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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to _____________
COMMISSION FILE NO 1-12968
LXR BIOTECHNOLOGY INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 68-0282856
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1401 MARINA WAY SOUTH
RICHMOND, CALIFORNIA 94804
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 412-9100
Securities registered pursuant to Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.0001 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Check whether the Issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 .
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Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[X]
Issuer's revenues for the year ended December 31, 1996 were $414,396.
As of March 6, 1997, there were outstanding 21,817,675 shares of the
Registrant's common stock, par value $0.0001 per share. As of that date, the
aggregate market value of the shares of common stock held by non-affiliates of
the Registrant (based on the closing price for the common stock on the American
Stock Exchange on March 6, 1997) was approximately $32,447,795. This excludes
4,512,184 shares of common stock held by directors, officers and stockholders
whose ownership exceeded five percent of the shares outstanding at February 28,
1997. Exclusion of shares held by any person should not be construed to indicate
that such person possesses power, direct or indirect, to direct or cause the
direction of the management or policies of the Registrant, or that such person
is controlled by or is under common control with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held June 11, 1997, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1996.
Transitional Small Business Disclosure Format (Check One) Yes No X
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LXR BIOTECHNOLOGY INC.
Annual Report on Form 10-KSB
For the fiscal year ended December 31, 1996
TABLE OF CONTENTS
PART I
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Item 1 Description of Business...................................... 3
Item 2 Description of Property...................................... 25
Item 3 Legal Proceedings............................................ 25
Item 4 Submission of Matters to a Vote of Security Holders.......... 27
Item 4A Executive Officers of the Registrant......................... 27
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters.................................. 30
Item 6 Plan of Operations........................................... 31
Item 7 Financial Statements......................................... 38
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 38
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act... 39
Item 10 Executive Compensation....................................... 39
Item 11 Security Ownership of Certain Beneficial Owners and
Management................................................... 39
Item 12 Certain Relationships and Related Transactions............... 39
Item 13 Exhibits and Reports on Form 8-K............................. 40
Financial Statements.................................................... F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Business section contains forward looking statements regarding, among
other things, product development and effectiveness, corporate partnering,
timing of filings with the United States Food and Drug Administration ("FDA")
and FDA approval thereof, clinical trial progress, sufficiency of cash resources
and overall resource allocation. These forward looking statements concern
matters that involve risks and uncertainties that could cause actual results to
differ materially from those projected in the forward looking statements. Words
such as "believe," "expects," "likely," "may" and "plans" are intended to
identify forward looking statements, although not all forward looking statements
contain these words. For a discussion of certain of these risks and
uncertainties, please see "Factors Affecting Future Results" in Part II below.
OVERVIEW
LXR Biotechnology Inc. ("LXR" or the "Company") is a biopharmaceutical
company engaged in the research and development of therapeutics to treat
diseases where the dysregulation of apoptosis, naturally occurring programmed
cell death, can play a key role in the onset of or damage caused by such
diseases. Apoptosis is a form of cell death that occurs in a timely and
atraumatic fashion in the normal development and maintenance of healthy tissues
and organs. The scientific field of apoptosis is relatively new and received
little attention prior to 1993. However, more recently, the concept of apoptosis
and programmed cell death has begun to have a profound impact on the basic
biological sciences, medicine and biotechnology. The Company believes that
several of its principal scientists have been in the forefront of the discovery,
understanding and acceptance of apoptosis as a discrete biological phenomenon in
the life cycle of cells. Further, the Company believes that it has played a
significant role in the development of new and promising therapeutic strategies
based upon the concept of apoptosis.
The Company's scientists have demonstrated using conventional in vitro
tests that apoptosis can be modulated with small molecule drugs. They have also
developed what the Company believes to be novel, proprietary and unique drug
screening assays that test compounds for apoptotic or anti-apoptotic activity.
Based on these advances, the Company has identified, developed or licensed-in
lead compounds and, in some cases, entered into strategic partnership agreements
with other companies, for each of its current research and development programs.
Recently, the Company has made several strategic changes in its management
structure and goals as a result of having reached certain early research and
development objectives, including completion of its first Phase I clinical trial
of a lead compound, Lexirin(TM), for suppression of AIDs-related diarrhea, and
the consummation of its first strategic partnership, with The Perkin-Elmer
Corporation ("Perkin-Elmer") for the scanning laser digital imaging ("SLDI")
technology. The purpose of these strategic changes was to enable the Company to
transition from an early-stage discovery-oriented company to a more mature
biotechnology company with active and expanding clinical development
initiatives. Accordingly, the Company expanded its executive and managerial
staff, appointing Donald H. Picker, Ph.D. as President and Chief Operating
Officer in October 1996, and subsequently hiring a Director of Regulatory
Affairs and a
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Director of Analytical Chemistry and Quality Assurance/Quality Control. The
Company expects to devote substantial resources to developing its newly-acquired
Cardiosol(TM) technology for heart preservation and cardioplegia and to continue
to focus efforts on its lead compounds Lexirin and Elirex(TM). The Company also
expects to conduct preclinical efficacy and toxicity studies of Maspin(TM) in
collaboration with Boehringer Mannheim Corporation ("Boehringer") and to
continue to support Perkin-Elmer's development of the SLDI technology. As a
result of these priorities, the Company expects to expend limited resources
on its Bak, apoptosis drug screening, surrogate apoptosis marker assay and Fas
programs. The Company will continue to seek patent protection for its promising
technologies. However, the Company is in the process of reevaluating its
intellectual property portfolio in light of its strategic direction and its
available resources, and there can be no assurance that the Company will choose
to prosecute to allowance all of its pending patent applications or maintain
all of the patents now owned or licensed by the Company.
The Company's product development programs are as follows:
ORGAN PRESERVATION/ORGAN PROTECTION. LXR believes that the global ischemia
which occurs following isolation of major organs from donors and the subsequent
reperfusion following transplantation lead to premature and inappropriate
apoptosis among critical cells of the organs, thereby leading to severe tissue
damage and organ dysfunction. LXR also believes that, similar to global
ischemia, regional organ and tissue ischemia such as that encountered with heart
attacks and strokes results in premature apoptosis and leads to severe organ
damage. LXR's near-term efforts in the areas of organ preservation and organ
protection focus on the Cardiosol technology and on LXR015, a small molecule
drug.
In 1996, LXR obtained patent and other rights to an experimental organ
preservation solution called Cardiosol. In small physician sponsored studies,
Cardiosol proved effective in preserving hearts for transplantation and as a
cardioplegic solution. The Company believes that it has improved the
formulation of the original Cardiosol solution, resulting in enhanced stability
and a potentially longer shelf life desirable for quality control in
manufacturing and marketing. In 1997, the Company filed patent applications on
these improvements. The Company plans to file an investigational device
exemption ("IDE") with the FDA to begin clinical studies of a new formulation
called HK-Cardiosol(TM) for use as a heart preservation solution, and an
investiga- tional new drug application ("IND") to begin clinical studies of a
closely- related formulation called CP-Cardiosol(TM) for use in hypothermic
cardioplegia, by the third quarter of 1997.
LXR has also demonstrated that a small molecule drug, LXR015, has
anti-apoptotic effects in in vitro tests and that, in preclinical animal models,
this drug appears to be capable of significantly increasing the efficacy of
conventional organ preservation techniques in the heart and liver. LXR also
believes that LXR015 may be useful in suppression of multiple organ damage
associated with hypothermic cardioplegia and cardiopulmonary bypass
applications. Based upon published results of clinical studies of this molecule,
the Company believes that it should be safe and well tolerated in human use. The
Company has filed patent applications on LXR015. The Company has formulated a
synthetic version of LXR015, which it has named Elirex, and is currently
investigating its activity in an ischemic heart attack model in dogs at the
Cleveland Clinic under the guidance of Dr. Eric Topol, and in a porcine model at
Emory University Medical School. The Company is also investigating this
formulation in an ischemic stroke model with Dr.
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M. Chopp at the Henry Ford Hospital. The Company anticipates that these
preclinical studies will be completed by the third quarter of 1997.
LXR has established scientific collaborations with organ transplant
surgeons, cardiothoracic surgeons and cardiovascular researchers at the
Cleveland Clinic, Emory University Medical School, Henry Ford Hospital, Stanford
Medical School, University of California at San Francisco, California Pacific
Medical Center in San Francisco and University of Kentucky Medical Center.
GASTROINTESTINAL DISORDERS. Based upon published results, LXR believes
that premature and inappropriate apoptosis occurs in critical cells of the small
intestine in association with the development of AIDS in HIV positive
individuals, and in cancer patients who are receiving chemotherapy and radiation
therapy.
LXR has formulated a highly purified, orally administerable version of
LXR015, which it has named Lexirin, for gastrointestinal disorders. LXR has
demonstrated, in preclinical animal models, that oral administration of Lexirin
is capable of suppressing gastrointestinal dysfunction associated with
anti-cancer chemotherapy. The Company has also completed preclinical
toxicological tests of Lexirin in animal models and believes that the drug may
be safe and well tolerated for human use in the suppression of gastrointestinal
dysfunction most notably associated with severe diarrhea in AIDS and radiation
and chemotherapy patients. The Company filed an IND on Lexirin and has now
completed a Phase I clinical trial in AIDS patients, with the final report
expected in the second quarter of 1997. Based on the preliminary results of the
Phase I studies, LXR expects to request FDA approvals during the third quarter
of 1997 to begin a Phase I/II trial for the suppression of AIDS-related diarrhea
and a Phase I/IIa study for the suppression of chemotherapy induced diarrhea.
METASTATIC CANCER. Metastatic cancer involves a migration of tumor cells
in which the failure to regulate normal cell behavior leads to delayed apoptosis
and, therefore, undesirable and damaging cell proliferation. The Company has an
exclusive license to a recently issued patent from Dana-Farber Cancer Institute,
a teaching affiliate of the Harvard Medical School, to a newly discovered tumor
suppressor molecule designated LXR023 and referred to as Maspin. Maspin has been
shown to bind to the surface of invasive and metastatic breast tumor cells and
restore normal cell migration behavior. The Company believes that Maspin may
indirectly modulate apoptosis and reduce metastatic tumor cell survival. The
Company has initiated a preclinical development program to investigate Maspin's
mechanism of action and the use of Maspin protein both as a prognostic marker as
well as in treating cancer. Preclinical trials in a rodent model system appear
to have demonstrated that recombinant Maspin is capable of increasing the
lifespan of mice injected with a lethal metastatic breast tumor cell line.
Researchers at the Dana-Farber Cancer Institute have shown recently that Maspin
is also active in in vitro tests against a number of prostate cancer cell lines.
LXR has entered into a letter of intent with Boehringer pursuant to which LXR
and Boehringer have agreed to evaluate the preclinical efficacy and toxicity of
Maspin. Based on the results of these preclinical studies, which are expected in
the third quarter of 1997, LXR and Boehringer will determine whether to expand
the limited scope of their current collaboration. However, Boehringer has no
obligation to proceed with this project. See "Licenses and Collaborative
Research--Boehringer Mannheim Letter of Intent for Maspin" below.
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The Company believes that it has developed a proprietary reagent
technology based on Maspin that will permit early assessment of metastatic
potential of breast tumors using histochemical techniques directly on tumor
biopsy samples. LXR has licensed the Maspin reagent technology for research
purposes.
SCANNING LASER DIGITAL IMAGING TECHNOLOGY. In August 1996, the Company
entered into an exclusive license agreement with Perkin-Elmer (the "Perkin-Elmer
License Agreement") to further develop the SLDI technology licensed from Ohio
State University. See "Research Programs--Scanning Laser Digital Imaging
Technology" and "Licenses and Collaborative Research--Ohio State University" and
"--Perkin-Elmer License Agreement" below.
OTHER PRODUCT OPPORTUNITIES. The Company also conducts research in
certain other areas of lesser priority. These areas include Bak (a gene whose
protein product is present in heart, muscle and brain and may facilitate
apoptosis of muscle and nerve cells following ischemia or exposure to toxic
drugs), apoptosis drug screening technologies (which the Company has used to
identify compounds with apoptosis modulating ability), surrogate apoptosis
marker assays (which may be useful in indicating the level of apoptosis in the
body), and Fas (an apoptosis-signalling glycoprotein on the surface of many
cell types, including lymphocytes and cardiac cells). These programs, which
are described in more detail below, may lead to additional opportunities for
the Company.
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The work of the Company's Chief Executive Officer, Dr. L. David Tomei, and
Dr. Samuil Umansky in the field of apoptosis is complemented by the expertise of
other key Company employees, including: the molecular biology expertise of Dr.
Michael Kiefer, Vice President of Molecular Biology; the drug development
expertise of Dr. Donald Picker, President & Chief Operating Officer, Jerilyn
Domagala, Director of Regulatory Affairs, and Dr. John Statler, Director of
Analytical Chemistry QA/QC; and the protein and lipid chemistry expertise of Dr.
Ian Bathurst, Vice President of Manufacturing and Process Development. Further,
Dr. Philip Pemberton, Director of Protein Chemistry, brings expertise in
Maspin-related genes from his work at the Dana-Farber Cancer Institute. The
Company's principal scientists are complemented with a group of eminent
scientific advisors and consultants, including: Professor Luc Montagnier of the
Pasteur Institute (generally regarded as the co-discoverer of HIV as the virus
that causes AIDS, and recently active in apoptosis research as a potential AIDS
therapeutic strategy), Drs. Eric Topol and Michael Chopp, who bring to the
Company their widely-recognized expertise in the areas of cardiology and
neurology, respectively, and Dr. Geoffrey Collins, who pioneered many of the
currently accepted methods for organ preservation for transplantation.
The Company was incorporated in Delaware on April 20, 1992. The term
"Company" or "LXR" refers to LXR Biotechnology Inc. and its wholly-owned
subsidiary Optical Analytic, Inc. Optical Analytic, Inc. was acquired by LXR
in December 1993. The principal executive offices of the Company are located
at 1401 Marina Way South, Richmond, California 94804. The Company's
telephone number is (510) 412-9100, and its facsimile number is (510)
412-9109.
SCIENTIFIC BACKGROUND: APOPTOSIS
There are two forms of cell death, apoptosis and necrosis. Apoptosis is an
atraumatic, orderly and predictable self-destruction of cells in which they
shrink within their membranes while still in place in the tissue, and their DNA
is broken up into packets called nucleosomes for safe removal by other cells in
the body such as white blood cells. This process is under close genetic control
and is a normal physiological process. Necrosis is the traumatic destruction of
cells caused by catastrophic damage leading to the release into the surrounding
tissues of enzymes and intact DNA, which is then broken into random fragments.
The necrosis process releases
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degradative products and active enzymes directly into the surrounding tissue and
can cause severe inflammation and extensive damage in those tissues. The
clinical importance of apoptosis has only recently been recognized by the
scientific community, and its role in disease is just beginning to be explored.
Apoptosis is now understood to be the principal form of cell death in healthy
persons, and is critical to the normal functioning of the immune system as well
as other processes such as the production of healthy new red blood cells.
Apoptosis is a fundamental mechanism in the growth and development of
organisms and occurs throughout the stages of embryonic development in the early
formation of organs, substitution of one tissue by another, and resorption of
temporary tissues such as the webbing between embryonic fingers. The genetic
orchestration of cell division, differentiation and death dictates the ultimate
shape of the body. Apoptosis plays a complementary role to that of cell division
in the regulation of the size of cell populations. Apoptosis also enables the
body to replace older, presumably defective cells, such as skin cells, with
healthy new cells in an orderly fashion.
In the ordinary course of events, cells undergo apoptosis in response to
signals sent by other cells indicating a need for cell replacement, or perhaps
from internal signals indicating that the ongoing existence of the cell would be
damaging to the organism. The theoretical point at which cells decide, based on
the signals they receive, whether to undergo apoptosis or continue to grow or
proliferate is called the modulation point. In certain cases, the body
malfunctions and sends out aberrant apoptosis signals. These signals may cause
sudden, inappropriate apoptosis resulting in severe tissue damage. Conversely,
these signals may lead to delayed or faulty control of apoptosis resulting in
overpopulation of certain cell types or the continued existence of damaged or
defective cells. Since apoptosis has been recognized as an inherent part of the
normal life cycle of cells, the dysregulation of normal and timely apoptotic
cell death is involved in a broad range of disease conditions. Examples of
disease conditions associated with inappropriate apoptosis are heart tissue
damage following a heart attack or brain damage associated with stroke, and
damage to the basal crypt epithelial region in connection with the development
of AIDS and in cancer patients who are receiving chemotherapy and radiotherapy.
An example of a disease associated with delayed or faulty control of apoptosis
is cancer.
From a medical and commercial standpoint, the key aspect of apoptosis is
that it can be temporarily modulated using drugs specifically designed to
increase or decrease the process. As a result, it may be possible to treat
diseases with biopharmaceutical therapies that suppress or stimulate apoptosis.
The Company believes that such therapies could substantially reduce tissue
damage and improve recovery from a number of major diseases.
PRODUCT DEVELOPMENT PROGRAMS
ORGAN PRESERVATION. LXR scientists believe they have demonstrated that the
heart retains its ability to initiate cell death by apoptosis following
ischemia, a condition caused by a lack of a combination of critical factors
including oxygen, glucose and other nutrients normally provided by fresh blood
flow. LXR further believes that apoptotic cell death is critical in a number of
clinically important situations, such as heart attacks and strokes (examples of
regional organ ischemia) and organ transplantation (an example of global organ
ischemia). In organ
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transplantation, an organ such as a heart or liver that is being removed from
the donor for transplantation is suddenly deprived of fresh blood flow and
becomes ischemic. Transplantation procedures are especially difficult because
the heart and liver cannot survive severe global ischemia for more than
approximately four to six hours. The resultant failure of a heart or liver is
believed to be a consequence of inappropriate and unwanted apoptotic cell death
in the organ -- a death that may be preventable by specific anti-apoptotic
agents.
LXR scientists believe that the current solutions used for organ
preservation prior to transplantation can be significantly improved, especially
for hearts, where donor organs generally must be transplanted within four hours
of organ harvest. LXR's organ preservation efforts are directed to its newly
acquired Cardiosol technology and LXR015.
In 1996, LXR obtained all rights to an experimental heart preservation
solution called Cardiosol. Before LXR acquired the technology, Cardiosol had
been compared to St. Thomas solution, a standard organ preservation solution, in
a small physician sponsored trial in 20 transplant patients at the California
Pacific Medical Center between 1988 and 1991. Multivariable analysis
demonstrated that a patient's rejection profile and the composition of the
preservation solution were major factors in influencing patient survival. The
incidence of chronic rejection per patient was reduced by approximately 50% in
the Cardiosol group. Survival was highest in the Cardiosol patient group: 100%
at over five years compared to 82% at one year and 68% at five years for the
control group.
Since obtaining rights to Cardiosol, LXR scientists believe that they have
improved the formulation, resulting in enhanced stability and a potentially
longer shelf life desirable for quality control in manufacturing and marketing.
LXR filed patent applications on these improved formulations in early 1997.
Using the historical data on the original Cardiosol solution referred above,
LXR filed a 510(k) notification with the FDA in August 1996 for clearance to
market the improved preservation solution for heart transplantation. The FDA
rejected the notification, finding that the improved formulation was materially
different from the formulation of the original Cardiosol solution. LXR expects
to file an IDE with the FDA for approval to begin studies comparable to a Phase
III clinical trial of the improved formulation, called HK-Cardiosol, in the
third quarter of 1997. LXR expects that the studies, if approved, will be
conducted at a minimum of three sites over a period of at least 12 months.
LXR015 has also been identified as having anti-apoptotic activity in in
vitro tests and, in collaboration with organ transplantation surgeons and
scientists at the University of Kentucky Medical Center at Lexington, the
University of California at San Francisco, the Cleveland Clinic, Emory
University, and the California Pacific Medical Center in San Francisco, in
conventional preclinical animal models. These results suggest that ischemic
organ survival can be prolonged in humans beyond the practical limits obtainable
without treatment and that heart survival can be extended during all types of
surgical procedures where the organ is deprived of fresh blood flow.
ORGAN PROTECTION: MYOCARDIAL INFARCTION (HEART ATTACK). Heart attacks are
a leading cause of death and disability in humans. In the United States,
approximately 1.3 million people suffer heart attacks each year and
approximately one-third of those who have their first heart attack do not
survive. Heart attacks are caused by the obstruction of coronary arteries and
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blockade of normal blood flow to small regions of the heart muscle. This can
lead to ischemia and eventually to permanent damage called a myocardial
infarction. Significant advances have been made in the treatment of heart
attacks with both advanced surgical techniques to replace damaged coronary
arteries or to clear them of obstruction, and with new drugs that dissolve blood
clots and open arteries to fresh blood flow. However, there has been no
comparable advance in the prevention of permanent damage to the heart muscle,
known as an acute myocardial infarction, which occurs in the first few hours or
days following a heart attack. Development of a means to prevent this tissue
damage would be an important step toward reducing death and disability from
heart attacks.
Ischemia and subsequent reperfusion ultimately lead to severe damage and
death of heart muscle cells that can be the primary cause of the death of up to
one-third of all patients who experience their first heart attack. Until
recently, scientists had assumed that this cell death was caused by the oxygen
starvation itself or even the reintroduction of toxic oxygen radicals during
reperfusion. LXR scientists have shown in in vitro and in animal studies that
oxygen starvation can ultimately lead to apoptotic cell death in the heart in
the critical hours following a heart attack. These findings have been confirmed
by research reports from several other investigators that subsequently appeared
in the medical literature. Accordingly, LXR believes that the primary reason
heart muscle cells die in connection with a heart attack is not because they can
no longer survive oxygen starvation, or because they are irreparably damaged by
oxygen radicals, but rather because the heart cells receive a signal to die
voluntarily. Paradoxically, not only does oxygen starvation appear to signal
cells to die following a blockage of coronary artery blood flow, but the return
of blood flow, called reperfusion, into the affected region of the heart
following the removal of the obstruction also causes oxidative damage to
proteins and DNA resulting in cell death. The Company believes that the cell
death caused by reperfusion is also a form of apoptosis, which can be considered
an inappropriate response on the part of the heart cells that react as if they
had received deliberate instructions to die. Before the cell undergoes
apoptosis, the DNA damage is actually repaired by the cell, but the cell
nonetheless undergoes apoptosis as a result of those instructions.
In the case of heart attacks, treatment with apoptosis inhibitors may
minimize the occurrence of persistent heart muscle damage and eventual formation
of non-functional scar tissue. LXR believes that there is a "window of
opportunity" for therapeutic intervention of between one to six hours following
a heart attack. During this window the cells of the heart may still be stopped
from dying and go on to live and function normally. This window for therapeutic
intervention creates an opportunity for the development of a therapy that blocks
apoptosis and could be combined effectively with existing treatments designed to
restore blood flow. Prevention of heart damage can reasonably be expected to
markedly improve the recovery and quality of life in patients who otherwise
would experience physical limitations related to the persistent organ damage.
The Company has formulated a synthetic version of LXR015, which it has
named Elirex, and is currently investigating its activity in an ischemic heart
attack model in dogs at the Cleveland Clinic under the guidance of Dr. Eric
Topol, and in a porcine model at Emory University Medical School. Positive
results from these models, along with preclinical toxicity safety data, would
justify human clinical trials.
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ORGAN PROTECTION: STROKE. Stroke is one of the top three causes of
death in the U.S., as well as a leading cause of death in many countries
throughout the world. However, mortality rates alone do not represent the
true impact of stroke, as many patients survive stroke with severe, permanent
disability or lesser, but significant, degrees of impairment. There are over
500,000 new stroke victims per year in the U.S. alone.
Stroke is damage to a part of the brain caused by interruption to its
blood supply (ischemic stroke) or leakage of blood outside of vessel walls
(hemorrhagic stroke). There is increasing published evidence that apoptosis
plays an important role in determining the final size of the damaged brain
tissue, or infarct. FDA recently approved the use of new "clot buster" drugs, or
thrombolytics, to treat stroke by dissolving blood clots in the brain. However,
physicians have expressed substantial concern that such drugs may cause harm to
some patients if the drugs are either administered more than a few hours after
the stroke or are administered to patients who have experienced a hemorrhagic
stroke rather than an ischemic one. LXR scientists believe that drugs that could
temporarily block induction of apoptosis could have a beneficial effect in the
final outcome of stroke either as an adjunct therapy with thrombolytics or alone
in cases where the physician may not know either when the stroke occurred or
whether or not it was an ischemic stroke.
LXR is evaluating Elirex in animal models of ischemic stroke with Dr.
Michael Chopp of the Henry Ford Hospital. The Company expects to receive initial
results of these studies by the third quarter 1997. Positive results in these
animal models, along with favorable preclinical toxicity safety data, would
justify clinical evaluation of Elirex.
ORGAN PROTECTION: CARDIOPLEGIA. Cardioplegia is defined as the temporary
electromechanical arrest of the beating heart. Cardioplegic solutions are
routinely infused during open heart surgical procedures to protect the
myocardium from ischemic insult. Several cardioplegic solutions are available to
improve the arrested state; however, LXR scientists believe problems remain with
all solutions currently in use.
As previously discussed, LXR obtained the rights to an experimental
solution called Cardiosol in 1996. In a small physician sponsored study of 95
cardiopulmonary bypass surgeries conducted in 1990, before LXR obtained rights
to the technology, Cardiosol was shown to be safe and effective as a
cardioplegic solution when compared to St. Thomas solution.
LXR expects to file an IND with the FDA to begin clinical evaluation of an
improved derivative formulation of Cardiosol, called CP-Cardiosol, for use as a
cardioplegic solution in open heart surgery, in the third quarter of 1997. In
early 1997, the Company filed patent applications on the improved
CP-Cardiosol technology.
GASTROINTESTINAL DYSFUNCTION PROGRAM. Based upon published results, LXR
believes that premature and inappropriate apoptosis occurs in critical cells of
the small intestine located in the basal crypt epithelial region. This is
encountered in association with the development of AIDS in HIV-positive
individuals and in cancer patients who are receiving chemotherapy and
radiotherapy. These cells are special because they are constantly providing
replacements for cells located on the
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surface structures of the intestinal lining called villi. The villi are
responsible primarily for absorbing nutrients from food material that passes
from the stomach into the small intestine. The consequence of this rapid and
apparently inappropriate death of critical cells is loss of villus integrity,
secondary necrosis, inflammation and general loss of intestinal function.
Clinically this situation appears as severe diarrhea and inability of the
intestinal tract to provide nutrients for the patient, which leads to increased
morbidity and difficulty in treating the patient.
LXR has formulated a highly purified, orally administerable version of
LXR015, named Lexirin, for gastrointestinal disorders. LXR has demonstrated, in
preclinical animal models, that oral administration of Lexirin is capable of
suppressing gastrointestinal dysfunction associated with anti-cancer
chemotherapy. The Company has also completed preclinical toxicological tests of
Lexirin in animal models and believes that the drug may be safe and well
tolerated for human use in the suppression of gastrointestinal dysfunction
associated with severe diarrhea in AIDS and in radiation and chemotherapy
patients. LXR has received patents on Lexirin. LXR recently completed a Phase I
clinical trial of Lexirin in AIDS patients for the treatment of AIDS-related
diarrhea. The final report on the study is expected in the second quarter of
1997. In the third quarter of 1997, LXR expects to request FDA approvals to
begin a Phase I/II clinical trial for suppression of AIDS-related diarrhea and a
Phase I/IIa clinical trial for suppression of chemotherapy and
radiotherapy-induced diarrhea.
METASTATIC CANCER PROGRAM. Breast cancer is a leading cause of mortality
in women. Over the last 20 to 30 years, the incidence of breast cancer has
increased disproportionately relative to other types of cancer. Current
statistics indicate that approximately one in nine women will develop breast
cancer at some point in their lifetimes. In the United States alone,
approximately 175,000 new cases of breast cancer are reported each year and
there is a mortality rate of approximately 45,000 deaths per year. While the
cause of this global cancer epidemic has not been fully identified, it is clear
that worldwide increases in breast cancer rates have occurred during the same
period in which the global environment has become contaminated with industrial
synthetic chemicals.
LXR's metastatic cancer program is focused on a recently discovered
protein known as Maspin (mammary serine proteinase inhibitor),which the Company
has designated LXR023. The patent on Maspin was recently issued and LXR is the
exclusive licensee for use in therapeutics, and co-exclusive licensee for use in
clinical diagnostics, as a metastasis prognostic marker in breast cancer and
other types of highly metastatic tumors such as prostate cancer. Maspin is a
member of a family of onco-suppressors that was identified by Dr. Ruth Sager, a
scientist at Dana-Farber Cancer Institute. Maspin is a naturally occurring
protein produced by normal mammary gland cell and is of particular interest
because Dr. Sager has demonstrated in animal models that genetically engineered
forms of Maspin can bind to invasive and metastatic breast tumor cells and block
their growth throughout the body. Unlike most known onco-suppressors, which
exert their effect only from within the cell, Maspin appears to exert its
activity by binding to the outer surface of cancer cells. This ability makes it
attractive as a potential therapeutic because it could be administered directly
to the patient by conventional means such as orally or by injection, rather
than gene therapy.
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LXR has entered into a letter of intent with Boehringer Mannheim
Corporation pursuant to which LXR is undertaking certain preclinical efficacy
and toxicity studies of Maspin. Based on the results of the studies, which are
expected in the third quarter of 1997, LXR and Boehringer will determine whether
to expand the scope of their collaboration, which could lead to the evaluation
of the Maspin recombinant protein in human clinical trials. Boehringer has no
obligation to continue this project. See "Licenses and Collaborative Research -
Boehringer Mannheim Letter of Intent for Maspin" below.
More recently, the Company believes Dr. Sager's group has shown that
recombinant Maspin protein can also block, in an in vitro assay, the invasive
capacity of a number of prostate cancer cell lines. Based upon this published
data, the Company believes that Maspin may have beneficial effects on the
suppression of prostate tumor metastasis.
SCANNING LASER DIGITAL IMAGING TECHNOLOGY. The recognition that apoptosis
can be modulated has created an increased need for fast computer-controlled
robotic instruments that can perform biological and molecular tests for
apoptosis modulators. In addition, LXR believes that conventional approaches to
optical analysis, which are both tedious and slow, will need to be replaced by
advanced high-speed computer-controlled techniques. Accordingly, through the
acquisition of Optical Analytic, Inc. ("OAI") in 1993, LXR acquired an exclusive
license from Ohio State University to three issued patents covering both the
apparatus and methodology of scanning laser digital imaging technology for the
fast, non-invasive, three-dimensional analysis of tissues and organs. The SLDI
technology utilizes high-speed three-dimensional scanning laser beams that cover
the entire surface of any test material, performing several different
measurements simultaneously at each position. See "Licenses and Collaborative
Research--Ohio State University" below. The laser moves rapidly (in
approximately one millionth of a second) to new positions on the test material
until the entire test area has been analyzed and the measurements have been
stored in the computer. These measurements are then retrieved as digital images
of the expression of genes in tissues and cells. The Company believes that this
technology will enable researchers to perform remote, non-contact measurements
of gene expression in millions of individual cells within a few seconds, which
the Company believes is not possible with any current instrument. The principal
inventor of the SLDI technology is Dr. L. David Tomei, a founder of LXR and its
Chief Executive Officer, who directs the development of prototype instruments.
The Company recently entered into an exclusive license agreement with
Perkin-Elmer to further develop the SLDI technology. In partnership with
Perkin-Elmer, LXR is continuing to design and develop improved instrument
systems and has filed patent applications to protect certain improvements. The
Company believes that SLDI technology will enable the development of instruments
for high-throughput robotic screening for apoptosis modulators. The Company
believes that the SLDI technology also may be capable of detecting extremely
rare events such as the presence of one HIV-infected cell among five million
uninfected cells within five seconds. Because the SLDI technology does not
involve contact with the sample material, it can be used to test for highly
infectious agents without contamination of the instrument. Accordingly, the
Company believes that the SLDI technology may have an important application in
the field of clinical cytometry.
The Company's overall strategy has been to establish an early competitive
advantage based upon the initial exclusive use of SLDI instruments by LXR, and
to generate a longer-term revenue stream from licensing the SLDI technology to
third parties and the sale by LXR of related reagents. The Company believes that
commercial development and sale of SLDI-based instruments by Perkin-Elmer under
the Perkin-Elmer License Agreement will provide future royalty revenues to the
Company. Further, the Company believes that the new generation of fast laser
instruments from Perkin-Elmer will provide the basis for development of new
high-throughput screening systems by the Company which could augment the value
of the Company's OAI subsidiary and provide LXR scientists with a continued
technological advantage in their apoptosis drug discovery and screening efforts.
The Perkin-Elmer License Agreement may be terminated by Perkin-Elmer upon
certain conditions. Also, there can be no assurance that the Perkin-Elmer
collaboration, if continued, will be successful, that the Company will receive
royalties or technological advantages from the collaboration, or that the
collaboration will result in any increase in value of OAI.
RESEARCH PROGRAMS
CARDIAC PROTECTION. Inappropriate apoptosis is particularly damaging in
cell populations that are essential such as nerve cells (neurons) and heart
muscle cells (cardiac myocytes). When these cells die after a stroke or a heart
attack, or through toxic chemical insult such as in chemotherapy, they are
generally replaced by scar tissue, leading to irreversible impairment of organ
function. As described above, the Company believes that it is possible to
protect heart cells from damage using small molecule drugs such as its synthetic
formulation of LXR015 known as Elirex. Pursuant to understanding the mechanism
of action of the Elirex compound, LXR scientists recently published in the
Proceedings of the National Academy of Sciences evidence that they have isolated
and cloned a receptor linked with the apoptosis suppressant action of the agent.
Furthermore, LXR is approaching this problem by using genetic engineering
techniques to identify new drugs that will specifically block the death of heart
cells.
In efforts to discover the genes responsible for control of apoptosis in
cells of heart and other organs, LXR scientists have isolated a gene, designated
Bak (for Bcl-2 homologous antagonist/killer, formerly referred to as Cdi-1),
whose protein product is present in heart, muscle, and brain, and may facilitate
apoptosis of muscle and nerve cells following ischemia or exposure to toxic
drugs. They have also discovered a second gene whose protein product associates
with Bak, designated BBP (for Bak binding protein), through which Bak may exert
its apoptotic effect. Currently, LXR is directing its research in this area to
regulating the expression of levels of Bak in cardiac cells by gene delivery
techniques to assess its role in modulating cell death. LXR scientists have also
developed an assay for monitoring Bak-BBP interactions. This may lead to a
screening method to identify peptides or small molecules that disrupt this
interaction, therefore modulating the apoptotic activity of Bak.
LXR scientists have also shown that several viral proteins interact with
Bak. This is presumably a strategy used by the virus to prevent cell death
following infection, enabling the virus to successfully replicate. Thus, LXR
scientists are also attempting to develop assays for monitoring Bak-viral
protein interactions that could lead to the identity of anti-viral compounds. In
additions, LXR scientists plan to investigate the possibility of treating tumors
by Bak-gene targeted therapy.
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The Company has filed patent applications on the Bak gene and the related
technology. Further, LXR has licensed the Bak reagent technology for marketing
in the research field.
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APOPTOSIS DRUG SCREENING. The key to LXR's drug discovery and development
process is its proprietary apoptosis screening assay ("ASA") that measures the
ability of potential therapeutic agents to suppress or stimulate apoptosis.
Unlike other assays for such a purpose, ASA utilizes an untransformed,
non-tumorigenic cell strain that retains many normal behavioral characteristics,
including the regulation of apoptotic death as well as the control of normal
proliferation and differentiation. The Company believes that assays used by
other researchers utilize tumor cell lines, which are less useful as assays
because they exhibit significantly abnormal or often complete loss of apoptosis
regulation. ASA has been used by LXR to identify its lead drugs, Lexirin for
oral administration, and Elirex for intravenous administration.
As discussed above, LXR scientists have also developed an assay for
monitoring Bak-BBP interactions. This may lead to a screening method to identify
peptides or small molecules that disrupt this interaction, thereby modulating
the apoptotic activity of Bak.
SURROGATE APOPTOSIS MARKER ("SAM") ASSAYS. When cells in the body undergo
normal apoptosis, the breakdown products must be eliminated from the body safely
and efficiently to prevent inflammation and tissue damage. The Company believes
that measurement of the level of apoptosis by-products in the blood or excreted
in urine will be indicative of the level of apoptosis that has occurred in the
body within the previous few hours. Although the Company has substantially
reduced its efforts in this area, it continues limited research to develop
assays for markers that may be related to levels of apoptosis or other
conditions and to seek partners interested in pursuing its SAM assay technology.
Potential applications are discussed below.
It has been known for several years that the primary breakdown products of
the cells are fragments of DNA and crosslinked proteins. However, researchers
could find only minute levels of DNA in the blood, and the crosslinked proteins
were further degraded in the tissues and blood. Apoptosis is also known to
involve extensive protein crosslinking mediated by the appearance of a special
apoptosis-related enzyme called tissue transglutaminase. The Company believes
that this apoptosis waste material is present in blood and urine as molecules
called Isodipeptides ("IDPs"). LXR's SAM assays can rapidly measure the levels
of IDP in human blood or urine samples. Because of the relative ease of
measurement and reliability, the Company has worked to develop the IDP assay as
a clinically relevant test.
Although these assays can be performed using conventional analytical
instruments, the Company has worked to adapt the SAM assay for large-scale
robotic instrumentation. The Company expects that speed, precision and data
control can be significantly improved through the integration of the SAM assay
with LXR's SLDI technology. Furthermore, the Company believes that the IDP SAM
assay may provide oncologists early determinations of the degree of tumor
response shortly after administration of chemotherapeutic drugs or
administration of radiotherapy. Such early measurements are not available by
other conventional methods and may provide important information regarding the
determination of the course of anti-tumor treatment.
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The potential applications of the SAM assays include the following:
Assessment of Anti-Cancer Therapy. The Company believes that the SAM
assays will yield an early indication of tumor response more quickly and
more accurately than current means, because the appearance of IDP in urine
is expected to occur before any measurable changes in actual tumor size.
Heart Attack Assessment. LXR believes that the SAM assays will be
able to test for the appearance of IDP in the blood in order to mark the
earliest onset of apoptosis following a heart attack and may permit
assessment of the degree of cardiac damage in the two to six hours
following a heart attack.
Measurement of Red Blood Cell Production. The Company believes that
determination of IDP specifically from red blood cells could provide a
direct measurement of the amount of new red blood cell production (which
involves apoptosis of the cell nuclei) for conditions involving anemia.
Profile of Cell Death and Tissue Identification. The Company
believes that a profile of total blood IDP can be determined by a
tissue-specific SAM assay that would provide physicians with information
regarding the relative levels of apoptosis in several tissues and organs.
FAS. Another area being investigated by LXR scientists relates to Fas. Fas
is a cell surface apoptosis-signaling glycoprotein on the surface of many cell
types including lymphocytes and cardiac cells. LXR scientists have identified a
splice variant of the Fas gene that encodes a soluble form of Fas, termed
Fas(delta TM), which appears in vitro to interfere with the mechanism of action
responsible for aberrantly high levels of apoptosis in lymphocytes from
HIV-infected AIDS patients. LXR is currently evaluating strategies that could
lead to a clinical candidate in this area.
PRODUCT DEVELOPMENT PLAN
LXR's strategy is to focus on the development of therapeutics for the
treatment of a variety of apoptosis-related disease conditions. LXR has
identified, developed and licensed-in lead compounds targeted at the modulation
of apoptosis. These compounds are currently at various stages of
preclinical/clinical trials and research and development, with near, medium and
long-term target development timelines. The filing of additional IND and IDE
applications with the FDA to commence use of compounds in human clinical trials
will depend on a number of factors including, but not limited to, the results of
the Company's preclinical toxicity and efficacy studies and the availability of
sufficient funding. There can be no assurance that the Company will file such
applications or begin preclinical or clinical trials on any of these compounds
within the Company's targeted time frames, if at all. Although the Company
believes that all of these potential products may have commercial value, the
Company may choose not to develop some or all of these potential products
depending upon the availability of resources, the outcomes of
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preclinical and clinical trials and the relative progress of the Company's
research and development programs.
COMMERCIALIZATION STRATEGY
Given the broad potential applicability of the Company's technology and
product strategies, LXR intends to commercialize its potential products
independently as well as in conjunction with corporate partners, depending upon
the nature of the product and the market into which it might be sold. The
Company intends to seek development partners in areas where clinical development
may be protracted. In such a case, the Company would expect to conduct the
preclinical research to generate lead compounds suitable for clinical
development. Thereafter, in conjunction with selected corporate partners, the
Company would be jointly responsible for the clinical development,
manufacturing, regulatory approval and marketing of the product. In return, LXR
would expect to receive contractor and license fees, royalties or rights to
revenue sharing or cooperative marketing of resulting products. The Company also
intends to seek parties to license or independently develop certain patented
technologies, such as Fas(delta TM) and gingipain for periodontal disease, which
the Company is no longer actively pursuing and does not expect to commercialize
itself.
Recognizing that there are substantial challenges associated with direct
marketing in the pharmaceutical industry, the Company is considering pursuing
direct sales and marketing only in focused markets that are a reasonable size
and where a specialty sales and marketing organization can compete effectively.
Examples of such markets are cardioplegia and heart transplantation, where
therapeutic decisions are controlled by concentrated customers (emergency rooms
and organ transplant centers, respectively) and specific prescribers (emergency
room specialists and cardiothoracic surgeons). However, certain other product
opportunities may address broader markets that will require a substantial
commercialization infrastructure. Early product opportunities in these areas
will make it likely that LXR will seek sales and marketing partners, especially
outside the United States.
The Company conducts significant research and development activities
relating to the following programs: HK-Cardiosol, CP-Cardiosol, LXR015 (Elirex
and Lexirin) and LXR023 (Maspin). The Company continues to support
Perkin-Elmer's efforts to develop the SLDI technology. The Company conducts
limited research and development activities related to Bak, apoptosis drug
screening technologies, serum apoptosis marker assays, and Fas(delta TM).
Research and development expenses include certain employee salaries, clinical
development expenses, cost of acquired technology, laboratory supplies and
equipment, professional fees (including certain legal and consulting fees and
contract research), research facility payments and related expenditures.
Research and development expenses amounted to $5,519,317 and $4,303,661 for
the years ended December 31, 1996 and 1995, respectively. No research and
development expenses were born by third parties other than the National
Institutes of Health, which provided a total of approximately $114,000 in
grant funding in the year ended December 31, 1996.
LICENSES AND COLLABORATIVE RESEARCH
The Company has entered into license agreements and collaborative research
arrangements with a number of universities and research institutions. These
include the following:
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Dana-Farber Cancer Institute
The Company and Dana-Farber Cancer Institute, a teaching affiliate of the
Harvard Medical School, have entered into a license agreement whereby the
Company has obtained the exclusive right and license to make, use and sell
Maspin for therapeutic purposes. The Company has also obtained certain
co-exclusive diagnostic rights. The license pertains to one issued U.S. patent
and two pending US patent applications filed as a result of the work of Dr.
Ruth Sager. This patent and patent application relate to Maspin and a variety
of other genes and their products that are either elevated or suppressed in
breast cancer tissues relative to healthy tissue. See "Product Development
Programs--Metastatic Cancer Program." The Company believes that Maspin, and
possibly other gene products, may be useful in the treatment of metastatic
breast cancer. The license to Maspin includes proprietary DNA and protein
sequences and novel therapeutic uses thereof. The license also provides the
Company with an exclusive option to negotiate a license for the additional
proteins covered by the patent and patent application. Additionally, the
Company provided $200,000 in funding for sponsored research in 1996, and has
the option to acquire an exclusive license for all inventions and discoveries
resulting from this research. The license agreement permits the Company to
enter into sublicensing agreements, subject to sublicensing and royalty fees,
and obligates the Company to diligently pursue commercial development of
licensed products, to make certain milestone payments upon completion of a
successful mid-point review of Phase III clinical trials and upon product
approval in the first of the United States, Japan, Australia, Sweden, the
United Kingdom, France or Germany. The license agreement also requires the
Company to pay all costs relating to the filing, prosecution and maintenance of
patent applications related to Maspin, and to pay a royalty on sales of
licensed products. The license agreement terminates upon the expiration of the
last to expire of the patents covered thereby. As partial consideration for the
license, the Company agreed to pay approximately $10,000 and granted
Dana-Farber Cancer Institute a warrant to purchase 5,000 shares of the
Company's Common Stock at any time prior to May 6, 1999 at an exercise price
per share of $3.15. The license agreement requires the Company to pay a minimum
royalty per year beginning 12 months after the completion of successful Phase
II clinical trials. So long as the Company diligently pursues the commercial
development of licensed products, minimum royalties will be waived until the
successful completion of Phase III clinical trials.
Ohio State University
The Company, through the acquisition of 100% of the outstanding stock of
OAI in December 1993, acquired exclusive license rights in three issued patents
and related technology developed in the laboratory of LXR's Dr. L. David Tomei
while he was a research scientist at Ohio State University. These patents and
technology relate to SLDI, a high resolution, high-throughput system that the
Company will use to automate certain drug screening programs. See "Product
Development Programs--Scanning Laser Digital Imaging Technology" above and
"Licenses and Collaborative Research--Perkin-Elmer License Agreement" below. The
license agreement obligates the Company to make certain royalty payments to the
Ohio State University Research Foundation ("OSURF") upon the sale of any
licensed products but not on the sale of any products developed using the
technology. The Company began paying minimum royalties to OSURF in 1996.
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Perkin-Elmer License Agreement
In August 1996, the Company and OAI entered into an agreement with The
Perkin-Elmer Corporation whereby Perkin-Elmer was granted an exclusive worldwide
license to the patents OAI had licensed from Ohio State University related to
the SLDI microscope, for life sciences and clinical diagnostic applications, for
the life of any of the patent claims. The Company also licensed certain related
software, technical information and rights to ongoing technological
developments. In connection therewith, Perkin-Elmer agreed to (i) make up to
$1.4 million of cash milestone payments to the Company over a three-year period,
(ii) contribute up to $400,000 of equipment to the Company in the future; (iii)
make certain royalty payments (which do not include minimums) to the Company on
any sales of licensed product and (iv) commit certain funds to the development
of products covered by licensed patents. Upon signing of the agreement,
Perkin-Elmer paid the Company $300,000 of the cash milestone payments, which was
included in the Company's revenues as of December 31, 1996.
Boehringer Mannheim Letter of Intent for Maspin
In July 1996, the Company entered into a letter of intent with Boehringer
Mannheim Corporation to jointly evaluate the development of Maspin for the
treatment of cancer (the "Maspin Letter of Intent"). Upon signing the Maspin
Letter of Intent, Boehringer agreed to purchase 37,500 shares of the Company's
common stock at a price of $4.00 per share (for a total of $150,000). Pursuant
to the Maspin Letter of Intent, LXR currently is conducting preclinical efficacy
and toxicity studies of Maspin. If the results of the studies are favorable, it
is contemplated that Boehringer would purchase additional shares of the
Company's common stock at a premium over market price, provide research and
development funding to the Company, and commit internal resources to the
development of Maspin. In addition, the Company would grant Boehringer an option
to acquire an exclusive, worldwide license to the Maspin protein for therapeutic
uses. There can be no assurance that the results of the preclinical testing
undertaken pursuant to the Maspin Letter of Intent will be successful, that
Boehringer will elect to proceed with this project or that the parties will
enter into any additional agreements.
University of Tennessee
In January 1997, the Company entered into a three-year research agreement
with the University of Tennessee and the University of Tennessee Research
Corporation (together, "University of Tennessee") to support research related to
the LPA receptor (the "Tennessee Research Agreement"). The Company agreed to pay
$70,000 per year for three years, with the third year of funding contingent upon
meeting certain milestones. In connection with the Tennessee Research Agreement,
the Company and the University of Tennessee entered into an agreement (the
"Tennessee License Agreement") whereby the University of Tennessee granted the
Company an exclusive, worldwide license, subject to certain exceptions, to
related patent rights and technology. As consideration for the Tennessee License
Agreement, the Company agreed to pay a license issue fee, annual license fee and
royalties. The license fee was waived in consideration for the Company's
research support under the Tennessee Research Agreement.
UAB Research Foundation
Based on an assessment of the Company's proprietary position with respect
to Fas(deltaTM), in March 1997, the Company gave the UAB Research Foundation
("UAB") a 60 day notice of its intention to terminate the Company's agreement
with UAB (the "UAB License Agreement"), pursuant to which the Company has an
exclusive worldwide license to rights UAB may have to Fas(deltaTM).
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Patents and Proprietary Technology
As of December 31, 1996, the Company owned two issued United States
patents, one covering the original Cardiosol technology and one related to
Lexirin. In addition, the Company owned five allowed U.S. patent applications
related to Lexirin, one pending U.S. patent application related to Elirex,
three pending U.S. patent applications relating to improved components of the
SLDI technology and two allowed and ten pending U.S. patent applications
related to Bak/BPP, Fas(deltaTM) and other research projects. In some cases,
the Company also owned multiple corresponding foreign patent applications.
Subsequent to December 31, 1996, the Company filed seven U.S. patent
applications, two covering improved formulations of Cardiosol, three related to
Elirex and two related to Bak/BPP.
Under license agreements and collaborative research arrangements with a
number of universities and research institutions, the Company has obtained
exclusive licenses (or options therefor) under five issued United States
patents (three relating to SLDI, one relating to Maspin and one relating to
gingipain) and twelve pending United States and foreign patent applications, to
technology covered in whole or in part by the claims in such patents and
pending patent applications. See "Licenses and Collaborative Research." These
licenses require the Company to pay royalties on sales, if any, of patented
inventions relating to licensed technologies and also require the Company to
make certain milestone payments. In some instances, the Company is responsible
for the costs relating to patent application filing and prosecution. The
Company anticipates that it will continue to obtain licenses from universities
and other research institutions where applicable technology complements its
research programs.
The Company intends to seek patent protection aggressively for its
potential products and key technologies and their use to modulate apoptosis and
treat other disorders. The Company also intends to seek patent protection or
rely upon trade secret rights to protect certain other enabling technologies
that will be used in discovering and evaluating new drugs which could become
marketable products. Finally, the Company intends to continue to seek patent
protection in areas that complement the Company's existing portfolio and may
provide future licensing opportunities for the Company. However, there can be
no assurance as to the breadth or the degree of protection that any of the
Company's patents, if issued, will afford the Company, that the Company will
choose to prosecute to allowance all of its pending patent applications or
maintain all of the patents now owned or licensed by the Company, or that the
Company will be able to license to others any of the patents or patent
applications it owns or has licensed. Subsequent to December 31, 1996, the
Company made a strategic decision not to continue to prosecute four pending
U.S. patent applications and certain related foreign patent applications either
owned by or exclusively licensed to the Company. These included pending patent
applications related to Fas(deltaTM), pollen protease, LXR017 (a small molecule
drug no longer pursued by the Company) and a diagnostic technology. The
Company has also given UAB notice of its intention to terminate the UAB License
Agreement related to Fas(deltaTM).
The Company's success depends on its ability to obtain patents, to protect
trade secrets, to operate without infringing upon the proprietary rights of
others and to prevent others from infringing on the proprietary rights of the
Company. A substantial number of patents have been applied for by and issued to
other pharmaceutical, biotechnology and biopharmaceutical companies, and other
companies may have filed applications for, may have been issued patents or may
obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company.
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The patent position of biotechnology firms generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. There is a substantial backlog of biotechnology patent
applications at the USPTO, and no consistent policy has emerged from the USPTO
and the courts regarding the breadth of claims allowed or the degree of
protection afforded under biotechnology patents. Additionally, the USPTO may
request data demonstrating efficacy of potential therapeutic agents. The need to
provide such data, if required, could delay or adversely affect the Company's
ability to obtain patent protection for any of its potential products. There can
be no assurance that any patent applications relating to the Company's potential
products or processes will result in patents being issued, or that the resulting
patents, if any, will provide protection against competitors who successfully
challenge the Company's patents, obtain patents that may have an adverse effect
on the Company's ability to conduct business, or are able to circumvent the
Company's patent position. It is possible that other parties have conducted
research and made discoveries of compounds or processes that preceded the
Company's discoveries, which could prevent the Company from obtaining patent
protection of these discoveries. The Company is aware of two cases where other
parties have published papers on subjects with respect to which the Company has
claims in pending patent applications. In April 1995, the Company and two other
scientific groups simultaneously published (in separate articles) the sequence
of the Bak gene. In July 1995, a third party published a paper regarding
Fas(delta TM). Although the Company believes that the priority dates of its
patent applications relating to Bak and Fas(delta TM) are prior to the dates on
which these other parties made their discoveries, there can be no assurance of
this. Thus, the impact of the work done by these parties and possibly other
parties cannot be assessed. Finally, there can be no assurance that others will
not independently develop pharmaceutical products similar to or obsoleting those
under development by the Company, or duplicate any of the Company's products.
The Company's competitive position is also dependent upon unpatented trade
secrets. The Company is developing a substantial database of information
concerning its research and development. The Company has taken security measures
to protect its data and is in the process of exploring ways to enhance further
the security for its data. However, trade secrets are difficult to protect.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. In an effort to protect its trade secrets, the Company has a
policy of requiring its employees, consultants and advisors to execute
proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of their relationship with the Company must be kept
confidential, except in specified circumstances. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets or other proprietary information in the event of
unauthorized use or disclosure of confidential information. Invention assignment
agreements executed by consultants and advisors may conflict with, or be subject
to, the rights of third parties with whom such individuals have employment or
consulting relationships.
The Company may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands and more patents are
issued, the risk increases that the
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Company's potential products may give rise to claims that they infringe the
patents of others. No assurance can be given that any licenses required under
any such patents or proprietary rights would be made available on terms
acceptable to the Company. If the Company does not obtain such licenses, it
could encounter delays in product market introductions while it attempts to
design around such patents, or could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others, and could result in substantial costs to and diversion of effort by, and
may have a material adverse impact on, the Company. In addition, there can be no
assurance that these efforts by the Company will be successful.
REGULATORY MATTERS
Regulation by governmental authorities in the United States, the State of
California and other countries will be a significant factor in the production
and marketing of any pharmaceutical or diagnostic product or other medical
device that may be developed by the Company or a licensee of the Company. The
nature of and extent to which such regulation may apply to the Company will vary
depending on the nature of any such products. The Company's or its licensees'
potential products will require regulatory approval by governmental agencies
prior to export/import, labeling, investigation, registration and
commercialization. In particular, human medical products are subject to rigorous
preclinical and clinical testing and other approval procedures by the FDA in the
United States and similar health authorities in foreign countries. Various
federal and, in some cases, state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, distribution, record
keeping and marketing of such products, including the use, manufacture, storage,
handling and disposal of hazardous materials and certain waste products. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations will require the
expenditure of substantial resources.
In order to test clinically, produce, market, import or export products
for diagnostic or therapeutic use, a company must comply with mandatory
procedures and safety standards established by the FDA and comparable agencies
in foreign countries. Before beginning human clinical testing, a company must
file an IND application for drugs or biologics, or an IDE application for a
medical device, and receive clearance from the FDA to begin such testing. These
applications are a summary of the preclinical studies carried out to
characterize the drug or device and its manufacturing process, including
toxicity and safety, as well as an in-depth discussion of the human clinical
studies that are being proposed.
The human clinical testing program required for approval by the FDA of an
investigational new drug typically involves a time-consuming and costly
three-phase process. In Phase I, clinical trials are conducted with a small
number of patients afflicted with a targeted disease or healthy volunteers to
determine the early safety profile, the pattern of drug distribution and
metabolism. Phase II clinical trials are conducted with groups of patients
afflicted with a target disease in order to determine preliminary efficacy,
optimal dosage and expanded evidence of safety. In Phase III, large scale,
multi-center, comparative clinical trials are conducted with patients afflicted
with a
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<PAGE> 23
target disease in order to provide enough data for statistical proof of efficacy
and safety required by the FDA and others.
The FDA closely monitors the progress of each of the three phases of
clinical testing and may, at its discretion, re-evaluate, alter, suspend or
terminate the testing based on the data which have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient. Typical
estimates of the total time required for completing such clinical testing vary
between four and ten years. Upon successful completion of clinical testing of a
new drug, a company typically submits a New Drug Application ("NDA"), or Product
and Establishment License Application ("PLA/ELA") for biological drugs, to the
FDA summarizing the results and observations of the drugs during the clinical
trials. Based on its review of the NDA or PLA/ELA, the FDA will decide whether
or not to approve the drug. This review process usually takes a year or more,
and approval may not be granted at all or the Company may be asked to perform
additional clinical studies before the FDA can grant approval. As a result, the
process of seeking and obtaining approval for the production and marketing of a
new pharmaceutical product can require a number of years and substantial
funding. There can be no assurance that any approvals will be granted on a
timely basis, if at all, or that the FDA may not require additional clinical
trials.
Certain products that the Company may pursue, such as HK-Cardiosol for use
as a preservation solution in organ transplantation and products based on the
SAM technology, are regulated as medical devices. Medical devices may be subject
to one of two marketing approval procedures, either a 510(k) pre-market
notification or a Pre-Market Approval ("PMA") application. For a 510(k), the
Company must demonstrate that its product is "substantially equivalent" in
intended use and performance characteristics to a predicate device that is
currently marketed under a 510(k) or was marketed before 1976 and is not subject
to PMA requirements. A 510(k) frequently requires human clinical data to
demonstrate that its performance characteristics are substantially equivalent to
those of the predicate device. The Company must therefore perform clinical
studies of its products, which may take as long as six months to several years
to complete. The criteria for PMA approval are similar to those applied to
approval of an NDA for a pharmaceutical product in that the Company would need
to submit data from multiple human clinical trials and other data demonstrating
that its product is able to safely and effectively diagnose the diseases or
conditions that it is intended to diagnose or otherwise safely and effectively
perform its specified function. In many cases, the clearance of a 510(k) is a
faster process, usually requiring less clinical data than a PMA. However, there
can be no assurance that any future potential medical device products that the
Company develops will qualify for a 510(k) clearance. It is more likely that
PMAs will be required for some or all of the Company's proposed device products.
Furthermore, use of in vitro diagnostic assays and test systems is
regulated under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA").
Under CLIA, diagnostic assays or systems must be classified by complexity level,
and use of such diagnostics is limited to those facilities that have been
certified or accredited for using diagnostics of the same or higher level of
complexity. Successful marketing of the Company's in vitro diagnostic products
may depend on the products being certified at specific complexity levels, such
as low or moderate complexity versus high complexity. The inability of the
Company to obtain lower complexity
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<PAGE> 24
level designations for its products may impair the successful marketing of the
Company's in vitro diagnostic products.
Once the sale of a product is approved, FDA regulations govern the
production process, labeling, promotion and marketing activities. A
post-marketing testing, surveillance and reporting program may be required to
continuously monitor the product's usage within its intended uses and effects.
Product approvals may be withdrawn, or other actions may be ordered by the FDA
if compliance with regulatory standards and cleared intended uses are not
maintained. Other countries in which any products developed by the Company or
its licensees may be marketed impose a similar regulatory process.
For marketing outside the United States, the Company will also be subject
to foreign regulatory requirements governing human clinical trials,
manufacturing and marketing approval for drugs and other medical products. The
regulatory requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
Additionally, if the manufacturing facility for a product is located in
California, the facility will be subject to registration with and periodic
inspection by the Food and Drug branch of the California Department of Health
Services.
The Company's research and development processes involve the controlled
use of hazardous and radioactive materials. The Company is subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposing of such materials and certain waste products. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company. Although the Company believes that it is in
compliance in all material respects with applicable environmental laws and
regulations and currently does not expect to make material capital expenditures
for environmental control facilities in the near-term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.
COMPETITION
Competition in the field of biotechnology is intense and is expected to
increase. Many companies, including biotechnology, pharmaceutical and nutrition
companies, are actively engaged in the research and development of products in
the Company's targeted areas, including the treatment of heart attack, stroke
and metastatic cancers. Additionally, as the importance of apoptosis becomes
increasingly recognized, increasing numbers of companies are devoting
significant resources to understanding and developing products based on or
related to apoptosis. Many of these companies have substantially greater
financial, technical and marketing resources than the Company. In addition,
unlike the Company, some of them have considerable experience in preclinical
testing, human clinical trials and other regulatory approval procedures.
Moreover,
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<PAGE> 25
certain academic institutions, governmental agencies and other research
organizations are conducting research in areas in which the Company is working.
These institutions are becoming increasingly aware of the commercial value of
their findings and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for the use of technology that their
scientists have developed. These institutions may also market competitive
commercial products on their own or through joint ventures and compete with the
Company in recruiting highly qualified scientific personnel.
The Company is pursuing areas of product development in a relatively new
field in which there is a potential for extensive technological innovation in
relatively short periods of time. The Company's competitors may succeed in
developing technologies or products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's technology or proposed products becoming obsolete or noncompetitive.
HUMAN RESOURCES
As of December 31, 1996, the Company employed a total of 50 employees,
including 46 full-time employees, 16 of whom hold Ph.D. degrees. Most of these
employees are actively engaged in research and development activities. The
Company's employees are not represented by any collective bargaining unit, and
the Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTIES
In August 1996, the Company amended its lease agreement for laboratory and
office space located in Richmond, California, near San Francisco, to add
approximately 4,100 square feet and extend the term through 2010. Accordingly,
as of December 31, 1996, the Company leases approximately 32,800 square feet of
laboratory and office space under a lease terminating June 30, 2010. Monthly
rent payments are $24,603 through March 1, 1997, increase to $26,243 through
June 30, 2002 and then increase to $32,804 beginning July 1, 2002, through the
end of the lease term. The Company believes that these facilities should be
sufficient to meet its needs through 1997. In 1997, the Company expects to
construct and equip a small GMP manufacturing facility at the Richmond site to
produce product for clinical trials. See "Plan of Operations: Research and
Development Plans."
ITEM 3. LEGAL PROCEEDINGS
The Company and five of its past and present directors and officers are
named as defendants in Katz vs. Blech, 95 Civ. 7215 (S.D.N.Y.) ("Katz") and
Degulis vs. LXR Biotechnology Inc., et al., 95 Civ. 4204 (S.D.N.Y.)
("Degulis"). One of the five, Mark Germain, the former Chairman of the Company
and a former managing director of D. Blech & Company, Incorporated, the
underwriter for the Company ("D. Blech & Co."), is named as a defendant in the
above two cases and also in In re Blech Securities Litigation, 94 Civ. 7696
(S.D.N.Y.) ("In re Blech"). In addition, L. Scott Minick, a former director
and former officer of the Company; James D. Coombs, a former director and
former officer, and Mark J. Tomei, a director and former officer, are
defendants in Katz and Degulis; and Christopher Henney, a former director,
is a defendant in Katz. The Company was previously named as a defendant in In
re Blech, but was dismissed by the Court on June 6, 1996.
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<PAGE> 26
All three cases are brought on behalf of classes of persons purchasing
common shares of the Company prior to September 21, 1994, and assert claims
arising out of the Company's initial public offering ("IPO") and subsequent
trading of those shares. The suits allege violations of Sections 11 and 12 of
the Securities Act of 1933, as amended (the "Securities Act") and Sections
10(b) and 20 of the Securities Exchange Act of 1934, including
misrepresentations and omissions in connection with the IPO and manipulation
of share prices. The suits also allege common law claims for fraud and deceit
and seek punitive damages. The complaints allege that defendants, including
the Company and the defendant directors and officers, failed to disclose in
securities filings connected with the IPO the leveraged financial condition of
the Company's underwriter, D. Blech & Co., and its principal, David Blech. The
suits further allege that defendants failed to disclose that D. Blech & Co.
would act as principal market maker for the Company's shares following the IPO,
and that D. Blech & Co.'s extended financial commitments would effect its
ability to maintain a market for the Company's shares. The suits also allege
that defendants assisted or acquiesced in a post-offering scheme to manipulate
the market for the Company's shares and artificially inflate share prices.
Under the Company's bylaws, individual agreements, and state law, the
Company's current and former directors and officers may have certain rights to
indemnification and defense costs in the event they are named in litigation.
Four individual defendants in Katz and/or Degulis have submitted claims for
indemnity and advancement of defense costs, and the Company has agreed to
advance defense costs and indemnify those individuals to the extent permitted by
law. In addition, on February 12, 1997, the Company authorized advancement of
costs for Mr. Germain's defense in the Katz and Degulis actions (but not In re
Blech), subject to an undertaking to repay those amounts in the event it is
later determined that he is not entitled to indemnity. A demand by the
independent underwriter for contractual indemnity has been denied. Such denial
is subject to contest by the underwriter. The Company and the underwriter have
entered into a tolling agreement whereby the Company agreed that the running of
any statute of limitations applicable to claims of the underwriter against the
Company would be tolled until the earlier of June 30, 1997 and the termination
of the tolling agreement.
None of the complaints in Katz, Degulis or In re Blech states a claim
for a specific amount of monetary damages. The complaint in In re Blech seeks
damages and interest as provided by law, costs and expenses of litigation,
attorneys fees, expert fees, other costs and disbursements, and such other
relief as may be just and proper. The complaint in Katz seeks rescission, an
award of compensatory damages, fees costs and expenses including expert fees,
and such other relief as the court deems proper. The complaint in Degulis seeks
compensatory damages including rescissionary damages, interest, punitive
damages, counsel fees and other costs of suit, a constructive trust over the
proceeds of the offering, and such other and further relief as the Court deems
just and proper.
The Company's primary level directors and officers liability insurance
carrier has tentatively agreed to provide coverage for reasonable attorneys fees
in the defense of the four current and former directors and/or officers
referenced above, but the carrier has refused to provide indemnity or defense
costs for the Company. The Company and the carrier have entered into an
allocation agreement whereby 83% of the defense costs related to the Katz and
Degulis actions (not including any defense costs incurred by Mr. Germain) will
be borne by the carrier, with the remaining 17% to be borne by the Company. The
carrier is not obligated to make any payments until a $250,000 deductible
(applicable to all covered claims, in the aggregate) under the policy is
exhausted. No agreement exists between the Company and the carrier with respect
to coverage for Mr. Germain's defense, or for the Company with respect to
defense costs incurred in In re Blech prior to its dismissal from that action.
The extent to which costs of defending the litigation will ultimately be covered
by insurance is not yet known. The extent to which insurance would cover any
settlement or judgment has not been determined and may not be determined until
the litigation is completed.
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<PAGE> 27
The Company denies any wrongdoing and is defending the above cases
vigorously. While an adverse judgment or settlement could have a material
adverse effect on the Company, the early stage of the litigation, uncertainty as
to whether any material judgment or settlement will result, and the possibility
that some portion of any settlement or judgment may be covered by insurance,
make it impossible to predict at this time whether the litigation will have a
material adverse financial impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The names of the executive officers of the Company and certain information
about them are set forth below:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE
OFFICER AGE PRINCIPAL OCCUPATION
------- --- --------------------
<S> <C> <C>
L. David Tomei 51 Chief Executive Officer
Donald H. Picker 51 President & Chief Operating Officer
Mark J. Tomei 40 Chief Financial Officer and Secretary
Shelli J. Geer 32 Vice President, Finance and
Administration
Ian C. Bathurst 47 Vice President, Manufacturing & Process
Development
Michael C. Kiefer 44 Vice President, Molecular Biology
Samuil R. Umansky 55 Vice President, Molecular Pharmacology
</TABLE>
L. David Tomei, Ph.D. has been Chief Executive Officer of the Company
since November 1995 and a director since January 1996. Dr. Tomei was President
of the Company from November 1995 until October 1996 and Acting President and
Chief Executive Officer of the Company from July 1995 until November 1995. Dr.
Tomei served as Executive Vice President, Cell Biology of the Company since
September 1992, and was a director of the Company from October 1992 until April
1993. Before joining the Company, Dr. Tomei was a research scientist at Ohio
State University from September 1981 until October 1992. Dr. Tomei's research
has focused primarily in the area of apoptosis. Dr. Tomei was the first to
publish that apoptosis could be blocked by drugs and has edited two books and
organized two international scientific conferences on apoptosis. Dr. Tomei has
published over 90 scientific articles in the field of biology and optical
engineering and has been granted four patents. Dr. Tomei received a B.S. in
biology and philosophy from Canisius College, an M.S. in biochemistry from the
State University of New York, Roswell Park Memorial Institute Division, and a
Ph.D. in biochemical pharmacology from the State University of New York at
Buffalo. He is the brother of Mark J. Tomei.
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<PAGE> 28
Donald H. Picker, Ph.D. has been the Company's President and Chief
Operating Officer since October 1996. Dr. Picker was Chief Operating Officer of
Corvas International, Inc., a biotechnology company, from March 1996 to June
1996. Prior to that, Dr. Picker served as Senior Vice President, Research &
Development, at Genta, Inc., an antisense technology company, from November 1991
to February 1996. Dr. Picker also held a senior management position at Johnson
Matthey, Inc., a biopharmaceutical company, from 1983 to 1991. Dr. Picker
received a B.S. in chemistry from Brooklyn Polytechnic Institute and a Ph.D. in
organic chemistry from the State University of New York at Albany. Dr. Picker
played a major role in the development of Paraplatin(TM), currently one of the
world's leading anti-cancer drugs, and has been involved in bringing many other
drugs from the research laboratory into clinical development and to the market,.
Dr. Picker has also been involved with filing numerous INDs and running multiple
clinical trials of products in different stages of development.
Mark J. Tomei has been Chief Financial Officer of the Company since April
1993 and Secretary and a director of the Company since September 1992. Mr. Tomei
was also Chairman of the Board of Directors of the Company from September 1992
until December 1993, and Chief Operating Officer of the Company from December
1993 until October 1996. Mr. Tomei has been a Senior Vice President of
Prudential Securities Inc., an investment banking and brokerage firm, from May
1989 through January 1994. In that capacity, Mr. Tomei has served as a member of
an investment team managing a portfolio in excess of $1 billion. Mr. Tomei
continues to be employed by Prudential Securities Inc. and acts as a consultant
to the Company in his capacity as a director and officer. Mr. Tomei has a B.S.
in business administration from the State University of New York at Buffalo. He
is the brother of L. David Tomei.
Shelli J. Geer was appointed the Company's Vice President, Finance and
Administration in October 1996. Ms. Geer had been the Company's Controller since
September 1994. Prior to joining the Company, Ms. Geer was an accountant with
KPMG Peat Marwick LLP since July 1988, most recently as Audit Manager. Ms. Geer
received a B.S. in Business Administration from California State University at
Chico and is a Certified Public Accountant in the State of California.
Ian C. Bathurst, Ph.D., was appointed Vice-President of Manufacturing and
Process Development and Regulatory and Clinical Affairs Coordinator of the
Company in January 1996. From September 1992 to January 1996, Dr. Bathurst
served as Director of Protein Chemistry at the Company. Prior to joining the
Company, Dr. Bathurst was a Senior Scientist at Chiron from February 1986 until
August 1992. During his tenure at Chiron, Dr. Bathurst was instrumental in the
production of a number of biopharmaceuticals that were introduced into human
clinical trials. Dr. Bathurst has published over 50 scientific articles in the
field of clinical protease inhibition, and in the biotechnology and immunology
of infectious diseases. Dr. Bathurst received his Ph.D. at the University of
London and was Scientific Officer at Christchurch Clinical School of Medicine,
New Zealand.
Michael C. Kiefer, Ph.D., was appointed Vice-President of Molecular
Biology of the Company in January 1996. He served as Senior Scientist of the
Company from March 1993 to February 1995 and as a Director of Molecular Biology
from March 1995 to January 1996. Prior to joining the Company, Dr. Kiefer was a
Senior Scientist at Chiron where he worked on the
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<PAGE> 29
molecular biology of bone growth and differentiation factors and related
processes from July 1987 to March 1993. Dr. Kiefer has published over 60
articles in the area of molecular biology. Dr. Kiefer received a B.S. in zoology
and a Ph.D. in biochemistry from the University of California at Davis.
Samuil R. Umansky, M.D., Ph.D., D.Sc., was appointed Vice-President of
Molecular Pharmacology in January 1996. From February 1993 to January 1996, he
served as Director of Cell Biology. Prior to joining the Company, Dr. Umansky
was a professor at the Institute of Biological Physics, the USSR Academy of
Science from 1968 to 1993. In 1987, Dr. Umansky was awarded the Soviet State
Prize for his work in the field of radiation treatment induced cell death and is
recognized internationally for his research on apoptosis. He is a founder of the
USSR Radiobiological Society and a member of the Radiological Scientific Council
of the USSR Academy of Sciences. Dr. Umansky has published numerous articles in
both Soviet and Western journals, including the first description of
apoptosis-related DNA fragmentation. Dr. Umansky holds an M.D., a Ph.D., and a
Doctorate of Science in radiation biology from the highest committee of
Attestation of Scientists, awarded on the basis of his studies at the Institute
of Biological Physics, the USSR Academy of Science.
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<PAGE> 30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information for Common Stock
The Company's common stock is traded on the American Stock Exchange. The
following table reflects the range of high and low sales prices of the Company's
common stock for the four quarters in each of 1995 and 1996. This information is
based on closing prices as reported by the American Stock Exchange.
<TABLE>
<CAPTION>
1995
--------------------
HIGH LOW
---- ---
<S> <C> <C>
First Quarter.......... $1.125 $0.75
Second Quarter......... $2.50 $1.00
Third Quarter.......... $3.00 $1.5625
Fourth Quarter......... $2.1875 $1.25
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------
HIGH LOW
---- ---
<S> <C> <C>
First Quarter.......... $7.875 $1.75
Second Quarter......... $6.75 $3.75
Third Quarter.......... $4.3125 $2.125
Fourth Quarter......... $2.6875 $2.0625
</TABLE>
- ------------
Recent Sales of Unregistered Securities
In December 1996, the Company sold 5,201,350 shares of its common stock at
a price of $2.00 per share in a private placement. The total offering price was
approximately $10.4 million. The Company also issued an additional 534,385
shares of common stock at a price of $1.84 per share and warrants to purchase up
to 458,858 shares of common stock at an exercise price of $2.20 per share, to
the placement agents as consideration for services rendered in connection with
the private placement.
The shares sold in the private placement were offered and sold to a
limited number of domestic and foreign accredited investors without registration
under the Securities Act, in reliance upon the exemptions provided by Section
4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated by the
Securities and Exchange Commission thereunder. Such shares were also offered and
sold in reliance upon exemptions from registration or qualification under
certain state securities laws.
The shares issued in the private placement, the shares issuable upon
exercise of the warrants issued to the placement agents and certain other
securities of the Company were registered for resale on a registration statement
on Form S-3 that was declared effective on February 6, 1997.
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<PAGE> 31
Holders
As of March 6, 1997 there were approximately 304 stockholders of record of
the Company's common stock.
Dividends
The Company has neither declared nor paid cash dividends on its common
stock in the past. The Company intends to retain future earnings, if any, for
the development of its business and, therefore, does not anticipate that it will
declare or pay cash dividends on its common stock in the foreseeable future.
ITEM 6. PLAN OF OPERATIONS
The following Plan of Operations contains forward looking statements
regarding, among other things, product development and effectiveness, corporate
partnering, capital and other expenditures, timing of FDA filings, FDA approval
thereof and clinical trial progress, sufficiency of cash resources and the
ability of the Company to raise additional funding. These forward looking
statements concern matters that involve risks and uncertainties that could cause
actual results to differ materially from those projected in the forward looking
statements. Words such as "believe," "expects," "likely," "may" and "plans" are
intended to identify forward looking statements, although not all forward
looking statements contain these words. For a discussion of certain of these
risks and uncertainties, please see "Factors Affecting Future Results" below.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company funded its operations, repaid certain short-term
borrowings and paid certain accrued liabilities primarily from approximately
$8.6 million in net proceeds from the sale of 7,360,000 shares of the Company's
common stock at a price of $1.25 per share in a private placement in January
1996. (See Note 5 of the Consolidated Financial Statements included under Item 8
of this report.) The Company also received approximately $114,000 in government
grant revenues and $300,000 in license fee revenue from Perkin-Elmer pursuant to
the Perkin-Elmer License Agreement. In addition, the Company sold a Scanning
Laser Digital Imaging prototype to Perkin-Elmer for $150,000. However, since the
cost of constructing the prototype was included in research and development
costs of previous periods, the selling price of the prototype was recorded as a
reduction of research and development costs for 1996 rather than revenue.
In December 1996, the Company sold 5,201,350 shares of common stock in a
private placement at a price of $2.00 per share, for net proceeds of
approximately $10.1 million. (See Note 5 of the Consolidated Financial
Statements included under Item 8 of this report.) The proceeds have been
invested in short-term interest bearing investments.
As of December 31, 1996, the Company's sources of capital consist of
approximately (i) $11.5 million in cash, short-term interest bearing investments
and a private placement receivable, (ii) interest from investments, (iii) a
commitment from Boehringer to purchase $150,000 in shares
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<PAGE> 32
of common stock pursuant to the Maspin Letter of Intent, and (iv) payments
anticipated under the Perkin-Elmer License Agreement. In addition,
during 1997 the Company expects to obtain capital lease financing of
approximately $700,000 in connection with the construction of the Company's
pilot manufacturing facility and to receive approximately $70,000 in grant
revenue. The Company believes these resources are sufficient to fund the
Company's operations through 1997. However, there can be no assurance that
unanticipated events affecting the Company's resources will not result in the
Company depleting its funds before that time. See "Factors Affecting Future
Results - Future Capital Needs; Uncertainty of Future Funding."
The Company and five of its past or present directors and officers are
defendants in class action lawsuits. See Item 3. Legal Proceedings. The Company
maintains officers and directors liability insurance under policies providing
aggregate coverage totaling $3 million, which cover (i) the Company for amounts
spent indemnifying directors and officers or (ii) directors and officers
directly if the Company fails to indemnify them. The policies do not provide
coverage to the Company itself with respect to its own defense costs and
liability. The Company and its insurance carriers are currently involved in
disputes relating to the deductibles and exclusions under the policies. Whether
or to what extent insurance covers any settlement or judgment in the above
litigation will depend on the outcome of the disputes. As a result, the Company
cannot predict, at this time, the amount of any insurance reimbursement that
will be obtained. For the years December 31, 1996 and 1995, the Company incurred
expenses of approximately $111,000 and $39,000, respectively, relating to this
litigation. To date the Company has received no reimbursement for these
expenses. The failure of the Company to obtain reimbursement for the amounts
spend defending the indemnified defendants, along with the Company's own defense
costs and any judgment or settlement payable by the Company could have a
material adverse effect on the Company's cash flows, results of operations and
financial condition.
The Company does not have any committed sources of future equity or debt
funding, other than the commitment from Boehringer to purchase $150,000 of
additional shares of common stock referred to above. Accordingly, the Company
will need to raise substantial additional capital to fund its operations,
including the development of its lead compounds, beyond 1997. Although the
Company is currently expending significant efforts to obtain the additional
funding necessary to fund the Company's operations beyond 1997, there can be no
assurance that additional funding will be available on favorable terms, if at
all. Failure to raise additional funds in the relatively near future will have a
material adverse effect on the Company.
RESEARCH AND DEVELOPMENT PLANS
The Company's overall level of research and development expenditures are
expected to increase significantly over the next twelve months in order
to continue the Company's research and development programs for Cardiosol,
Lexirin, Elirex, Maspin, and SLDI, to fund possible clinical trials of Lexirin,
HK-Cardiosol and CP-Cardiosol, and to support limited research in areas such as
Bak and Fas(deltaTM).
A final report on the results of the Company's Phase I clinical trial of
Lexirin for the suppression of severe diarrhea associated with the pathogenesis
of AIDS is expected in the second quarter of 1997. If the results of the study
are favorable, the Company intends to request FDA approval to commence a Phase
I/II trial for the suppression of diarrhea in AIDS patients and a Phase I/IIa
trial for the suppression of chemotherapy induced diarrhea by the end of the
third quarter of 1997.
The Company is focusing its research and development efforts relating to
the suppression of apoptosis in the heart on the Cardiosol technology. The
Company plans to file an IDE with the FDA to begin clinical studies of
HK-Cardiosol for heart preservation in transplant patients by the end of the
third quarter of 1997. The Company also plans to file an IND with the FDA to
begin clinical studies of CP-Cardiosol as a cardioplegic solution by the end of
the third quarter of 1997.
The Company currently is conducting preclinical studies of Elirex in
animals for ischemic heart attack, stroke and liver transplantation. During
1997, the Company expects to evaluate the results of the preclinical data and
determine whether to file an IND to commence clinical studies and/or to pursue
collaborative partnerships for further research and development of Elirex.
Pursuant to the Maspin Letter of Intent, the Company and Boehringer
currently are conducting preclinical studies to assess the efficacy and
toxicity of Maspin. Based on the results of the studies, which are expected in
the third quarter of 1997, the Company and Boehringer will
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<PAGE> 33
determine whether to proceed with further research and development efforts.
However, Boehringer has no obligation to proceed with the project.
The Company expects to continue to support Perkin-Elmer's efforts to
develop the SLDI technology.
The Company plans to seek additional corporate partners for its research
and development activities. However, there can be no assurance that the Company
will be able to secure any new corporate partner relationships. In addition to
the studies mentioned above, the Company expects to fund research at the
University of Tennessee relating to lysophosphatidic acid ("LPA") technology
during 1997, and may enter into research relationships with other universities
and research institutions. The Company also regularly evaluates the possibility
of licensing or otherwise acquiring technologies from third parties.
There can be no assurance that the Phase I clinical trial results of
Lexirin will be favorable, that the FDA will permit the Company to undertake
additional clinical trials of Lexirin or begin clinical trials of HK-Cardiosol
or CP-Cardiosol, that the pre-clinical trial results of Elirex or Maspin will
support further research and development or the commencement of clinical trials,
that the Company will have sufficient funding to conduct additional clinical
trials, or that the results of any such clinical trials will be favorable. See
"Factors Affecting Future Results - Early Stage of Development; Regulatory and
Technological Uncertainties."
As of December 31, 1996, the Company employed 50 employees, including
46 full-time employees. During 1997, the Company expects to increase its
number of employees to approximately 60 to support the Company's increased
research and development efforts and expanding manufacturing and clinical
trial activities. Subsequent to December 31, 1996, the Company hired a
Director of Regulatory Affairs, a Director of Analytical Chemistry and Quality
Assurance/Quality Control and an Intellectual Property Attorney. Further
increases in employees may occur if the Company undertakes additional clinical
studies.
The Company's capital expenditures increased to approximately $183,000 in
1996 from approximately $55,000 in 1995. The 1996 expenditures were primarily
for laboratory equipment, computer equipment and office furniture. In 1996, the
Company amended the terms of its laboratory and office lease to extend the term
and add approximately 4,100 square feet of space. The additional space is
expected to be used for the Company's expanding clinical trial activities and
new pilot GMP manufacturing facility for producing materials for clinical
trials. During 1997, the Company estimates the total cost of constructing and
equipping the new GMP manufacturing facility will be approximately $800,000 to
$1,000,000. The Company currently is negotiating a capital lease line for
approximately $700,000 to finance a portion of this construction, as well as
the purchase of manufacturing and other laboratory equipment related thereto.
However, there is no assurance that the lease line will be available to the
Company on favorable terms or at all.
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<PAGE> 34
FACTORS AFFECTING FUTURE RESULTS
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
LXR is at an early stage of development. Other than the SLDI microscope, a
prototype of which was sold to Perkin-Elmer, all of the Company's potential
pharmaceutical and medical device products are currently in research and
development, and no revenues from the sale of such potential products have been
generated to date. Substantially all of the Company's resources have been and
for the foreseeable future will continue to be dedicated to the Company's
research programs and the development of potential pharmaceutical and medical
device products emanating therefrom. There can be no assurance that the Company
will be able to develop a commercial product from these projects. The Company is
awaiting final results of a Phase I clinical trial of its Lexirin drug
candidate, which began in August 1996. All of the Company's other drug and
medical device candidates are in preclinical development. While the Company
believes that the results attained to date in such preclinical studies support
further research and development of these potential products, results attained
in preclinical studies are not necessarily indicative of results that will be
obtained in human clinical testing. Additionally, the Company has not previously
met its forecasted schedule for introducing products into clinical trials.
The potential pharmaceutical products currently under development by the
Company will require significant additional research and development and
preclinical testing and will require extensive clinical testing prior to
submission of any regulatory application for commercial use. The Company's
potential pharmaceutical products are subject to the risks of failure inherent
in the development of pharmaceutical products based on new technologies. These
risks include the possibilities that the Company's novel approach to diagnosis
and therapy will not be successful; that any or all of the Company's potential
pharmaceutical products will be found to be unsafe, ineffective or toxic, or
otherwise fail to receive necessary regulatory clearances; that the products, if
safe and effective, will be difficult to manufacture on a large scale or
uneconomical to market; that proprietary rights of third parties will preclude
the Company from marketing such products; or that third parties will market
superior or equivalent products. As a result, there can be no assurance that the
Company's research and development activities will result in any commercially
viable pharmaceutical products.
The Company's product development efforts are based on the novel
scientific approach of therapeutic apoptosis modulation, which has not been
widely studied. There is, therefore, substantial risk that this approach will
not prove to be successful. Moreover, the Company is applying this novel
approach to discover new treatments for a variety of diseases that are also the
subject of research and development efforts by other companies. Biotechnology is
a relatively new field in which there is a potential for extensive technological
innovation in relatively short periods of time. The Company's competitors may
succeed in developing technologies or products that are more effective than
those of the Company. Rapid technological change or developments by others may
result in the Company's technology or proposed products becoming obsolete or
noncompetitive.
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<PAGE> 35
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funds to continue the
research and development programs and preclinical and clinical testing of its
potential pharmaceutical and medical device products and conduct marketing of
any products that may be developed. The Company's capital requirements depend on
numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, the cost of obtaining technological rights, competing technological and
market developments, changes in the Company's existing research relationships,
the ability of the Company to establish collaborative arrangements, the
development of commercialization activities and arrangements, the cost of
constructing and equipping the Company's pilot manufacturing facility, the cost
of purchasing additional capital equipment, and legal expenses incurred in
connection with defending certain lawsuits that have been brought against the
Company (described above in Item 3). Based upon its current plans, the Company
believes it has sufficient funds to meet the Company's operating expenses and
capital requirements through the end of 1997. However, there can be no assurance
that unanticipated changes or other events affecting the Company's operating
expenses will not result in the expenditure of proceeds before the estimated
time.
The Company will need to raise substantial additional capital to fund its
operations, including the development of its lead compounds. The Company intends
to seek such additional funding through public or private financings and/or
collaborative or other arrangements with corporate partners. There can be no
assurance, however, that additional funding will be available from any of these
sources, or if available, will be available on acceptable terms. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate one or more of its research and development programs, including but
not limited to the development of its lead compounds. If the Company raises
additional funds through public or private financings, such financings may
result in substantial dilution to the Company's stockholders. In 1996, the
Company issued a total of approximately 15 million shares and warrants therefor
(or approximately 62% of the Company's total current outstanding stock, assuming
all shares underlying warrants and other rights are outstanding) to raise needed
funds. If the Company is able to enter into corporate partnerships to obtain
funds, such arrangements will require the Company to relinquish rights to
certain of its technologies or potential products that the Company would not
otherwise relinquish. Failure to obtain additional funds will have a material
adverse effect on the Company's operations.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred significant operating losses since its inception
in 1992. At December 31, 1996, the Company had an accumulated deficit of
approximately $23.5 million. The Company will be required to conduct significant
research, development, testing and regulatory compliance activities that,
together with projected general and administrative expenses, are expected to
result in significant operating losses for at least the next several years.
Revenues, if any, that the Company may receive in the next few years will be
limited to payments anticipated from Perkin-Elmer under the Perkin-Elmer License
Agreement, payments from Boehringer under
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<PAGE> 36
the Maspin Letter of Intent, revenues from grants currently awarded to the
Company and which may be awarded to the Company in the future, payments under
research or product development relationships that the Company may hereafter
establish, payments under license agreements that the Company may hereafter
establish, sales of products that the Company may acquire in the future, and
interest payments. There can be no assurance, however, that the Company will (i)
receive any additional funds under the Perkin-Elmer Agreement, as Perkin-Elmer
may terminate such agreement at any time in its discretion, (ii) be successful
in its collaboration with Boehringer or that such relationship will be expanded
beyond its current very limited scope, (iii) be able to establish any additional
relationships, (iv) enter into any license agreements, or (v) acquire any
products in the future. The Company's ability to achieve profitability depends
upon its ability successfully to complete either alone or with others,
development of its potential products, conduct clinical trials, obtain required
regulatory approvals, and manufacture and market its products or to enter into
license agreements on acceptable terms. The Company may never achieve
significant revenue or profitable operations.
DEPENDENCE ON OTHERS; COLLABORATIONS
The Company's strategy for the research, development and commercialization
of its potential products may require the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others, in addition to those already established, and the Company may therefore
be dependent upon the subsequent success of outside parties in performing their
responsibilities. For example, the Company has provided Perkin-Elmer with
significant exclusive rights to its SLDI product, and is dependent on
Perkin-Elmer to satisfactorily commercialize such product so that the Company
will receive remuneration for its efforts in this area. There can be no
assurance that Perkin-Elmer's efforts to commercialize this product will be
successful, or that the Company will receive any such remuneration. There can
also be no assurance that the Company will be able to establish additional
collaborative arrangements or license agreements to develop and commercialize
its potential products, or that any of its collaborative arrangements or license
agreements will be successful. Moreover, certain of the collaborative
arrangements that the Company may enter into in the future may place
responsibility for preclinical testing and human clinical trials and for
preparing and submitting applications for regulatory approval for potential
products on the collaborative partner. Should a collaborative partner fail to
develop or commercialize successfully any potential product to which it has
rights, the Company's business may be adversely affected. In addition, there can
be no assurance that collaborators will not be pursuing alternative technologies
or developing products either on their own or in collaboration with others,
including the Company's competitors, as a means for developing treatments for
the diseases or disorders targeted by such partners' collaborative programs with
the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 6, 1997, the Company had 21,817,675 shares of common stock
outstanding. Pursuant to a registration statement on Form S-3 that became
effective on May 8, 1996 (the "1996 Registration Statement"), 10,756,992 of the
Company's outstanding shares and 1,079,847 shares issuable upon the exercise of
then-outstanding warrants were registered for public resale. In addition,
pursuant to a registration statement on Form S-3 that became effective on
February 6, 1997 (the "1997 Registration Statement"), 5,810,735 of the Company's
then-outstanding shares
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<PAGE> 37
and 693,895 shares issuable upon exercise of then-outstanding warrants and other
rights were registered for public resale. The holders of the shares referred to
above may sell such shares publicly at any time in their sole discretion,
subject to certain limited exceptions, most notably that approximately 2,160,992
of such shares are subject to the market standoff described below.
The Company believes that, as of March 6, 1997, a total of approximately
4,216,755 shares have been sold under the 1996 Registration Statement and a
total of approximately 85,674 shares have been sold under the 1997 Registration
Statement.
As of March 6, 1997, certain holders of the Company's securities were
parties to market standoff agreements with respect to approximately 3,568,065
shares of Common Stock and/or options therefor, whereby they have agreed not to
sell any such securities until after February 1, 1998 without the prior written
consent of Sunrise Securities Corp. (the "Standoff"). This restriction may be
released at any time in the sole discretion of Sunrise Securities Corp.
The aforementioned 12,265,298 outstanding shares registered but not resold
under the 1996 and 1997 Registration Statements as of March 6, 1997 are equal to
approximately 50% of the Company's currently outstanding common stock. Since the
Company's stock has historically had a low trading volume, the sale of
additional shares on the open market under the 1996 and 1997 Registration
Statements, upon release of the Standoff or otherwise could have a material
adverse effect on the market price of the Company's common stock. Additionally,
future sales of the Company's Common Stock by the Company's stockholders under
Rule 144 of the Securities Act, or otherwise, could also have a material adverse
effect on the price of the Company's common stock.
MANUFACTURING LIMITATIONS
Although the Company has received general approval from local authorities
to undertake manufacturing, it currently does not have the capability to
manufacture products under the Good Manufacturing Practices ("GMP") requirements
prescribed by the FDA.
In 1997, the Company expects to construct and equip a pilot manufacturing
facility at its Richmond site to manufacture, package, label and distribute
products for clinical trials and possibly for limited production of selected
commercial products in the future. Once completed, the Company's new
manufacturing facility must pass a pre-approval plant inspection before the FDA
will issue a pre-market approval or product and establishment license, where
applicable, for any investigational or commercial product. The Company will also
be required to obtain a license from the State of California, which license will
be issued only if the Company is in compliance with GMP regulations and has a
qualified person supervising the facility, as determined by an inspection
conducted by the State of California.
The Company has no experience in designing, constructing and equipping a
manufacturing facility or in manufacturing pharmaceutical products or medical
devices in clinical quantities or for commercial purposes. There can be no
assurance that the pilot manufacturing facility will be completed on schedule or
within budget or that, once completed, the facility will be in compliance with
the FDA, State of California and local regulations. Also, there can be no
assurance that the Company will be able to manufacture any products consistent
with the Company's specifications
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<PAGE> 38
and in continuing compliance with the GMP regulations or in a commercially
cost-effective manner. If the Company is unable to manufacture in compliance
with GMPs or contract for a sufficient supply of its potential products on
acceptable terms, the Company's preclinical and human clinical testing schedule
may be delayed, resulting in delayed submission of products for premarket
regulatory approval and initiation of new development programs. Also, the
Company may not be able to commercialize its products as planned. Such results
would have a material adverse effect on the Company.
Even if the Company is successful in independently producing some of its
potential products for clinical trials and/or limited commercial distribution,
the Company also expects to establish arrangements with contract manufacturers
to supply sufficient quantities of other products for clinical trials as well as
to manufacture, package, label and distribute finished products if other such
potential products are approved for commercialization. If the Company chooses to
contract for manufacturing services for a product for any reason and encounters
delays or difficulties in establishing relationships with manufacturers, market
introduction and subsequent sales of such product would be adversely affected.
Moreover, contract manufacturers that the Company may use must be in compliance
with the FDA GMP regulations and other applicable state and local regulatory
requirements. Contract manufacturers are subject to similar risks regarding
delays or difficulties encountered in manufacturing any such products as
described for the Company above. The Company's potential dependence upon third
parties to manufacture and distribute its products may adversely affect the
Company's profit margins and its ability to develop and deliver such products on
a timely and competitive basis.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by Item 7 are set
forth below on pages F-1 through F-26 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 39
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The section entitled "Proposal No. 1 - Election of Directors" appearing in
the Company's proxy statement for the 1997 annual meeting of stockholders sets
forth certain information with respect to the directors of the Company and is
incorporated herein by reference.
Certain information with respect to the executive officers of the Company
is incorporated herein by reference from Item 4A of this Report appearing on
page 27.
The section entitled "Compliance under Section 16(a) of the Securities
Exchange Act of 1934" appearing in the Company's proxy statement for the 1997
annual meeting of stockholders sets forth the information concerning compliance
by officers, directors and 10% stockholders of the Company with Section 16 of
the Exchange Act and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Company's
proxy statement for the 1997 annual meeting of stockholders sets forth certain
information with respect to the compensation of management of the Company and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's proxy statement for the 1997 annual
meeting of stockholders sets forth certain information with respect to the
ownership of the Company's common stock and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Company's
proxy statement for the 1997 annual meeting of stockholders sets forth certain
information with respect to certain business relationships and transactions
between the Company and its directors, officers and principal stockholders and
is incorporated herein by reference.
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<PAGE> 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are attached hereto or incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
3.01 Company's Certificate of Incorporation. (Incorporated by reference
to Exhibit Number 3.01 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
3.02 Company's Bylaws. (Incorporated by reference to Exhibit Number 3.02
to the Company's Registration Statement on Form S-1 (File No.
33-72814) declared effective by the Securities and Exchange
Commission on May 6, 1994 (the "Form S-1"))
3.03 Amendment to the Company's Certificate of Incorporation.
(Incorporated by reference to Exhibit Number 3.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
4.01 Form of Specimen Certificate for Company's Common Stock.
(Incorporated by reference to Exhibit Number 4.01 to the Form S-1)
*10.01 1993 Stock Option Plan, as amended to date, and related Stock
Option Agreement and Exercise Agreement. (Incorporated by reference
to Exhibit Number 10.01 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
*10.02 1993 Directors' Stock Option Plan and related Stock Option
Agreement and Exercise Agreement. (Incorporated by reference to
Exhibit Number 10.02 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996)
10.03 Sublease for Building C of Marina Bay Business Park, 1401 Marina Way
South, Richmond, California 94804 dated August 19, 1993 between the
Company and Quick Response Services, Inc. (Incorporated by reference
to Exhibit Number 10.03 to the Form S-1)
10.04 Owner Consent and Agreement among the Company, Schooner Drive
Associates and Quick Response Services, Inc. (Incorporated by
reference to Exhibit Number 10.04 to the Form S-1)
*10.05 Form of Indemnification Agreement entered or to be entered into
between the Company and each of the Company's officers and
directors. (Incorporated by reference to Exhibit Number 10.05 to the
Form S-1)
</TABLE>
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<PAGE> 41
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
*10.06 Form of Employment and Proprietary Information Agreement as entered
into between the Company and each of L. Scott Minick, Mark J. Tomei,
Philip J. Barr, Ph.D., and L. David Tomei, Ph.D. (Incorporated by
reference to Exhibit Number 10.06 to the Form S-1)
10.07 Master Lease Agreement dated May 26, 1993 and Equipment Financing
Agreement dated May 26, 1993, both between the Company and Lease
Management Services, Inc., and related documents. (Incorporated by
reference to Exhibit Number 10.08 to the Form S-1)
10.08 Series A Preferred Stock Purchase Agreement dated February 19, 1993
between the Company and certain of its stockholders, as amended.
(Incorporated by reference to Exhibit Number 10.09 to the Form S-1)
10.09 Investors Rights Agreement dated February 19, 1993 between the
Company and certain of its stockholders, as amended. (Incorporated
by reference to Exhibit Number 10.10 to Amendment No. 1 to the Form
S-1 filed with the Securities and Exchange Commission on December
22, 1993)
10.10 Letter agreement dated January 20, 1993 between the Company and D.
Blech & Company, Incorporated (the "Underwriter") regarding the
Company's retention of the Underwriter as a consultant.
(Incorporated by reference to Exhibit Number 10.11 to the Form S-1)
10.11 Letter agreement dated January 22, 1993 and letter agreement dated
May 20, 1993, between the Company and David Blech, regarding (i) the
sale of equity securities to designees of David Blech, (ii)
composition of the Company's Board of Directors and (iii) future
financing of the Registrant. (Incorporated by reference to Exhibit
Number 10.12 to the Form S-1)
10.12 License Agreement dated August 16, 1991, and amended May 18, 1993
and November 29, 1993, among Optical Analytic, Inc., The Ohio State
Research Foundation and The Ohio State University, and related
documents. (Incorporated by reference to Exhibit Number 10.14 to the
Form S-1)
**10.13 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.15 to the Form S-1)
**10.14 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.16 to the Form S-1)
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
**10.15 Licensing Agreement dated June 15, 1993 between the Company and
Dana-Farber Cancer Institute. (Incorporated by reference to Exhibit
Number 10.17 to the Form S-1)
**10.16 Research Support Agreement dated November 1, 1993 between the
Company and Dana Farber Cancer Institute. (Incorporated by reference
to Exhibit Number 10.18 to the Form S-1)
**10.17 Licensing Agreement dated June 21, 1994 between the Company and
UAB Research Foundation. (Incorporated by reference to Exhibit
Number 10.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994)
10.18 Agreement for Purchase and Sale of Shares dated November 29, 1993
among the Company and William K. Root, F. David Resch and James M.
McCormick. (Incorporated by reference to Exhibit Number 10.20 to the
Form S-1)
10.19 Agreement for Purchase and Sale of Shares dated November 29, 1993
between the Company and L. David Tomei. (Incorporated by reference
to Exhibit Number 10.21 to the Form S-1)
10.20 Agreement for Purchase and Sale of Shares dated December 7, 1993
between the Company and Gregory J. Bergman. (Incorporated by
reference to Exhibit Number 10.22 to the Form S-1)
10.21 Agreement Between Owner and Design/Builder dated September 15, 1993
between the Company and Devcon Inc. (Incorporated by reference to
Exhibit Number 10.23 to the Form S-1)
10.22 Form of Warrant Agreement among the Company and the Underwriter.
(Incorporated by reference to Exhibit Number 10.24 to the Form S-1)
10.23 Form of Indemnity Agreement among the Company, Shoenberg, Hieber
Inc. and the Underwriter. (Incorporated by reference to Exhibit
Number 10.29 to Amendment No. 5 to the Form S-1)
10.24 Warrant Agreement between the Company and Dana Farber Cancer
Institute. (Incorporated by reference to Exhibit Number 10.32 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994)
10.25 Sales Agency Agreement dated December 31, 1995 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
Number 1.02 to the Company's Current Report on Form 8-K dated
January 9, 1996 (the "January 1996 Form 8-K"))
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
10.26 Share Purchase Warrant of the Company. (Incorporated by reference to
Exhibit Number 4.02 to the January 1996 Form 8-K)
10.27 Registration Rights Agreement dated January 9, 1996. (Incorporated
by reference to Exhibit Number 4.03 to the January 1996 Form 8-K)
10.28 Registration Rights Agreement dated January 9, 1996 between the
Company and Biotechnology Investment Group L.L.C. (Incorporated by
reference to Exhibit Number 10.28 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995)
10.29 First Amendment to Sublease for Building C of Marina Bay Business
Park, 1401 Marina Way South, Richmond, California 94804 dated August
5, 1996 between the Company and Marina Westshore Partners.
(Incorporated by reference to Exhibit Number 10.29 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1996 (the "September 1996 Form 10-QSB"))
10.30 Patent and Technology Transfer and Stock Purchase Agreement dated as
of August 8, 1996 among the Company, Geoffrey M. Collins and Winston
M. Wicomb. (Incorporated by reference to Exhibit Number 10.30 to the
September 1996 Form 10-QSB)
10.31 Amendment effective as of July 10, 1996 to the License Agreement
among Optical Analytic, Inc., The Ohio State Research Foundation and
The Ohio State University. (Incorporated by reference to Exhibit
Number 10.31 to the September 1996 Form 10-QSB)
10.32 Amendment effective as of August 27, 1996 to the License Agreement
among Optical Analytic Inc., The Ohio State Research Foundation and
The Ohio State University. (Incorporated by reference to Exhibit
Number 10.32 to the September 1996 Form 10-QSB)
**10.33 License Agreement among the Company, on behalf of itself and
Optical Analytic, Inc., its wholly owned subsidiary, and The
Perkin-Elmer Corporation, dated as of August 29, 1996. (Incorporated
by reference to Exhibit Number 10.33 to the September 1996 Form
10-QSB)
*10.34 President and Chief Operating Officer Letter Agreement dated
September 24, 1996. (Incorporated by reference to Exhibit Number
10.34 to the September 1996 Form 10-QSB)
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
10.35 Sales Agency Agreement dated December 11, 1996 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
No. 1.03 to the Company's Current Report on Form 8-K dated January
31, 1997 (the "January 1997 Form 8-K"))
10.36 Form of Share Purchase Warrant of the Company (Incorporated by
reference to Exhibit No. 4.04 to the January 1997 Form 8-K)
10.37 Form of Registration Rights Agreement dated December 11, 1996.
(Incorporated by reference to Exhibit No. 4.05 to the January 1997
Form 8-K)
10.37 Form of Registration Rights Agreement dated December 12, 1996.
(Incorporated by reference to Exhibit No. 4.06 to the January 1997
Form 8-K)
11.01 Statement regarding computation of net loss per share.
21.01 Subsidiaries of the Company. (Incorporated by reference to Exhibit
Number 21.01 to the Form S-1)
23.01 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27.01 Financial Data Schedule.
</TABLE>
* Represents a management contract or compensatory plan or arrangement.
** Confidential treatment has been granted with respect to certain portions
of this document.
(b) Reports on Form 8-K.
On December 16, 1996, the Company filed a report on Form 8-K reporting the
first closing of its December 1996 private placement.
With the exception of the information incorporated herein by reference to
the Company's proxy statement for the 1997 annual meeting of stockholders in
Items 9, 10, 11 and 12 of Part III, the Proxy Statement is not deemed to be
filed with this Report.
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<PAGE> 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
-F1-
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LXR Biotechnology Inc.:
We have audited the accompanying consolidated balance sheets of LXR
Biotechnology Inc. and subsidiary (the Company), a development stage enterprise,
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1996, and for the period from April
20, 1992 (date of incorporation) through December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LXR Biotechnology
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, and for the period from April 20, 1992 (date of
incorporation) through December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
San Francisco, California
February 26, 1997
F-2
<PAGE> 47
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,217,203 $ 68,245
Prepaid expenses 98,881 183,691
Private placement receivable 1,278,700 --
Other receivables 39,500 33,355
---------- ----------
Total current assets 11,634,284 285,291
Equipment and leasehold improvements, net 592,093 890,468
Notes receivable from related parties 160,000 --
Deposits and other assets 32,315 232,138
---------- ---------
Total assets $ 12,418,692 $1,407,897
========== ==========
Liabilities and Stockholders' Equity
- ---------------------------------------
(Deficit)
- ---------
Current liabilities:
Accounts payable $ 324,606 $ 422,255
Accrued expenses 584,049 403,157
Deferred rent obligation 259,975 160,076
Short-term borrowings from related parties -- 600,000
Short-term portion of obligations under
capital leases -- 223,420
----------- -----------
Total current liabilities 1,168,630 1,808,908
Obligations under capital leases, excluding
short-term portion --
183,540
--------- ---------
Total liabilities 1,168,630 1,992,448
--------- ---------
Commitments and contingencies (notes 4, 5, 10,
11, 13, 14, and 16)
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 5,000,000
shares authorized; none issued or
outstanding -- --
Common stock, $0.0001 par value; 45,000,000
shares authorized; 21,924,687 and
7,725,403 shares issued and outstanding in
1996 and 1995, respectively 2,163 773
Common stock subscribed; 187,500 shares in
1996 and none in 1995 19 --
Additional paid-in capital 34,778,774 15,396,249
Notes receivable from stockholders -- (79,000)
Deficit accumulated during the development
stage (23,515,719) (15,892,720)
Treasury stock, at cost; 182,012 and 128,978
shares in 1996 and 1995, respectively (15,175) (9,853)
--------- ----------
Total stockholders' equity (deficit) 11,250,062 (584,551)
--------- ----------
Total liabilities and stockholders'
equity (deficit) $ 12,418,692 $ 1,407,897
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 48
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
April 20, 1992
(date of
Years ended incorporation)
December 31, through
------------------------------------------ December 31,
1996 1995 1994 1996
<S> <C> <C> <C> <C>
Revenues:
Grant revenue $ 114,396 $ -- $ -- $ 114,396
License fee revenue 300,000 -- -- 300,000
------------ ----------- ----------- ------------
Total revenues 414,396 -- -- 414,396
------------ ----------- ----------- ------------
Research and development 5,519,317 4,303,661 4,254,635 16,908,707
General and administrative 2,702,390 2,012,017 1,767,340 7,267,444
------------ ----------- ----------- ------------
Total expenses 8,221,707 6,315,678 6,021,975 24,176,151
------------ ----------- ----------- ------------
Loss from operations (7,807,311) (6,315,678) (6,021,975) (23,761,755)
------------ ----------- ----------- ------------
Interest income, net:
Interest income 244,476 89,127 265,231 605,458
Interest expense (58,564) (88,596) (155,997) (354,617)
------------ ----------- ----------- ------------
Interest income, net 185,912 531 109,234 250,841
------------ ----------- ----------- ------------
Loss before income
taxes (7,621,399) (6,315,147) (5,912,741) (23,510,914)
Income taxes 1,600 800 800 4,800
------------ ----------- ----------- ------------
Net loss $ (7,622,999) $(6,315,947) $(5,913,541) $(23,515,714)
============ =========== =========== ============
Net loss per share $ (.48) $ (.84) $ (.94)
============ ============ ============
Weighted average shares used to
compute net loss per share 15,815,495 7,513,541 6,267,407
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 49
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
April 20, 1992 (date of incorporation) through December 31, 1996
<TABLE>
<CAPTION>
Common stock
Preferred stock Common stock Subscribed Notes
------------------- -------------- ------------- Additional receivable
Shares Shares paid-in from
Issued Amount Issued Amount Shares Amount capital stockholders
------ ------ ------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock -- $ -- 758,333 $ 76 -- $ -- $113,674 $(91,000)
Issuance of Series A preferred stock 1,059,000 10,590 -- -- -- -- 518,910 --
Net loss -- -- -- -- -- -- -- --
--------- -------- --------- ------ ----- ----- -------- --------
Balances as of December 31, 1992 1,059,000 10,590 758,333 76 -- -- 632,584 (91,000)
Issuance of Series A preferred stock 191,000 1,910 -- -- -- -- 93,590 --
Issuance of 2% common stock dividend -- -- 15,167 1 -- -- 4 --
Conversion of Series A preferred
stock to common stock (1,250,000) (12,500) 625,000 63 -- -- 12,437 --
Issuance of common stock per
agreement with D. Blech and
others -- -- 2,000,000 200 -- -- 400 --
Issuance of common stock -- -- 551,650 55 -- -- 16,495 (16,385)
Forgiveness of notes receivable
from stockholders -- -- -- -- -- -- -- 16,385
Issuance of stock warrants -- -- -- -- -- -- 10,500 --
Net loss -- -- -- -- -- -- -- --
--------- -------- --------- ------ ----- ----- -------- --------
Balances as of December 31, 1993 -- -- 3,950,150 395 -- -- 766,010 (91,000)
Issuance of common stock -- -- 2,875,000 288 -- -- 10,921,607 --
Conversion of note payable to D
Blech and others into common
stock -- -- 798,778 80 -- -- 3,594,420 --
Payment of notes receivable and
repurchase of common stock -- -- -- -- -- -- -- 10,743
Net loss -- -- -- -- -- -- -- --
--------- -------- --------- ------ ----- ----- -------- --------
Balances as of December 31, 1994 -- -- 7,623,928 763 -- -- 15,282,037 (80,257)
Issuance of common stock -- -- 100,000 10 -- -- 114,168 --
Payment of notes receivable -- -- -- -- -- -- -- 1,257
Stock options exercised -- -- 1,475 -- -- -- 44 --
Net loss -- -- -- -- -- -- -- --
--------- -------- --------- ------ ----- ----- -------- --------
Balances as of December 31, 1995 -- -- 7,725,403 773 -- -- 15,396,249 (79,000)
Private placement of common stock
(net of issuance costs) -- -- 8,096,000 810 -- -- 8,630,157 --
Stock options exercised -- -- 10,169 1 -- -- 1,798 --
Repurchase of common stock -- -- -- -- -- -- -- 3,812
Warrant exercised -- -- 319,880 1 -- -- 19,504 --
Acquisition of Cardiosol technology -- -- 37,500 4 187,500 19 576,540 --
Issuance of warrant -- -- -- -- -- -- 6,572 --
Cancellation of notes receivable
from stockholders -- -- -- -- -- -- -- 75,188
Private placement of common stock
(net of issuance costs) -- -- 5,735,735 574 -- -- 10,116,079 --
Stock options granted -- -- -- -- -- -- 31,875 --
Net loss -- -- -- -- -- -- -- --
--------- -------- --------- ------ ----- ----- -------- --------
Balances as of December 31, 1996 -- $ -- 21,924,687 $2,163 187,500 $ 19 $34,778,774 $ --
========= ======== ========== ====== ======= ====== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Deficit Total
accumulated Treasury Stock stock-
during the ---------------------- holders'
development Shares equity
stage repurchased Amount (deficit)
-------------- ----------- ------ ---------
<S> <C> <C> <C> <C>
Issuance of common stock $ -- -- $ -- $ 22,750
Issuance of Series A preferred stock -- -- -- 529,500
Net loss (222,213) -- -- (222,213)
----------- ---------- -------- -----------
Balances as of December 31, 1992 (222,213) -- -- 330,037
Issuance of Series A preferred stock -- -- -- 95,500
Issuance of 2% common stock dividend (5) -- -- --
Conversion of Series A preferred
stock to common stock -- -- --
Issuance of common stock per
agreement with D. Blech and
others -- -- -- 600
Issuance of common stock -- -- -- 165
Forgiveness of notes receivable
from stockholders -- -- -- 16,385
Issuance of stock warrants -- -- -- 10,500
Net loss (3,441,014) -- -- (3,441,014)
----------- ---------- -------- -----------
Balances as of December 31, 1993 (3,663,232) -- -- (2,987,827)
Issuance of common stock -- -- -- 10,921,895
Conversion of note payable to D
Blech and others into common
stock -- -- -- 3,594,500
Payment of notes receivable and
repurchase of common stock -- (128,978) (9,853) 890
Net loss (5,913,541) -- -- (5,913,541)
----------- ---------- -------- -----------
Balances as of December 31, 1994 (9,576,773) (128,978) (9,853) 5,615,917
Issuance of common stock -- -- -- 114,178
Payment of notes receivable -- -- -- 1,257
Stock options exercised -- -- -- 44
Net loss (6,315,947) -- -- (6,315,947)
----------- ---------- -------- -----------
Balances as of December 31, 1995 (15,892,720) (128,978) (9,853) (584,551)
Private placement of common stock
(net of issuance costs) -- -- -- 8,630,967
Stock options exercised -- -- -- 1,799
Repurchase of common stock -- (53,034) (5,322) (1,510)
Warrant exercised -- -- -- 19,505
Acquisition of Cardiosol technology -- -- -- 576,563
Issuance of warrant -- -- -- 6,572
Cancellation of notes receivable
from stockholders -- -- -- 75,188
Private placement of common stock
(net of issuance costs) -- -- -- 10,116,653
Stock options granted -- -- -- 31,875
Net loss (7,622,999) -- -- (7,622,999)
----------- ---------- -------- -----------
Balances as of December 31, 1996 $(23,515,719) (182,012) $ (15,175) $ 11,250,062
============ ========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 50
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
April 20, 1992
(date of
Years ended incorporation)
December 31, through
------------------------------------------ December 31,
1996 1995 1994 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,622,999) $(6,315,947) $ (5,913,541) $(23,515,714)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 275,140 291,181 255,693 909,852
Amortization 215,029 248,861 245,576 760,526
Amortization of discount on
investments -- (22,568) (67,282) (89,850)
Loss on disposal of assets -- -- -- 4,076
Cancellation of notes
receivable from stockholders 75,188 -- -- 91,573
Cost of acquired research and
development related to OAI
acquisition in exchange for
note receivable -- -- -- 106,111
Cost of acquired technology
related to Cardiosol in
exchange for common stock 576,563 -- -- 576,563
Stock warrant obligation
incurred as partial
consideration for consulting
services 6,572 -- -- 6,572
Stock warrant issued as
partial consideration for
licensing agreement -- -- -- 10,500
Stock options granted 31,875 -- -- 31,875
Changes in operating assets
and liabilities:
Prepaid expenses and other
receivables 78,665 (32,666) 164,953 (137,751)
Deposits and other assets 190,823 -- (170,921) (71,945)
Accounts payable (97,649) 199,793 (572,656) 324,606
Accrued expenses and deferred
rent obligation 280,791 156,775 (264,992) 844,024
------------ ----------- ------------ ------------
Net cash used in operating
activities (5,990,002) (5,474,571) (6,323,170) (20,148,982)
------------ ----------- ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- (3,910,150) (3,910,150)
Purchase of equipment and
leasehold improvements (182,794) (55,045) (285,774) (1,451,034)
Proceeds from maturity of
investments -- 3,000,000 1,000,000 4,000,000
Loans to related parties (160,000) -- -- (160,000)
------------ ----------- ------------ ------------
Net cash provided by (used
in) investing activities (342,794) 2,944,955 (3,195,924) (1,521,184)
------------ ----------- ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common
stock 17,468,920 114,178 10,921,895 29,153,508
Proceeds from notes payable to
related parties -- 600,000 1,434,500 4,694,500
Proceeds from line of credit -- -- 375,000 375,000
Repayment of notes payable and
line of credit (600,000) -- (981,111) (1,581,111)
Principal payments for
obligations under capital lease (406,960) (189,282) (160,416) (776,513)
Payments received for notes
receivable from stockholders -- 1,257 890 2,147
Net proceeds from exercise of
stock options 1,799 44 -- 1,843
Repurchase of common stock (1,510) -- -- (1,510)
Proceeds from exercise of warrants 19,505 -- -- 19,505
------------ ----------- ------------ ------------
Net cash provided by
financing activities 16,481,754 526,197 11,590,758 31,887,369
------------ ----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents 10,148,958 (2,003,419) 2,071,664 10,217,203
Cash and cash equivalents at
beginning of period 68,245 2,071,664 -- --
------------ ----------- ------------ ------------
Cash and cash equivalents at end of
period $ 10,217,203 $ 68,245 $ 2,071,664 $ 10,217,203
============ =========== ============ ============
</TABLE>
(Continued)
F-6
<PAGE> 51
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
April 20, 1992
(date of
Years ended incorporation)
December 31, through
------------------------------- December 31,
1996 1995 1994 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid for income taxes $ 1,600 $ 1,000 $ 800 $ 4,200
=========== ======= ========== ==========
Cash paid for interest $ 68,890 $78,270 $ 199,170 $ 355,139
=========== ======= ========== ==========
Noncash investing and financing activities:
Common stock issued in exchange
for notes receivable from
stockholders $ -- $ -- $ -- $ 107,385
=========== ======= ========== ==========
Equipment purchased under
capital lease obligation $ -- $ -- $ 339,645 $ 855,022
=========== ======= ========== ==========
Stock dividend $ -- $ -- $ -- $ 5
=========== ======= ========== ==========
Common stock issued in exchange
for note payable to D. Blech
and others $ -- $ -- $3,594,500 $3,594,500
=========== ======= ========== ==========
Repurchase of common stock in
exchange for notes receivable
from stockholders $ 3,812 $ -- $ 9,853 $ 13,665
=========== ======= ========== ==========
Receivable for common stock
issued in Private Placement $ 1,278,700 $ -- $ -- $1,278,700
=========== ======= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 52
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
LXR Biotechnology Inc. (the Company) is a biopharmaceutical company
developing novel classes of therapeutics to treat diseases by controlling
the process of programmed cell death known as apoptosis. The initial
targets of the Company's therapeutic research and development program are
ischemic organ damage, heart disease, gastrointestinal dysfunction, breast
cancer, and immunosuppression-related diseases. The Company was founded and
incorporated in Delaware in April 1992.
The Company commenced operations in September 1992 and since that time has
been engaged principally in organizational activities, obtaining financing,
acquiring technology, research and development of therapeutics and
apoptosis screening assays, and commencing clinical trials.
The Company is presently working on a number of long-term development
projects that involve experimental and unproven technology, which may
require many years and substantial expenditures to complete, and which may
be unsuccessful. All of the Company's potential pharmaceutical products are
currently in research and development, and no revenues from the sale of
pharmaceutical products have been generated to date. There can be no
assurance that the Company will be able to develop, manufacture, or market
a commercial product from these projects. In addition, there can be no
assurance that future revenues will be significant, that any sales will be
profitable, or that the Company will have sufficient funds available to
complete its research and development programs or market any products it
may develop.
Cash and Cash Equivalents
Cash equivalents at December 31, 1996 and 1995 represent funds held in
money market accounts.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost, net of accumulated
depreciation. Furniture, fixtures, and office equipment are depreciated by
the straight-line method over the five year estimated useful life of the
assets. Computer and laboratory equipment are depreciated by the
straight-line method over the three year estimated useful life of the
assets. Leasehold improvements are amortized over the shorter of the lease
term or the useful life of the improvement. Equipment under capital lease
is stated at the estimated present value of minimum lease payments and
amortized over the shorter of the lease term or the useful life of the
asset.
Fair Value of Financial Instruments
Financial assets and liabilities have carrying values which approximate
their fair values for all periods presented. The carrying amounts of cash
and cash equivalents, private placement receivable, and short-term
borrowings from related parties approximate fair value because of their
short-term nature. The fair market values of the notes receivable from
related parties, notes receivable from stockholders and other receivables
are not readily determinable due to their related party nature.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, the Company reviews, as circumstances dictate, the carrying amount of
its long-lived assets. The purpose of these reviews is to determine whether
the carrying amounts are recoverable. Recoverability is determined by
comparing the projected undiscounted net cash flows of the long-lived
assets against their respective carrying amounts. The amount of impairment,
if any, is measured based upon the excess of the carrying value over the
fair value.
F-8
<PAGE> 53
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Research and Development
All research and development costs are expensed as incurred and include
salaries and expenses related to employees who conduct research and
development. Costs related to the acquisition of technology rights and
patents, for which development work is in process, are expensed and
considered a component of research and development costs.
Income Taxes
The Company accounts for income taxes under the asset and liability method
as prescribed by SFAS No. 109, Accounting for Income Taxes, with deferred
income tax assets and liabilities recognized for the future tax
consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Deferred tax assets are recognized for deductible temporary differences,
with a valuation allowance established against the resulting assets to the
extent it is more likely than not that the related tax benefit will not be
realized.
Net Loss Per Share
Net loss per share has been computed using the weighted average number of
common shares, common stock subscribed and common equivalent shares
outstanding during each period presented. Common stock equivalents,
consisting of stock options and warrants, are excluded from the Company's
net loss per share computation when the effect would be antidilutive.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
(Continued)
F-9
<PAGE> 54
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, the
disclosure 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Optical Analytic, Inc. (OAI).
All significant intercompany balances and transactions have been eliminated
in consolidation.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
(2) PRIVATE PLACEMENT RECEIVABLE
The private placement receivable represents a portion of the proceeds from
the December Private Placement (note 5) which were held in a designated
escrow account at December 31, 1996, pursuant to legally binding contracts
between the Company and purchasers of common stock effective as of December
31, 1996. These proceeds were not transferred to the Company's account
until January 1997. All stock related to the proceeds had been issued and
was outstanding as of December 31, 1996.
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Laboratory equipment $ 1,075,033 $ 970,544
Computer equipment 147,013 101,240
Furniture and fixtures 480,736 459,549
Leasehold improvements 519,833 508,488
----------- -----------
2,222,615 2,039,821
Accumulated depreciation and amortization (1,630,522) (1,149,353)
----------- -----------
Equipment and leasehold improvements, net $ 592,093 $ 890,468
=========== ===========
</TABLE>
(Continued)
F-10
<PAGE> 55
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS, CONTINUED
Depreciation and amortization expense amounted to approximately $481,000,
$531,000 and $492,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
(4) LEASES
As of December 31, 1996, there are no assets under capital lease. As of
December 31, 1995, the Company had ten noncancelable capital leases for
furniture and laboratory equipment with an interest rate of 15.3% per annum
and guaranteed by a deposit amounting to $194,128. In November 1996, the
Company paid off the balance due on the lease line of approximately
$217,000 using the lease line deposit and accrued interest.
As of December 31, 1996 and 1995, the gross amounts of furniture and
laboratory equipment and related accumulated amortization recorded under
these capital leases were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Furniture and laboratory equipment $ -- $ 855,022
Accumulated amortization -- (506,498)
-------- --------
$ -- $ 348,524
======== ========
</TABLE>
Equipment recorded under capital leases and related accumulated
amortization are included in equipment and leasehold improvements (note 3).
The Company has also entered into noncancelable operating leases,
principally related to its operating facilities in California. The
facilities lease was amended in 1996 to add approximately 4,100 square feet
of additional space and to extend the term of the lease to June 30, 2010.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1996 were:
<TABLE>
<CAPTION>
Year ending Operating
December 31, leases
------------ ------
<S> <C>
1997 $ 311,638
1998 314,918
1999 314,918
2000 314,918
2001 314,918
Thereafter 3,306,643
----------
Total minimum lease payments $ 4,877,953
==========
</TABLE>
Rental expense for operating leases amounted to approximately $344,000 for
the year ended December 31, 1996, and approximately $230,000 for the years
ended December 31, 1995 and 1994.
(Continued)
F-11
<PAGE> 56
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(5) CAPITAL STOCK
Preferred Stock
During 1992, the Company issued 1,059,000 shares of Series A preferred
stock in exchange for $529,500. Series A preferred stock entitled the
holders to preferences in liquidation of $0.50 per share and conversion
privileges.
In February 1993, the Company issued 191,000 shares of preferred stock in
exchange for $95,500.
In April 1993, all the outstanding shares of preferred stock, totaling
1,250,000 shares, were converted to 625,000 shares of the Company's common
stock.
Common Stock
During 1992, the Company issued 758,333 shares of common stock in exchange
for $22,750 in cash and $91,000 in notes receivable from stockholders. On
their respective dates of purchase, a total of 481,250 of these shares were
subject to certain vesting provisions. Unvested shares can be repurchased
by the Company at the issuance price. As of December 31, 1996, a total of
11,807 of such shares remain subject to vesting.
In March 1993, the Company declared a 2% stock dividend to all common
stockholders of record. A total of 9,625 of the 15,167 shares granted as a
stock dividend were subject to certain vesting provisions. As of December
31, 1996, a total of 237 of such shares remain subject to vesting.
In April 1993, the Company issued 2,000,000 shares of common stock (note
13) in exchange for $600. In June 1993, the Company issued 551,650 shares
of common stock in exchange for $165 in cash and notes receivable from
stockholders totaling $16,385. In December 1993, the Board of Directors
forgave the $16,385 of indebtedness. On their respective dates of purchase,
a total of 444,817 of these shares were subject to certain vesting
provisions. As of December 31, 1996, a total of 23,555 of such shares
remain subject to vesting.
In May 1994, the Company raised approximately $10,922,000 (net of
underwriting discounts and offering expenses), through an initial public
offering and sale of 2,875,000 shares of common stock at $4.50 per share
(the Initial Public Offering). Upon consummation of the Initial Public
Offering, the Blech Lenders converted the principal balance owed by the
Company under a line of credit provided by such persons and entities into
798,778 shares of common stock at a conversion price per share equal to the
Initial Public Offering price of $4.50 (note 13).
In October 1995, the Company engaged in an offshore private placement of
the Company's common stock and raised $114,178 (net of offering costs)
through the issuance of 100,000 shares of common stock at a price of $1.50
per share. The issuance is exempt from registration pursuant to the
exemption provided by Regulation S of the Securities Act of 1993, as
amended.
(Continued)
F-12
<PAGE> 57
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(5) CAPITAL STOCK, CONTINUED
In January 1996, the Company raised approximately $8.6 million (net of
offering costs) through a private placement offering (the January Private
Placement) and sale of 7,360,000 shares of the Company's common stock at a
price of $1.25 per share. The Company also issued 736,000 shares of common
stock and warrants to purchase an additional 736,000 shares of the
Company's common stock to the placement agents as a selling commission for
the January Private Placement (note 6). The Company filed a registration
statement on Form S-3 covering resale of the 8,832,000 shares of common
stock issued or issuable in connection with the January Private Placement
and 3,004,839 other shares of common stock issued or issuable by
the Company.
In August 1996, in connection with the Cardiosol Acquisition (note 11), the
Company committed to issue 225,000 shares of its common stock to the
sellers, of which 37,500 shares have been issued and are outstanding as of
December 31, 1996. The remaining 187,500 shares are recorded as common
stock subscribed. An additional 75,000 shares of common stock may be issued
to the sellers upon the attainment of certain milestones related to
Cardiosol.
In December 1996, the Company raised approximately $10.1 million (net of
offering costs) through a private placement offering (the December Private
Placement) and sale of 5,201,350 shares of the Company's common stock at a
price of $2.00 per share. The Company also issued 534,385 shares of common
stock and warrants to purchase an additional 458,858 shares of the
Company's common stock to the placement agents as a selling commission for
the December Private Placement (note 6). The Company filed a registration
statement on Form S-3 covering resale of the 6,194,593 shares of common
stock issued or issuable in connection with the December Private Placement
and 310,037 other shares of common stock issued or issuable by the Company
(note 16).
During 1996, the Company's shareholders approved the proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
shares of common stock authorized for issuance from 30,000,000 shares to
45,000,000.
Treasury Stock
During 1994, the Company exercised its option to repurchase 128,978
unvested shares of common stock for a total repurchase price of $9,853.
During 1996, the Company exercised its option to repurchase 53,034 unvested
shares of common stock for a total repurchase price of $5,322.
(6) COMMON STOCK WARRANTS
During November 1993, in connection with a licensing agreement (note 10),
the Company issued a warrant to purchase 5,000 shares of the Company's
common stock at any time within five years of an initial public offering of
the Company's common stock at a price per share equal to $3.15. The
estimated value of the warrant was included in research and development
expense for the year ended December 31, 1993.
(Continued)
F-13
<PAGE> 58
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(6) COMMON STOCK WARRANTS, CONTINUED
Upon consummation of the Initial Public Offering in May 1994, the Company
issued to D. Blech & Company, Incorporated a warrant to purchase
approximately 250,000 shares of common stock at an exercise price of $6.30.
The warrants are subject to certain antidilution provisions. As of December
31, 1996, the number of shares issuable under this warrant was 305,884 at
an exercise price of $5.15. The warrants expire in May 1999.
In October 1995, the Company issued warrants to purchase 40,000 shares of
the Company's common stock in connection with short-term borrowings from
related parties. The warrants have an exercise price of $2.25 per share and
expire in January 2001 (note 13).
In December 1995, the Company issued a warrant to purchase 8,000 shares of
the Company's common stock in connection with short-term borrowings from
another related party. The warrant has an exercise price of $2.25 per share
and expires in January 2001 (note 13).
In connection with the January Private Placement (note 5), the Company
issued warrants to purchase 736,000 shares of the Company's common stock at
an exercise price of $1.375 per share. The warrants expire January 2001. In
May 1996, the Company issued 305,694 shares of common stock upon exercise
of a portion of these warrants. The warrant holder elected a cashless
exercise of this 404,789 share warrant resulting in a reduction of the
shares issuable under the warrant by 99,095. In July 1996, another warrant
holder exercised his option to purchase 14,186 shares of the Company's
common stock at a purchase price of $19,505.
In connection with the December Private Placement (note 5), the Company
issued warrants to purchase 458,858 shares of the Company's common stock at
an exercise price of $2.20 per share. The warrants expire in December 2001.
In August 1996, in connection with the signing of a License Agreement, the
Company became obligated to issue a warrant to purchase approximately 3,600
shares of the Company's common stock at a price per share equal to
approximately $2.51. The estimated value of the warrant was included in
general and administrative expenses for the year ended December 31, 1996.
The warrant, which has not yet been issued, will expire in August 2001.
As of December 31, 1996, warrants to purchase approximately 1,138,367
shares of the Company's common stock remained outstanding.
(Continued
F-14
<PAGE> 59
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) STOCK OPTION PLANS
1993 Stock Option Plan
The Company has a Stock Option Plan (the Option Plan), which was approved
by the Board of Directors in May 1993 and approved by its stockholders in
August 1993. Options granted under the Option Plan may be incentive stock
options or nonqualified stock options. Under the Option Plan, 1,049,850
shares of common stock are authorized and remain reserved for issuance, and
options to purchase shares may be granted to employees, officers,
directors, consultants, independent contractors, and advisers of the
Company. The exercise price of an option granted under the Option Plan must
be not less than 100% of the fair market value of the shares on the date
the option is granted. The exercise price of any option granted to a person
owning more than 10% of the total combined voting power of the Company's
common stock must not be less than 110% of the fair market value of the
shares on the date the option is granted. Options granted under the Option
Plan are nontransferable.
The fair value of each stock option grant is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: expected
dividend yield of 0.0% for both years; expected volatility of 107.5% for
both years; risk-free interest rates of 6.51% and 6.42%; and expected lives
of 8.6 and 8.4 years.
As of December 31, 1996, options to purchase 953,140 shares were
outstanding and options to purchase 85,066 shares were reserved and
unissued under the Option Plan. Options granted pursuant to the Option Plan
prior to March 10, 1996 generally vest 20% after one year and as to 1.67%
of the shares each month thereafter. Options granted pursuant to the Option
Plan after March 10, 1996 generally vest 25% after one year and as to 2.08%
of the shares each month thereafter. The options expire ten years from date
of grant. As of December 31, 1996 and 1995, options to purchase 259,580 and
172,725 shares, respectively, were exercisable under the Option Plan and
the weighted average exercise price of those options was $1.32 and $1.14,
respectively.
The following summarizes the activity under the Option Plan:
<TABLE>
<CAPTION>
Stock options outstanding
-----------------------------
Number of Weighted-average exercise
shares price per share
--------- -------------------------
<S> <C> <C>
Balance as of December 31, 1993 266,049 $ 2.68
Options granted 22,700 1.68
Options canceled or expired (63,833) 5.22
-------
Balance as of December 31, 1994 224,916 1.85
Options granted 304,833 1.62
Options canceled or expired (48,889) 4.22
Options exercised (1,475) 0.03
-------
Balance as of December 31, 1995 479,385 1.47
Options granted 543,005 2.61
Options canceled or expired (59,081) 1.95
Options exercised (10,169) 0.18
-------
Balance as of December 31, 1996 953,140 $ 2.10
=======
</TABLE>
(Continued)
<PAGE> 60
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) STOCK OPTION PLANS, CONTINUED
1993 Stock Option Plan, Continued
An additional 150,000 options were issued outside of the 1993 stock option
plan (note 13) at an exercise price of $2.063. These options are subject to
all provisions of the 1993 Option Plan and have been included in the
disclosures which follow.
The weighted-average fair value of options granted during 1996 and 1995 was
$2.28 and $1.47, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Range of Number Weighted-average Weighted-average Number Weighted-average
exercise outstanding remaining years exercise exercisable exercise
prices at 12/31/96 to expiration price at 12/31/96 price
------ ----------- ------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.03 29,124 6.20 $0.03 20,705 $0.03
1.00 to 1.50 208,334 6.68 1.29 184,422 1.28
1.56 to 2.44 717,227 9.36 2.03 53,806 1.88
2.56 to 4.81 146,500 9.22 3.92 -- --
5.25 to 6.19 1,955 8.06 5.73 647 5.25
--------- -------- -------
1,103,140 8.75 $2.10 259,580 $1.32
========= =======
</TABLE>
On November 20, 1996, the Board of Directors approved the repricing of the
exercise price from $4.125 to $2.125 per share for the 1996 grant of
options for the purchase of 125,000 shares of common stock.
Directors Stock Option Plan
In December 1993, the Board of Directors approved the 1993 Directors Stock
Option Plan (the Directors Option Plan) under which 200,000 shares of
common stock are authorized, reserved, and available for issuance. The
Directors Option Plan provides for the automatic grant to each nonemployee
director of the Company of an option to purchase 5,000 shares of common
stock on the date the nonemployee director becomes a member of the Board of
Directors and on each anniversary date of joining the Board. Such options
will have an exercise price equal to the fair market value of the Company's
common stock at the date of grant.
In December 1995, the Board of Directors approved an amendment, subject to
shareholder approval, to the Directors Option Plan to grant the Chairman of
the Board an additional option to purchase 10,000 shares of the Company's
common stock. The shareholders approved this amendment at the June 1996
shareholder meeting.
The fair value of each stock option grant is estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: expected
dividend yield 0.0% for both years; expected volatility of 107.5% for both
years; risk-free interest rates of 6.53% and 6.50%; and an expected life of
nine years for both years.
(Continued)
F-16
<PAGE> 61
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) STOCK OPTION PLANS, CONTINUED
Directors Stock Option Plan, Continued
As of December 31 1996, options to purchase 40,000 shares were outstanding
and options to purchase 160,000 shares were reserved and unissued under the
Directors Option Plan. Options granted pursuant to the Directors Option
Plan generally vest as to 20% of the shares one year after their respective
dates of grant and as to 1.67% of the shares each month thereafter. The
options expire ten years from date of grant. As of December 31, 1996 and
1995, options to purchase 8,664 and 2,332 shares, respectively were
exercisable under the Directors Option Plan and the weighted average
exercise price was $1.55 and $1.38, respectively.
The following summarizes the activity in the Directors Option Plan:
<TABLE>
<CAPTION>
Stock options outstanding
--------------------------------------
Number of Weighted-average exercise
shares price per share
<S> <C> <C>
Balance as of December 31, 1993 -- $ --
Options granted 10,000 1.38
------
Balance as of December 31, 1994 10,000 1.38
Options granted 25,000 1.58
------
Balance as of December 31, 1995 35,000 1.52
Options granted 15,000 3.27
Options canceled or expired (10,000) 3.22
-------
Balance as of December 31, 1996 40,000 $ 1.75
======
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 was
$3.01 and $1.45, respectively.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------ --------------------------------
Range of Number Weighted-average Weighted-average Number Weighted-average
exercise outstanding remaining exercise exercisable exercise
prices at 12/31/96 contractual life price at 12/31/96 price
------ ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.00 to 1.38 10,000 7.75 years $ 1.38 4,332 $ 1.38
1.56 to 1.88 20,000 8.83 1.72 4,332 1.73
2.19 10,000 9.75 2.19 -- --
------ -----
40,000 8.79 $ 1.75 8,664 $ 1.55
====== =====
</TABLE>
(Continued)
F-17
<PAGE> 62
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) STOCK OPTION PLANS, CONTINUED
Pro Forma Disclosure
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss As reported $(6,315,947) $ (7,622,999)
Pro forma $(6,360,650) $ (7,881,884)
Net loss per share As reported $ (.84) $ (.48)
Pro forma $ (.85) $ (.50)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of four to five years and compensation cost for
options granted prior to January 1, 1995 is not considered.
(8) NOTES RECEIVABLE FROM STOCKHOLDERS
As of December 31, 1995, the Company had $79,000 of notes receivable from
stockholders related to their purchases of shares in 1992 (note 5). The
notes receivable from stockholders accrued interest at an annual rate of 6%
compounded semiannually. During 1996, notes receivable from stockholders
was reduced by $3,812 in connection with the repurchase of unvested stock.
In December 1996, the balance of notes receivable from stockholders of
$75,188 and the related accrued interest receivable of approximately
$22,000 was canceled by the Company.
(9) INCOME TAXES
Income tax expense represents minimum state franchise tax.
As of December 31, 1996, the Company had federal and state research and
experimentation credit carryforwards of approximately $713,000. Under
current tax law, the carryforwards expire during the years beginning 1997
through 2011.
There are approximately $100,000 of federal and state net operating loss
carryforwards as of December 31, 1996. Under current tax law, the
carryforwards expire during the years beginning 2001 through 2011.
(Continued)
F-18
<PAGE> 63
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(9) INCOME TAXES, CONTINUED
The tax effect of the temporary differences that give rise to a significant
portion of the deferred tax asset as of December 31, 1996 and 1995 is
presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Start-up and research costs
capitalized for tax purposes $ 10,179,000 $ 6,333,000
Research and experimentation credit 713,000 635,000
Net operating loss carryforward 43,000 20,000
--------- ---------
Total gross deferred tax
assets 10,935,000 6,988,000
Less valuation allowance (10,935,000) (6,988,000)
----------- ----------
Net deferred tax assets $ -- $ --
=========== ==========
</TABLE>
The change in the valuation allowance for the years ended December 31,
1996, 1995, and 1994 was approximately $3,947,000, $2,751,000, and
$2,707,000, respectively.
(10) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS
Dana-Farber Cancer Institute, Inc.
During 1993, the Company entered into exclusive license and research
agreements with Dana-Farber Cancer Institute, Inc. (DFCI) related to
certain patent applications and technology, including the exclusive right
and license to make, use and sell Maspin(TM), a possible tumor suppressor
molecule, for therapeutic purposes. Under the terms of the DFCI licensing
agreement (the DFCI Agreement), the Company may enter into sublicensing
agreements subject to sublicensing and royalty fees. As partial
consideration for the license, the Company agreed to pay DFCI approximately
$10,000 and granted DFCI a warrant to buy 5,000 shares of the Company's
common stock at any time prior to May 6, 1999 (note 6).
The DFCI Agreement obligates the Company to use its diligent efforts to
bring one or more licensed products to the marketplace and to make certain
additional payments to DFCI contingent upon completion of certain
milestones occurring in the clinical trials and regulatory approval of each
licensed product. A portion of such payments are to be construed as an
advance on royalties due to DFCI subject to certain limitations. The DFCI
Agreement requires the Company to pay royalties to DFCI on net sales of
licensed products that incorporate or use the patent rights.
(Continued)
F-19
<PAGE> 64
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(10) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS, CONTINUED
Dana-Farber Cancer Institute, Inc., Continued
The DFCI Agreement requires the Company to pay a minimum royalty per year
beginning 12 months after the completion of successful Phase II clinical
trials. So long as the Company diligently pursues the commercial
development of licensed products, minimum royalties will be waived until
the successful completion of Phase III clinical trials. The Company must
also pay all costs relating to the filing, prosecution, and maintenance of
the patent applications related to Maspin, whether such fees were incurred
before or after the date of the DFCI Agreement. During 1996, 1995 and 1994,
the Company paid approximately $6,000, $42,000 and $30,000, respectively,
to DFCI for costs associated with patents.
Effective November 1993, the Company entered into a separate agreement with
DFCI to support the research of Maspin in return for certain rights to
inventions and discoveries from the funded research. During 1996, 1995 and
1994, the Company paid approximately $200,000, $172,000 and $168,000,
respectively, to fund the Maspin(TM) research. The research agreement was
canceled effective January 31, 1997.
Ohio State University
The Company, through the acquisition of Optical Analytic, Inc. (OAI), in
December 1993 (note 11), has acquired exclusive license rights to patents
and technology related to Scanning Laser Digital Imaging (SLDI). This
agreement obligates the Company to make certain royalty payments to the
Ohio State University Research Foundation upon the sale of licensed
products. In addition, under the terms of the license agreement, the
Company is required to satisfy certain performance conditions. During 1996,
the terms of the license agreement were amended to delete the requirement
that an application with the FDA for regulatory approval of a licensed
product or service be filed by August 1996, and to delete from the scope of
the license a patent relating to optical multiplexers that was unrelated to
the SLDI product.
(Continued)
F-20
<PAGE> 65
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(10) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS, CONTINUED
Perkin Elmer License Agreement
In August 1996, the Company and OAI entered into an agreement with Perkin
Elmer (the Perkin Elmer agreement) whereby Perkin Elmer was granted an
exclusive worldwide license to the patents OAI had licensed from Ohio State
University related to the Scanning Laser Digital Imaging microscope, for
life sciences and clinical diagnostic applications, for the life of any of
the patent claims. The Company also licensed certain related software,
technical information and rights to ongoing technological developments. In
connection therewith, Perkin Elmer agreed to (i) make up to $1.4 million of
cash milestone payments to the Company over a three-year period, (ii)
contribute up to $400,000 of equipment to the Company over the future;
(iii) make certain royalty payments (which do not include minimums) to the
Company on any sales of licensed product and (iv) commit certain funds to
the development of products covered by licensed patents. Upon signing of
the agreement, Perkin Elmer paid the Company $300,000 of the cash milestone
payments, which was included in the Company's revenues for the year ended
December 31, 1996. The agreement may be terminated by Perkin Elmer, in its
discretion, subject to payment of certain amounts to the Company in certain
circumstances. In connection with this agreement, the Company incurred
obligations to pay a success fee and issue a warrant to purchase
approximately 3,600 shares of the Company's common stock at an exercise
price of approximately $2.51. The warrant is valued at approximately $6,600
and is included in general and administrative expenses for the year ended
December 31, 1996 (notes 6 and 13).
Boehringer Mannheim
In July 1996, the Company entered into a letter of intent with Boehringer
Mannheim Corporation ("Boehringer") to jointly evaluate the development of
Maspin for the treatment of cancer. Upon signing the letter of intent,
Boehringer agreed to purchase 37,500 shares of the Company's common stock
at a price of $4.00 per share (for a total of $150,000). Pursuant to the
letter of intent, LXR currently is conducting preclinical efficacy and
toxicity studies of Maspin. If the results of the studies are favorable, it
is contemplated that Boehringer would purchase additional shares of the
Company's common stock at a premium over market price, provide research and
development funding to the Company, and commit internal resources to the
development of Maspin. In addition, the Company would grant Boehringer an
option to acquire an exclusive worldwide license to the Maspin protein for
therapeutic uses. There can be no assurance that the results of the
preclinical testing undertaken pursuant to the letter of intent will be
successful, that Boehringer will elect to proceed with this project or that
the parties will enter into any additional agreements.
Other Agreements
The Company has entered into various other research agreements requiring
future payments totaling approximately $375,000 as of December 31, 1996.
(Continued)
F-21
<PAGE> 66
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(11) ACQUISITION OF TECHNOLOGY
OAI Acquisition
In December 1993, the Company consummated agreements to purchase 100% of
the issued and outstanding stock of OAI for $200,000. Consideration for the
stock was comprised of $93,889 in cash paid upon closing of such purchase
and $106,111 in promissory notes and other indebtedness. The promissory
notes bore interest at a rate of 6% and both principal and interest were
paid in 1994. An executive officer and stockholder of the Company owned
approximately 35% of the total issued and outstanding stock of OAI prior to
the acquisition and received $77,778 in cash and notes for his shares.
OAI's only asset consisted of a technology license from Ohio State
University related to research in process and OAI had not commenced
operations. Accordingly, the Company expensed the $200,000 purchase price
as research and development expense at the date of purchase.
Cardiosol Acquisition
In August 1996, the Company acquired certain patent and other rights
related to Cardiosol, a preservation solution for use during heart
transplantation (the Cardiosol Acquisition). In connection with such
acquisition, the Company paid $98,000 in cash and committed to issue
225,000 shares of its common stock to the sellers (note 5). An additional
75,000 shares may be issued upon the attainment of certain milestones. The
total cost of the acquisition, including cash and shares, amounted to
approximately $675,000 and is included in research and development expenses
for the year ended December 31, 1996.
(12) GRANT AWARD
In September 1995, the Company received notice from the National Institute
of Health of a grant award in the amount of $100,000 for its research on
the role of the FAS/CD95 antigen in HIV infection. The Company recognized
$100,000 in grant revenue related to this grant for the year ended December
31, 1996.
In September 1996, the Company received notice from the National Institute
of Health of a grant award in the amount of approximately $70,000 for its
research on the evaluation of Maspin as a widespread tumor suppresser. The
Company recognized $14,396 in grant revenue related to this grant for the
year ended December 31, 1996. Proceeds from the grant award have not been
received as of December 31, 1996.
(13) RELATED PARTY TRANSACTIONS
(a) Relationships with Related Parties
D. Blech & Company, Incorporated (the Underwriter) was the sole
underwriter for the Company's Initial Public Offering (note 5) in May
1994. David A. Blech, the sole stockholder and chief executive officer
of the Underwriter, established a trust with his son as the sole
beneficiary (the Edward Blech Trust) which was a principal stockholder
of the Company as of December 31, 1994. During 1994, the Underwriter
ceased operations and was no longer a member of the National Association
of Securities Dealers.
(Continued)
F-22
<PAGE> 67
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(13) RELATED PARTY TRANSACTIONS, CONTINUED
During 1995, the Edward Blech Trust transferred control of 1,831,900
shares of the Company's common stock to Biotechnology Investment Group,
L.L.C. (BIO). According to a Schedule 13D filed with the Securities and
Exchange Commission in February 1995, both BIO and the Edward Blech
Trust may be deemed the beneficial owner of shares held of record by
BIO; however, each disclaims beneficial ownership of the shares. Being
five percent shareholders, both the Edward Blech Trust and BIO are
subject to SEC regulation 13D. Any subsequent transactions would be
subject to SEC Schedule 13D requirements.
(b) Financing Transactions
On January 22, 1993, the Company entered into an agreement with David A.
Blech whereby Mr. Blech, certain trusts in which Mr. Blech and his minor
son are income beneficiaries, and a relative of Mr. Blech (collectively,
the Blech Lenders) would provide a line of credit to the Company for up
to $5,000,000. Upon consummation of the Company's Initial Public
Offering, the line of credit was terminated and the principal balance of
$3,594,500 due under the line of credit was converted into 798,778
shares of common stock at the Initial Public Offering price of $4.50 per
share.
On April 5, 1993, the Company issued the Edward Blech Trust and Mark
Germain (formerly a managing director of the Underwriter and Chairman of
the Company's Board of Directors), an aggregate of 2,000,000 shares of
common stock in exchange for $600.
In October 1995, the Company received $250,000 in short term borrowings
from BIO and $250,000 in short term borrowings from the Blech Family
Trust (the Holders). The notes payable accrued interest at an annual
rate of 10.5% and both of the notes payable and accrued interest were
paid in January 1996. In addition, in connection with this borrowing,
the Company issued warrants to the Holders to purchase 40,000 shares of
the Company's common stock at a price of $2.25 per share.
In December 1995, the Company received $100,000 in short-term borrowings
from Kenneth McGuire, a shareholder who beneficially purchased
approximately 1.5 million shares of common stock in the Company's
January 1996 Private Placement (note 5). As a result of this
transaction, McGuire is subject to SEC Schedule 13D requirements. The
note payable accrued interest at a rate of 10.5% and both the note
payable and accrued interest were paid in January 1996. In connection
with this borrowing, the Company also issued warrants to the debt holder
to purchase 8,000 shares of the Company's common stock at an exercise
price of $2.25 per share.
(c) Consulting Agreements
In October 1995, the Company entered into a consulting arrangement with
The Olmsted Group, L.L.C. (the Consultant) for services to be provided
in connection with the management of the Company's business. As
consideration for the agreement, the Company agreed to pay $10,000 per
month through October 1996. The agreement also provides for the payment
of additional fees in cash and warrants based on a percentage of the
consideration derived from certain transactions on which the Consultant
has worked. Mark Germain is managing director of the Olmsted Group, LLC.
As of December 31, 1996, the Company incurred an obligation to pay a
success fee and issue a warrant to purchase approximately 3,600 shares
of the Company's common stock to the Consultant in connection with the
Perkin Elmer Agreement (note 10).
(Continued)
F-23
<PAGE> 68
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(13) RELATED PARTY TRANSACTIONS, CONTINUED
During 1995, the Company paid David A. Blech $25,000 for consulting
services provided in connection with the Company's debt financing.
In conjunction with the Cardiosol Acquisition (note 11), the Company
entered into a one-year consulting agreement with one of the
co-inventors of the Cardiosol solution to serve on the Company's
Scientific Advisory Board at a rate of $12,000 for the year. The Company
also entered into a one-year employment agreement with the other
co-inventor to serve as Director of Pre-Clinical Affairs for annual
compensation of $100,000.
(d) Executive Officer Agreements
The Company has entered into agreements with the Company's Chief
Financial Officer and Chief Executive Officer providing for an annual
base compensation of $145,000 and $240,000, respectively. In the event
of termination of these agreements, the individuals are entitled to
severance compensation in an amount equal to two times the individuals'
annual base compensation.
In October 1996, the Company entered into an employment agreement with a
new President and Chief Operating Officer (COO) for an annual salary of
$225,000 and one time recruitment bonus of $15,000. This agreement
provided for an initial stock option grant for the right to purchase
310,000 shares of the Company's common stock, of which the right to
purchase 150,000 of these shares was granted outside of the Company's
Stock Option Plan (note 7). This agreement also provided for
reimbursement of certain relocation costs and a home loan of $175,000,
which may be forgiven over an eight year period in the amount of $25,000
per year beginning December 31, 1997, subject to certain conditions. As
of December 31, 1996, the Company had advanced the COO $160,000 under
this agreement. The balance of the loan will become due and payable if
the COO resigns or is terminated for cause. If the Company terminates
the COO without cause, he will be entitled to receive severance equal to
one year's salary.
(14) LITIGATION
The Company and five of its past and present directors and officers are
named as defendants in Katz vs. Blech, 95 Civ. 7215 (S.D.N.Y.)
("Katz") and Degulis vs. LXR Biotechnology Inc., et al., 95 Civ. 4204
(S.D.N.Y.) ("Degulis"). One of the five, Mark Germain, the former Chairman
of the Company and a former managing director of D. Blech & Company,
Incorporated, the underwriter for the Company ("D. Blech & Co."), is named
as a defendant in the above two cases and also in In re Blech Securities
Litigation, 94 Civ. 7696 (S.D.N.Y.) ("In re Blech"). In addition, L. Scott
Minick, a former director and former officer of the Company; James D.
Coombs, a former director and former officer, and Mark J. Tomei, a
director and former officer, are defendants in Katz and Degulis; and
Christopher Henney, a former director, is a defendant in Katz. The
Company was previously named as a defendant in In re Blech, but was
dismissed by the Court on June 6, 1996.
(Continued)
F-24
<PAGE> 69
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(14) LITIGATION, CONTINUED
All three cases are brought on behalf of classes of persons purchasing
common shares of the Company prior to September 21, 1994, and assert claims
arising out to the Company's Initial Public Offering and subsequent trading
of those shares. The suits allege violations of Sections 11 and 12 of the
Securities Act of 1933 and Sections 10(b) and 20 of the Securities
Exchange Act of 1934, including misrepresentations and omissions in
connection with the Initial Public Offering and manipulation of share
prices. The suits also allege common law claims for fraud and deceit and
seek punitive damages The complaints allege that defendants, including the
Company and the defendant directors and officers, failed to disclose in
securities filings connected with the Initial Public Offering, the
leveraged financial condition of the Company's underwriter, D. Blech & Co.,
and its principal, David Blech. The suits further allege that defendants
failed to disclose that D. Blech & Co. would act as principle market maker
for the Company's shares following the Initial Public Offering, and that D.
Blech & Co.'s extended financial commitments would affect its ability to
maintain a market for the Company's shares. The suits also allege that
defendants assisted or acquiesced in a post-offering scheme to manipulate
the market for the Company's shares and artificially inflate share prices.
Under the Company's bylaws, individual agreements, and state law, the
Company's current and former directors and officers may have certain rights
to indemnification and defense costs in the event they are named in
litigation. Four individual defendants in Katz and/or Degulis have
submitted claims for indemnity and advancement of defense costs, and the
Company has agreed to advance defense costs and indemnify those individuals
to the extent permitted by law. In addition, on February 12, 1997, the
Company authorized advancement of costs for Mr. Germain's defense in the
Katz and Degulis actions (but not In re Blech), subject to an undertaking
to repay those amounts in the event it is later determined that he is not
entitled to indemnity. A demand by the independent underwriter for
contractual indemnity has been denied. Such denial is subject to contest by
the underwriter. The Company and the underwriter have entered into a
tolling agreement whereby the Company agreed that the running of any
statute of limitations applicable to claims of the underwriter against the
Company would be tolled until the earlier of June 30, 1997 and the
termination of the tolling agreement.
None of the complaints in Katz, Degulis or In re Blech states a claim for a
specific amount of monetary damages. The complaint in In re Blech seeks
damages and interest as provided by law, costs and expenses of litigation,
attorneys fees, expert fees, other costs and disbursements, and such other
relief as may be just and proper. The complaint in Katz seeks rescission,
an award of compensatory damages, fees, costs and expenses including expert
fees, and such other relief as the court deems proper. The complaint in
Degulis seeks compensatory damages including rescissionary damages,
interest, punitive damages, counsel fees and other costs of suit, a
constructive trust over the proceeds of the offering, and such other and
further relief as the Court deems just and proper.
The Company maintains officers and directors liability insurance under
policies providing aggregate coverage totaling $3 million, which cover (i)
the Company for amounts spent indemnifying directors and officers or (ii)
directors and officers directly if the Company fails to indemnify them. The
policies do not provide coverage to the Company itself with respect to its
own defense costs and liability. The Company and its insurance carriers are
currently involved in disputes relating to the deductibles and exclusions
under the policies. Whether or to what extent insurance covers any
settlement or judgment in the above litigation will depend on the outcome
of the disputes. As a result, the Company cannot predict, at this time, the
amount of any insurance reimbursement that will be obtained. For the years
December 31, 1996 and 1995, the Company incurred expenses of approximately
$111,000 and $39,000, respectively, relating to this litigation. To date
the Company has received no reimbursement for these expenses. The failure
of the Company to obtain reimbursement for the amounts spent defending the
indemnified defendants, along with the Company's own defense costs and any
judgment or settlement payable by the Company could have a material adverse
effect on the Company's cash flows, results of operations and financial
condition.
The Company's primary level directors and officers liability insurance
carrier has tentatively agreed to provide coverage for reasonable attorneys
fees in the defense of the four current and former directors and/or
officers referenced above, but the carrier has refused to provide indemnity
or defense costs for the Company. The Company and the carrier have entered
into an allocation agreement whereby 83% of the defense costs related to
the Katz and Degulis (not including any defense costs incurred by Mr.
Germain) will be borne by the carrier, with the remaining 17% to be borne
by the Company. The carrier is not obligated to make any payments until a
$250,000 deductible (applicable to all covered claims, in the aggregate)
under the policy is exhausted. As of December 31, 1996, claims made for
expenses related to this litigation have been expensed by the Company and
have not exceeded the deductible amount of $250,000. No agreement exists
between the Company and the carrier with respect to coverage for Mr.
Germain's defense, or for the Company with respect to defense costs
incurred in In re Blech prior to its dismissal from that action. The extent
to which costs of defending the litigation will ultimately be covered by
insurance is not yet known. The extent to which insurance would cover any
settlement or judgment has not been determined and may not be determined
until the litigation is completed.
(Continued)
F-25
<PAGE> 70
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(14) LITIGATION, CONTINUED
The Company denies any wrongdoing and is defending the above cases
vigorously. While an adverse judgment or settlement could have a material
adverse financial impact on the Company, the early stage of litigation,
uncertainty as to whether any material judgment or settlement will result,
and the possibility that some portion of any settlement or judgment may be
covered by insurance make it impossible to predict at this time whether the
litigation will have a material adverse financial impact on the Company.
(15) EMPLOYEE BENEFIT PLAN
On January 1996, the Company implemented a savings plan that is intended to
qualify under Section 401(k) of the Internal Revenue Code. Eligible
employees may contribute up to 15% of their compensation, as defined,
subject to limitation. Under the provisions of the Savings Plan, employees
are eligible to join the plan upon employment and after attaining the age
of 18. The Company is not required to make any contributions under the
Plan.
(16) SUBSEQUENT EVENTS
UNIVERSITY OF TENNESSEE
In January 1997, the Company entered into an exclusive license and
three-year research agreement with the University of Tennessee and the
University of Tennessee Research Corporation related to certain patent
applications and technology. As consideration for the agreement, the
Company agreed to pay a license issue fee of $20,000 and an annual license
fee of $10,000. The license issue fee was waived as a result of the
research agreement to fund research in the amount of $70,000 per year for
three years, with the third year's funding contingent upon meeting certain
milestones.
REGISTRATION STATEMENT
On February 7, 1997, the Company's registration statement on Form S-3
covering the resale of 6,194,593 shares of common stock issued or issuable
in connection with the December Private Placement and 310,037 other shares
of common stock issued or issuable by the Company went effective. As of
that date, the Company had 21,817,675 shares issued and outstanding, of
which 19,774,251 shares had been registered, 100,000 shares are exempt from
registration and 1,943,424 shares were not registered. In addition,
2,192,068 shares issuable upon the exercise of certain warrants and other
rights have been registered.
Certain holders of the Company's securities have entered into agreements
applicable to 3,568,065 shares of common stock and/or options therefor,
whereby they have agreed not to sell any such securities until February 1,
1998 without the prior written consent of Sunrise Securities Corp. This
restriction may be released at any time in the sole discretion of Sunrise
Securities Corp.
F-26
<PAGE> 71
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Richmond, State of California, on this 24th day of
March, 1998.
LXR BIOTECHNOLOGY INC.
By: /s/ L. DAVID TOMEI
----------------------------
L. David Tomei Chairman and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, each person whose signature appears
below constitutes and appoints L. David Tomei and Shelli Geer his true and
lawful attorneys-in-fact and agents, each acting alone, will full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to the Annual Report on
Form 10-KSB, and to file the same, with all exhibits thereto, and all documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ L. David Tomei Chief Executive Officer and March 24, 1998
- ------------------------------ Director (Principal
L. David Tomei Executive Officer)
/s/ Donald H. Picker President, Chief Operating March 24, 1998
- ------------------------------ Officer and Director
Donald H. Picker
Shelli Geer Chief Financial Officer, March 24, 1998
- ------------------------------- (Principal Accounting and
Shelli Geer Financial Officer)
/s/ Mark J. Tomei Director March 24, 1998
- -------------------------------
Mark J. Tomei
/s/ Eugene Eidenberg Director March 24, 1998
- -------------------------------
Eugene Eidenberg
Director March 24, 1998
- --------------------------------
Neil Flanzraich
/s/ Brian D. Brookover Director March 24, 1998
- -------------------------------
Brian D. Brookover
/s/ G. Kirk Raab Director March 24, 1998
- -------------------------------
G. Kirk Raab
/s/ Kenneth R. McGuire Director March 24, 1998
- -------------------------------
Kenneth R. McGuire
/s/ William R. Hambrecht Director March 24, 1998
- -------------------------------
William R. Hambrecht
</TABLE>
- 45 -
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
------ ----- --------
<S> <C> <C>
3.01 Company's Certificate of Incorporation. (Incorporated by reference
to Exhibit Number 3.01 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
3.02 Company's Bylaws. (Incorporated by reference to Exhibit Number 3.02
to the Company's Registration Statement on Form S-1 (File No.
33-72814) declared effective by the Securities and Exchange
Commission on May 6, 1994 (the "Form S-1"))
3.03 Amendment to the Company's Certificate of Incorporation.
(Incorporated by reference to Exhibit Number 3.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
4.01 Form of Specimen Certificate for Company's Common Stock
(Incorporated by reference to Exhibit Number 4.01 to the Form S-1)
*10.01 1993 Stock Option Plan, as amended to date, and related Stock
Option Agreement and Exercise Agreement. (Incorporated by reference
to Exhibit Number 10.01 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
*10.02 1993 Directors' Stock Option Plan and related Stock Option
Agreement and Exercise Agreement. (Incorporated by reference to
Exhibit Number 10.02 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996)
10.03 Sublease for Building C of Marina Bay Business Park, 1401 Marina Way
South, Richmond, California 94804 dated August 19, 1993 between the
Company and Quick Response Services, Inc. (Incorporated by reference
to Exhibit Number 10.03 to the Form S-1)
10.04 Owner Consent and Agreement among the Company, Schooner Drive
Associates and Quick Response Services, Inc. (Incorporated by
reference to Exhibit Number 10.04 to the Form S-1)
*10.05 Form of Indemnification Agreement entered or to be entered into
between the Company and each of the Company's officers and
directors. (Incorporated by reference to Exhibit Number 10.05 to the
Form S-1)
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
------ ----- --------
<S> <C> <C>
*10.06 Form of Employment and Proprietary Information Agreement as entered
into between the Company and each of L. Scott Minick, Mark J. Tomei,
Philip J. Barr, Ph.D., and L. David Tomei, Ph.D. (Incorporated by
reference to Exhibit Number 10.06 to the Form S-1)
10.07 Master Lease Agreement dated May 26, 1993 and Equipment Financing
Agreement dated May 26, 1993, both between the Company and Lease
Management Services, Inc., and related documents. (Incorporated by
reference to Exhibit Number 10.08 to the Form S-1)
10.08 Series A Preferred Stock Purchase Agreement dated February 19, 1993
between the Company and certain of its stockholders, as amended.
(Incorporated by reference to Exhibit Number 10.09 to the Form S-1)
10.09 Investors Rights Agreement dated February 19, 1993 between the
Company and certain of its stockholders, as amended. (Incorporated
by reference to Exhibit Number 10.10 to Amendment No. 1 to the Form
S-1 filed with the Securities and Exchange Commission on December
22, 1993)
10.10 Letter agreement dated January 20, 1993 between the Company and D.
Blech & Company, Incorporated (the "Underwriter") regarding the
Company's retention of the Underwriter as a consultant.
(Incorporated by reference to Exhibit Number 10.11 to the Form S-1)
10.11 Letter agreement dated January 22, 1993 and letter agreement dated
May 20, 1993, between the Company and David Blech, regarding (i) the
sale of equity securities to designees of David Blech, (ii)
composition of the Company's Board of Directors and (iii) future
financing of the Registrant. (Incorporated by reference to Exhibit
Number 10.12 to the Form S-1)
10.12 License Agreement dated August 16, 1991, and amended May 18, 1993
and November 29, 1993, among Optical Analytic, Inc., The Ohio State
Research Foundation and The Ohio State University, and related
documents. (Incorporated by reference to Exhibit Number 10.14 to the
Form S-1)
**10.13 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.15 to the Form S-1)
**10.14 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.16 to the Form S-1)
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
------ ----- --------
<S> <C> <C>
**10.15 Licensing Agreement dated June 15, 1993 between the Company and
Dana-Farber Cancer Institute. (Incorporated by reference to Exhibit
Number 10.17 to the Form S-1)
**10.16 Research Support Agreement dated November 1, 1993 between the
Company and Dana Farber Cancer Institute. (Incorporated by reference
to Exhibit Number 10.18 to the Form S-1)
**10.17 Licensing Agreement dated June 21, 1994 between the Company and
UAB Research Foundation. (Incorporated by reference to Exhibit
Number 10.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994)
10.18 Agreement for Purchase and Sale of Shares dated November 29, 1993
among the Company and William K. Root, F. David Resch and James M.
McCormick. (Incorporated by reference to Exhibit Number 10.20 to the
Form S-1)
10.19 Agreement for Purchase and Sale of Shares dated November 29, 1993
between the Company and L. David Tomei. (Incorporated by reference
to Exhibit Number 10.21 to the Form S-1)
10.20 Agreement for Purchase and Sale of Shares dated December 7, 1993
between the Company and Gregory J. Bergman. (Incorporated by
reference to Exhibit Number 10.22 to the Form S-1)
10.21 Agreement Between Owner and Design/Builder dated September 15, 1993
between the Company and Devcon Inc. (Incorporated by reference to
Exhibit Number 10.23 to the Form S-1)
10.22 Form of Warrant Agreement between the Company and the Underwriter.
(Incorporated by reference to Exhibit Number 10.24 to the Form S-1)
10.23 Form of Indemnity Agreement among the Company, Shoenberg, Hieber
Inc. and the Underwriter. (Incorporated by reference to Exhibit
Number 10.29 to Amendment No. 5 to the Form S-1)
10.24 Warrant Agreement between the Company and Dana Farber Cancer
Institute. (Incorporated by reference to Exhibit Number 10.32 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994)
10.25 Sales Agency Agreement dated December 31, 1995 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
Number 1.02 to the Company's Current Report on Form 8-K dated
January 9, 1996 (the "January 1996 Form 8-K"))
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
------ ----- --------
<S> <C> <C>
10.26 Share Purchase Warrant of the Company. (Incorporated by reference to
Exhibit Number 4.02 to the January 1996 Form 8-K)
10.27 Registration Rights Agreement dated January 9, 1996. (Incorporated
by reference to Exhibit Number 4.03 to the January 1996 Form 8-K)
10.28 Registration Rights Agreement dated January 9, 1996 between the
Company and Biotechnology Investment Group L.L.C. (Incorporated by
reference to Exhibit Number 10.28 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995)
10.29 First Amendment to Sublease for Building C of Marina Bay Business
Park, 1401 Marina Way South, Richmond, California 94804 dated August
5, 1996 between the Company and Marina Westshore Partners.
(Incorporated by reference to Exhibit Number 10.29 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1996 (the "September 1996 Form 10-QSB"))
10.30 Patent and Technology Transfer and Stock Purchase Agreement dated as
of August 8, 1996 among the Company, Geoffrey M. Collins and Winston
M. Wicomb. (Incorporated by reference to Exhibit Number 10.30 to the
September 1996 Form 10-QSB)
10.31 Amendment effective as of July 10, 1996 to the License Agreement
among Optical Analytic, Inc., The Ohio State Research Foundation and
The Ohio State University. (Incorporated by reference to Exhibit
Number 10.31 to the September 1996 Form 10-QSB)
10.32 Amendment effective as of August 27, 1996 to the License Agreement
among Optical Analytic Inc., The Ohio State Research Foundation and
The Ohio State University. (Incorporated by reference to Exhibit
Number 10.32 to the September 1996 Form 10-QSB)
**10.33 License Agreement between the Company, on behalf of itself and
Optical Analytic, Inc., its wholly owned subsidiary, and The
Perkin-Elmer Corporation, dated as of August 29, 1996. (Incorporated
by reference to Exhibit Number 10.34 to the September 1996 Form
10-QSB)
*10.34 President and Chief Operating Officer Letter Agreement dated
September 24, 1996. (Incorporated by reference to Exhibit Number
10.34 to the September 1996 Form 10-QSB)
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
------ ----- --------
<S> <C> <C>
10.35 Sales Agency Agreement dated December 11, 1996 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
No. 1.03 to the Company's Current Report on Form 8-K dated January
31, 1997 (the "January 1997 Form 8-K"))
10.36 Form of Share Purchase Warrant of the Company (Incorporated by
reference to Exhibit No. 4.04 to the January 1997 Form 8-K)
10.37 Form of Registration Rights Agreement dated December 11, 1996.
(Incorporated by reference to Exhibit No. 4.05 to the January 1997
Form 8-K)
10.37 Form of Registration Rights Agreement dated December 12, 1996.
(Incorporated by reference to Exhibit No. 4.06 to the January 1997
Form 8-K)
11.01 Statement regarding computation of net loss per share.
21.01 Subsidiaries of the Company. (Incorporated by reference to Exhibit
Number 21.01 to the Form S-1)
23.01 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27.01 Financial Data Schedule.
</TABLE>
* Represents a management contract or compensatory plan or
arrangement.
** Confidential treatment has been granted with respect to certain portions
of this document.
<PAGE> 1
EXHIBIT 11.01
LXR BIOTECHNOLOGY INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss....................... $(7,622,999) $ (6,315,947) $ (5,913,541)
=========== ============= =============
Weighted average number of shares outstanding:
Common stock................. 15,762,729 7,513,541 6,267,407
Common stock
subscribed................ 52,766 -- --
----------- ------------- -------------
15,815,495 7,513,541 6,267,407
=========== ============= =============
Net loss per share......... $ (.48) $ (.84) $ (.94)
=========== ============= =============
</TABLE>
<PAGE> 1
EXHIBIT 23.01
Consent of Independent Auditors
-------------------------------
The Board of Directors
LXR Biotechnology Inc.:
We consent to incorporation by reference in the registration statement
(No. 33-92488) on Form S-8 of LXR Biotechnology Inc. of our report dated
February 26, 1997, relating to the consolidated balance sheets of LXR
Biotechnology Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 1996, and for the period from April 20, 1992 (date of incorporation) through
December 31, 1996, which report appears in the December 31, 1996, annual report
on Form 10-KSB of LXR Biotechnology Inc.
/s/ KPMG Peat Marwick LLP
San Francisco, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,217,203
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,634,284
<PP&E> 2,222,615
<DEPRECIATION> 1,630,522
<TOTAL-ASSETS> 12,418,692
<CURRENT-LIABILITIES> 1,168,630
<BONDS> 0
0
0
<COMMON> 2,163
<OTHER-SE> 11,247,899
<TOTAL-LIABILITY-AND-EQUITY> 12,418,692
<SALES> 0
<TOTAL-REVENUES> 414,396
<CGS> 0
<TOTAL-COSTS> 8,221,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,564
<INCOME-PRETAX> (7,621,399)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,622,999)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> 0.00
</TABLE>
