 2001
-------------- ----------------
Accrued payroll expenses $ 2,291 $ 2,347
Accrued clinical trial
expenses 478 445
Accrued legal fees 1,850 505
Other 967 1,125
-------------- ----------------
$ 5,586 $ 4,422
-------------- ----------------
NOTE 3 - LICENSE AGREEMENT
In February of 2002, XOMA and MorphoSys AG announced cross-licensing agreements
for antibody-related technologies. Under the agreements, XOMA will receive
license payments from MorphoSys in addition to a license to use the MorphoSys
HuCAL(R) GOLD antibody library for its target discovery and research programs.
MorphoSys and its partners receive a license to use the XOMA antibody expression
technology for developing antibody products using MorphoSys' phage display-based
HuCAL(R) antibody library. MorphoSys also receives a license for the production
of antibodies under the XOMA patents. Because there are no continuing
performance obligations on the part of the Company under the MorphoSys
agreement, the fixed and determinable portion of the license fee provided for in
that agreement was recognized as revenue in the first quarter of 2002. Under the
terms of the agreement, the license fee is to be paid in two installments. The
first was due and paid in the first quarter of 2002, and the second more
significant portion is due in the fourth quarter of 2002.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Revenues for the three months ended June 30, 2002 decreased to $4.7 million, or
10%, compared to $5.2 million for the same period in 2001. The decrease was
primarily due to lower contract revenue from Baxter Healthcare Corporation as a
result of a reduced level of contracted services requested by Baxter and was
partially offset by higher contract revenue from Onyx Pharmaceuticals, Inc. for
development services. Revenues for the six months ended June 30, 2002 increased
72% to $13.9 million compared to $8.1 million for the same period in 2001. This
increase was primarily due to increased licensing fees related to our agreement
with MorphoSys AG entered into in February 2002 and the amortization into
revenue of certain license fees and other payments received in prior periods
from Baxter and Onyx.
Research and development expenses for the three months and six months ended June
30, 2002 increased to $10.8 million and $20.7 million, respectively, or 14% and
16%, respectively, from $9.5 million and $17.9 million, respectively, for the
comparable periods of 2001. Spending in 2002 reflected increased development
costs associated with Raptiva(TM) (Efalizumab, formerly Xanelim(TM)), MLN01,
CAB2 and ONYX-015. The increase was partially offset by reduced spending on the
Mycoprex and Genimune development programs that were discontinued during 2001.
Our research and development activities can be divided into earlier stage
programs, which include molecular biology, process development, pilot-scale
production and preclinical testing, and later stage programs, which include
clinical testing, regulatory affairs and manufacturing clinical supplies. The
cost associated with these programs approximate the following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------------------ -----------------
Earlier stage programs $ 3.9 $ 3.3 $ 7.8 $ 6.3
Later stage programs 6.9 6.2 12.9 11.6
------------------ -----------------
Total $ 10.8 $ 9.5 $ 20.7 $ 17.9
================== =================
Our research and development activities can be divided into those related to our
internal projects and those related to collaborative arrangements. The cost
related to internal projects versus collaborative arrangements approximate the
following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------------------ -----------------
Internal projects $ 4.7 $ 5.8 $ 9.9 $ 11.5
Collaborative arrangements 6.1 3.7 10.8 6.4
Total ------------------ -----------------
$ 10.8 $ 9.5 $ 20.7 $ 17.9
================== =================
For the six months ended June 30, 2002 and 2001 no single project accounted for
more than 20% of our total research and development costs.
Marketing, general and administrative expenses for the three months and six
months ended June 30, 2002 increased to $3.8 million and $8.7 million,
respectively, or 81% and 135%, respectively, from $2.1 million and $3.7 million,
re-
-9-
spectively, for the comparable periods in 2001. The increases were primarily due
to legal expenses related to the litigation against Biosite Incorporated and
certain securities-related litigation, to pre-launch marketing expenses for
RaptivaTM, and to expenses related to licensing activities.
Investment income for the three months and six months ended June 30, 2002
decreased to $0.2 million and $0.5 million, respectively, or 67% and 50%,
respectively, compared to $0.6 million and $1.0 million for the same periods of
2001 due to lower interest rates somewhat offset by higher average cash
balances. Interest expense for the three months and six months ended June 30,
2002 decreased 44% and 31%, respectively, to $0.5 million and $1.1 million,
respectively, compared to $0.9 million and $1.6 million, respectively, for the
same periods of 2001. This decrease reflected lower interest rates on a higher
average outstanding balance of the convertible subordinated notes due to
Genentech, Inc. and Millennium Pharmaceuticals, Inc.
Liquidity and Capital Resources
XOMA had $49.5 million in cash, cash equivalents and short-term investments at
June 30, 2002 compared to $67.6 million at December 31, 2001. Working capital
(current assets minus current liabilities) at June 30, 2002 decreased to $38.4
million from $52.6 million at December 31, 2001. These decreases were primarily
due to net operating losses and capital expenditures for facility expansions.
Net cash used in operations for the six months ended June 30, 2002 was $17.4
million, compared with $11.5 million for the same period of 2001. This increase
primarily reflected higher expenses for research and development and legal fees.
Capital expenditures increased to $5.9 million for the six months ended June 30,
2002 from $3.7 million for the same period of 2001. Current year spending
included expenses related to the renovation and expansion of our manufacturing
facilities.
Net cash provided by financing activities decreased to $5.0 million for the six
months ended June 30, 2002 from $51.8 million for the same period of 2001. The
prior year period included net proceeds of $43.3 million from a common share
equity financing completed in June 2001. In addition, for the six months ended
June 30, 2002, the Company received $4.0 million of debt financing from
Genentech for the Company's share of RaptivaTM development costs compared to
$3.5 million for the same period of 2001. Proceeds received from capital leases
were $1.0 million for the six months ended June 30, 2002 compared to $0.7
million for the same period in 2001.
For the full year 2002, the Company currently expects its net loss to be
somewhat higher than in 2001, due to increased expenses on RaptivaTM and on the
Millennium collaboration, and the further expansion of the Company's development
infrastructure.
Based on current spending levels, currently anticipated revenues, and debt
financing provided by Genentech for XOMA's share of RaptivaTM development costs,
the Company estimates it has sufficient cash resources to meet its operating
needs through at least the middle of 2004. Any significant revenue shortfalls,
or increases in planned spending on internal programs could shorten this period.
Any licensing arrangements or collaborations, or favorable market conditions
supporting taking advantage of financing commitments from Millennium under the
collaborative agreement between the companies, or otherwise entering into new
equity or other financing arrangements, could extend this period. Genentech and
XOMA announced in early April 2002 that a pharmacokinetic study comparing
XOMA-produced material and Genentech-produced material did not achieve a
pre-defined statistical definition for comparability. The treatment phase of an
additional 500 patient Phase III efficacy study testing Genentech material has
now been completed. Genentech has announced that pending data from this
additional efficacy study and discussions with the FDA, it anticipates filing a
Biologics License Application (BLA) for RaptivaTM in psoriasis by end of 2002.
The timeliness of this submission, subsequent review by the FDA and progress or
setbacks by potentially competing products may have an adverse affect on the
Company's ability to raise new funding on
-10-
acceptable terms. A further discussion of the risks related to our business and
their effects on our cash flow and ability to raise new funding on acceptable
terms is set forth below under the heading "Forward-Looking Statements And
Cautionary Factors That May Affect Future Results".
Forward-Looking Statements And Cautionary Factors That May Affect Future Results
Certain statements contained herein related to the relative size of the
Company's loss for 2002, the estimated levels of its expenses and revenues for
the balance of 2002, the sufficiency of its cash resources and the BLA filing
time frame, as well as other statements related to the progress and timing of
product development and present or future licensing or collaborative
arrangements, or that otherwise relate to future periods, are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements are based
on assumptions that may not prove accurate. Actual results could differ
materially from those anticipated due to certain risks inherent in the
biotechnology industry and for companies engaged in the development of new
products in a regulated market. Among other things, the actual loss for 2002
could be higher depending on the size and timing of expenditures and whether
there are unanticipated expenditures; the sufficiency of cash resources could be
shortened if expenditures are made earlier or in larger amounts than anticipated
or are unanticipated or if funds are not available; and the BLA filing could be
delayed by unexpected safety or efficiency issues or additional time
requirements for data analysis, BLA preparation, discussions with the FDA,
enrollment in clinical studies, additional clinical studies or manufacturing
process modifications. These and other risks, including those related to changes
in the status of the existing collaborative relationships, availability of
additional licensing or collaboration opportunities, the timing or results of
pending and future clinical trials, the ability of collaborators and other
partners to meet their obligations, market demand for products, actions by the
Food and Drug Administration or the U.S. Patent and Trademark Office,
uncertainties regarding the status of biotechnology patents, uncertainties as to
the costs of protecting intellectual property and risks associated with
counterclaims against XOMA are described in more detail in the remainder of this
section.
None Of Our Pharmaceutical Products Have Received Regulatory Approval; If Our
Products Do Not Receive Regulatory Approval, Neither We Nor Our Third Party
Collaborators Will Be Able To Manufacture And Market Them
Even our most developed pharmaceutical product has yet to complete final
clinical testing. We will be unable to manufacture and market our products
without required regulatory approvals in the United States and other countries.
The United States government and governments of other countries extensively
regulate many aspects of our products, including:
o testing
o manufacturing
o promotion and marketing and
o exporting.
In the United States, the Food and Drug Administration regulates pharmaceutical
products under the Federal Food, Drug, and Cosmetic Act and other laws,
including, in the case of biologics, the Public Health Service Act. At the
present time, we believe that our products will be regulated by the FDA as
biologics. State regulations may also affect our proposed products.
The FDA has substantial discretion in both the product approval process and
manufacturing facility approval process and, as a result of this discretion and
uncertainties about outcomes of testing, we cannot predict at what point, or
whether, the FDA will be satisfied with our submissions or whether the FDA will
raise questions which may be material and delay or preclude product approval or
manufacturing facility approval. As we accumulate additional clinical data, we
will submit it to the FDA, which may have a material impact on the FDA product
approval process.
-11-
Our potential products will require significant additional research and
development, extensive preclinical studies and clinical trials and regulatory
approval prior to any commercial sales. This process is lengthy, often taking a
number of years, and expensive. As clinical results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory
approvals, the length of time necessary to complete clinical trials and to
submit an application for marketing approval for a final decision by a
regulatory authority varies significantly. As a result, it is uncertain whether:
o our future filings will be delayed
o our studies will be successful
o we will be able to provided necessary additional data
o our future results will justify further development or
o we will ultimately achieve regulatory approval for any of these
products.
For example,
o In 1996, we and Genentech began developing Raptiva(TM) (Efalizumab,
formerly Xanelim (TM)), in patients with moderate-to-severe psoriasis.
In April of 2002, we and Genentech announced that a pharmacokinetic
study conducted on Raptiva(TM)comparing XOMA-produced material and
Genentech-produced material did not achieve the pre-defined
statistical definition of comparability, delaying the filing of a
Biologics Licensing Application with the FDA for Raptiva(TM)beyond the
previously-planned time frame of summer 2002. Because this additional
study was not successful, we do not know when or whether this filing
will be made. Genentech plans to submit data from an additional
ongoing efficacy study using Genentech-produced material to the FDA
and, contingent upon successful discussions with the FDA, expects to
be able to submit data from this efficacy study before the end of
2002. We are also conducting a Phase I/II study of Raptiva(TM)in
kidney transplant recipients. Because no final decisions have been
made, we do not know whether there will be follow-on studies, and if
there are such follow-on studies we do not know whether any such
studies will be sufficient for regulatory approval. We have also
announced the initiation of enrollment in a Phase II clinical study of
Raptiva(TM)in patients suffering from rheumatoid arthritis. We do not
know whether any such testing will demonstrate product safety and
efficacy in this patient population or result in regulatory approval.
o In December of 1992, we began human testing of our NEUPREX(R)product,
a genetically-engineered fragment of a particular human protein, and
have licensed certain worldwide rights to Baxter. In April of 2000,
members of the FDA and representatives of XOMA and Baxter discussed
results from the Phase III trial that tested NEUPREX(R)in pediatric
patients with a potentially deadly bacterial infection principally of
children called meningococcemia, and senior representatives of the FDA
indicated that the data presented were not sufficient to support the
filing of an application for marketing approval at that time. Because
we have not generated any additional data or completed any further
analysis, we do not know whether we will be able to supply such
additional data. If we conduct an additional trial to provide the
requested additional data, we will not know whether the results will
be adequate for approval until the trial has been completed and the
resulting data reviewed by the FDA. In September of 1999, we
discontinued patient enrollment in our Phase III clinical trial
testing NEUPREX(R)in trauma patients with severe blood loss because an
independent data safety monitoring board told us that interim results
from the trial did not support continuing the trial. Baxter has
initiated a Phase II study with NEUPREX(R)in Crohn's disease patients.
Because this study has not been completed and we do not know the
results, we do not know whether the results will support product
approval or justify further development.
-12-
Given that regulatory review is an interactive and continuous process, we
maintain a policy of limiting announcements and comments upon the specific
details of the ongoing regulatory review of our products, subject to our
obligations under the securities laws, until definitive action is taken.
Because All Of Our Products Are Still In Development, We Will Require
Substantial Funds To Continue; We Cannot Be Certain That Funds Will Be Available
And, If Not Available, We May Have To Take Actions Which Could Adversely Affect
Your Investment
If adequate funds are not available, we may have to dilute or otherwise
adversely affect the rights of existing shareholders, curtail or cease
operations or, in extreme circumstances, file for bankruptcy protection. We have
spent, and we expect to continue to spend, substantial funds in connection with:
o research and development relating to our products and production
technologies
o expansion of our production capabilities
o extensive human clinical trials and
o protection of our intellectual property.
Based on current spending levels and third party funding, we believe that we
have enough cash to meet our currently anticipated needs for operating expenses,
working capital, equipment acquisitions and current research projects through at
least the middle of 2004. However, to the extent we experience changes in the
timing or size of expenditures or unanticipated expenditures, or if our
collaborators do not meet their obligations to us, these funds may not be
adequate for this period. As a result, we do not know whether:
o operations will generate meaningful funds
o additional agreements for product development funding can be reached
o strategic alliances can be negotiated or
o adequate additional financing will be available for us to finance our
own development on acceptable terms, if at all.
Cash balances and operating cash flow are influenced primarily by the timing and
level of payments by our licensees and development partners, as well as by our
operating costs.
Because All Of Our Products Are Still In Development, We Have Sustained Losses
In The Past And We Expect To Sustain Losses In The Future
We have experienced significant losses and, as of December 31, 2001, we had an
accumulated deficit of approximately U.S.$507.6 million.
For the year ended December 31, 2001 and the six months ended June 30, 2002, we
had a net loss of approximately U.S.$28.0 million, or U.S.$0.41 per common share
(basic and diluted) and U.S.$16.1 million, or U.S.$.23 per common share (basic
and diluted), respectively. We expect to incur additional losses in the future.
Our ability to make profits is dependent in large part on obtaining regulatory
approval for our products and entering into agreements for product development
and commercialization, both of which are uncertain. Our ability to fund our
ongoing operations is dependent on the foregoing factors and on our ability to
secure additional funds. Because all of our products are still in development,
we do not know whether we will ever make a profit or whether cash flow from
future operations will be sufficient to meet our needs.
-13-
If Third Party Collaborators Do Not Successfully Develop and Market Our
Products, We May Not Be Able To Do So On Our Own
Our financial resources and our marketing experience and expertise are limited.
Consequently, we depend to a large extent upon securing the financial resources
and marketing capabilities of third parties with whom we collaborate.
o In April of 1996, XOMA and Genentech entered into an agreement whereby
XOMA agreed to co-develop Genentech's humanized monoclonal antibody
product Raptiva(TM). In April of 1999, the companies extended and
expanded the agreement.
o In January of 2000, we licensed the worldwide rights to all
pharmaceutical compositions containing a particular human protein for
treatment of meningococcemia and additional potential future human
clinical indications to Baxter.
o In January of 2001, we entered into a strategic process development
and manufacturing alliance with Onyx Pharmaceuticals, Inc. pursuant to
which we are scaling up production to commercial volume and will
manufacture one of Onyx's cancer products.
o In November of 2001, we entered into a collaboration with Millennium
Pharmaceuticals, Inc. to develop two of Millennium's products for
certain vascular inflammation indications.
Because our collaborators are independent third parties, they may be subject to
different risks than we are and have significant discretion in determining the
efforts and resources they will apply, we do not know whether Genentech, Baxter,
Onyx or Millennium will successfully develop or market any of the products we
are collaborating on.
Even when we have a collaboration relationship, other circumstances may prevent
it from resulting in successful development of marketable products. For example,
in June of 1999, we licensed certain genetically-engineered fragments of a
particular human protein to Allergan Inc. to treat bacterial ophthalmic
infections. In May of 2000, following successful product testing at Allergan, we
expanded the collaboration. In November of 2000, Allergan advised us that for
internal economic reasons they planned to discontinue development of ophthalmic
anti-infective products derived from this protein.
Although we continue to evaluate additional strategic alliances and potential
partnerships, we do not know whether or when any such alliances or partnerships
will be entered into.
If Any Of Our Products Receives Regulatory Approval, We May Not Be Able To
Increase Existing Or Acquire New Manufacturing Capacity Sufficient To Meet
Market Demand
Because we have never commercially introduced any pharmaceutical products and
none of our products have received regulatory approval, we do not know whether
the capacity of our existing manufacturing facilities can be increased to
produce sufficient quantities of our products to meet market demand. Also, if we
need additional manufacturing facilities to meet market demand, we cannot
predict that we will successfully obtain those facilities because we do not know
whether they will be available on acceptable terms. In addition, any
manufacturing facilities acquired or used to meet market demand must meet the
FDA's quality assurance guidelines.
Because We Do Not And Cannot Currently Market Any Of Our Products For Commercial
Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products
Even if we receive regulatory approval for our products and we or our third
party collaborators successfully manufacture them, our products may not be
accepted in the marketplace. For example, physicians and/or patients may not
accept a product for a particular indication because it has been biologically
derived (and not discovered and developed by more traditional means) if no
biologically-derived products are currently in widespread use in that
indication, as is currently the case with psoriasis. Consequently, we do not
know if physicians or patients will adopt or use our products for their approved
indications.
-14-
If Our Patent Protection For Our Principal Products And Processes Is Not
Enforceable, We Will Not Realize Our Profit Potential
Because of the length of time and the expense associated with bringing new
products to the marketplace, we hold and are in the process of applying for a
number of patents in the United States and abroad to protect our products and
important processes and also have obtained or have the right to obtain exclusive
licenses to certain patents and applications filed by others. However, the
patent position of biotechnology companies generally is highly uncertain and
involves complex legal and factual questions, and no consistent policy regarding
the breadth of allowed claims has emerged from the actions of the U.S. Patent
and Trademark Office with respect to biotechnology patents. Legal considerations
surrounding the validity of biotechnology patents continue to be in transition,
and historical legal standards surrounding questions of validity may not
continue to be applied, and current defenses as to issued biotechnology patents
may not in fact be considered substantial in the future. These factors have
contributed to uncertainty as to:
o the degree and range of protection any patents will afford against
competitors with similar technologies
o if and when patents will issue
o whether or not others will obtain patents claiming aspects similar to
those covered by our patent applications or
o the extent to which we will be successful in avoiding infringement of
any patents granted to others.
The Patent Office has issued 60 patents to us related to our products based on
human bactericidal permeability-increasing protein, which we call BPI, including
novel compositions, their manufacture, formulation, assay and use. In addition,
we are the exclusive licensee of BPI-related patents and applications owned by
New York University and Incyte Pharmaceuticals Inc. The Patent Office has also
issued and/or allowed nine patents to us related to our bacterial expression
technology.
If certain patents issued to others are upheld or if certain patent applications
filed by others issue and are upheld, we may require licenses from others in
order to develop and commercialize certain potential products incorporating our
technology or we may become involved in litigation to determine the proprietary
rights of others. These licenses, if required, may not be available on
acceptable terms, and any such litigation may be costly and may have other
adverse effects on our business, such as inhibiting our ability to compete in
the market place and absorbing significant management time.
Due to the uncertainties regarding biotechnology patents, we also have relied
and will continue to rely upon trade secrets, know-how and continuing
technological advancement to develop and maintain our competitive position. All
of our employees have signed confidentiality agreements under which they have
agreed not to use or disclose any of our proprietary information. Research and
development contracts and relationships between us and our scientific
consultants and potential customers provide access to aspects of our know-how
that are protected generally under confidentiality agreements. These
confidentiality agreements may not be honored or may not be enforced by a court.
To the extent proprietary information is divulged to competitors or to the
public generally, such disclosure may adversely effect our ability to develop or
commercialize our products by giving others a competitive advantage or by
undermining our patent position.
Protecting Our Intellectual Property Can Be Costly And Exposes Us To Risks Of
Counterclaims Against Us
We may be required to engage in litigation or other proceedings to protect our
intellectual property. For example, we are currently engaged in litigation with
Biosite Incorporated regarding certain license agreements and patents relating
to our expression technology. Our amended complaint seeks unspecified monetary
damages, injunctive and other relief for infringement of our expression
technology patents, fraud and misrepresentation, breach of contract,
misappro-
-15-
priation and unfair business practices. Biosite has made counterclaims for
unspecified damages for breach of contract, breach of covenant of good faith and
fair dealing, intentional interference with contracts and with prospective
economic advantage, unfair business practices, violation of the Lanham Act and
injunctive and declaratory relief. Biosite has also asserted, among other
defenses, that the patents at issue are invalid. In February of 2002, Biosite
announced that it has begun implementing an antibody expression technology
intended to allow it to operate its business without using our patents and that
it is launching a licensing program. In June of 2002, we amended and
supplemented our complaint alleging that Biosite's recently announced antibody
expression technology continues to willfully infringe our patents and that
Biosite's statements regarding it are false and misleading.
The cost to us of this and other patent litigation, even if resolved in our
favor, could be substantial. Such litigation could also divert management's
attention and resources. In addition, if this or other patent litigation is
resolved against us, our patents may be declared invalid, and we could be held
liable for significant damages. In addition, if the litigation included a claim
of infringement by us of another party's patent that was resolved against us, we
or our collaborators may be enjoined from developing, manufacturing, selling or
importing products, processes or services without a license from the other
party.
Other Companies May Render Some Or All Of Our Products Noncompetitive Or
Obsolete
Developments by others may render our products or technologies obsolete or
uncompetitive. Technologies developed and utilized by the biotechnology and
pharmaceutical industries are continuously and substantially changing.
Competition in the areas of genetically-engineered DNA-based and antibody-based
technologies is intense and expected to increase in the future as a number of
established biotechnology firms and large chemical and pharmaceutical companies
advance in these fields. Many of these competitors may be able to develop
products and processes competitive with or superior to our own for many reasons,
including that they may have:
o significantly greater financial resources
o larger research and development and marketing staffs
o larger production facilities
o entered into arrangements with, or acquired, biotechnology companies
to enhance their capabilities or
o extensive experience in preclinical testing and human clinical trials.
These factors may enable others to develop products and processes competitive
with or superior to our own. In addition, a significant amount of research in
biotechnology is being carried out in universities and other non-profit research
organizations. These entities are becoming increasingly interested in the
commercial value of their work and may become more aggressive in seeking patent
protection and licensing arrangements.
Without limiting the foregoing, we are aware that:
o Biogen Inc. has announced that its Amevive(R) product achieved
positive results in two Phase III clinical trials in patients with
moderate-to-severe plaque psoriasis, that the FDA and the EMEA have
officially accepted Biogen's filings for approval of Amevive(R) in
psoriasis and that a FDA advisory panel voted to recommend approval of
Amevive(R) for the treatment of moderate-to-severe chronic plaque
psoriasis;
o Centocor Inc., a unit of Johnson & Johnson, has tested its rheumatoid
arthritis and Crohn's disease drug in psoriasis, and it has been
announced that the drug has shown clinical benefit,
-16-
o it has been announced that Immunex Corp. (recently acquired by Amgen
Inc.) has tested its rheumatoid arthritis and psoriatic arthritis drug
in psoriasis with positive results;
o MedImmune, Inc. has completed enrollment in three Phase II trials to
evaluate its anti-T cell monoclonal antibody in psoriasis; and
o other companies, including Medarex, Inc., are developing monoclonal
antibody or other products for treatment of inflammatory skin
disorders.
Currently, there are several companies with marketed biologics that are approved
for treating patients with rheumatoid arthritis:
o Immunex Corp. markets Enbrel,
o Amgen Inc. gained FDA approval for Kineret and
o Centocor Inc. is approved to market Remicade to rheumatoid arthritis
patients.
In addition to approved products, a number of companies are developing drugs
with a biologic mechanism of action for the treatment of rheumatoid arthritis.
These companies include Cambridge Antibody Technology Group plc, Biogen Inc.,
Celltech Group plc and others.
A number of companies are developing monoclonal antibodies targeting cancers,
which may prove more effective than ONYX-015 or the ING-1 antibody.
It is possible that one or more other companies may be developing one or more
products based on the same human protein as our NEUPREX(R) product, and these
product(s) may prove to be more effective than NEUPREX(R) or receive regulatory
approval prior to NEUPREX(R) or any BPI-derived ophthalmic product developed by
XOMA.
If We Do Business Internationally, We Will Be Subject To Additional Political,
Economic and Regulatory Uncertainties
We may not be able to successfully operate in any foreign market. We believe
that, because the pharmaceutical industry is global in nature, international
activities will be a significant part of our future business activities and
that, when and if we are able to generate income, a substantial portion of that
income will be derived from product sales and other activities outside the
United States. Foreign regulatory agencies often establish standards different
from those in the United States, and an inability to obtain foreign regulatory
approvals on a timely basis could put us at a competitive disadvantage or make
it uneconomical to proceed with a product's development. International
operations may be limited or disrupted by:
o imposition of government controls
o export license requirements
o political or economic instability
o trade restrictions
o changes in tariffs
o restrictions on repatriating profits
-17-
o taxation and
o difficulties in staffing and managing international operations.
Also, our financial results could be significantly affected by factors such as
fluctuations in currency exchange rates or weak economic conditions in the
foreign markets in which we or our collaborators seek to operate.
Because We Are A Relatively Small Biopharmaceutical Company With Limited
Resources, We May Not Be Able To Attract And Retain Qualified Personnel, And The
Loss Of Key Personnel Could Delay Or Prevent Achieving Our Objectives
Our success in developing marketable products and achieving a competitive
position will depend, in part, on our ability to attract and retain qualified
scientific and management personnel, particularly in areas requiring specific
technical, scientific or medical expertise. There is intense competition for
such personnel. Our research, product development and business efforts would be
adversely affected by the loss of one or more of key members of our scientific
or management staff, particularly our executive officers: John L. Castello, our
Chairman of the Board, President and Chief Executive Officer; Patrick J.
Scannon, M.D., Ph.D., our Chief Scientific and Medical Officer and Senior Vice
President; Clarence L. Dellio, our Senior Vice President, Operations; Peter B.
Davis, our Vice President, Finance and Chief Financial Officer; and Christopher
J. Margolin, our Vice President, General Counsel and Secretary. We have
employment agreements with Mr. Castello, Dr. Scannon and Mr. Davis. We currently
have no key person insurance on any of our employees.
Because We Engage In Human Testing, We Are Exposed To An Increased Risk Of
Product Liability Claims
The testing and marketing of medical products entails an inherent risk of
allegations of product liability. We believe that we currently have adequate
levels of insurance for our clinical trials; however, in the event of one or
more large, unforeseen awards, such levels may not provide adequate coverage. We
will seek to obtain additional insurance, if needed, if and when our products
are commercialized; however, because we do not know when this will occur, we do
not know whether adequate insurance coverage will be available or be available
at acceptable costs. A significant product liability claim for which we were not
covered by insurance would have to be paid from cash or other assets. To the
extent we have sufficient insurance coverage, such a claim would result in
higher subsequent insurance rates.
If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
Against Us Because We Are A Foreign Entity
We are a Bermuda company. All or a substantial portion of our assets may be
located outside the United States. As a result, it may be difficult for
shareholders and others to enforce in United States courts judgments obtained
against us. We have irrevocably agreed that we may be served with process with
respect to actions based on offers and sales of securities made hereby in the
United States by serving Christopher J. Margolin, c/o XOMA Ltd., 2910 Seventh
Street, Berkeley, California 94710, our United States agent appointed for that
purpose. We have been advised by our Bermuda counsel, Conyers Dill & Pearman,
that there is doubt as to whether Bermuda courts would enforce judgments of
United States courts obtained in (1) actions against XOMA or our directors and
officers that are predicated upon the civil liability provisions of the U.S.
securities laws or (2) original actions brought in Bermuda against XOMA or such
persons predicated upon the U.S. securities laws. There is no treaty in effect
between the United States and Bermuda providing for such enforcement, and there
are grounds upon which Bermuda courts may not enforce judgments of United States
courts. Certain remedies available under the United States federal securities
laws may not be allowed in Bermuda courts as contrary to that nation's policy.
Our Shareholder Rights Agreement Or Bye-laws May Prevent Transactions That Could
Be Beneficial To Our Shareholders And May Insulate Our Management From Removal
Our shareholder rights agreement could make it considerably more difficult or
costly for a person or group to acquire control of XOMA in a transaction that
our board of directors opposes.
-18-
Our bye-laws:
o require certain procedures to be followed and time periods to be met
for any shareholder to propose matters to be considered at annual
meetings of shareholders, including nominating directors for election
at those meetings;
o authorize our board of directors to issue up to 1,000,000 preference
shares without shareholder approval and to set the rights, preferences
and other designations, including voting rights, of those shares as
the board of directors may determine; and
o contain provisions, similar to those contained in the Delaware General
Corporation Law, that may make business combinations with interested
shareholders more difficult.
These provisions of our shareholders rights agreement and our bye-laws, alone or
in combination with each other, may discourage transactions involving actual or
potential changes of control, including transactions that otherwise could
involve payment of a premium over prevailing market prices to holders of common
shares, could limit the ability of shareholders to approve transactions that
they may deem to be in their best interests and could make it considerably more
difficult for a potential acquiror to replace management.
Because We Have No History Of Profitability And Because The Biotechnology Sector
Has Been Characterized By Highly Volatile Stock Prices, Announcements We Make
And General Market Conditions For Biotechnology Stocks Could Result In A Sudden
Change In The Value Of Our Common Shares
As a biopharmaceutical company, we have experienced significant volatility in
our common shares. Fluctuations in our operating results and general market
conditions for biotechnology stocks could have a significant impact on the
volatility of our common share price. From June 30, 2001 through June 30, 2002,
our share price has ranged from a high of U.S.$17.09 to a low of U.S$3.00. On
August 12, 2002 the last reported sale price of the common shares as reported on
the Nasdaq National Market was U.S$4.80 per share. Factors contributing to such
volatility include:
o results of preclinical studies and clinical trials,
o information relating to the safety or efficacy of our products,
o developments regarding regulatory filings,
o announcements of new collaborations,
o failure to enter into collaborations,
o developments in existing collaborations,
o our funding requirements and the terms of our financing arrangements,
o announcements of technological innovations or new indications for our
therapeutic products,
o government regulations,
o developments in patent or other proprietary rights,
o the number of shares outstanding,
o the number of shares trading on an average trading day,
-19-
o announcements regarding other participants in the biotechnology and
pharmaceutical industries, and
o market speculation regarding any of the foregoing.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market rate risk due to changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. By policy, the Company places its investments with high quality debt
security issuers, limits the amount of credit exposure to any one issuer, limits
duration by restricting the term and holds investments to maturity except under
rare circumstances. The Company classifies its cash equivalents as fixed rate if
the rate of return on an instrument remains fixed over its term. As of June 30,
2002 all the Company's cash equivalents are classified as fixed rate.
The Company also has a long-term convertible note due to Genentech in 2005.
Interest on this note of LIBOR plus 1% is reset at the end of June and December
each year and is therefore variable.
The table below presents the amounts and related weighted interest rates of the
Company's cash equivalents and long-term convertible note at June 30, 2002:
Fair Value Average
Maturity (in thousands) Interest Rate
----------------- ---------------- -------------------
Cash equivalents, fixed rate Daily $ 49,148 1.9 %
Long-term convertible note, variable rate 2005 $ 57,029 3.0 %
Other Market Risk. At June 30, 2002 the Company had a long-term convertible note
outstanding which is convertible into common shares based on the market price of
the Company's common shares at the time of conversion. A 10% decrease in the
market price of the Company's common shares would increase the number of shares
issuable upon conversion of either security by approximately 11%. An increase in
the market price of Company common shares of 10% would decrease the shares
issuable by approximately 9%.
-20-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On June 3, 2002, XOMA announced that it filed an amended and supplemental
complaint in its ongoing litigation against Biosite Incorporated alleging that
Biosite's recently announced "new" antibody expression technology continues
willfully to infringe XOMA's patents and that Biosite's statements regarding it
are false and misleading. XOMA's complaint specifically alleges that Biosite's
highly publicized BNP products were made in a manner that infringed XOMA's
technology, Biosite wrongfully used and relied upon XOMA's patents in developing
its announced "new" technology, Biosite's use of its "new" technology has
induced others to infringe or contributed to the infringement by others of
XOMA's patents, the public statements made by and on behalf of Biosite about its
"new" technology are materially false and misleading and likely to deceive the
public and Biosite continues, wrongfully, to hold itself out as licensed by
XOMA.
On June 14, 2002, the parties executed a settlement agreement in the action that
had been filed in the California Superior Court in San Diego County against
XOMA, Genentech and certain unidentified "John Doe" defendants, and which had
incorporated many of the allegations that were made in the federal class action
lawsuits that were voluntarily dismissed without prejudice in March, 2002.
Pursuant to the June 14, 2002 agreement, the plaintiff voluntarily dismissed the
California state court action with prejudice on June 26, 2002.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company continues to use the net proceeds from its June 2001 registered
offering of common shares for general corporate purposes, including leasehold
improvements, equipment acquisitions, current research and development projects,
the development of new products or technologies, general working capital and
operating expenses. Pending application of the net proceeds as described above,
the Company has invested the remaining net proceeds of the offering in
short-term, investment-grade, interest-bearing securities.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 2002, the Company held its annual general meeting of
shareholders. The following persons (the only nominees) were elected
as the Company's directors, having received the indicated votes:
Name Votes For Votes Withheld
- ---- --------- --------------
James G. Andress 55,927,808 2,178,067
William K. Bowes, Jr. 56,396,774 1,709,101
John L. Castello 56,403,041 1,702,834
Arthur Kornberg, M.D. 56,388,275 1,717,600
Steven C. Mendell 55,960,285 2,145,590
Patrick J. Scannon, M.D., Ph.D. 56,413,816 1,692,059
W. Denman Van Ness 55,948,096 2,157,779
The appointment of Ernst & Young LLP to act as the Company's
independent auditors for the 2002 fiscal year was ratified and the
authorization of the Board to agree to such auditors' fee was
approved, having received 56,277,871 votes for, 1,709,040 votes
against, 118,964 absten-
-21-
tions and no broker non-votes.
In addition, the amendment to the Company's 1998 Employee Share
Purchase Plan to increase the number of shares issuable over the term
of the plan by 1,000,000 shares to 1,500,000 shares in the aggregate
was approved, having received 55,952,680 votes for, 1,914,464 votes
against, 238,731 abstentions and no broker non-votes.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS & REPORTS ON FORM 8-K
a) Exhibits:
None
b) Reports on Form 8-K:
None
-22-
XOMA Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XOMA Ltd.
Date: August 14, 2002 By: /s/ JOHN L. CASTELLO
--------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 2002 By: /s/ PETER B. DAVIS
------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
-23-
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(18 U.S.Css.1350)
Each of the undersigned officers of XOMA Ltd. (the "Company") hereby certify
that (1) the Quarterly Report of the Company on Form 10-Q for the period ended
June 30, 2002 (the "Report") fully complies with the requirements of Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934 and (2) the information
contained in the Report fairly presents, in all material respects, the financial
condition and the results of operations of the Company.
XOMA Ltd.
Date: August 14, 2002 By: /s/ JOHN L. CASTELLO
--------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 2002 By: /s/ PETER B. DAVIS
------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer