<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-12968
LXR BIOTECHNOLOGY INC.
(Exact name of issuer as specified in its charter)
Delaware 68-0282856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Marina Way South, Richmond, California 94804
(Address of principal executive offices)
(510) 412-9100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 [ ]
At November 2, 1998, the number of outstanding shares of the Registrant's Common
Stock, par value $0.0001, was 28,507,935.
1
<PAGE> 2
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 (unaudited), and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997 and for the
period from April 20, 1992 (date of Incorporation) through
September 30, 1998 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 and for the period
from April 20, 1992 (date of incorporation) through
September 30, 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE> 3
PART I. Financial Information
Item I. Financial Statements
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------ ------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,092,262 $ 11,536,687
Prepaid expenses 131,796 210,695
Other receivables 87,852 40,237
------------ ------------
Total current assets 5,311,910 11,787,619
Equipment and leasehold improvements,
net of accumulated depreciation 1,119,071 1,485,847
Notes receivable from related parties 330,000 205,000
Deposits and other assets 41,960 96,633
------------ ------------
Total assets $ 6,802,941 $ 13,575,099
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 327,159 $ 740,809
Accrued private placement commission -- 467,789
Accrued payroll related expenses 177,733 161,280
Other accrued liabilities 42,197 113,503
Deferred rent obligation 310,776 290,408
Short-term portion of note payable 192,361 172,730
------------ ------------
Total current liabilities 1,050,226 1,946,519
Note payable, excluding short-term portion 250,465 409,707
------------ ------------
Total liabilities 1,300,691 2,356,226
------------ ------------
Commitments and contingencies (notes 2, 5, 6 and 7)
Subsequent event (note 8)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.0001 par value; 60,000,000
shares authorized; 28,689,947 and 27,485,850
shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 2,839 2,719
Common stock to be issued; 76,722 shares and 252,453
at September 30, 1998 and December 31, 1997, respectively 8 26
Additional paid-in capital 46,059,523 44,017,309
Deficit accumulated during the development stage (40,544,945) (32,786,006)
Treasury stock, at cost; 182,012 shares at
September 30, 1998 and December 31, 1997 (15,175) (15,175)
------------ ------------
Total stockholders' equity 5,502,250 11,218,873
------------ ------------
Total liabilities and stockholders' equity $ 6,802,941 $ 13,575,099
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
April 20, 1992
Three Months Nine Months (Date of
Ended Ended Incorporation)
------------------------------ ------------------------------ through
September 30, September 30, September 30, September 30, September 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Grant revenue $ -- $ 17,300 $ -- $ 57,282 $ 171,744
Funded research -- 33,454 101,665 101,665
License fee revenue 50,000 700,000 50,000 700,000 1,050,000
------------ ------------ ------------ ------------ ------------
Total revenues 50,000 750,754 50,000 858,947 1,323,409
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development 1,284,914 2,020,934 5,040,079 5,000,414 29,103,407
General and administrative 808,125 944,617 3,060,321 2,449,636 13,662,932
------------ ------------ ------------ ------------ ------------
Total expenses 2,093,039 2,965,551 8,100,400 7,450,050 42,766,339
------------ ------------ ------------ ------------ ------------
Loss from operations (2,043,039) (2,214,797) (8,050,400) (6,591,103) (41,442,930)
------------ ------------ ------------ ------------ ------------
Interest income, net:
Interest income 87,716 87,729 353,796 326,848 1,359,974
Interest expense (18,635) (21,435) (61,135) (21,435) (454,384)
------------ ------------ ------------ ------------ ------------
Total interest income, net 69,081 66,294 292,661 305,413 905,590
------------ ------------ ------------ ------------ ------------
Loss before income taxes (1,973,958) (2,148,503) (7,757,739) (6,285,690) (40,537,340)
Income taxes 400 400 1200 1,200 7,600
------------ ------------ ------------ ------------ ------------
Net loss $ (1,974,358) $ (2,148,903) $ (7,758,939) $ (6,286,890) $(40,544,940)
============ ============ ============ ============ ============
Net loss per share $ (0.07) $ (0.10) $ (0.28) $ (0.29)
============ ============ ============ ============
Weighted average shares used
to compute net loss per share 28,579,869 21,970,958 28,093,525 21,967,162
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statement of Stockholders' Equity
For the nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
SHARES ISSUED AMOUNT
------------ ------------
<S> <C> <C>
Balances at December 31, 1997 27,485,850 $ 2,719
Issuance of common stock in connection with acquisition
of Cardiosol technology 75,000 7
Private placement of common stock (net of issuance costs) 891,658 90
Stock options exercised 68,362 6
Warrants exercised 64,077 6
Stock options granted -- --
Issuance of common stock to consultant 15,000 2
Stock issued in connection with settlement of
contract with related party 90,000 9
Net loss -- --
------------ ------------
Balances at September 30, 1998 28,689,947 $ 2,839
============ ============
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
TO BE ISSUED ADDITIONAL DURING THE
------------------------------ PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 252,453 $ 26 $ 44,017,309 $(32,786,006)
Issuance of common stock in connection with acquisition
of Cardiosol technology (75,000) (7) -- --
Private placement of common stock (net of issuance costs) (85,731) (9) 1,368,169 --
Stock options exercised -- -- 100,640 --
Warrants exercised -- -- 92,213 --
Stock options granted -- -- 269,701 --
Issuance of common stock to consultant (15,000) (2) -- --
Stock issued in connection with settlement of
contract with related party -- -- 211,491 --
Net loss -- -- -- (7,758,939)
------------ ------------ ------------ ------------
Balances at September 30, 1998 76,722 $ 8 $ 46,059,523 $(40,544,945)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
------------------------------ TOTAL STOCK-
SHARES HOLDERS'
REPURCHASED AMOUNT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balances at December 31, 1997 (182,012) $ (15,175) $ 11,218,873
Issuance of common stock in connection with acquisition
of Cardiosol technology -- -- --
Private placement of common stock (net of issuance costs) -- -- 1,368,250
Stock options exercised -- -- 100,646
Warrants exercised -- -- 92,219
Stock options granted -- -- 269,701
Issuance of common stock to consultant -- -- --
Stock issued in connection with settlement of
contract with related party -- -- 211,500
Net loss -- -- (7,758,939)
------------ ------------ ------------
Balances at September 30, 1998 (182,012) $ (15,175) $ 5,502,250
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
April 20, 1992
(Date of
Incorporation)
Nine Months Ended September 30, through
----------------------------------- September 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities: $ (7,648,738) $ (6,389,528) $(36,494,228)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- (3,910,150)
Purchase of equipment and leasehold
improvements (67,191) (899,375) (2,471,417)
Proceeds from maturity of investments -- -- 4,000,000
Loans to related parties (150,000) (30,000) (355,000)
------------ ------------ ------------
Net cash used in investing activities (217,191) (929,375) (2,736,567)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 1,368,250 150,000 39,673,242
Receipt from Private Placement proceeds -- 1,278,700 1,278,700
Proceeds from notes payable to related parties -- -- 4,694,500
Proceeds from line of credit -- -- 375,000
Proceeds from note payable -- 536,568 701,249
Repayment of notes payable and line of credit (139,611) (73,559) (1,839,534)
Principal payments for obligations under
capital lease -- -- (776,513)
Payments received for notes receivable from
stockholders -- -- 2,147
Repurchase of common stock -- -- (1,510)
Net proceeds from exercise of warrants 92,219 -- 111,724
Net proceeds from exercise of stock options 100,646 1,563 104,052
------------ ------------ ------------
Net cash provided by financing
activities 1,421,504 1,893,272 44,323,057
------------ ------------ ------------
Net increase (decrease) in cash and cash (6,444,425) (5,425,631) 5,092,262
equivalents
Cash and cash equivalents at beginning of
period 11,536,687 10,217,203 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,092,262 $ 4,791,572 $ 5,092,262
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Company's
financial position as of September 30, 1998 and December 31, 1997,
results of operations for the three and nine months ended September 30,
1998 and 1997 and for the period from April 20, 1992 (date of
incorporation) through September 30, 1998, cash flows for the nine
months ended September 30, 1998 and 1997 and for the period from April
20, 1992 (date of incorporation), through September 30, 1998, and
changes in stockholders' equity for the nine months ended September 30,
1998.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
for the years ended December 31, 1997 and 1996, which are included as
part of the Company's Annual Report on Form 10-KSB/A for the year ended
December 31, 1997.
The Company's condensed consolidated financial statements include the
accounts and results of operations of the Company and its wholly owned
subsidiary, Optical Analytic, Inc. (OAI). All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company has incurred losses since its inception and expects to incur
substantial additional research and development costs prior to reaching
profitability, including costs related to clinical trials and
manufacturing and marketing expenses. The Company does not have any
committed sources of future equity or debt funding. Based upon its
current strategic plan, the Company believes it has sufficient funds to
meet the Company's operating and capital requirements through the first
quarter of 1999. The Company will need to raise substantial additional
capital to fund its operations, including the research and development
of its lead compounds. The Company intends to seek such additional
funding through public or private financing or collaborative or other
arrangements with corporate partners. There is no assurance that such
additional funds will be available for the Company to finance its
operations on acceptable terms, if at all. Should the plans contemplated
by management not be realized, the Company will have to seek alternative
sources of capital or reevaluate its operating plans.
The Company's independent auditors have issued their report on the
Company's 1997 Consolidated Financial Statements which states in part
that the Company has suffered recurring losses which raise substantial
doubt about the ability of the Company to continue as a going concern.
(2) CAPITAL STOCK
In January 1998, the Company issued 75,000 shares of the Company's
common stock in connection with the acquisition of certain patent and
other rights related to Cardiosol(TM), a preservation solution for use
during heart transplantation (the "Cardiosol(TM) Acquisition"). These
shares were valued at the fair market value on the date the agreement
was entered into. In addition, in January 1998, the Company issued
15,000 shares of the Company's common stock to a consultant as
consideration for rendering certain advisory services. These shares were
valued at the fair market value on the date of the grant. At December
31, 1997, the 75,000 shares and 15,000 shares were included in common
stock to be issued.
In January 1998, the Company raised approximately $368,000 (net of
offering costs), through the sale of an additional 229,123 shares of the
Company's common stock at a price of $1.75 per share and completed the
private placement of stock commenced in December 1997 (the "December
1997 Private Placement"). The Company raised a total of approximately
$9.4 million (net of offering costs) in the December 1997 Private
Placement. In connection with the December 1997 Private Placement, the
Company became obligated to issue 92,828 shares of the Company's common
stock to the placement agent as sales commission (the "Sales Commission
Shares"). The Company issued 91,106 Sales
(continued)
7
<PAGE> 8
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(2) CAPITAL STOCK (CONTINUED)
Commission Shares in January 1998, of which 87,453 shares were included
in common stock to be issued at December 31, 1997. As of September 30,
1998, an additional 1,722 of shares remain to be issued as sales
commissions and are included in common stock to be issued.
In January 1998, the Company also issued warrants to purchase 571,429
shares of the Company's common stock at an exercise price of $2 per share
to the placement agent for the December 1997 Private Placement.
In February 1998, the Company raised $1,000,000 through a private
placement offering and sale of 571,429 shares of the Company's common
stock at a price of $1.75 per share to a related party.
In February 1998, the Company issued an option to purchase 250,000 shares
of the Company's common stock to G. Kirk Raab for consulting services. In
April 1998, Mr. Raab was granted additional options to purchase 500,000
shares of the Company's common stock in connection with an employment
agreement. The Company recorded compensation expense of approximately
$161,000 for the nine months ended September 30, 1998 related to these
options (notes 3 and 6).
In April 1998, the Company committed to issue 90,000 shares of the
Company's common stock to Mark Tomei as partial consideration of the
severance due to him upon termination of his Independent Consulting
Agreement with the Company (note 6). The fair value of these shares of
approximately $211,500 based on the average closing price of the
Company's common stock during the ten days prior to the termination of
the Independent Consulting Agreement was included in general and
administrative expense for the nine months period ended September 30,
1998. These shares were issued in July 1998.
In June 1998, the Company terminated Dr. Kiefer's employment with the
Company, and entered into a separate Consulting Agreement (the "Kiefer
Consulting Agreement") with him. Under the terms of the Kiefer Consulting
Agreement, options to purchase 108,500 shares of the Company's common
stock, previously granted to Dr. Kiefer as an employee of the Company,
continue to vest and vested options continue to be exercisable. The
Company recorded compensation expense of approximately $43,000 for the
nine months ended September 30, 1998 related to these options (notes 3
and 6).
In July 1998, the Company terminated the employment agreement with Dr. L.
David Tomei (Dr. Tomei) and entered into a separate Consulting Agreement
(the "Tomei Consulting Agreement") with him. Under the terms of the
Tomei Consulting Agreement, options to purchase 418,800 shares of the
Company's common stock, previously granted to him, continue to vest and
vested options continue to be exercisable. In addition, Dr. Tomei was
granted options to purchase 300,000 shares of the Company's common stock
under the Tomei Consulting Agreement. The Company recorded compensation
expense of approximately $66,000 for the nine months ended September 30,
1998 related to these options (notes 3 and 6).
During the nine months ended September 30, 1998, the Company issued
64,077 shares of the Company's common stock upon exercise of warrants
issued at a purchase price of $92,219. As of September 30, 1998, warrants
to purchase 1,689,958 shares of stock remain outstanding.
In June 1998, the Company's stockholders approved a proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
shares of common stock authorized for issuance from 45,000,000 to
60,000,000.
(CONTINUED)
8
<PAGE> 9
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(3) STOCK OPTION PLANS
The following summarizes the Stock Option activity:
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------------
1993 Stock Directors Stock Other Stock
Option Plan Option Plan Option Grants
---------- ---------- ----------
<S> <C> <C> <C>
Balance as of December 31, 1997 1,330,701 60,000 150,000
Options granted 2,722,066 25,000 420,000
Options canceled or expired (423,231) (20,000) --
Options exercised (68,362) -- --
---------- ---------- ----------
Balance as of September 30, 1998 3,561,174 65,000 570,000
========== ========== ==========
</TABLE>
In February 1998, the Company appointed G. Kirk Raab to the Board of
Directors of the Company and also entered into a three year consulting
agreement (the "Raab Consulting Agreement") with him. Under the Raab
Consulting Agreement, Mr. Raab received options to purchase 250,000
shares of the Company's common stock at an exercise price equal to the
fair market value of the common stock on the date of the grant. Options
to purchase 50,000 shares of the Company's common stock vested
immediately upon signing the Raab Consulting Agreement and the balance
vest at a rate of 1/36th per month. The Board of Directors may
accelerate the vesting of 100,000 of the stock options upon achievement
of certain milestones. In April 1998, G. Kirk Raab was appointed as the
Chairman of the Board of Directors of the Company. Pursuant to this
change in position, the Company terminated the Raab Consulting Agreement
with the Company and entered into a separate Employment Agreement with
Mr. Raab. Under the terms of the Employment Agreement, Mr. Raab was
granted additional options to purchase 500,000 shares of the Company's
common stock and the options to purchase 250,000 shares of the Company's
common stock previously granted to him under the Raab Consulting
Agreement continue to vest under the new Employment Agreement in
accordance with the terms established previously under the Raab
Consulting Agreement.
As of April 20, 1998, options to purchase 61,110 shares of the Company's
common stock had vested under the Raab Consulting Agreement. The fair
value of these 61,110 vested options, using the Black Scholes pricing
model, with an expected dividend yield of 0.0%, expected life of ten
years, expected volatility of 95.8% and risk-free interest rate of
5.73%, was estimated at approximately $138,000 and was included in
general and administrative expense for the period ending September 30,
1998. In accordance with APB Opinion No. 25 (APB 25), the intrinsic
value of the remaining 188,890 unvested options that continue to vest
under the Employment Agreement is estimated at $153,000 representing the
difference between the exercise price and the fair market value of the
Company's common stock on the date of the Employment Agreement. As of
September 30, 1998, the Company recognized expense of approximately
$22,600 related to these unvested shares. Based on the three year
vesting schedule of these options, the Company expects to recognize
total expense of approximately $174,000, $54,000, $54,000 and $9,000 in
the years ending December 31, 1998, 1999, 2000 and 2001, respectively,
related to these options.
The options to purchase 500,000 shares of the Company's common stock
granted to Mr. Raab were
(CONTINUED)
9
<PAGE> 10
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(3) STOCK OPTION PLANS (CONTINUED)
granted under the 1993 Stock Option Plan at an exercise price of $3.3125
per share representing the fair market value on the date the options
were granted.
In March 1998, the Board adopted a stock option plan for directors,
supplemental to the 1993 Stock Option Plan (the "Supplemental Stock
Option Plan for Directors" or the "Supplemental Plan"), and authorized
an issuance of up to 300,000 shares of the Common Stock under the
Supplemental Plan. The terms of the options granted under the
Supplemental Plan are substantially the same as the terms of the options
granted under the 1993 Stock Option Plan.
In March 1998, the Board of Directors approved a resolution to grant
each director who is not an employee or substantial stockholder an
option to acquire 40,000 shares of the Company's common stock upon
joining the board. In connection with this resolution, the Board of
Directors granted options to purchase 160,000 shares of the Company's
common stock at an exercise price of $2.875 per share, representing the
fair market value of the shares on the date the options were granted. On
that day the board also approved a resolution to grant every
non-employee director an additional option to acquire 10,000 shares of
the Company's common stock at the end of each full year of service on
the board under the Company's Supplemental Stock Option Plan for
Directors.
In June 1998, the Company's stockholders approved an amendment to the
1993 Stock Option Plan to increase the shares of common stock authorized
for issuance from 1,849,850 shares to 3,849,850.
In June 1998, the Company terminated Dr. Kiefer's employment with the
Company, and entered into a separate consulting agreement with him to
complete existing projects and other projects as mutually agreed with
the Company. Under the terms of the Kiefer Consulting Agreement, options
to purchase 108,500 shares of the Company's common stock previously
granted to him as an employee of the Company, continue to vest and
vested options continue to be exercisable.
In July 1998, the Company terminated the employment agreement with Dr.
L. David Tomei and entered into a separate consulting agreement with him
to complete existing projects and other projects as mutually agreed with
the Company. Under the terms of the Tomei Consulting Agreement, option
to purchase 418,800 shares of the Company's common stock previously
granted to Dr. Tomei, continue to vest and vested options continue to be
exercisable. In addition, Dr. Tomei was granted options to purchase
300,000 shares of the Company's common stock under the Tomei Consulting
Agreement. These options were granted under the 1993 Stock Option Plan
at an exercise price of $3.3125 representing the fair market value on
the date the options were granted.
As of June, 1998 and July, 1998 options to purchase 16,508 and 282,717
shares had vested during Dr. Kiefer's and Dr. Tomei's employment with
the Company, respectively. In accordance with APB Opinion No. 25 (APB
25), the intrinsic value of these options is estimated at approximately
$1,200 and $24,500 for Dr. Kiefer and Dr. Tomei, respectively. The
intrinsic value of these options represents the difference between the
exercise price and fair market value of the Company's common stock on
the dates of the Kiefer Consulting Agreement and Tomei Consulting
Agreement, was included in general and administrative expense for the
nine month period ending September 30, 1998. The fair value of the
remaining 91,992 and 436,083 options that continue to vest under the
Kiefer Consulting Agreement and Tomei Consulting Agreement,
respectively, including the fair value of the 300,000 options granted to
Dr. Tomei under the Tomei Consulting Agreement, is estimated at $170,000
and $739,000, respectively. The fair value was estimated using the Black
Scholes pricing model, with an expected dividend yield of 0.0%, expected
life of ten years, expected volatility of 103.3% and risk free interest
rate of 5.73%. Based on a one year vesting schedule of Dr. Kiefers
options under the Kiefer Consulting Agreement, the Company expects to
recognize total expense related to these options of $86,000 and $84,000
in the years ending December 31, 1998 and December 31, 1999
respectively. Based on a three year vesting schedule of options under
the Tomei Consulting Agreement, the Company expects to recognize total
expense related to these options of $103,000, $246,000, $246,000 and
$144,000 in the years ending December 31, 1998, 1999, 2000 and 2001,
respectively. As of September 30, 1998 the Company recognized
compensation expense of $43,000 and $66,000 related to Dr. Kiefer's and
Dr. Tomei's options respectively.
(4) RESTRUCTURING CHARGES
In June 1998, the Company announced and began implementing a strategic
plan to manage cash to provide for operations through approximately the
first quarter of 1999. Under the plan, the Company reallocated its
resources to the research and development of its lead compounds,
suspended most pure research at the Company and eliminated certain
positions. In connection with the implementation
(CONTINUED)
10
<PAGE> 11
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(4) RESTRUCTURING CHARGES (CONTINUED)
of the strategic plan, the Company incurred restructuring charges of
approximately $145,000, primarily related to employee lay offs, all of
which has been paid as of September 30, 1998. These charges are included
in general and administrative expenses in the accompanying statement of
operations.
(5) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS:
Innovex, Inc.
In June 1998, the Company terminated its clinical service agreement with
Innovex, Inc. As of September 30, 1998, the Company has no commitment
under this contract.
Perkin Elmer License Agreement:
In July 1998, Perkin-Elmer Corporation notified the Company of the
termination of its license agreement with the Company and OAI related to
the development of the Company's proprietary Scanning Laser Digital
Imaging (SLDI) microscope technology. As a result of this termination
the Company will not be receiving any future license payments from
Perkin-Elmer relating to SLDI.
Ohio State University License Agreement
In August 1998, the Company terminated the license agreement with Ohio
State University (License Agreement). As a result of this termination
the Company does not owe any future payments to Ohio State University,
and gave up the exclusive license rights to patents and technology
owned by Ohio State University related to SLDI.
University of Tennessee
In August 1998, the Company terminated an exclusive license and research
agreement with University of Tennessee and the University of Tennessee
Research Corporation related to certain patent applications and
technology. As of September 30, 1998, the Company has no outstanding
commitments under the contract.
Introgen Therapeutics, Inc.
In September 1998, the Company entered into an Evaluation and Exclusive
Option Agreement (the "Option Agreement") with Introgen Therapeutics
Inc.("Introgen"). This agreement enables Introgen to assess the
anti-tumor activity of the BAK gene, and also gives Introgen an option
to enter into an exclusive license agreement with the Company related to
the BAK gene. In consideration for the Option Agreement, the Company
will receive a non-refundable up front payment of $50,000, which was
included in Company's revenue for the nine month period ended September
30, 1998. Certain other milestone payments and royalties have been
agreed to as the technology progresses through development.
(6) RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 1998, in connection with the
employment agreement with Dr. Donald H. Picker ("Dr. Picker") the
Company's former President and Chief Operating Officer (COO), the
Company forgave $25,000 of the outstanding loan in the original
principal amount of $175,000. As of September 30, 1998, the principal
balance of $150,000 remained outstanding under the loan. Subsequently,
the note was repaid by a set off against the amount owed to Dr. Picker
under the release letter (note 8).
In February 1998, the Company terminated its Independent Consulting
Agreement with Mark J. Tomei and included the severance of approximately
$290,000 due to him upon termination of the agreement in general and
administrative expenses. In April 1998, the Company agreed with Mr.
Tomei, to settle the severance through payment of cash of $78,500 and by
issuance of 90,000 shares of the Company's common stock (Note 2). As of
September 30, 1998, the Company has paid cash severance of
(CONTINUED)
11
<PAGE> 12
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(6) RELATED PARTY TRANSACTIONS (CONTINUED)
approximately $56,600 and the remaining $21,900 is included in accrued
payroll related expenses. The shares of common stock were issued in July
1998 (note 2).
In April 1998, G. Kirk Raab was appointed as the Company's Chairman and
Interim Chief Executive Officer. Pursuant to this change in position,
the Company terminated the Raab Consulting Agreement and entered into an
Employment Agreement with him. Under the Employment Agreement, Mr. Raab
will receive a base compensation of $180,000, options to purchase
500,000 shares of the Company's common stock and the options to purchase
250,000 shares of the Company's Common Stock previously granted to him
under the Raab Consulting Agreement will continue to vest under the
Employment Agreement (note 3).
In June 1998, in connection with the implementation of the strategic
plan, the Company laid off Dr. Kiefer, the Company's Vice President of
Molecular Biology, and entered into the Kiefer Consulting Agreement to
complete existing projects and other projects to be mutually agreed upon
with the Company over a twelve month period. The agreement provides for
$72,000 in cash compensation to be paid over the next six months and
that options to purchase 108,500 shares of the Company's common stock
granted to him as an employee of the Company will fully vest over the
next twelve months (notes 2 and 3).
In July 1998, the Company terminated its employment agreement with Dr.
L. David Tomei and entered into the Tomei Consulting Agreement to
complete existing projects and other projects as mutually agreed with
the Company over a three year period. Under the terms of the Consulting
Agreement, Dr. Tomei will receive cash compensation of $20,000 per month
over the three year term of the Consulting Agreement and option to
purchase 418,800 shares of the Company's common stock granted to him as
an employee of the Company will continue to vest during the term of the
Consulting Agreement. In addition, Dr. Tomei was granted options to
purchase 300,000 shares of the Company's common stock under the
Consulting Agreement (notes 2 and 3).
In August 1998, the Company entered into an employment agreement with
its new President and Chief Executive Officer (CEO) which provides for
an annual salary of $250,000. Under the agreement, the CEO was granted
options to purchase 1,000,000 shares of the Company's common stock under
the provisions of the Company's 1993 Stock Option Plan. This agreement
also provides for reimbursement of certain relocation costs and a loan
of $150,000, which may be forgiven over a three year period, subject to
certain conditions. The loan bears interest at the amount necessary to
avoid imputation of interest by the Internal Revenue Service. Any
remaining balance of the loan will become due and payable if the CEO
resigns or is terminated. If the Company terminates the CEO without
cause, he will be entitled to receive severance equal to one year's
salary. As of September 30, 1998, the Company has advanced $150,000
under this agreement, all of which is outstanding at September 30, 1998
and is included in notes receivable from related parties at September
30, 1998.
(7) LITIGATION
The Company and five of its past directors and officers are named as
defendants in Katz vs. Blech, ("Katz") and Degulis vs. LXR Biotechnology
Inc., et al. ("Degulis"). One of the five, Mark Germain, a former
director and former chairman of the Company, is named as a defendant in
the above two cases and also in In re Blech Securities Litigation, ("In
re Blech"). In addition, L. Scott Minick, a former director and former
officer of the Company; James D. Coombes, a former director and former
officer, and Mark J. Tomei, a former 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.
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 and
subsequent trading of those shares. The suits allege violations of
Sections 11 and 12 of
(CONTINUED)
12
<PAGE> 13
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(7) LITIGATION (CONTINUED)
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. Document discovery is largely
completed and depositions are underway. Under the current scheduling
order, no deadline for completion of discovery is presently set and no
trial date is set.
None of the complaints in Katz, Degulis or In re Blech state 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
recessionary 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 has agreed to indemnify and/or advance defense costs
to each of the former officers and directors who are named as defendants
in the litigation. 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, 1999 or the
termination of the tolling agreement.
The Company maintains officers and directors liability insurance under
policies providing aggregate coverage totaling $3 million, which covers
(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
retention's 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. The Company's primary level of
directors and officers liability insurance carrier has tentatively
agreed to provide coverage. On November 4, 1997, the Company's first
level excess insurer denied coverage based on the related party
transactions exclusion in its policy. The Company reserves the right to
contest this denial of coverage. The Company's second level excess
insurers has reserved its rights to deny coverage based on the same
issue. As a result, the Company cannot predict, at this time, the amount
of insurance reimbursement that will be obtained. During the nine months
ended September 30, 1998 and 1997, the Company incurred expenses of
approximately $41,000 and $73,200, respectively, relating to this
litigation. To date, the Company has received no reimbursements 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 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 denies any wrongdoing and is defending the above cases
vigorously. While it is possible that the litigation may have a material
adverse effect on the Company, 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.
(CONTINUED)
13
<PAGE> 14
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
(8) SUBSEQUENT EVENTS
Executive Officer Agreement
In October 1998, Dr. Donald H. Picker resigned as the Company's Chief
Operating Officer. Upon resignation, the Company and Dr. Picker signed a
release letter (the "release letter") under which Dr. Picker agreed to
certain covenants and promises. As consideration for signing the
contract, the Company paid Dr. Picker $225,000 and forgave $25,000 of
the outstanding loan balance. Dr. Picker, repaid the remaining loan
balance of $125,000 through a set off against the amount owed to him
under the release letter.
Option Re-pricing
In October 1998, the Company adopted a stock option re-pricing program
pursuant to which the Company offered to re-price any or all outstanding
options to purchase Common Stock of the Company to $1.25 per share and
to restart the vesting schedule for all options so re-priced. The
Company will recognize compensation expenses, if any, equal to the
difference between the new exercise price of $1.25 per share and fair
market value of the Company's common stock on the date the optionee
accepted the re-priced options.
Agreement with Boehringer Mannheim
In October, 1998, Boehringer Mannheim ("Boehringer") notified the
Company that Boehringer has reassessed its research program resulting
from its acquisition by Hoffman La Roche, and is terminating the
collaboration with the Company under its Letter of Intent related to the
research and development of Maspin. The Company and Boehringer are
currently negotiating the terms of the final settlement under the
Letter of Intent.
14
<PAGE> 15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for historical information, the following Management's Discussion
and Analysis of Financial Condition and Results of Operations including
the discussion of Factors Affecting Future Results contains forward
looking statements regarding, among other things, product development
plans, product efficacy, safety and effectiveness, corporate partnering,
capital and other expenditures, timing of FDA filings, FDA approval
thereof and clinical trial progress, sufficiency of cash resources, the
ability of the Company to raise additional funding and Year 2000
compliance. 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. The following
discussion and analysis should be read in conjunction with the Company's
financial statements and accompanying notes included herein, the
Company's Annual Report on Form 10-KSB/A for the year ended December 31,
1997, the Company's Form 10-Q for the quarters ended March 31, 1998 and
June 30, 1998, the Company's registration statement on Form S-3,
declared effective by the Securities and Exchange Commission on May 6,
1998.
PLAN OF OPERATIONS
In 1998, the Company implemented a strategic plan to reallocate
resources to the clinical development and commercialization of
CP-Cardiosol(TM), HK-Cardiosol(TM), Elirex(TM), and SARP's from other
research programs including Maspin, Bak, and Fas((DELTA))TM and Urine
DNA Analysis. The plan also entailed a significant reduction in
personnel.
In March 1998, the Company filed an IND with the FDA to begin clinical
studies of CP-Cardiosol(TM) for use in cardioplegia. In April of 1998,
the Company received a request from the FDA for additional preclinical
and non-clinical studies. The Company is currently conducting the
preclinical studies in response to the FDA's request. The Company plans
to complete all requested studies and file an amended IND by early next
year. The current strategy for further development of CP-Cardiosol(TM)
and HK-Cardiosol(TM) is expected to require obtaining a corporate
partner. However, there can be no assurance that the Company will be
able to secure a corporate partner or that the clinical trials of
CP-Cardiosol(TM) and HK-Cardiosol will commence. See "Factors Affecting
Future Results", below.
The Company is currently focusing on the development of Elirex(TM) and
is conducting preclinical studies of Elirex(TM) in animals for ischemic
heart attack and stroke application. The Company has received final
results of animal studies performed at Cleveland Clinic which showed
that the Elirex(TM) treated group had a 53% reduction in extent of
myocardial infarction when compared to controls. Experimental evidence
obtained in these studies also showed significant reduction of
inflammation and protection of heart function. Based on the results to
date of the preclinical studies for Elirex(TM), the Company is currently
evaluating its development strategy for Elirex(TM) and considering a
plan to seek a collaborative partnership after completing a Phase II
clinical trial. There can be no assurance that the Company will be able
to secure a collaborative partnership or commence clinical trials of
Elirex(TM).
In July 1998, Perkin-Elmer Corporation terminated the license agreement
with the Company related to the development of the Company's proprietary
SLDI technology. The Company subsequently evaluated its plan for further
development of SLDI technology and due to current resource constraints,
determined not to proceed with the project. As a result, the Company
terminated its License Agreement with Ohio State University and gave up
the license rights to patents and technology owned by Ohio State
University related to SLDI.
The Company has completed the preclinical studies to assess the efficacy
and toxicity of Maspin under its contract with Boehringer Mannheim. In
October 1998, Boehringer Mannheim notified the Company that Boehringer
has reassessed its research program resulting from its acquisition by
Hoffman LaRoche and does not intend to proceed with further research and
development of Maspin. The Company has also assessed that it will not
proceed with Maspin project at this time.
(Continued)
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PLAN OF OPERATIONS (CONTINUED)
The Company is currently conducting limited research on SARP's. To
further expand any of the basic research programs, including SARP's, Bak,
Fas((DELTA))TM, and Urine DNA Analysis, the Company will pursue business
development opportunities such as licensing and collaborative research
agreements. In September 1998, the Company entered into an Evaluation and
Exclusive Option Agreement with Introgen Therapeutics, Inc., related to
the Bak gene. Although the Company plans to seek additional corporate
partners for its research and development activities, its first priority
is establishing corporate partnerships for CP-Cardiosol(TM), and
HK-Cardiosol(TM) (collectively the "Cardiosol Products" or
"Cardiosol(TM)"). There can be no assurance that the Company will be able
to secure any new corporate partner relationships.
The Company has completed its assessment of the impact of what is
commonly called the "year 2000" problem, and the Company believes that
any of the systems which are mission-critical to the Company's business
operations will be able to recognize a date using "00" as the year 2000.
The Company has tested and is currently in the process of upgrading,
where necessary, its laboratory instruments to address the year 2000
issue. The Company intends to complete upgrading all of its current
laboratory instruments by mid-1999. The Company has made inquiries with
the providers of certain outside services upon which the Company relies
such as payroll, banking services and research organization to determine
their year 2000 readiness. While the Company believes that the providers
of these services will be ready for year 2000, failure of such third
party providers to comply, could be disruptive to the Company's business
operations if such systems were unavailable for an extended period of
time. However, the Company believes that its business operations would
not be materially adversely affected by disruption in such services. The
Company continuously evaluates its vendors to year 2000 compliance. The
Company believes that if its systems are not year 2000 compliant, its
technical personnel would be able to address and resolve such failure
prior to occurrence of any material adverse effect on the Company's
business operations, and that the Company's key processes could be
manually performed for a sufficient period time.
To date the Company has not incurred substantial costs to address the
year 2000 issue. The Company estimates that the additional costs, if any,
that may arise from actions take by the Company to address year 2000
problems would not be material. Despite the Company's efforts to address
the year 2000 impact on its systems and business operations, in the event
that the year 2000 problems proves more disruptive than the Company
reasonably expects and the Company's plans prove inadequate, the year
2000 problem may result in a material disruption of its business or have
a material adverse effect on the Company's business, financial condition
or results of operation.
In June 1998, in connection with the implementation of the strategic
plan, the Company reduced its workforce and recorded a restructuring
charge of approximately $145,000, consisting primarily of costs related
to employee lay offs. As of September 30, 1998, the Company employed 31
employees including 29 full-time employees. Over the next 12 months,
based on the existing resources and current management plan, the Company
does not expect a significant increase in its number of employees. In
July 1998, the Company entered into a three year consulting agreement
with Dr. L. David Tomei. In August 1998, the Company hired Paul J.
Hastings as its President and Chief Executive Officer. In October 1998,
Dr. Donald H. Picker resigned as the Company's Chief Operating Officer.
The Company made capital additions during the nine months ended September
30, 1998 of approximately $124,000. The Company has prioritized the use
of its existing resources and, under the current management plan, does
not expect to incur a significant amount of capital expenditures over the
next twelve months.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
The Company had revenues of approximately $50,000 for the three and nine
months ended September 30, 1998 as compared to revenues of approximately
$751,000 and $859,000 for the three and nine months ended September 30,
1997. The Company's revenues for the three and nine months ended
September 30, 1998 consisted of revenue to be received relating to the
Introgen Option Agreement. The decrease in revenues from 1997 to 1998 was
primarily due to a decrease of $700,000 in license fee revenue from
Perkin-Elmer, a decrease in grant revenues from the National Institute of
Health and a decrease in other funded research. The Company does not have
any commercially available products, and does not anticipate generating
any significant product revenues for at least the next several years
The Company incurred research and development expenses of approximately
$1,285,000 and $5,040,000 for the three and nine months ended September
30, 1998, respectively, compared to approximately $2,021,000 and
$5,000,000 for the three and nine months ended September 30, 1997,
respectively. These expenses included salaries and related benefits,
laboratory supplies, depreciation of equipment, facility costs,
consulting fees, research collaboration expenses, toxicology study costs,
clinical trial costs, contract manufacturing expenses, legal fees for
patents and other research related expenditures. The decrease in the cost
for the three months ended September 30, 1998 as compared to the same
period in the prior year was due to decreases in salary and benefit
costs, a decrease in purchases of supplies, and a decrease in license and
collaborative fees. The decrease in the above costs was due to a
reduction in personnel and refocus of resources to fewer projects
resulting from the restructuring in June 1998. In addition, clinical
trial costs decreased primarily due to the completion of Lexirin clinical
trials in 1997. The decrease in the above costs was offset by an increase
in preclinical costs for Elirex(TM) and CP-Cardiosol(TM), an increase in
contract manufacturing costs for Cardiosol(TM), and an increase in
depreciation expenses. The research and development expenses for the nine
months ended September 30, 1998 were consistent with the research and
development expenses for nine months ended September 30, 1997 primarily
because the decrease in the costs in the third quarter of 1998, related
to restructuring, was
(Continued)
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997 (CONTINUED)
offset by an increase in preclinical costs for Elirex and CP-Cardiosol,
and an increase in the contract manufacturing costs for Cardiosol(TM) in
the first two quarter of 1998.
Although the Company expects research and development expenses to
continue to increase substantially over the next several years, as the
Company undertakes clinical studies for Elirex(TM), such increases remain
contingent upon the Company's ability to obtain additional and adequate
amounts of capital resources. Unless and until such funds are received,
research and development activities will be limited by the Company's
available resources. See "Liquidity and Capital Resources" below.
The Company's general and administrative expenses were approximately
$808,000 and $3,060,000, for the three and nine months ended September
30, 1998, respectively, compared to approximately $945,000 and $2,450,000
for the three and nine months ended September 30, 1997, respectively. The
decrease in general and administrative expenses for the three months
ended September 30, 1998 as compared to the three months ended September
30, 1997 was primarily due to a decrease in investor relations costs and
consulting fees related to marketing survey and road-show presentations.
The increase in the general and administrative expenses for nine months
ended September 30, 1998 as compared to the same period in the prior year
was primarily due to the accrued severance obligation resulting from the
termination of Mark Tomei's independent consulting agreement, accrued
expenses relating to the employment and consulting agreement with Mr.
Raab, increased recruitment and relocation costs as a result of the
appointment of new President and Chief Executive Officer, increased legal
costs and restructuring charges. The increase in general and
administrative expenses was offset by decreased investor relations costs.
Legal expenses are expected to increase as a result of the securities
lawsuits currently pending against the Company and certain of its past
and present officers and directors.
Interest income was approximately $88,000 and $354,000, for the three and
nine months ended September 30, 1998, respectively, compared to
approximately $88,000 and $327,000 for the three and nine months ended
September 30, 1997, respectively. The slight increase in interest income
for the nine month period was primarily due to interest earned on a
larger investment balance. Interest expense was approximately $19,000 and
$61,000 for the three and nine months ended September 30, 1998,
respectively, compared to interest expense of $21,000 for three and nine
months ended September 30, 1997. The increase in interest expense was
primarily due to the equipment loan of $700,000 obtained during 1997.
The Company incurred net losses of approximately $1,974,000 and
$7,759,000, for the three and nine months ended September 30, 1998,
respectively, compared to approximately $2,149,000 and $6,287,000 for the
three and nine months ended September 30, 1997, respectively. As of
September 30, 1998, the Company had an accumulated deficit of
approximately $40,545,000. The Company expects to continue to incur
substantial losses over the next several years as it continues to
undertake preclinical and clinical studies.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, the Company raised
approximately $1.4 million in net proceeds through the sale of 800,552
shares of the Company's Common Stock at a price of $1.75 per share in
private placements. In addition, the Company received approximately
$193,000 in proceeds through the exercise of stock options and warrants.
As of September 30, 1998, the Company's remaining sources of capital
consisted of approximately $5.1 million in cash and cash equivalents and
interest from investments.
The Company and five of its past or present directors and officers are
defendants in class action lawsuits. (See "Note 7 of the Condensed
Consolidated Financial Statements".) The Company maintains officers and
directors liability insurance under policies providing aggregate coverage
totaling $3 million, which covers (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
(Continued)
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. The Company's
primary level of directors and officers liability insurance carrier has
tentatively agreed to provide coverage. On November 4, 1997, the
Company's first level excess insurer denied coverage based on the related
party transactions exclusion in its policy.
The Company reserves the right to contest the denial of coverage. The
Company's second level excess insurers has reserved its rights to deny
coverage based on the same issue. As a result, the Company cannot
predict, at this time, the amount of any insurance reimbursement that
will be obtained.
During the nine months ended September 30, 1998, and 1997, the Company
incurred expenses of approximately $41,000 and $73,200, 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 does not have any committed sources of future equity or debt
funding. The Company has a new strategic plan and as a result it is
expected that the Company's existing resources will provide for
operations through the first quarter of 1999. However, there can be no
assurance that unanticipated events affecting the Company's resources
will not result in the Company depleting its capital resources before
that time. Accordingly, the Company will need to raise substantial
additional capital to fund its operations. Although the Company is
currently seeking to obtain the additional funding necessary to fund the
Company's operations beyond the first quarter of 1999, 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.
The Company's independent auditors have issued their report on the
Company's 1997 Consolidated Financial Statements which states in part
that the Company has suffered recurring losses which raise substantial
doubt about the ability of the Company to continue as a going concern.
FACTORS AFFECTING FUTURE RESULTS
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
We will require substantial additional funds to continue our research and
development programs and preclinical and clinical testing of our
potential pharmaceutical products. We will also require substantial
additional funds to conduct marketing of any pharmaceutical products that
may be developed. Our capital requirements depend on numerous factors,
including the following:
o the progress of research and development programs;
o the progress of preclinical and clinical testing;
o the time and costs involved in obtaining regulatory approvals;
o the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
o the cost of obtaining technological rights;
o competing technological and market developments;
o changes in our existing research relationships;
o our ability to establish collaborative arrangements;
o the development of commercialization activities and arrangements;
o the purchase of additional capital equipment; and
o legal expenses incurred in connection with defending certain lawsuits
that have been brought against us and certain of our past and present
directors and officers.
18
<PAGE> 19
Based upon our current plans, we believe we have sufficient funds to meet
our operating expenses and capital requirements through the first quarter
of 1999. The factors identified above may result in the expenditure of
all available funds before then.
We intend to seek additional funding through public or private financings
or collaborative or other arrangements with corporate partners.
Additional financing may not be available from any of these sources, or
may not be available on favorable or acceptable terms.
Additional financings may result in substantial dilution to our security
holders. If we obtain funds by entering into arrangements with
collaborative partners or others, we may be required to relinquish rights
to certain of our technologies or potential products that we would not
otherwise relinquish. If adequate funds are not available, we may be
required to delay, scale back or eliminate the development of our
potential products to an even greater extent than we have done to date.
Our failure to obtain needed funds would have a material adverse effect
on our operations.
Our independent auditors have issued their report on our 1997
Consolidated Financial Statements. Their report states in part that we
have suffered recurring losses which raise substantial doubt about our
ability to continue as a going concern.
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
We are at an early stage of development. All of our potential
pharmaceutical and medical device products are currently in research and
development. No revenues from the sale of potential products have ever
been generated. Substantially all of our resources have been, and for the
foreseeable future will continue to be, dedicated to our research
programs and the development of potential pharmaceutical and medical
device products resulting from the research programs. We may not be able
to develop a commercial product from these projects.
All of our drug and medical device candidates are in preclinical
development, except for HK-Cardiosol(TM), which received approval to
enter the clinic and CP-Cardiosol(TM) which was placed on clinical hold
pending the outcome of additional preclinical studies.
We believe that the results attained to date in our preclinical studies
generally support further research and development of our potential
products. Results attained in preclinical studies, however, are not
necessarily indicative of results that will be obtained in human clinical
testing. Additionally, we have not previously met our forecasted schedule
for introducing products into clinical trials.
Assessments of market opportunities and priorities for allocating
available resources may affect development of our potential products.
The potential products we are developing 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. Our 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 following:
o our novel approach to diagnosis and therapy may not be successful;
o any or all of our potential pharmaceutical products may be found to be
unsafe, ineffective or toxic, or otherwise fail to receive necessary
regulatory clearances;
o the products, if safe and effective, will be difficult to manufacture
on a large scale or uneconomical to market;
o proprietary rights of third parties could preclude us from marketing
products; or
o third parties could market superior or equivalent products.
As a result of the above risks:
o our research and development activities may not be successfully
completed;
o clinical trials may not be allowed by the FDA or other regulatory
authorities;
o clinical trials may not commence as planned;
o required U.S. or foreign regulatory approvals may not be obtained on a
timely basis, if at all; and
o products for which approval is obtained may not result in any
commercially viable products.
19
<PAGE> 20
RELIANCE ON NOVEL SCIENTIFIC APPROACH
Our product development efforts are based on the novel scientific
approach of therapeutic apoptosis modulation, which is a process of
regulating genetically programmed cell death. This process has not been
widely studied. There is, therefore, substantial risk that this approach
will not be successful.
Moreover, we are 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. Many of these other companies are
much larger and better funded than the Company.
Biotechnology in general and apoptosis modulation in particular are
relatively new fields in which there is a potential for extensive
technological innovation in relatively short periods of time. Our
competitors may succeed in developing technologies or products that are
more effective than ours. Rapid technological change or developments by
others may result in our technology or proposed products becoming
obsolete or noncompetitive.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
We have incurred significant operating losses since our inception in
1992. At September 30, 1998, we had an accumulated deficit of
approximately $40.5 million. Our research, development, testing and
regulatory compliance activities and our projected general and
administrative expenses are expected to result in significant operating
losses for at least the next several years.
Revenues, if any, that we may receive in the next few years will be
limited to payments from the following sources:
o our agreement with Introgen related to the Bak gene, provided Introgen
exercises its option to enter into a license agreement with us;
o payments under research or product development relationships that we
may establish in the future;
o payments under license agreements that we may establish in the future;
o sales of products that we may develop in the future; and
o interest payments.
We may not receive the above payments because we may not be able to (i)
establish any additional collaborative relationships, (ii) enter into any
license agreements, or (iii) develop or acquire any products in the
future.
Our ability to achieve profitability also depends upon:
o our ability to successfully compete either alone or with others;
o development of our potential products;
o clinical trial results regulatory approvals; and our ability to
manufacture and market our products or to enter into license
agreements on acceptable terms.
Because of the above, we may never achieve significant revenue or
profitable operations.
20
<PAGE> 21
DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS
We are highly dependent on the principal members of our management and
scientific staff, including; G. Kirk Raab, Chairman of the Board of
Directors; Paul J. Hastings, President and Chief Executive Officer; and
Samuil R. Umansky, Ph.D., Chief Scientific Officer and Vice President,
Molecular Pharmacology. The departure of any of these persons or other
members of our staff could have a material adverse effect on operations.
We recently entered into employment agreements with Paul J. Hastings and
Mr. Raab. We also recently entered into a consulting agreements with L.
David Tomei. Any of these people, however, may terminate his relationship
with the Company at any time. Dr. Donald H. Picker, the Company's Chief
Operating Officer, recently resigned from the Company. The laws of the
State of California generally restrict or prohibit post-employment
noncompetition covenants and, therefore, none of the Company's employees
is subject to any restriction on competition in the future. Our employees
therefore may not remain with the Company. In the future, these employees
may organize competitive businesses or accept employment with companies
competitive with us.
We are dependent on collaborators at research institutions and our
advisors and consultants. Recruiting and retaining qualified personnel,
collaborators, advisors and consultants will be critical to our success.
There is intense competition for such qualified personnel, and we may not
be able to continue to attract and retain the personnel necessary for the
development of our business.
Our planned activities will require additional expertise in areas such as
preclinical testing, clinical trial management, regulatory affairs,
manufacturing and marketing. Such activities will require additional
expertise by existing management personnel or the hiring of additional
personnel. If we are unable to hire new qualified personnel or otherwise
develop such expertise, our operations could be adversely affected.
DEPENDENCE ON OTHERS; COLLABORATIONS
Our strategy for the research, development and commercialization of our
potential pharmaceutical products requires that we enter into various
arrangements with corporate and academic collaborators, licensors,
licensees and others, in addition to those already established. Our
success may therefore be dependent upon the subsequent success of outside
parties in performing their responsibilities.
For example, we entered into an Evaluation and Exclusive Option Agreement
with Introgen Therapeutics Inc., enabling Introgen to assess the
anti-tumor activity of the Bak gene. The agreement also grants Introgen
an option to enter into an exclusive license agreement with us related to
the Bak gene. Introgen may not, however, enter into a license agreement
with us.
We may not be able to establish additional collaborative arrangements or
license agreements we consider necessary or acceptable. Additionally, we
may not be able to develop and commercialize our potential products, and
our collaborative arrangements or license agreements may not be
successful.
Certain of our future collaborative arrangements may place responsibility
for preclinical testing and human clinical trials and for preparing and
submitting applications for regulatory approval for potential products on
our collaborative partner. Our business may be adversely affected if a
collaborative partner fails to develop or commercialize successfully any
potential product to which it has rights. Our collaborators may pursue
alternative technologies or develop products either on their own or in
collaboration with others.
21
<PAGE> 22
RISKS ASSOCIATED WITH LICENSES
We have historically licensed technologies developed by various research
institutes and universities. Pursuant to the terms of these agreements,
we may be obligated to make royalty payments on the sales, if any, of
licensed products or milestone payments. In some instances, we are
responsible for the cost of filing and prosecuting patent applications.
Our license agreements may also require that we exercise diligence in
bringing potential products to market. In the event that we are unable to
meet our obligations under the license agreements, we could lose our
rights to our technologies.
LIMITED MARKETING, SALES, CLINICAL TESTING OR REGULATORY COMPLIANCE
ACTIVITIES
We have restricted hiring to scientists and a small administrative staff
and have made only a small investment in clinical testing or regulatory
compliance resources. If we successfully develop any commercially
marketable pharmaceutical products, we may seek to enter joint venture,
sublicense or other marketing arrangements with parties that have an
established marketing capability. Alternatively, we may choose to pursue
the commercialization of products on our own. We may not, however, be
able to enter into such marketing arrangements on acceptable terms, or at
all.
We will also need to hire additional personnel skilled in the clinical
testing and regulatory compliance process and in marketing or product
sales if we develop pharmaceutical products with commercial potential
that we decide to commercialize without the help of others. We may not,
however, be able to hire these people.
MANUFACTURING LIMITATIONS
We currently do not have the capability to manufacture products under the
current Good Manufacturing Practices ("GMP") requirements prescribed by
the FDA. We need such capability in order to independently manufacture,
package, label and distribute our potential pharmaceutical or other
products. Alternatively, we may seek arrangements with contract
manufacturers or contract packagers to:
o supply sufficient quantities of such products to conduct clinical
trials, and
o manufacture, packaging, labeling and distribution of finished
pharmaceutical products.
If we are unable to manufacture or contract for a sufficient supply of
potential pharmaceutical products on acceptable terms, our preclinical
and human clinical testing schedule may be delayed. A delay in the
testing schedule would result in the delay of submission of products for
regulatory approval and initiation of new development programs. This may
have a material adverse effect on our business.
Delays or difficulties in establishing relationships with manufacturers
to produce, package, label and distribute our finished pharmaceutical or
other products could delay the market introduction and subsequent sales
of such products. Moreover, contract manufacturers that we may use must
adhere to GMP required by the FDA.
We have entered into a manufacturing agreement with Chesapeake Biological
Laboratories, Inc. ("CBL") to manufacture HK-Cardiosol(TM) and
CP-Cardiosol(TM) for clinical trials. CBL may not be able to manufacture
sufficient quantities of HK-Cardiosol(TM) and CP-Cardiosol(TM).
California manufacturing companies are required to obtain a license from
the State of California to distribute any investigational products. This
license will be issued to us only if we are in compliance with the GMP
regulations, as determined by an inspection conducted by the State of
California. If we are unable to manufacture our potential products
independently or obtain or retain third party manufacturing on
commercially acceptable terms, we may not be able to commercialize our
products as planned. Our potential dependence upon third parties for the
manufacture of our products may adversely affect our profit margins and
our ability to develop and deliver products on a timely and competitive
basis.
We have no experience in the manufacture of pharmaceutical products or
medical devices in clinical quantities or for commercial purposes. If we
decide to manufacture products ourselves, we would:
o be subject too the regulatory requirements described above;
o be subject to similar risks regarding delays or difficulties
encountered in manufacturing any such products; and
o require substantial additional capital.
Because of these risks, we may not be able to manufacture any products
successfully or in a cost effective manner.
Year 2000 Issue
We have reviewed all mission-critical systems that we currently use to
determine if they will work correctly on January 1, 2000. We have also
considered the extent to which the failure of third parties systems to
work on that date would adversely affect us. We have taken steps to
address the year 2000 impact on our operations, nonetheless if the year
2000 problem is more disruptive than is reasonably expected and our plans
prove inadequate, our business may be materially disrupted.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information in Note 7 to the Condensed Consolidated Financial
Statements included in Part I of this document is incorporated herein
by reference.
ITEM 5. OTHER INFORMATION
In July 1998, the Company terminated an Employment Agreement with Dr.
L. David Tomei and entered into a Consulting Agreement with him.
In August 1998, the Company announced the appointment of Paul Hastings
to the position of the President and Chief Executive Officer and to
the Board of Directors of the Company.
In October 1998, the Company announced the resignation of Donald H.
Picker, Ph.D., from the position of the Company's Chief Operating
Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits The following exhibits are attached hereto:
Exhibit
Number Title
------ -----
3.1 Certificate of Amendment of Restated Certificate of
Incorporation.
10.49 Consulting Agreement dated July 29, 1998 between the Company
and Dr. L. David Tomei.
10.50 Employment Agreement dated August 13, 1998 between the
Company and Paul J. Hastings.
10.51 Release Letter Agreement dated October 7, 1998 between the
Company and Dr. Donald H. Picker.
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period for
which this report is filed.
23
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 16, 1998 LXR BIOTECHNOLOGY INC.
By: /s/Shelli J. Geer
------------------------------
Shelli J. Geer
Chief Financial Officer and
Secretary (Principal Accounting
and Financial Officer)
By: /s/Paul J. Hastings
------------------------------
Paul J. Hastings
President and Chief Executive
Officer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Title
- ------ -----
<S> <C>
3.1 Certificate of Amendment of Restated Certificate of
Incorporation.
10.49 Consulting Agreement dated July 29, 1998 between the Company and Dr.
L. David Tomei.
10.50 Employment Agreement dated August 13, 1998 between the Company and
Paul J. Hastings.
10.51 Release Letter Agreement dated October 7, 1998 between the Company and
Dr. Donald H. Picker.
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
</TABLE>
- -----------------------
25
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
LXR BIOTECHNOLOGY INC.
LXR Biotechnology Inc., a Delaware corporation, does hereby certify that
the following amendment to the corporation's Restated Certificate of
Incorporation has been duly adopted by the Corporation's Board of Directors and
Stockholders in accordance with the provisions of Section 242 of the Delaware
General Corporation Law:
Article IV of the Restated Certificate of Incorporation is hereby amended
to read in full as follows:
The Corporation is authorized to issue two classes of shares
designated, respectively, Common Stock, of which the Corporation is
authorized to issue 60,000,000 shares, each having a par value of
$0.0001, and Preferred Stock, of which the Corporation is authorized
to issue 5,000,000 shares, each having a par value of $0.01. The
Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is authorized to fix or alter any or all of the
rights, preferences, privileges and restrictions, including, without
limitation, the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, preemptive rights and the
liquidation preferences of any wholly unissued series of Preferred
Stock, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the
number of shares of any series subsequent to the issuance of shares of
that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
IN WITNESS WHEREOF, said corporation has caused this Certificate of Amendment
to be signed and attested by its duly authorized officer this 11th day of June,
1998.
LXR BIOTECHNOLOGY INC.
/s/ G. Kirk Raab
-------------------------------------
G. Kirk Raab, Chief Executive Officer
Attested by:
/s/ Shelli Geer
- -------------------------------
Shelli Geer, Secretary
<PAGE> 1
EXHIBIT 10.49
July 29, 1998
L. David Tomei
1321 Sanderling Island
Richmond, CA 94801
Dear David:
As we have discussed, the following sets forth the terms of your new
consultancy relationship with LXR Biotechnology Inc. (the "Company").
Retention as Consultant; Termination as Employee: Compensation.
Effective as of the date of this letter (the "Letter Agreement") and up
to July 29, 2001 (the "Termination Date"), you are retained as a consultant to
the Company. By signing below, you agree to be retained as a consultant and you
agree that any officer, and employment relationship with the Company is
terminated as of the date of this letter. Your services as a consultant will
include, for example, completing projects that you are currently handling and
other projects as mutually agreed.
Compensation for your services as a consultant and for all other
agreements, releases and covenants contained in this Letter Agreement shall
consist solely of (i) cash payments in the amount of $20,000 per month to be
paid in accordance with the Company's regular payroll schedule, (ii) payment of
the benefits described below, and (iii) the grant of the option set forth below.
The Company will reimburse you for any reasonable expenses incurred by you in
the course of consulting for the Company, including any conferences attended at
the request of the Company, provided that all such expenses are approved in
advance by the Company and that requests for reimbursement are in a form
acceptable to the Company. You agree that you have received all compensation to
which you are entitled for services previously rendered, whether as an employee,
consultant or in any other capacity, and you agree that the compensation to be
paid to you in the future pursuant to this paragraph is in full satisfaction of
all amounts owed to you for services you are to perform in the future as a
consultant to the Company. Although you are responsible for the payment of all
state, federal and local taxes applicable to such compensation and benefits,
unless instructed otherwise in writing by you or required by law, the Company
will continue to withhold from the cash payments specified in item (i) of this
paragraph an amount for state and federal income taxes (but
<PAGE> 2
L. David Tomei
July 29, 1998
not FICA and other state and federal withholdings) in accordance with current
payroll practice.
You may terminate the Letter Agreement upon 30 days prior written
notice to the Company. The Company may terminate the Letter Agreement upon
providing 30 days prior written notice if you breach any material term of this
Letter Agreement; provided, however, that the Company shall not be entitled to
terminate this Letter Agreement if, to the reasonable satisfaction of the
Company, you cure the breach within 10 days from the date such notice is
provided to you and you provide written notice to the Company within such 10 day
period that you have cured such breach and describing how you have done so. In
the event of a termination pursuant to this paragraph, (i) you shall not be
entitled to any further cash compensation, (ii) all other benefits being
provided to you by the Company shall cease, and (iii) the option granted to you
pursuant to this Letter Agreement and all options held by you shall cease
vesting and you shall have 90 days thereafter to exercise such option.
Benefits.
For 18 months after the date hereof, the Company will pay COBRA
premiums for you and your dependents under the Company's medical and dental
plans provided you remain eligible under the plans and applicable law. After
such 18 month period, the Company will pay directly to you an amount equal to
such COBRA premiums and obtaining benefits after such date will be your
responsibility. Since you are no longer employed by the Company, you will not
accrue vacation or any other benefits.
Grant of Stock Option.
Effective as of April 20, 1998 (the "Grant Date"), the Company granted
you an option to purchase Three Hundred Thousand (300,000) shares of Common
Stock of the Company. The grant of this option was contingent upon you signing
an option agreement and upon approval by the stockholders of the Company of a
proposal acted upon at the June 11, 1998 Annual Meeting of Stockholders and such
proposal has been approved by the stockholders.
This stock option is intended not to qualify as an incentive stock
option ("ISO") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. The exercise price of this option is $3.3125, which was the
closing price of the Common Stock of the Company as listed on the American Stock
Exchange on the business day immediately preceding the Grant Date. This stock
option is granted pursuant to and subject to the terms and conditions of the
1993 Stock Option Plan, as amended, and hereby incorporated by reference. You
agree to enter into the Stock Option Grant Agreement attached hereto as Exhibit
A, which provides, among other things, that the
2
<PAGE> 3
L. David Tomei
July 29, 1998
stock option shall vest 25% on April 20, 1999 (the "Initial Vesting Date") and
2.083 1/3% at the end of each month thereafter; provided, however, that vesting
on the option granted pursuant to this Letter Agreement and all other options
you hold will stop on the day you cease to consult to the Company and vested
options must be exercised within 90 days from the date you cease to consult.
Certain of the options previously granted to you were intended to
qualify as ISOs. The tax laws applicable to ISOs require that, to maintain the
ISO status of your vested options, you must exercise your vested ISOs within
three months of the date your employment was terminated, i.e., before October
29, 1998. Please be aware that consultants are not eligible for ISOs and any of
your options that vest after October 29, 1998 will therefore be considered
"nonqualified stock options."
At the time of exercise of any options, the Company will withhold all
state, federal and local taxes subject to withholding obligations that the
Company determines are applicable. You should consult a tax advisor regarding
the tax treatment of your options, and by signing below you acknowledge that you
have consulted such an advisor or that you have knowingly chosen not to consult
such an advisor.
Invention Assignment.
Please take the time to review the obligations set forth in the
Employee Invention Assignment and Confidentiality Agreement attached hereto as
Exhibit B, which you have previously executed and are currently bound by. By
signing below, you confirm that you have been bound by the terms of such
Employee Invention Assignment and Confidentiality Agreement at all times during
your employment by the Company and that you have continuing obligations under
such agreement. Please examine areas in which you might have stored Company
proprietary information, including, among other places, personal computers and
computer disks, saved e-mail communications and personal files, as all Company
materials must be returned to the Company. Also, remember that you likely know
some proprietary information regarding the Company, and it is your legal
responsibility not to disclose this information to anyone.
You hereby irrevocably transfer and assign to the Company any and all
of your right, title, and interest in and to "Inventions" (as defined below),
including but not limited to all copyrights, patent rights, trade secrets and
trademarks. Inventions will be the sole property of the Company. For the
purposes of this Letter Agreement, the term "Inventions" will mean all
discoveries, inventions, improvements, developments, products, processes,
procedures, techniques, formulae, computer programs, drawings, designs, notes,
documents, information and materials made, conceived, developed or reduced to
practice by you, alone or with others, in the field of apoptosis, including
without limitation Inventions resulting from your services to the Company or
funded in whole or in part by the Company or which result from your use of any
premises or
3
<PAGE> 4
L. David Tomei
July 29, 1998
resources owned, leased or contracted for by the Company; provided, that if you
create an "Invention" that falls within the scope of this assignment solely
because it is within the field of apoptosis, and such Invention does not relate
to any products or research of the Company, the Company will consider reasonably
any request by you to retain such Invention. The Company will have the sole
right to determine the treatment of any Inventions, including the right to keep
them as trade secrets, to file and execute patent applications on them, to use
and disclose them without prior patent application, to file registrations for
copyrights or trademarks on them in its own name, or to follow any other
procedure that the Company deems appropriate.
You agree: (i) to disclose all Inventions to the Company promptly, in
writing; (ii) to cooperate with and assist the Company to apply for and to
prosecute, and to execute any applications and/or assignments and/or other
documents reasonably necessary to obtain or maintain, any patent, copyright,
trademark or other statutory protection for Inventions in the Company's name as
the Company deems appropriate; (iii) to deliver to the Company evidence for
interference purposes or other legal proceedings and to testify in any
interference or other legal proceedings and to otherwise assist the Company
related thereto, whenever requested to do so by the Company; and (iv) to
otherwise treat all Inventions as "Confidential Information," as defined below.
You hereby grant the Company a limited power of attorney to execute any
documents necessary or appropriate to effectuate the Company's rights hereunder.
If you have any questions as to whether a given invention, discovery or the like
qualifies as an "Invention" hereunder, you will inform the Company of the nature
of such invention or discovery for determinations to whether such is an
Invention.
Confidential Information.
You acknowledge that in the past and in the future while acting as a
consultant you will acquire information and materials from the Company and
knowledge about the Company's business, products, techniques, experimental work,
customers, clients and suppliers. You further acknowledge that all such
knowledge, information and materials acquired before or after the date of this
Letter Agreement, the existence, terms and conditions of this Letter Agreement,
and the Inventions at all time have been and will continue to be trade secrets
and confidential and proprietary information of Company (collectively, the
"Confidential Information"). Confidential Information will not include, however,
any information which is or becomes part of the public domain through no fault
of yours or which you can demonstrate by competent evidence was already known to
you or which is disclosed to you by a third party owing no duty of
confidentiality to the Company or that the Company regularly gives to third
parties without restriction on use or disclosure.
4
<PAGE> 5
L. David Tomei
July 29, 1998
To ensure the continued confidentiality of the Confidential
Information, you agree as follows: (i) to hold all Confidential Information in
strict confidence; not to disclose it to others or use it in any way,
commercially or otherwise, except in performing the consulting services
hereunder, and not to allow any unauthorized person access to it; (ii) to take
all action reasonably necessary to protect the confidentiality of the
Confidential Information including, without limitation, implementing and
enforcing operating procedures to minimize the possibility of unauthorized use
or copying of the Confidential Information; and (iii) that Confidential
Information furnished to you by the Company or produced by you or others in
connection with the services performed hereunder will be and remain the sole
property of the Company. You agrees to return all Confidential Information and
any materials or other property provided by the Company promptly, at the
Company's request, upon expiration of this Letter Agreement, or upon termination
of your services. You agree not to retain any Confidential Information or
reproductions thereof, or other such property or materials, after such request,
expiration or termination.
Covenant Not to Compete.
During the term of this Letter Agreement, you will not directly or
indirectly assist any person, business or enterprise which is engaged in
research or development related to the field of apoptosis without the express
prior written consent of the Company, which consent will not be unreasonably
withheld if the proposed activity does not compete or interfere with the
business of the Company. During the term of this Letter Agreement you will not
in any manner interfere with the operations, business, research or contractual
relations of the Company. For purposes of this paragraph, to "assist" is defined
as follows: (i) to be an officer, director, employee, partner, shareholder
(other than a holder of less than 1% of the voting power of a public company,
where you have no other relationship to such public company), principal, agent,
representative or consultant for such person or entity, or to carry on any
similar activities for such person or entity, in whatever capacity; (ii) to
promote or endorse or allow your name to be used in any Annual Report, Quarterly
Report, Private Placement Memorandum or advertisement of such entity; or (iii)
to solicit or attempt to solicit business or other opportunities on behalf of
such entity. For purposes of this paragraph, "interfere" shall include but not
be limited to taking any actions detrimental to the Company or its business,
disparaging the Company or its management, questioning the Company's legal
rights, including its rights to assets, or preventing or hindering the Company's
employees in the performance of their duties.
Nothing herein will prohibit you from servicing as an expert in
malpractice cases or on Boards of charitable organizations or from soliciting or
accepting support for research conducted by you at charitable organizations;
provided that such activities do not require or result in the disclosure of any
Confidential Information.
5
<PAGE> 6
L. David Tomei
July 29, 1998
Release, Etc.
By signing below, and in consideration of the payments, benefits and
option described above, you agree that the Company has satisfied all obligations
to you. You and your representatives, heirs, successors and assigns, do hereby
release, acquit and forever discharge the Company, and its affiliates,
subsidiaries, divisions and related companies, and the past, present and future
employees, agents, officers, directors, stockholders, partners, heirs,
executors, administrators, successors and assigns of all of the foregoing (all
hereinafter "Releasees"), from and against any and all claims, rights, demands,
actions, obligations, liabilities and causes of action -- whether asserted or
unasserted, whether known or unknown, and/or whether brought directly by or on
behalf of you or brought derivatively or in some other representative capacity
by you on behalf of the Company or others -- of any and every kind, nature and
character whatsoever, known or unknown, that you (or persons you may purport to
represent) may now have, that you (or persons you may purport to represent) has
ever had or that you (or persons you may purport to represent) may in the future
claim to have against Releasees, or any of them, including but not limited to
claims arising under the Civil Rights Act of 1964, the Age Discrimination in
Employment Act of 1967, California's Fair Employment and Housing Act, and any
claims of discrimination arising under any federal, state or local law, and
those arising from or in any way connected with or related to the employment of
you by Releasees, or any of them, the termination of that employment, the lack
of such employment, or any claims of discrimination or retaliation, and all acts
or omissions of Releasees, or any of them, whatsoever heretofore occurring or
arising.
As to the matters released above, you waive all rights or benefits
under Section 1542 of the California Civil Code, which provides as follows: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor."
By signing below, you agree, for yourself and for each of your
representatives, heirs, successors and assigns, not to assert any claims,
rights, demands, actions, obligations, liabilities or causes of action -whether
brought directly by or on behalf of you, or brought derivatively by you on
behalf of the Company or others -- of any and every kind, nature and character
whatsoever, that you may now have, that you have ever had or that may exist in
the future, or that you believe the Company or others may now have, have ever
had or may in the future have, against Releasees, except claims based on breach
of this Letter Agreement by the Company.
By signing below, you expressly state that you have been given a period
of at least 21 days within which to consider the release set forth above. You
are advised to consult with an attorney prior to signing below. Your release
does not become effective until 7
6
<PAGE> 7
L. David Tomei
July 29, 1998
days after you sign this Letter Agreement. You understand that you may revoke
the release at any time during the 7 days following the date you sign this
Letter Agreement. It is agreed that any such revocation must be received in
writing by the Company within said 7 day period in order to be effective. If you
revoke the release, as of the date of such revocation this Letter Agreement
shall be terminated, the option granted pursuant to this Letter Agreement shall
terminate and you shall not be entitled to any other compensation or benefits.
Miscellaneous.
Except for agreements related to confidential information of, any
assignment of inventions to, the Company, and any outstanding loan(s), this
Letter Agreement supersedes and replaces all prior understandings and agreements
between you and the Company. The obligations set forth in this Letter Agreement
under the captions "Invention Assignment" and "Confidential Information" will
survive any expiration or termination of this Letter Agreement.
You acknowledge that the Company will have no adequate remedy at law if
you violate your obligations set forth in this Letter Agreement under the
captions "Invention Assignment," "Confidential Information" and "Covenant Not To
Compete." In such event, the Company will have the right, in addition to any
other rights it may have, to obtain in any court of competent jurisdiction
injunctive relief to restrain any breach or threatened breach of this Letter
Agreement.
Any notice required or permitted hereunder will be given in writing and
will be deemed effectively given as follows: (a) upon personal delivery; (b)
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); (c) one (1) business day after its
deposit with any return receipt express courier (prepaid); or (d) one (1)
business day after transmission by fax or telecopier, addressed to the other
party at its address (or facsimile number, in the case of transmission by
telecopier) as shown on the first page hereof or on the records of the Company,
or to such other address as such party may designate in writing from time to
time to the other party. Any notice to the Company shall be addressed to the
President.
Upon submission of a request for reimbursement of expenses in a form
reasonably acceptable to the Company, the Company will reimburse you for
attorney fees related to the negotiation of this Letter Agreement, limited to
the lesser of $1200 or the amount of expenses actually incurred.
As soon as practicable after you sign this Letter Agreement, the
Company will allow you or your designee access to the Company's premises so that
you and the Company can identify, by mutual agreement, equipment brought with
you to the Company at the time of your original employment. Once identified, if
such equipment is
7
<PAGE> 8
L. David Tomei
July 29, 1998
not being used by the Company it will be promptly returned to you; if it is
being used, it will be returned to you at the earlier of the date such property
ceases to be used by the Company or the termination of this Agreement.
This Letter Agreement will be construed and enforced in accordance with
the internal laws of the State of California, excluding that body of laws
pertaining to conflict of laws. If any provision of this Letter Agreement is
determined by a court of law to be illegal or unenforceable, then such provision
will be enforced to the maximum extent possible and the other provisions will
remain in full force and effect.
Sincerely,
G. Kirk Raab
Interim Chief Executive Officer
AGREED AND ACCEPTED:
---------------------------------
L. David Tomei
8
<PAGE> 1
EXHIBIT 10.50
EMPLOYMENT AGREEMENT
(Paul Hastings)
This Employment Agreement ("Agreement") is effective as of August 13,
1998, and is by and between LXR Biotechnology Inc. ( "LXR"), a Delaware
corporation with its principal offices at 1401 Marina Way South, Richmond, CA
94804 and Paul Hastings (the "Executive") residing at 37 Gray Street #3, Boston,
Massachusetts, 92116.
LXR desires to employ the Executive as President and Chief Executive
Officer of LXR and of LXR's wholly-owned subsidiary, Optical Analytical Inc.
("OAI"), for the period and upon the terms and conditions hereinafter set forth.
Executive desires to serve in such capacities for such period and upon
such terms and conditions hereinafter set forth.
Accordingly, the parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF EXECUTIVE.
1.1. Employment. Subject to the terms and conditions of this Agreement, LXR
agrees to employ Executive as President and Chief Executive Officer of LXR and
OAI. Executive shall have such responsibilities and shall perform such specific
duties as are commensurate with such positions, and as may reasonably be
assigned to the Executive from time to time by the Board of Directors of LXR
and/or OAI, for the period commencing on the date hereof until terminated as
herein provided. Executive hereby accepts such employment. Executive shall
devote all of his business time, energy, and skill to the affairs of LXR and
OAI; provided, however, that reasonable time for personal business, charitable
or professional activities shall be permitted, so long as such activities do not
materially interfere with the Executive's performance of services under this
Agreement. Effective as of the date hereof, Executive shall be appointed to the
Board of Directors of LXR.
SECTION 2. COMPENSATION. For all services to be rendered by Executive to
LXR and OAI during the term of this Agreement, LXR shall pay to, and provide the
Executive with, the following compensation and benefits. Except as expressly set
forth in this Section 2, all benefits and amounts payable under this Agreement
shall be subject to, and shall be reduced for, applicable federal, state and
local taxes, and LXR will withhold from payments to Executive all such taxes and
other withholdings subject to withholding obligations.
<PAGE> 2
2.1. Base Salary and Bonus. For the period from the date hereof until
December 31, 1998, LXR shall pay to Executive a base salary at a rate of
$250,000 per year, pro rated for such portion of a year and payable in
substantially equal biweekly installments in accordance with LXR payroll
practice. In addition, commencing 12 months from the date hereof, Executive will
be eligible for an incentive bonus of up to 35% of base salary paid after such
12 month period. The amount of such bonus, if any, shall be determined at the
sole discretion of LXR and shall be payable within 60 days of year end. Such
bonus, if any, shall be pro-rated for any partial year and shall be based upon,
among other things, performance of the Company and other factors established at
the sole discretion of the Board of Directors and/or the Compensation Committee.
After December 31, 1998, LXR will review Executive's base salary and bonus from
time to time and may make adjustments to such base salary and determine such
bonus based upon, among other factors: (a) Executive's performance, (b) LXR's
performance, (c) changes in costs of living, (d) changes in Executive's
responsibilities, and (e) the benefit to LXR and OAI of Executive's efforts on
their behalf; provided that Executive's base salary shall not be less than
$250,000 per year during the term of this Agreement.
2.2. Initial and Subsequent Option Grants. LXR has authorized as of
the date of this Agreement, the grant to the Executive of an option (the
"Option") to purchase 1,000,000 shares of LXR's Common Stock at the "Fair Market
Value" on the date of grant, (as those terms are defined in LXR's 1993 Stock
Option Plan, as amended from time to time (the "Plan")), exercisable as to
250,000 shares after one year from the date hereof and 20,833-1/3 shares on the
last day of each month thereafter with full vesting at the end of four years.
From time to time at the sole discretion of the Board of Directors, LXR may
grant Executive additional stock options under LXR's stock option plans. This
Option shall be a nonqualified stock option pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended. This Option is granted pursuant to,
and is subject to the terms and conditions of, the Plan, a copy of which is
attached hereto as Exhibit A. The Option shall terminate in accordance with the
Plan. The Option and shares of stock issued upon exercise of the Option shall
secure the obligations of Executive pursuant to Section 2.4(c).
2.3. Participation in Benefit Plans. Executive shall be entitled to
immediate participation in all employee benefit plans or programs of LXR to the
extent and on the terms such plans or programs are available to other senior
executive officers of LXR, subject to eligibility requirements required by law
or the written provisions of any such plans or programs. LXR does not guarantee
the adoption or continuance of any particular employee benefit or stock plan or
other program during the term of this Agreement, and Executive's participation
in any
2
<PAGE> 3
such plan or program shall be subject to provisions, rules and regulations
applicable thereto. Executive shall be entitled to paid vacation each year in an
amount available to other senior executive officers and in accordance with
applicable LXR policy. Health and dental plans available to Executive pursuant
to this Section 2.3 shall cover Executive and his eligible dependents.
2.4. Relocation and Other Expenses.
(a) LXR shall reimburse Executive for all ordinary, reasonable
and necessary business expenses incurred in the performance of Executive's
duties under this Agreement, in accordance with LXR's policies and practices,
provided that Executive accounts properly for such expenses to LXR in accordance
with the general corporate policies of LXR and in accordance with the
requirements of the Internal Revenue Service regulations relating to
substantiation of expenses.
(b) LXR shall reimburse Executive for actual out-of-pocket
expenses in connection with Executive's relocation of residence to California,
including the reasonable out-of-pocket expenses related to three trips to the
San Francisco Bay Area of up to three days duration each for the purpose of
relocating, reasonable closing costs and real estate agent commission in the
sale of Executive's existing residence. LXR will reimburse the reasonable costs
of temporary housing for 90 days after the date hereof. LXR will make a loan to
Executive pursuant to Section 2.4(c). To the extent the Executive incurs federal
or state tax liability in connection with receipt of such relocation
reimbursement, LXR shall provide Executive with a "gross-up" payment to cover
such tax liability.
(c) LXR will make a loan of $150,000 to Executive, the
principal of which will be forgiven annually on August 13 over three years, if
Executive is employed by LXR continuously throughout the year proceeding the
date of forgiveness. Until forgiven or repaid in full, the loan shall be secured
by the Option and the shares of stock issued upon exercise of the Option.
Executive shall execute such documents and enter into any agreements or
arrangements reasonably requested by LXR to grant LXR a security interest in
such stock and the Executive shall cause the certificate(s) evidencing such
stock to be delivered to any third party acting as escrow agent for purposes of
securing LXR's security interest in the stock. The loan shall bear interest at
the minimum amount necessary to avoid imputation of interest by the Internal
Revenue Service. Executive will not be reimbursed for any tax liability related
to any receipt or forgiveness of interest or principal on the $150,000 loan. On
August 13 of each year, LXR shall pay a bonus to Executive in an amount equal to
the interest accrued on the note for the preceding 12 months and within 30 days
thereafter such interest shall be due and payable; provided, however that LXR
may elect to pay such bonus and reflect the receipt of such interest payment
through book entries without the need for
3
<PAGE> 4
payments by cash or check. In the event of termination of Executive for any
reason within three years of the date hereof the outstanding loan balance,
including accrued interest, shall be due and payable within 90 days of
termination.
SECTION 3. INTELLECTUAL PROPERTY AND CONFIDENTIAL INFORMATION AGREEMENT.
As a condition to LXR's obligations hereunder, the Executive will execute and
comply with the agreement pertaining to the intellectual property and
confidential information of LXR and OAI attached hereto as Exhibit B.
The obligations of Executive under this section and the agreements
referenced in the preceding paragraph shall survive termination of this
Agreement for any reason.
SECTION 4. TERMINATION AND SEVERANCE PAYMENT.
4.1 Termination. The employment of the Executive by LXR and OAI is "at will"
and may be terminated as follows:
(a) Executive's employment hereunder shall terminate upon
Executive's death, or his failure or inability by reason of physical or mental
impairment to perform substantially all of Executive's duties as contemplated
herein for a continuous period of 120 days or more.
(b) Executive's employment hereunder may be terminated by LXR
or Executive for any reason and without cause (hereinafter, termination pursuant
to this Section 4.1(b) is referred to as "Termination Without Cause"). A
substantial reduction of the responsibilities of Executive, including but not
limited to removal of the Executive as the Chief Executive Officer of LXR, shall
be deemed a Termination Without Cause by LXR.
(c) Executive's employment hereunder may be terminated by LXR
in the event of Executive's breach of any material duty or obligation hereunder,
or any established policy of LXR or OAI applicable to other executive officers,
intentional or grossly negligent conduct that is materially injurious to LXR or
OAI, failure to follow the reasonable directions of LXR's Board of Directors,
dishonesty of or fraud by Executive, or commission of a crime involving moral
turpitude, in each case as reasonably determined by LXR's Board of Directors
(termination because of any such event is referred to herein as "Termination for
Cause").
4
<PAGE> 5
4.2. Severance Payment; Benefits.
(a) Termination Events Resulting in Severance Payments. In the
event of the Termination Without Cause by LXR under Section 4.1(b) then LXR
shall make severance payment(s) to Executive equal to twelve (12) months of the
Executive's base salary as of the date of such termination (the "Base Salary
Payment"). Such severance amount shall be payable in installments in accordance
with LXR's payroll practice.
(b) Termination Events Not Resulting in Severance. In the
event of the termination of Executive's employment by Executive, or by the
Company pursuant to Section 4.1(c), the Executive shall not be entitled to any
further payments or benefits after the date of such termination.
(c) Benefits. Executive's coverage under LXR's life, health,
dental insurance plans will remain in effect, at LXR's expense, during the
twelve (12) period following Termination Without Cause by LXR, unless Executive
notifies LXR in writing that such coverage is no longer necessary or if
Executive is no longer eligible under COBRA. If, because of limitations required
by third parties or imposed by law, Executive cannot be provided such benefits
through LXR's plans, then LXR will provide Executive with substantially
equivalent benefits on an aggregate basis, at its expense. Executive shall not
be entitled to any further benefits after the date of any termination by
Executive, or after any Termination For Cause.
4.3. Accelerated Vesting of Options Upon a Change of Control. Vesting
of the Options shall accelerate upon a change in control in accordance with the
Plan.
SECTION 5. MISCELLANEOUS
5.1. Assignment. This Agreement may not be assigned, in whole or in
part, by any party without the prior written consent of the other party, except
that LXR may, without the consent of the Executive, assign its rights and
obligations under this Agreement to any corporation, firm or other business
entity with or into which LXR may merge or consolidate, or to which LXR may sell
or transfer all or substantially all of its assets, or of which 50% or more of
the equity investment and of the voting control is owned, directly or
indirectly, by, or is under common ownership with, LXR. After any such
assignment by LXR, LXR shall be discharged from all further liability hereunder
and such assignee shall have all the rights and obligations of LXR under this
Agreement.
5
<PAGE> 6
5.2. Notices. All notices, requests, demands and other communications to be
given pursuant to this Agreement shall be in writing and shall be deemed to have
been duly given if delivered by hand or mailed by registered or certified mail,
return receipt requested, postage prepaid, to the addresses set forth at the
beginning of this Agreement or such other address as a party shall have
designated by notice in writing to the other party, provided that notice of any
change in address must actually have been received to be effective hereunder.
5.3. Integration. This Agreement and the Exhibits hereto are the
entire agreement of the parties with respect to the subject matter hereof and
supersedes any prior agreement or understanding relating to Executive's
employment with or compensation by LXR and OAI. This Agreement may not be
amended, supplemented or otherwise modified except by a writing signed by
Executive and LXR.
5.4. Binding Effect. Subject to Section 5.1, this Agreement shall
insure to the benefit of and be binding upon the parties hereto and their
successors, assigns, heirs and personal representatives.
5.5. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original and shall together constitute one and
the same instrument.
5.6. Severability. If any provision hereof shall, for any reason, be
held to be invalid or unenforceable in any respect, such invalidity or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid or unenforceable provision had not been
included herein. If any provision hereof shall for any reason be held by a court
to be excessively broad as to duration, geographical scope, activity or subject
matter, it shall be construed by limiting and reducing it to make it enforceable
to the extent compatible with applicable law as then in effect.
5.7. Governing Law. This Agreement shall be governed by the laws of
the California state, without regard to its conflict of law provisions.
5.8. Arbitration. Any controversy or claim arising out of, or relating
to, this Agreement or the breach of this Agreement will be settled by
arbitration by, and in accordance with the applicable National Rules for the
Resolution of Employment Disputes of the American Arbitration Association and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction. The arbitrator(s) will have the right to assess,
against a party or among the parties, as the arbitrator(s) deem reasonable, (a)
administrative fees of the American Arbitration Association, (b) compensation,
if any, to the arbitrator(s)
6
<PAGE> 7
and (c) attorneys' fees incurred by a party. Arbitration hearings will be held
in San Francisco, Contra Costa or Alameda County, California. The provisions of
California Code of Civil Procedure Section 1283.05 will apply to any
arbitration.
5.9. Expiration of Agreement. Unless extended in writing by the
parties hereto or terminated earlier by a party hereto, this Agreement shall
expire on August __, 2001. Executive may terminate this Agreement prior to such
date upon thirty (30) days notice to LXR. This Agreement may be terminated by
LXR without notice.
5.10. Headings. The section headings used in this Agreement are
intended for convenience of reference and shall not by themselves determine the
construction or interpretation of any provision of this Agreement.
7
<PAGE> 8
IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as of the date first written above.
EXECUTIVE LXR BIOTECHNOLOGY INC.
- ------------------------------ ------------------------------
Paul Hastings Kirk Raab
8
<PAGE> 1
EXHIBIT 10.51
October 7, 1998
Donald H. Picker, Ph.D.
601 Blackstone Drive
San Rafael, CA 94903
Dear Don:
As we have discussed, the following sets forth the agreements we have
reached related to your resignation as an employee (including any officer
position) of LXR Biotechnology Inc. (the "Company") effective October 9, 1998.
This letter sets forth all of the payments and other benefits to which you are
entitled as a result of your resignation and this letter supersedes and replaces
in its entirety the letter from the Company to you dated September 24, 1996 and
countersigned by you on October 7, 1996 (the "Employment Agreement"). You and
the Company hereby agree that you are voluntarily resigning and that you are
therefore not entitled to severance benefits. We have agreed, however, that in
return for the covenants and promises set forth in this letter, the Company will
provide severance benefits as set forth below.
Severance Payment; Forgiveness of Loan.
The Company hereby agrees to provide you an amount equal to one years
salary, less all applicable withholding obligations, or $145,237.50 ($225,000
salary, less withholding obligations of $79,762.50), under the following terms
(the "Severance Payment"). The Severance Payment will not be paid directly to
you but will be deducted from the amount you owe the Company pursuant to a
Promissory Note in the original principal amount of $175,000 dated December 3,
1997 (the "Note").
The balance due under the Note is currently $145,412.37, after
forgiveness of $25,000 which is subject to Board approval. The $25,000
forgiveness is subject to withholding obligations of $8,862.50. After deducting
the Severance Payment of $145,237.50 from the loan balance of $145,412.37, you
owe the Company $174.87 plus the withholding obligation of $8,862.50, for a
total of $9,037.37. If you wish, the Company will deduct from this amount the
net amount of accrued vacation pay that the Company owes to you. Your net
payment is due and payable within 30 days of receipt of this letter.
If you breach any provision of this letter, all amounts due and payable
under the Note, plus interest at the rate specified in the Note through such
date, shall be immediately due and payable.
<PAGE> 2
Donald H. Picker, Ph.D.
October 7, 1998
Invention Assignment; Confidentiality.
Please take the time to review the obligations set forth in the Employee
Invention Assignment and Confidentiality Agreement attached hereto as EXHIBIT B
(the "Invention and Confidentiality Agreement"), which you have previously
executed and are currently bound by. By signing below, you confirm that you have
been bound by the terms of the Invention and Confidentiality Agreement at all
times during your employment by the Company and that you have continuing
obligations under such agreement. Please examine areas in which you might have
stored Confidential Information (as defined in the Invention and Confidentiality
Agreement), including, among other places, personal computers and computer
disks, saved e-mail communications and personal files, as all Company materials
must be returned to the Company. Also, it is your legal responsibility not to
disclose to anyone any Confidential Information and by signing below you
reaffirm such continuing obligation.
In addition to the foregoing, you shall not discuss the business of the
Company with any current or former employee of the Company or any current or
former consultant to the Company. You may, however, from time to time discuss
the business of the Company with persons that are then officers of the Company
at the request of such officers.
Covenant Not to Compete.
For the next three years, you will not directly or indirectly assist any
person, business or enterprise which is engaged in research or development
related to the field of apoptosis without the express prior written consent of
the Company, which consent will not be unreasonably withheld if the proposed
activity does not compete or interfere with the business of the Company. During
the term of this Letter Agreement you will not in any manner interfere with the
operations, business, research or contractual relations of the Company. For
purposes of this paragraph, to "assist" is defined as follows: (i) to be an
officer, director, employee, partner, shareholder (other than a holder of less
than 1% of the voting power of a public company, where you have no other
relationship to such public company), principal, agent, representative or
consultant for such person or entity, or to carry on any similar activities for
such person or entity, in whatever capacity; (ii) to promote or endorse or allow
your name to be used in any Annual Report, Quarterly Report, Private Placement
Memorandum or advertisement of such entity; or (iii) to solicit or attempt to
solicit business or other opportunities on behalf of such entity. For purposes
of this paragraph, "interfere" shall include but not be limited to taking any
actions detrimental to the Company or its business, disparaging the Company or
its management, questioning the Company's legal rights, including its rights to
assets, or preventing or hindering the Company's employees in the performance of
their duties.
Nothing herein will prohibit you from servicing as an expert in
malpractice cases or on Boards of charitable organizations or from soliciting or
accepting support for research conducted by you at charitable organizations;
provided that such activities do not require or result in the disclosure of any
Confidential Information.
2
<PAGE> 3
Donald H. Picker, Ph.D.
October 7, 1998
Release, Etc.
You agree that the Company has satisfied all obligations to you. You
and your representatives, heirs, successors and assigns, do hereby release,
acquit and forever discharge the Company, and its affiliates, subsidiaries,
divisions and related companies, and the past, present and future employees,
agents, officers, directors, stockholders, partners, heirs, executors,
administrators, successors and assigns of all of the foregoing (all hereinafter
"Releasees"), from and against any and all claims, rights, demands, actions,
obligations, liabilities and causes of action -- whether asserted or unasserted,
whether known or unknown, and/or whether brought directly by or on behalf of you
or brought derivatively or in some other representative capacity by you on
behalf of the Company or others -- of any and every kind, nature and character
whatsoever, known or unknown, that you (or persons you may purport to represent)
may now have, that you (or persons you may purport to represent) has ever had or
that you (or persons you may purport to represent) may in the future claim to
have against Releasees, or any of them, including but not limited to claims
arising under the Civil Rights Act of 1964, the Age Discrimination in Employment
Act of 1967, California's Fair Employment and Housing Act, and any claims of
discrimination arising under any federal, state or local law, and those arising
from or in any way connected with or related to the employment of you by
Releasees, or any of them, the termination of that employment, the lack of such
employment, or any claims of discrimination or retaliation, and all acts or
omissions of Releasees, or any of them, whatsoever heretofore occurring or
arising.
As to the matters released above, you waive all rights or benefits
under Section 1542 of the California Civil Code, which provides as follows: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor."
By signing below, you agree, for yourself and for each of your
representatives, heirs, successors and assigns, not to assert any claims,
rights, demands, actions, obligations, liabilities or causes of action --
whether brought directly by or on behalf of you, or brought derivatively by you
on behalf of the Company or others -- of any and every kind, nature and
character whatsoever, that you may now have, that you have ever had or that may
exist in the future, or that you believe the Company or others may now have,
have ever had or may in the future have, against Releasees, except claims based
on breach of this letter by the Company.
By signing below, you expressly state that you have been given a period of at
least 21 days within which to consider the release set forth above. You are
advised to consult with an attorney prior to signing below. Your release does
not become effective until 7 days after you sign below. You understand that you
may revoke the release at any time during the 7 days following the date you sign
below. It is agreed that any such revocation must be received in writing by the
Company within said 7 day period in order to be effective. If you revoke the
release, as of the date of such revocation all amounts due under the Note shall
be immediately due and payable.
3
<PAGE> 4
Donald H. Picker, Ph.D.
October 7, 1998
Miscellaneous.
Except for agreements related to (i) Confidential Information of, and
any assignment of inventions to, the Company, (ii) the Note other than as
modified herein, and (iii) agreements related to the grant and exercise of
options to purchase Common Stock of the Company, this letter supersedes and
replaces all prior understandings and agreements between you and the Company.
You acknowledge that the Company will have no adequate remedy at law if
you violate your obligations set forth in this agreement under the captions
"Invention Assignment; Confidential Information" and "Covenant Not to Compete."
In such event, the Company will have the right, in addition to any other rights
it may have, to obtain in any court of competent jurisdiction injunctive relief
to restrain any breach or threatened breach of this letter.
Any notice required or permitted hereunder will be given in writing and
will be deemed effectively given as follows: (a) upon personal delivery; (b)
three days after deposit in the United States mail by certified or registered
mail (return receipt requested); (c) one business day after its deposit with any
return receipt express courier (prepaid); or (d) one business day after
transmission by fax or telecopier, addressed to the other party at its address
(or facsimile number, in the case of transmission by telecopier) as shown on the
first page hereof or on the records of the Company, or to such other address as
such party may designate in writing from time to time to the other party. Any
notice to the Company shall be addressed to the President.
The terms of this letter will be construed and enforced in accordance
with the internal laws of the State of California, excluding that body of laws
pertaining to conflict of laws. If any provision of this letter is determined by
a court of law to be illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain in
full force and effect.
Sincerely,
Paul Hastings
Chief Executive Officer
AGREED AND ACCEPTED:
---------------------------------
Donald H. Picker, Ph.D.
4
<PAGE> 1
LXR Biotechnology Inc. and Subsidiary
Exhibit 11.01
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Loss $ 1,974,358 $ 2,148,903 $ 7,758,939 $ 6,286,890
------------ ------------ ------------ ------------
Weighted average number of shares outstanding:
Common Stock 28,503,147 21,818,675 28,017,919 21,816,393
Common Stock to be issued 76,722 152,283 75,606 150,769
------------ ------------ ------------ ------------
28,579,869 21,970,958 28,093,525 21,967,162
============ ============ ============ ============
Net Loss Per Share $ (0.07) $ (0.10) $ (0.28) $ (0.29)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
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