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Prospectus pursuant
to Rule 424(b)(3)
Reg. No. 333-45297
PROSPECTUS
6,401,568 SHARES
LXR BIOTECHNOLOGY INC.
COMMON STOCK
This prospectus ("Prospectus") covers the resale of shares (the
"Shares") of Common Stock, $0.0001 par value per share (the "Common Stock"), of
LXR Biotechnology Inc. ("LXR," the "Company" or the "registrant") held or
issuable to certain persons named in this Prospectus ("Selling Stockholders").
The Company will not receive any of the proceeds from the sale of the Shares.
The Shares covered hereby include 5,820,392 shares of Common Stock held by
Selling Stockholders and up to an additional 581,176 shares of Common Stock
issuable upon exercise of warrants and other rights to purchase Common Stock
(the "Warrants") held by Selling Stockholders. See "Selling Stockholders" for
information with respect to Shares held by or issuable to the Selling
Stockholders. This Prospectus does not cover the issuance or transfer of the
Warrants themselves; but covers only the dispositions of the shares of Common
Stock issuable upon exercise of the Warrants.
All of the shares of Common Stock offered hereby are being sold by the
Selling Stockholders. Such shares are being offered on a continuous basis
pursuant to Rule 415 under the Securities Act of 1933, as amended. The Company's
Common Stock is traded on the American Stock Exchange under the symbol "LXR". On
May 6, 1998, the closing price for the Common Stock, as reported on the
American Stock Exchange, was $3.3125.
Shares offered by this Prospectus may be offered for sale from time to
time by the Selling Stockholders at such prices and on such terms as may then be
obtainable, in negotiated transactions, or otherwise. See "Plan of
Distribution". This Prospectus may be used by the Selling Stockholders or by any
broker-dealer who may participate in sales of securities covered hereby. The
Selling Stockholders and the brokers and dealers through whom such sales are
effected may be deemed to be underwriters under the Securities Act of 1933, as
amended (the "Securities Act"). The Selling Stockholders will pay all
commissions, transfer taxes, and other expenses associated with the sales of
Shares by them. Pursuant to agreements with certain of the Selling Stockholders,
the Company has paid the expenses of the preparation of this Prospectus. The
Company has also agreed to indemnify the Selling Stockholders against certain
liabilities, including liabilities arising under the Securities Act.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the securities offered by this Prospectus. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto, which may be examined without charge at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of which may be obtained from
the Commission upon payment of the prescribed fees.
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SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is May 6, 1998.
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No dealer, salesman, or any other person has been authorized to give any
information or to make any representations or projections of future performance
other than those contained in this Prospectus, and any such other information,
projections, or representations, if given or made, must not be relied upon as
having been so authorized. The delivery of this Prospectus or any sale hereunder
at any time does not imply that the information herein is correct as of any time
subsequent to its date. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction where, and to any person to whom, it is unlawful to make such offer
or solicitation.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such Registration Statement, reports, proxy statements and other
information can be inspected and copied at public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at such address. Such
reports, proxy statements and other information can also be inspected at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Northwest Atrium Center, 500 West Madison, Chicago, Illinois
60661, and at the offices of the American Stock Exchange at 86 Trinity Place,
New York, New York 10006. The Commission maintains an Internet World Wide Web
site that contains reports, proxy and information reports and other materials
that are filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval System. The site can be accessed at http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the Commission are incorporated
herein by reference:
(a) The Company's annual report on Form 10-KSB, as amended,
filed with the Commission for the fiscal year ended December 31, 1997.
(b) The Company's current report as filed with the Commission on
Form 8-K dated December 31, 1997.
(c) The Company's current report as filed with the Commission on
Form 8-K dated February 27, 1998.
(d) The Company's current report as filed with the Commission on
Form 8-K dated April 8, 1997.
(e) The description of the Company's Common Stock contained in
the Registration Statement filed under the 1934 Act registering such Common
Stock under Section 12 of the 1934 Act and any amendment or report filed for the
purpose of updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the 1934 Act after the date of this Prospectus and prior to the
termination of the offering of the securities offered hereby shall be deemed to
be incorporated by reference in this Prospectus.
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The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of such person, a copy of any or all
of the documents referred to above which have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents which are
not specifically incorporated by reference into the information that this
Prospectus incorporates. Requests for such copies should be directed to: LXR
Biotechnology Inc., 1401 Marina Way South, Richmond, California 94804,
Attention: Investor Relations, Telephone (510) 412-9100.
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THE COMPANY
The principal executive offices of the Company are located at 1401
Marina Way South, Richmond, California 94804, its telephone number is (510)
412-9100 and its fax number is (510) 412-9109. In this Prospectus, the term
"LXR" or "Company" refers to LXR Biotechnology Inc., a Delaware corporation, and
subsidiaries, unless the context otherwise requires.
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should consider carefully the
following risk factors in evaluating the Company and its business. This
Prospectus contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, such
as statements of the Company's or its management's plans, objectives,
expectations, intentions, beliefs and estimates. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from those
described in the forward-looking statements. Factors which could cause such
results to differ materially from those described in the forward-looking
statements include those set forth in the risk factors below.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; GOING CONCERN
DISCLOSURE IN INDEPENDENT AUDITOR'S REPORT
The Company will require substantial additional funds to continue the
research and development programs and preclinical and clinical testing of its
potential pharmaceutical products and to conduct marketing of any pharmaceutical
products that may be developed. The Company's capital requirements depend on
numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, the cost of obtaining technological rights, competing technological and
market developments, changes in the Company's existing research relationships,
the ability of the Company to establish collaborative arrangements, the
development of commercialization activities and arrangements, the purchase of
additional capital equipment and legal expenses incurred in connection with
defending certain lawsuits that have been brought against the Company and
certain of its past and present directors and officers. Based upon its current
plans, the Company believes it has sufficient funds to meet the Company's
operating expenses and capital requirements through the third quarter of 1998.
However, there can be no assurance that changes in the Company's research and
development plan or other events affecting the Company's operating expenses will
not result in the expenditure of funds before the estimated time.
The Company will need to raise substantial additional capital to fund
its operations, including the development of its lead compounds. The Company
intends to seek such additional funding through public or private financings or
collaborative or other arrangements with corporate partners. There can be no
assurance, however, that additional financing will be available from any of
these sources, or if available, will be available on favorable or acceptable
terms. If the Company raises additional funds through public or private
financings, any such financing may result in substantial dilution to the
Company's stockholders. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its research and
development programs, including but not limited to the development of its lead
compounds, or to obtain funds through entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products that the Company
would not otherwise relinquish. Failure to obtain such needed funds could have a
material adverse effect on the Company's operations.
The Company's independent auditors have issued their report on the 1997
Consolidated Financial Statements which states in part that the Company has
suffered recurring losses which raise substantial doubt about its ability
to continue as a going concern.
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
LXR is at an early stage of development. Other than the SLDI microscope,
a prototype of which was sold to Perkin-Elmer Corporation ("Perkin-Elmer"), all
of the Company's potential pharmaceutical and medical device products are
currently in research and development, and no revenues from the sale of products
have been generated to date. Substantially all of the Company's resources have
been and for the foreseeable future will continue to be dedicated to the
Company's research programs and the development of potential pharmaceutical and
medical device products emanating therefrom. There can be no assurance that the
Company will be able to develop a commercial product from any of these projects.
All of the Company's drug and medical device candidates except for HK-Cardiosol,
which is now entering the clinical testing phase, and Lexirin, which is
discussed below, are in preclinical development. While the Company believes that
the results attained to date in such preclinical studies generally support
further research and development of these potential products, results attained
in preclinical studies are not necessarily indicative of results that will be
obtained in human clinical testing. Additionally, the Company has not previously
met its forecasted schedule for introducing products into clinical trials. The
Company recently reassessed the market for Lexirin in the treatment of AIDS
patients and decided not to proceed with further U.S. clinical trials of Lexirin
in AIDS patients at this time. Similar assessments of market opportunities and
priorities for allocating available resources may again affect the Company's
decision to undertake or continue preclinical and/or clinical trials or
otherwise continue to pursue research and development programs for its potential
products.
The potential pharmaceutical products currently under development by the
Company will require significant additional research and development and
preclinical testing and will require extensive clinical testing prior to
submission of any regulatory application for commercial use. The Company's
potential pharmaceutical products are subject to the risks of failure inherent
in the development of pharmaceutical products based on new technologies. These
risks include the possibilities that the Company's novel approach to diagnosis
and therapy will not be successful; that any or all of the Company's potential
pharmaceutical products will be found to be unsafe, ineffective or toxic, or
otherwise fail to receive necessary regulatory clearances; that the products, if
safe and effective, will be difficult to manufacture on a large scale or
uneconomical to market; that proprietary rights of third parties will preclude
the Company from marketing such products; or that third parties will market
superior or equivalent products. As a result, there can be no assurance that any
of the Company's research and development activities will be successfully
completed; that clinical trials will be allowed by the United States Food and
Drug Administration (the "FDA") or other regulatory authorities; that clinical
trials will commence as planned; that required United States or foreign
regulatory approvals will be obtained on a timely basis, if at all; or that any
products for which approval is obtained will result in any commercially viable
products.
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RELIANCE ON NOVEL SCIENTIFIC APPROACH
The Company's product development efforts are based on the novel
scientific approach of therapeutic apoptosis modulation (a process of regulating
genetically programmed cell death), which has not been widely studied. There is,
therefore, substantial risk that this approach will not prove to be successful.
Moreover, the Company is applying this novel approach to discover new treatments
for a variety of diseases that are also the subject of research and development
efforts by other companies, many of which are much larger and better funded.
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. The Company's competitors may succeed in
developing technologies or products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's technology or proposed products becoming obsolete or noncompetitive.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred significant operating losses since its
inception in 1992. At December 31, 1997, the Company had an accumulated deficit
of approximately $32.8 million. The Company will be required to conduct
significant research, development, testing and regulatory compliance activities
that, together with projected general and administrative expenses, are expected
to result in significant operating losses for at least the next several years.
Revenues, if any, that the Company may receive in the next few years will be
limited to payments from Perkin-Elmer under the License Agreement dated as of
August 29, 1996 between the Company, on behalf of itself and Optical Analytic,
Inc., a wholly-owned subsidiary of the Company, and Perkin-Elmer (the
"Perkin-Elmer Agreement"), payments under the Company's collaboration agreement
with Boehringer Mannheim GmbH "(Boehringer"), payments under research or product
development relationships that the Company may hereafter establish, payments
under license agreements that the Company may hereafter establish, sales of
products that the Company may acquire in the future and interest payments. There
can be no assurance, however, that the Company will (i) receive any additional
funds under the Perkin-Elmer Agreement, as Perkin-Elmer may terminate such
agreement at any time in its discretion, (ii) be successful in its collaboration
with Boehringer or that such relationship will be expanded beyond its current
limited scope, (iii) be able to establish any additional collaborative
relationships, (iv) enter into any license agreements, or (v) acquire any
products in the future. The Company's ability to achieve profitability depends
upon its ability to successfully complete either alone or with others,
development of its potential products, conduct clinical trials, obtain required
regulatory approvals, and manufacture and market its products or to enter into
license agreements on acceptable terms. In the event that the Company does enter
into any future license agreements, such license agreements may adversely affect
the Company's profit margins on its potential products. The Company may never
achieve significant revenue or profitable operations.
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SHARES ELIGIBLE FOR FUTURE SALE
As of May 6, 1998, the Company had outstanding approximately 28,377,181
shares of Common Stock and options, warrants and other rights to purchase up to
approximately 4,962,628 shares of the Company's Common Stock. Of the outstanding
shares, 5,714,286 were issued in the Company's private placement in December
1997 and January 1998 at a price of $1.75 per share. An additional 106,106
shares were issued for consulting services and services rendered in connection
with the private placement. These 5,820,392 shares, together with 581,176 shares
underlying the Warrants are being registered pursuant to this Registration
Statement. Upon effectiveness of this Registration Statement, the holders of
such shares will be able to publicly sell such shares at any time in their sole
discretion, subject to certain limited exceptions. As the aforementioned
6,401,568 shares to be newly registered are equal to approximately 21 percent of
the Company's currently outstanding Common Stock (assuming all shares underlying
warrants and other rights offered hereby are outstanding), and the Company's
stock has historically had a low trading volume, the sale of these shares on the
open market could have a material adverse effect on the market price of the
Company's Common Stock. In addition, pursuant to a registration statement which
became effective on May 8, 1996 (the "1996 Registration Statement"), 10,756,992
of the Company's outstanding shares and 1,079,847 shares issuable upon the
exercise of then outstanding warrants were registered for public resale. The
holders of such shares may sell such shares at any time in their sole
discretion, subject to certain exceptions. The Company believes that, as of
January 27, 1998, a total of approximately 6,232,170 of such shares have been
sold under the 1996 Registration Statement. Additionally, pursuant to a
registration statement which became effective on February 6, 1997 (the "1997
Registration Statement"), 5,810,735 of the Company's outstanding shares and
693,895 shares issuable upon the exercise of then outstanding warrants were
registered for public resale. The holders of such shares may sell such shares at
any time in their sole discretion, subject to certain exceptions. The Company
believes that, as of January 27, 1998, a total of approximately 2,277,563 of
such shares have been sold under the 1997 Registration Statement. Since the
Company's stock has historically had a low trading volume, the sale of
additional shares on the open market under the 1996 Registration Statement, the
1997 Registration Statement or otherwise, could have a material adverse effect
on the market price of the Company's Common Stock. Furthermore, future sales of
the Company's Common Stock by the Company's stockholders under Rule 144 of the
Securities Act of 1933, as amended, or otherwise, could also have a material
adverse effect on the market price of the Company's Common Stock.
DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS
The Company is highly dependent on the principal members of its
management and scientific staff, including L. David Tomei, Ph.D., its Chief
Scientific Officer; Donald H. Picker, Ph.D., its President and Chief Operating
Officer; and Samuil R. Umansky, Ph.D., Vice President, Molecular Pharmacology
and Chief Scientific Officer. The Company's loss of services of any of these
persons or other members of its staff could have a material adverse effect on
the Company's operations.
The Company has entered into employment agreements with Drs. Tomei and
Picker, however, either of them may terminate his relationship with the Company
at any time. The laws of the State of California generally prohibit
post-employment noncompetition covenants and, therefore, none of the Company's
employees is subject to any restriction on competition in the future.
Accordingly, there can be no assurance that any of the Company's employees will
remain with the Company or that, in the future, these employees will not
organize competitive businesses or accept employment with companies competitive
with the Company. In addition, the Company is dependent on collaborators at
research institutions
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and its advisors and consultants. Recruiting and retaining qualified personnel,
collaborators, advisors and consultants will be critical to the Company's
success. There is intense competition for such qualified personnel in the area
of the Company's activities, and there can be no assurance that the Company will
be able to continue to attract and retain such personnel necessary for the
development of the Company's business. The Company's planned activities will
require additional expertise in areas such as preclinical testing, clinical
trial management, regulatory affairs, manufacturing and marketing. Such
activities will require the addition of new personnel, including management, and
the development of additional expertise by existing management personnel. The
inability to acquire such services or to develop such expertise could have a
material adverse effect on the Company's operations.
DEPENDENCE ON OTHERS; COLLABORATIONS
The Company's strategy for the research, development and
commercialization of its potential pharmaceutical products will require the
Company to enter into various arrangements with corporate and academic
collaborators, licensors, licensees and others, in addition to those already
established, and may therefore be dependent upon the subsequent success of
outside parties in performing their responsibilities. For example, the Company
has provided Perkin-Elmer with significant exclusive rights to its SLDI product,
and is dependent on Perkin-Elmer to satisfactorily commercialize such product so
that the Company will receive remuneration for its efforts in this area. There
can be no assurance that Perkin-Elmer's efforts to commercialize this product
will be successful, or that the Company will receive any such remuneration. In
addition, the Company has entered into a collaboration with Boehringer to
jointly evaluate the development of Maspin, a naturally occurring protein, for
the treatment of breast and prostate cancer. There can be no assurance that such
collaboration will be successful or that the Company will enter into any further
agreements with Boehringer. There can also be no assurance that the Company will
be able to establish additional collaborative arrangements or license agreements
that the Company deems necessary or acceptable to develop and commercialize its
potential products, or that any of its collaborative arrangements or license
agreements will be successful. Certain of the collaborative arrangements that
the Company may enter into in the future may place responsibility for
preclinical testing and human clinical trials and for preparing and submitting
applications for regulatory approval for potential products on the collaborative
partner. Should a collaborative partner fail to develop or commercialize
successfully any potential product to which it has rights, the Company's
business may be adversely affected. In addition, there can be no assurance that
collaborators will not be pursuing alternative technologies or developing
products either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases or
disorders targeted by such partners' collaborative programs with the Company.
RISKS ASSOCIATED WITH LICENSES
The Company has licenses to technologies developed by various research
institutes and universities. Pursuant to the terms of those agreements, the
Company is obligated to make royalty payments on the sales, if any, of licensed
products and, in some instances, the Company is responsible for the costs of
filing and prosecuting patent applications. The Company's license agreements
also require that the Company exercise diligence in bringing potential products
to market. In some cases, the Company's license agreements require that the
Company make payments that may be substantial, upon completion of certain
milestones occurring in the clinical trials and regulatory approval of licensed
products. In the event that the Company is unable to meet the diligence
requirements, to make the required milestone payments or ongoing annual license
payments or otherwise to meet its obligations under the license agreements, the
Company could lose its rights to the technologies.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain patents
and/or appropriate licenses from third parties, to protect trade secrets, to
operate without infringing upon the proprietary rights of others and to prevent
others from infringing on the proprietary rights of the Company. The Company's
policy is to seek to protect its proprietary position by, among other methods,
filing United States and foreign patent applications related to its proprietary
technology, inventions and improvements that are important to the development of
its business. Proprietary rights relating to the Company's planned and potential
products will be protected from unauthorized use by third parties only to the
extent that they are covered by valid and enforceable patents or are effectively
maintained as trade secrets. There can be no assurance as to the
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breadth of protection that any such patents may afford the Company. There can be
no assurance that the Company will choose to prosecute to allowance all of the
pending patent applications or maintain all of the patents now owned or licensed
by the Company. Some of the Company's patent applications do not cover
compositions of matter, but rather relate only to the method of use of specific
compounds for certain disease indications, or to screening methods for
identifying compositions of matter. The scope of potential patent protection for
such methods may not be as broad as it is for compositions of matter.
The patent position of biotechnology firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of frequent litigation. There is a substantial backlog of
biotechnology patent applications at the United States Patent and Trademark
Office ("USPTO"), and no consistent policy has emerged from the USPTO and the
courts regarding the breadth of claims allowed or the degree of protection
afforded under biotechnology patents. Additionally, the USPTO may request data
demonstrating efficacy of potential therapeutic agents. The need to provide such
data, if required, could delay or adversely affect the Company's ability to
obtain patent protection for any of its potential products.
There can be no assurance that any patent applications relating to the
Company's potential products or processes will result in patents being issued,
or that resulting patents, if any, will provide protection against competitors
who successfully challenge the Company's patents, obtain patents that may have
an adverse effect on the Company's ability to conduct business, or are able to
circumvent the Company's patent position. A substantial number of patents have
been applied for by and issued to other pharmaceutical, biotechnology and
biopharmaceutical companies. Although the Company has conducted database
searches to discover the existence of previous patents and to determine the
state of the art of its inventions, such searches are not conclusive. The
Company is aware of one case where other parties have published papers and/or
filed applications on subjects with respect to which the Company has claims in
pending patent applications. In April 1995, the Company and two other scientific
groups simultaneously published (in separate articles) the sequence of the BAK
gene. Further, International Patent Application Number WO 96/35951, filed by a
third party, discloses and claims a BAK protein similar to a protein claimed in
one of the Company's pending patent applications. Although the Company believes
that the priority dates of its patent applications relating to BAK are prior to
the dates on which these other parties made their discoveries, there can be no
assurance of this. Thus, the impact of the work done by these parties and
possibly other parties cannot be assessed. There can be no assurance that others
will not independently develop pharmaceutical products similar to or obsoleting
those under development by the Company, or duplicate any of the Company's
products.
Interference proceedings in the USPTO may be necessary to determine the
priority of inventions with respect to patents and patent applications of the
Company. In addition, litigation may be necessary to defend against or assert
claims of infringement, to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the scope and
validity of the proprietary rights of others. There can be no assurance any such
efforts by the Company would be successful. Further, litigation or interference
proceedings could result in substantial costs to and diversion of effort by the
Company, and could have a material adverse effect on the Company's business,
financial condition and results of operations.
In view of the time delay in patent approval and secrecy afforded patent
applications, the Company does not know and is not able to determine if there
are patent applications belonging to others which have priority over
applications belonging to the Company. Moreover, portions or all of the
Company's patent applications could be rejected and there could be a material
adverse effect on the Company's business and future prospects if patents or
prior art exist that were not uncovered through database searches or if there
are patent applications that have priority over any of the Company's patent
applications.
Other companies or institutions may have filed applications for, may
have been issued patents or may obtain additional patents and proprietary rights
relating to products or processes similar in function or effect to those of the
Company or products that treat conditions that may be treated by the Company's
potential products. At this time, the Company cannot predict whether or not
these patents, patent applications and/or proprietary rights will lead to the
development of products competitive with the Company's potential products. If
such competitive products are developed and successfully commercialized, they
could adversely affect the Company's ability to commercialize its potential
products.
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If the USPTO should determine that any issued or pending patents claim the same
subject matter as any of the Company's pending patent applications and that the
subject matter of such issued or pending patents was invented first, the Company
could be prevented from obtaining patent protection or the scope of such
protection could be narrowed. Further, because of the extensive time required
for development, testing and regulatory review of a potential product, it is
possible that, before any of the Company's products can be commercialized, any
related patent may expire or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent, which
could adversely affect the Company's ability to protect future product
development and, consequently, its operating results and financial position.
The Company's competitive position is also dependent upon unpatented
trade secrets. The Company is developing a substantial database of information
concerning its research and development. However, trade secrets are difficult to
protect. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. In an effort to protect its trade secrets, the Company has a
policy of requiring its employees, consultants, advisors and, when appropriate,
Scientific Advisory Board members to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
relationship must be kept confidential except in specified circumstances. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets or other proprietary information in
the event of unauthorized use or disclosure of confidential information.
Invention assignment agreements executed by Scientific Advisory Board members,
consultants and advisors may conflict with, or be subject to, the rights of
third parties with whom such individuals have employment or consulting
relationships.
The Company may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands and more patents are
issued, the risk increases that the Company's potential products may give rise
to claims that they infringe the patents of others. No assurance can be given
that any licenses required under any such patents or proprietary rights would be
made available on terms acceptable to the Company. If the Company does not
obtain such licenses, it could encounter delays in product market introductions
while it attempts to design around such patents, or could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others, and could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
LIMITED MARKETING, SALES, CLINICAL TESTING OR REGULATORY COMPLIANCE ACTIVITIES
In view of the early stage of the Company and its research and
development programs, the Company has restricted hiring to scientists and a
small administrative staff and has made only a small investment in marketing,
product sales, clinical testing or regulatory compliance resources. If the
Company successfully develops any commercially marketable pharmaceutical
products, it may seek to enter joint venture, sublicense or other marketing
arrangements with parties that have an established marketing capability or it
may choose to pursue the commercialization of such products on its own. There
can be no assurance, however, that the Company will be able to enter into such
marketing arrangements on acceptable terms, if at all. Further, the Company will
need to hire additional personnel skilled in the clinical testing and regulatory
compliance process and in marketing or product sales if it develops
pharmaceutical products with commercial potential that it determines to
commercialize itself. There can be no assurance, however, that it will be able
to acquire such resources or personnel.
GOVERNMENT REGULATION AND PRODUCT APPROVAL
The FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the testing,
manufacturing, labelling, distribution, and marketing of therapeutics and
diagnostics through lengthy and detailed laboratory and clinical human testing
procedures, premarket approval or clearance requirements, manufacturing
standards, sampling activities and other costly and time consuming procedures
and requirements.
9
<PAGE> 10
Satisfaction of these requirements typically takes several years or more (five
to ten years or more for a drug or biological product) and varies substantially
based upon the type, complexity and technological novelty of the drug or
diagnostic product.
In late 1997, the Company received notice from the FDA that its
Investigational Drug Exemption application ("IDE") for use of HK-Cardiosol as a
heart preservation solution had been approved. The Company expects to initiate
clinical trials of HK-Cardiosol during 1998. There can be no assurance as to the
results of such trial, or whether or when the FDA will permit the Company to
conduct additional trials of HK-Cardiosol. In March 1998, the Company filed an
Investigational New Drug application ("IND") to conduct clinical studies for the
use of CP-Cardiosol for improved organ protection during heart/lung bypass
operations. In April 1998, the commencement of these clinical studies was
delayed by a request from the FDA for additional preclinical data. Although the
Company believes it will be able to fully respond to the FDA's request by the
third quarter of 1998, there can be no assurance that the Company will be able
to provide the additional preclinical data requested by the third quarter of
1998, nor can there be any assurance as to whether or when the FDA will approve
the Company's IND for CP-Cardiosol. There also can be no assurance as to whether
or when the Company will make filings with the FDA for the commencement of
clinical trials of any other potential product, or whether or when the Company
will submit to the FDA an application to market any other potential product.
The Company has relied on scientific, technical, clinical, commercial
and other data supplied or disclosed by others, including its academic
collaborators, in obtaining the FDA's approval to begin clinical trials of
HK-Cardiosol and the Company may rely on such data in support of INDs to enter
human clinical trials for its other potential products, including the IND to
conduct clinical studies of CP-Cardiosol that the Company currently is
preparing. Although the Company has no reason to believe that this information
contains errors or omissions of fact, there can be no assurance that there are
no errors or omissions of fact that would change materially the Company's view
of the future likelihood of FDA approval of INDs or of the commercial viability
of these potential products. There can be no assurance that clinical data from
studies performed by others will be available to the Company or acceptable to
the FDA or other regulatory agencies in support of the Company's applications
for marketing approval, and the FDA may, among other things, require the Company
to collect additional data and conduct controlled clinical studies prior to
acceptance of any such applications.
The effect of compliance with government regulation may be to delay for
a considerable period of time or prevent the marketing of any product that the
Company may develop and/or to impose costly requests for additional animal,
human or other data upon the Company, the result of which may be a delay in the
marketing of its products, thus furnishing an advantage to its competitors.
There can be no assurance that FDA or other regulatory approval to market or
clinically test any products developed by the Company will be granted on a
timely basis or at all or that, if granted, such approval will not be
subsequently suspended or withdrawn. Any such delay in obtaining or failure to
obtain such approvals would adversely affect the marketing of the Company's
potential products and the ability to earn product revenues or royalties. As
with all investigational products, additional government regulations may be
promulgated requiring additional research and data to be submitted that could
delay marketing approval of the Company's potential products. The Company cannot
predict whether any adverse government regulation might arise from future
legislation or administrative action.
MANUFACTURING LIMITATIONS
Although the Company has received approval from local authorities to
undertake manufacturing, it currently does not have the capability to
manufacture products under the current Good Manufacturing Practices ("GMP")
requirements prescribed by the FDA. The Company intends either to independently
manufacture, package, label and distribute its potential pharmaceutical or other
products or to establish arrangements with contract manufacturers to supply
sufficient quantities of such products to conduct clinical trials as well as for
the manufacture, packaging, labelling and distribution of finished
pharmaceutical products if its potential products are approved for
commercialization. If the Company is unable to manufacture or contract for a
sufficient supply of its potential pharmaceutical products on acceptable terms,
the Company's preclinical and human clinical testing schedule may be delayed,
resulting in the delay of submission of products for regulatory approval and
initiation of new development programs, which may have a material adverse effect
on the Company. If the Company chooses to contract for manufacturing services
and encounters delays or difficulties in establishing relationships with
manufacturers to produce, package, label and distribute its finished
pharmaceutical or other products, market introduction and subsequent sales of
such products would be adversely affected. Moreover, contract manufacturers that
the Company may use must adhere to GMP required by the FDA. The Company has
entered into a
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<PAGE> 11
manufacturing agreement with Chesapeake Biological Laboratories, Inc. ("CBL") to
manufacture HK-Cardiosol for clinical trials. There can be no assurance that CBL
will be able to manufacture sufficient quantities of HK-Cardiosol for the
Company's clinical trials.
Manufacturing facilities must pass a pre-approval plant inspection
before the FDA will issue a pre-market approval or product and establishment
licenses, where applicable, for the products. The Company will also be required
to obtain a license from the State of California to manufacture any
investigational products, which license will be issued only if the Company is in
compliance with GMP regulations, as determined by an inspection conducted by the
State of California. If the Company is unable to manufacture its potential
products independently or obtain or retain third party manufacturing on
commercially acceptable terms, it may not be able to commercialize its products
as planned. The Company's potential dependence upon third parties for the
manufacture of its products may adversely affect the Company's profit margins
and its ability to develop and deliver such products on a timely and competitive
basis. The Company has no experience in the manufacture of pharmaceutical
products or medical devices in clinical quantities or for commercial purposes.
Should the Company determine to manufacture products itself, the Company would
be subject to the regulatory requirements described above, would be subject to
similar risks regarding delays or difficulties encountered in manufacturing any
such products and would require substantial additional capital. In addition,
there can be no assurance that the Company will be able to manufacture any
products successfully and in a cost effective manner.
COMPETITION AND TECHNOLOGICAL CHANGE
There are many companies, both public and private, including well-known
pharmaceutical companies, chemical companies and specialized biotechnology
companies, engaged in developing synthetic pharmaceuticals and biotechnological
products for certain of the applications being pursued by the Company.
Additionally, increasing numbers of companies are focusing on apoptosis
modulation as a promising area for research and development. Many of these
companies have substantially greater capital, research and development,
manufacturing, marketing and human resources and experience than the Company and
represent substantial long-term competition for the Company. Such companies may
succeed in developing products that are more effective, or less costly or more
successful than any that may be developed by the Company. The industry in which
the Company proposes to compete is characterized by extensive research efforts
and rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render the
Company's programs or potential products noncompetitive. Competition may
increase further as a result of advances that may be made in the commercial
applicability of technologies and greater availability of capital for investment
in these fields.
RISK OF PRODUCT LIABILITY
Clinical trials or marketing of any of the Company's potential
pharmaceutical and other products may expose the Company to liability claims
related to the use of such products. To date, the Company has conducted limited
Phase I clinical trial of Lexirin, and it expects to be beginning clinical
trials of HK-Cardiosol for heart preservation in transplant patients during the
first quarter of 1998. None of the Company's other potential products has
entered clinical trials or been marketed (other than marketing undertaken by the
Company in connection with its SLDI product). Accordingly, the Company currently
does not carry product liability insurance. The Company presently is seeking
product liability insurance. However, there can be no assurance that the Company
will be able or will choose to obtain such insurance or, if obtained, that
sufficient coverage can be acquired at a reasonable cost. An inability to obtain
sufficient insurance coverage at an acceptable cost or otherwise protect against
potential product liability claims could prevent or inhibit the
commercialization of any products developed by the Company. Furthermore, a
product liability related claim or recall could have a material adverse effect
on the business or financial condition of the Company.
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development processes involve the controlled
use of hazardous and radioactive materials. The Company is subject to federal,
state and local laws and regulations governing the manufacture, storage,
handling, use and disposal of such materials and certain waste products.
Although the Company believes that its safety procedures for storing, using,
handling and disposing of such materials comply with the standards prescribed by
such laws
11
<PAGE> 12
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company. Although the Company believes that it
is in compliance in all material respects with applicable environmental laws and
regulations and currently does not expect to make material capital expenditures
for environmental control facilities in the near-term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, nor that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.
UNCERTAINTY OF PRODUCT PRICING; HEALTHCARE REFORM AND RELATED MATTERS
The Company's future revenues may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of
healthcare through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and there may
continue to be, federal and state proposals to implement similar government
control. It is uncertain what legislative proposals will be adopted or what
actions federal, state or private payors for healthcare goods and services may
take in response to any healthcare reform proposals or legislation. There can be
no assurance that any such proposals or reforms will not have a material adverse
effect on the Company. Further, to the extent that such proposals or reforms
have a material adverse effect on the business, financial condition and
profitability of other pharmaceutical companies that are prospective
collaborators for certain of the Company's potential products, the Company's
ability to commercialize its potential products may be adversely affected.
In addition, in both the United States and elsewhere, sales of
prescription medical products are dependent in part on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance plans. Significant uncertainty exists as to the reimbursement
of newly approved health care products, and third party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive basis.
POSSIBLE VOLATILITY OF STOCK PRICE
The price of the Company's Common Stock has fluctuated substantially
since its initial public offering ("IPO"). The market price of the shares of the
Company's Common Stock, like that of the common stock of many other
biotechnology companies, is likely to continue to be highly volatile.
Additionally, the Company's Common Stock has historically not been heavily
traded, which could increase the volatility of the price of such stock. Factors
such as the timing and results of preclinical studies and clinical trials by the
Company or its competitors, other evidence of the safety or efficacy of
pharmaceutical products of the Company or its competitors, announcements of
technological innovations or new therapeutic products by the Company or its
competitors, governmental regulation, healthcare legislation, developments in
patent or other proprietary rights of the Company or its competitors, including
litigation, fluctuations in the Company's operating results, and market
conditions for life science stocks in general could have a significant impact on
the future price of the Common Stock.
OUTSTANDING OPTIONS, WARRANTS AND OTHER RIGHTS
As of May 6, 1998, the Company had outstanding options, warrants and
other rights to purchase approximately 4,962,628 shares of Common Stock. To the
extent that these options, warrants or rights are exercised, the interests of
the Company's stockholders would be diluted. Moreover, as long as such options,
warrants or rights are outstanding, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of the outstanding options, warrants or rights can be expected to
exercise them, to the extent they are able to, at a time when the Company would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in the options, warrants or rights.
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<PAGE> 13
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of May 6, 1998, the Company's management and existing holders of 5%
or more of the Company's Common Stock beneficially owned, in the aggregate,
approximately 38% of the outstanding Common Stock of the Company. As a result,
such persons may have the ability to significantly influence the Company-and
direct its affairs and business. The Company's charter provides for 45,000,000
authorized shares of Common Stock and 5,000,000 authorized shares of Preferred
Stock. As of May 6, 1998, there were approximately 28,377,181 shares of Common
Stock and no shares of Preferred Stock outstanding. The rights, preferences,
qualifications, limitations and restrictions of the Preferred Stock may be fixed
by the Board of Directors without any further vote or action by the
stockholders. Issuance of these shares, or shares of the Company's authorized
but unissued Common Stock, could have the effect of delaying, deferring or
preventing a change of control of the Company, or diluting the Common Stock.
RISKS OF LITIGATION
The Company and five of its past and present directors and officers are
named as defendants in Katz vs. Blech, 95 Civ. 7215 (S.D.N.Y.) ("Katz"), and
Degulis vs. LXR Biotechnology Inc., et al., 95 Civ. 4204 (S.D.N.Y.)
("Degulis"). One of the five, Mark Germain, the former Chairman of the Company
and a former managing director of D. Blech & Company, Incorporated, is named as
a defendant in the above two cases and also in In re Blech Securities
Litigation, 94 Civ. 7696 (S.D.N.Y.) ("Blech"). In addition, L. Scott Minick, a
former director and former officer, James D. Coombs, a former director and Mark
J. Tomei, a director and former officer, are defendants in Katz and Degulis,
and Christopher Henney, a former director and former officer, is a defendant in
Katz. The Company was previously named as a defendant in Blech but was
dismissed from the case on June 6, 1996.
All three cases were 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 IPO and subsequent trading of those shares. The
suits allege violations of Sections 11 and 12 of the Securities Act and Sections
10(b) and 20 of the 1934 Act, including misrepresentations and omissions in
connection with the IPO and manipulation of share prices. The suits also allege
common law claims for fraud and deceit and seek punitive damages. The complaints
allege that defendants, including the Company and the defendant directors and
officers, failed to disclose in securities filings connected with the IPO the
leveraged financial condition of the Company's underwriter, D. Blech & Company,
Inc. ("D. Blech & Co."), and its principal, David Blech. The suits further
allege that defendants failed to disclose that D. Blech & Co. would act as
principal market maker for the Company's shares following the IPO, and that D.
Blech & Co.'s extended financial commitments would effect its ability to
maintain a market for the Company's shares. The suits also allege that
defendants assisted or acquiesced in a post-offering scheme to manipulate the
market for the Company's shares and artificially inflate share prices. 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 states a claim
for a specific amount of monetary damages. The complaint in In re Blech seeks
damages and interest as provided by law, costs and expenses of litigation,
attorneys fees, expert fees, other costs and disbursements, and such other
relief as may be just and proper. The complaint in Katz seeks rescission, an
award of compensatory damages, fees, costs and expenses including expert fees,
and such other relief as the court deems proper. The complaint in Degulis seeks
compensatory damages including rescissionary damages, interest, punitive
damages, counsel fees and other costs of suit, a constructive trust over the
proceeds of the offering, and such other and further relief as the Court deems
just and proper.
The Company has agreed to indemnify and/or advance defense costs to each
of the current or 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, 1998 or the termination of the tolling agreement.
The Company's primary level 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. Under the Company's directors and officers liability
policies, coverage is not provided for the Company's own liability, but only for
the amounts paid in indemnity by the Company to or on behalf of the director and
officer defendants. The extent to which insurance would cover any defense costs,
settlements or judgments in this case is presently unknown.
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, the current stage of the litigation, uncertainty as to
whether any material judgment or settlement will result, and the possibility
that some portion of any settlement or judgment may be covered by insurance,
make it impossible to predict at this time whether the litigation will have a
material adverse financial impact on the Company. An adverse judgment or
settlement could have a material adverse effect on the Company.
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<PAGE> 14
SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock before and after the sale of the Shares
offered hereby by the Selling Stockholders as of January 27, 1998. Except as
described below, based on information supplied to the Company, no Selling
Stockholder had any position, office or other material relationship with the
Company within the past three years.
<TABLE>
<CAPTION>
Common
Common Stock Stock Common Stock
Beneficially Owned Offered Beneficially Owned
Prior to Offering(1) Hereby After Offering(2)
-------------------- ------- --------------------
Name Number Percent Number Percent
- ---- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Alfa Mutual Fire Insurance 410,715 1.5% 285,715 125,000 *
Bear Stearns Securities
Corp.(3) 315,631 1.1 9,747 305,884 1.1%
Michael Brailov 100,000 * 100,000 -- --
Brian D. Brookover(4) & 5,295,034(5) 19.1(5) 4,513,734(6) 781,300(7) 2.8(7)
Maureen LeComte Brookover
Grace Brothers, Ltd.(8) 5,145,034 18.5 4,363,734 781,300 2.8
Pequot Scout Fund, LP 500,000 1.8 300,000 200,000 *
SciFin, Inc. 15,000 * 15,000 -- --
Trenton Small Cap Fund 170,000 * 170,000 -- --
Harold L. Weinberg 59,123 * 59,123 -- --
Marvin Whitmore IRA 285,714 1.0 285,714 -- --
Custodian Account
Derek Caldwell(9) 33,606 * 20,000 13,606 *
Lorne Caplan(10) 8,500 * 8,500 -- --
Family Trust of Nathan A. Low 1,261,161 4.4 214,293 1,046,868(12) 3.7(12)
dated 4/12/94(11)
Dwight Miller(13) 50,247 * 20,785 29,462 *
Richard Stone(14) 639,714 2.3 249,892 389,822 1.4
Alan Swerdloff(15) 14,976 * 3,779 11,197 *
Preston Tsao(16) 560,836 2.0 145,286 415,550 1.5
</TABLE>
- ---------------
* Less than 1%
(1) Applicable percentage of ownership is based on 27,714,067 shares of
Common Stock outstanding as of January 27, 1998.
(2) Assumes that Selling Stockholders have not sold any Common Stock
beneficially owned prior to the Offering other than the Shares.
(3) Represents an option that is fully exercisable held by holder as pledgee
pursuant to a pledge by D. Blech & Co. Inc. 305,884 shares issuable upon
exercise of such option have been previously registered.
(4) Mr. Brookover was elected to the Company's Board of Directors on January
22, 1998.
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<PAGE> 15
(5) Mr. Brookover is the Portfolio Manager of Grace Brothers, Ltd. ("Grace
Brothers"). Includes 5,145,034 shares beneficially owned by Grace
Brothers, of which Mr. Brookover disclaims beneficial ownership.
(6) Includes the 4,363,734 Shares offered hereby by Grace Brothers.
(7) Represents the 781,300 shares to be held by Grace Brothers upon
completion of the offering contemplated hereby.
(8) Information is as of December 31, 1997 as provided by holder in its
Schedule 13G filed with the Securities and Exchange Commission on
January 15, 1998. Holder has reported sole voting power and sole
disposition power as to all such shares. Holder's address is 1560
Sherman Avenue, Suite 900, Evanston, Illinois 60201.
(9) Represents warrants transferred from Sunrise Securities Corp.
("Sunrise") that are immediately exercisable, including a Warrant
exercisable for 20,000 Shares.
(10) Represents a Warrant transferred from Sunrise that is immediately
exercisable.
(11) Represents 430,516 shares of Common Stock and warrants for 830,645
shares that are immediately exercisable transferred from Sunrise,
including a Warrant exercisable for 214,293 Shares. Includes 430,516
shares of Common Stock and warrants for 616,352 shares beneficially
owned by Nathan A. Low, co-trustee, of which the Nathan A. Low Family
Trust disclaims beneficial ownership.
(12) Represents the 1,046,846 shares beneficially owned by Nathan A. Low.
(13) Represents 21,713 shares of Common Stock and warrants for 28,530 shares
that are immediately exercisable transferred from Sunrise, including
6,500 Shares and a Warrant exercisable for 14,285 Shares.
(14) Represents 294,510 shares of Common Stock and warrants for 345,204
shares that are immediately exercisable transferred from Sunrise,
including 84,606 Shares and a Warrant exercisable for 165,286 Shares.
(15) Represents warrants transferred from Sunrise that are immediately
exercisable, including a Warrant exercisable for 3,779 Shares.
(16) Represents 225,019 shares of Common Stock and warrants for 335,817
shares that are immediately exercisable transferred from Sunrise,
including a Warrant exercisable for 145,286 Shares. Sunrise served as
placement agent for the Company's private placements in January 1996,
December 1996 and December 1997-January 1998. Messrs. Caldwell, Caplan,
Low, Miller, Stone, Swerdloff and Tsao are employees of Sunrise.
Certain of the Shares offered hereby by the Selling Stockholders were
acquired pursuant to (i) Subscription Agreements (the "Subscription Agreements")
among the Company and the Selling Stockholders, (ii) a Financial Consulting
Agreement between the Company and SciFin, Inc. dated September 9, 1997 (the
"Consulting Agreement"); (iii) a Letter Agreement dated December 11, 1997,
between the Company and Sunrise Securities Corp. ("Sunrise") (the "Letter
Agreement"); and (iv) Investment Representation Letters (the "Investment
Representation Letters"). In addition, certain of the Shares offered hereby by
the Selling Shareholders are issuable upon the exercise of Warrants issued
pursuant to the Letter Agreement; these Warrants are exercisable immediately for
$2.00 per share and expire in January 2003. In addition, another Selling
Shareholder holds an option to purchase up to 315,631 shares of the Company's
Common Stock, 9,747 of which are being offered hereby. That option is
exercisable immediately at $4.99 per share and expires in May 1999.
This Prospectus does not cover the issuance or the transfer of the
Warrants. Rather, it covers dispositions of the shares of Common Stock issuable
upon exercise of such Warrants.
Under the Subscription Agreements, the Consulting Agreement, the Letter
Agreement and the Investment Representation Letters, each Selling Stockholder
represented to the Company that it was acquiring the Shares from the Company for
investment purposes, without any present intention of effecting a distribution
of those shares. However, in accordance with the Subscription Agreements,
Consulting Agreement and the Letter Agreement, the Company agreed to register
the resale of the Shares offered hereby by the Selling Stockholders to permit
such resales from time to time in the market or in privately-negotiated
transactions. The Company has also agreed to bear certain expenses in connection
with the registration statement.
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<PAGE> 16
PLAN OF DISTRIBUTION
All or a portion of the Shares offered hereby by the Selling
Stockholders may be delivered and/or sold in transactions from time to time on
the over-the-counter market, on the American Stock Exchange, in negotiated
transactions, or a combination of such methods of sale, at market prices
prevailing at the time, at prices related to such prevailing prices or at
negotiated prices and/or may also be used to cover any short positions
previously established. The Selling Stockholders may effect such transactions by
selling to or through one or more broker-dealers, and such broker-dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders. The Selling Stockholders and any
broker-dealers that participate in the distribution may under certain
circumstances be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by such broker-dealers and any
profits realized on the resale of Shares by them may be deemed to be
underwriting discounts and commissions under the Securities Act. The Company has
agreed to indemnify the Selling Stockholders with respect to the Shares offered
hereby against certain liabilities, including, without limitation, certain
liabilities under the Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from the Selling Stockholders (and, if they act as agent for
the purchaser of such Shares, from such purchaser). Broker-dealers may agree
with the Selling Stockholders to sell a specified number of Shares at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholders, to purchase as principal any
unsold Shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholders. Broker-dealers who acquire Shares as principal may
thereafter resell such Shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Shares commissions computed as described above.
Under applicable rules and regulations under the 1934 Act, any person
engaged in the distribution or the resale of Shares may not simultaneously
engage in market making activities with respect to the Common Stock of the
Company for a period of two business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act, and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders.
The Selling Stockholders will pay all commissions, transfer taxes, and
other expenses associated with the sale of securities by them. The Shares
offered hereby are being registered pursuant to contractual obligations of the
Company, and the Company has paid the expenses of the preparation of this
Prospectus.
This offering will terminate as to each Selling Stockholder on the
earlier of (a) the date on which such Selling Stockholder's shares may be resold
pursuant to Rule 144 under the Securities Act; or (b) the date on which all
Shares offered hereby have been sold. There can be no assurance that any of the
Selling Stockholders will sell any or all of the Shares offered hereby.
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<PAGE> 17
LEGAL MATTERS
The legality of the issuance of the securities being offered hereby is
being passed upon for the Company by Heller Ehrman White & McAuliffe, Palo Alto,
California.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for each of the years in the three year period ended December 31, 1997 have
been incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in auditing and accounting.
MATERIAL CHANGES
Since the quarter ended December 31, 1997, the Company has experienced
the following material changes in its affairs:
In January 1998, the Company completed a private placement for 5,714,286
shares of Common Stock aggregating $10 million in total gross proceeds and
approximately $9.4 million in net proceeds. The selling price was $1.75 per
share of Common Stock. In connection with the private placement, the Company
issued 91,106 additional shares for services rendered by the private placement
agent and issued warrants for an additional 571,428 shares, exercisable for
$2.00 per share. The securities sold in the private placement are among those
being registered for resale pursuant to the Registration Statement of which this
Prospectus forms a part. See "Risk Factors - Shares Eligible for Future Sale."
In February 1998, the Company completed a private placement of 571,428 shares
of its Common Stock at $1.75 per share to a related party for aggregate gross
proceeds of $1 million.
Brian Brookover, Kirk Raab and William Hambrecht were elected to the
Company's Board of Directors in January 1998. Mr. Brookover replaces Jack
Watson, who resigned from the Company's Board of Directors in January 1998.
In February 1998, the Company entered into a three year consulting
agreement with Kirk Raab pursuant to which Mr. Raab received an option to
purchase 250,000 shares of the Company's common stock. Options to purchase
50,000 shares of the Company's common stock vested immediately upon signing
the contract. In addition, the Board of Directors may accelerate the vesting
of 100,000 of the stock options upon achievement of certain milestones.
In February 1998, the Board of Directors approved an amendment, subject
to shareholders approval, 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 February 1998, the Board of Directors approved a proposal to
terminate the Company's Independent Consulting agreement with Mr. Mark Tomei
and settle the severance of approximate value $290,000 due to him upon
termination of the agreement in cash or by issuance of the Common Stock of the
Company or both.
In March 1998, the Board of Directors approved a proposal subject to
shareholders approval 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. In March 1998, Mr. John C. Kane was
elected to the Company's Board of Directors.
In April 1998, the commencement of the Company's planned CP-Cardiosol
clinical trials was delayed by a request from the FDA for additional preclinical
data. The Company believes it will be able to fully respond to the FDA's request
by the third quarter of 1998. See "Risk Factors--Government Regulation and
Product Approval."
In April 1998, Donald H. Picker and Mark J. Tomei resigned from the
Board of Directors.
On April 22, 1998, the Company announced that David Tomei had stepped
down as its Chairman and Chief Executive Officer and that Kirk Raab had been
appointed as the Company's Chairman and interim Chief Executive Officer. Dr.
Tomei remains a director of the Company and will serve as its Executive Vice
President and Chief Scientific Officer.
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