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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to _____________
COMMISSION FILE NO 1-12968
LXR BIOTECHNOLOGY INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 68 - 02828
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1401 MARINA WAY SOUTH
RICHMOND, CALIFORNIA 94804
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 412-9100
Securities registered pursuant to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.0001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Check whether the Issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ].
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for the year ended December 31, 1997 were $859,013.
As of February 24, 1998, there were outstanding 27,715,850 shares of the
Registrant's common stock, par value $0.0001 per share. As of that date, the
aggregate market value of the shares of common stock held by non-affiliates of
the Registrant (based on the closing price for the common stock on the American
Stock Exchange on February 24, 1998) was approximately $41,599,863. This
excludes 10,200,118 shares of common stock held by directors, officers and
stockholders whose ownership exceeded five percent of the shares outstanding at
February 24, 1998. Exclusion of shares held by any person should not be
construed to indicate that such person possesses power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant,
or that such person is controlled by or is under common control with the
Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held June 11, 1998, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1997.
Transitional Small Business Disclosure Format (Check One) Yes [ ] No [X]
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LXR BIOTECHNOLOGY INC.
Annual Report on Form 10-KSB
For the fiscal year ended December 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1 Description of Business................................................. 3
Item 2 Description of Properties............................................... 17
Item 3 Legal Proceedings....................................................... 17
Item 4 Submission of Matters to a Vote of Security Holders..................... 18
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters............................................. 21
Item 6 Management's Discussion and Analysis of Financial Condition, Plan of
Operations and Results of Operations.................................... 22
Item 7 Financial Statements.................................................... 31
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 31
PART III
Item 9 Directors and Executive Officers........................................ 32
Item 10 Executive Compensation.................................................. 32
Item 11 Security Ownership of Certain Beneficial Owners and Management.......... 32
Item 12 Certain Relationships and Related Transactions.......................... 32
Item 13 Exhibits and Reports on Form 8-K........................................ 33
Financial Statements.............................................................. F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Except for historical information, this Annual Report contains forward
looking statements regarding, among other things, product development plans,
market projections, product efficacy and safety, corporate partnering, timing of
filings with the United States Food and Drug Administration ("FDA") and FDA
approval thereof, clinical trial progress, sufficiency of cash resources and
overall resource allocation and the ability of the Company to raise additional
funding. These forward looking statements concern matters that involve risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward looking statements. Words such as "believe," "expects,"
"likely," "may" and "plans" are intended to identify forward looking statements,
although not all forward looking statements contain these words. These risks and
uncertainties are discussed in the section entitled "Factors Affecting Future
Results" in Part II below and elsewhere in this Annual Report and in other
reports filed with the Securities and Exchange Commission ("SEC").
OVERVIEW
LXR Biotechnology Inc. ("LXR" or the "Company") is a biopharmaceutical
company engaged in the research and development of therapeutics to treat
diseases where the dysregulation of apoptosis, naturally occurring programmed
cell death, can play a key role in the onset of or damage caused by such
diseases. The Company's strategy has evolved to focus on apoptosis in the area
of cardiology. Apoptosis is a form of cell death that occurs in a timely and
atraumatic fashion in the normal development and maintenance of healthy tissues
and organs. The scientific field of apoptosis is relatively new and received
little attention prior to 1993. However, more recently, the concept of apoptosis
and programmed cell death has begun to have an impact on the basic biological
sciences, medicine and biotechnology. The Company believes that several of its
principal scientists have been in the forefront of the discovery, understanding
and acceptance of apoptosis as a discrete biological phenomenon in the life
cycle of cells. Further, the Company believes that it has played a significant
role in the development of new and promising therapeutic strategies based upon
the concept of apoptosis.
The current strategy of the Company is to direct the Company's resources
primarily towards the development of HK-Cardiosol and CP-Cardiosol for use as a
heart transplantation solution and a cardioplegia solution, respectively. The
Company believes these lead drug candidates have promising profiles as a result
of their preclinical and clinical data, low toxicity, low manufacturing costs
and the potential to address large markets with unmet needs. In support of this
strategy, the Company recently engaged an independent consulting firm to perform
a marketing study for Cardiosol, completed construction of a GMP manufacturing
facility and has recruited and hired additional personnel with preclinical and
clinical development expertise to further complement the Company's scientific
research capabilities. In November 1997, the Company received notice from the
FDA that its Investigational Drug Exemption ("IDE") for use of HK-Cardiosol as a
heart preservation solution has been approved. The Company expects to commence
clinical trials of HK-Cardiosol during 1998. The Company also filed an
Investigational New Drug application ("IND") to begin clinical studies of
CP-Cardiosol for use in cardioplegia in the first quarter of 1998. See "Research
and Development Programs - Cardiosol Technology" below.
The Company is conducting limited research and development activities
relating to Elirex, a drug for the suppression of damage following a heart
attack, and to Secreted Apoptosis Regulatory Protein ("SARP"), a family of genes
discovered by the Company that are tissue specific producers of soluble proteins
that either protect or sensitize cells to apoptotic stimuli. The Company
believes that Elirex has a favorable therapeutic profile and expects to pursue a
collaborative partnership
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for further research and development with the objective of filing of an IND to
commence clinical studies. Additionally, the Company believes SARP may have
potential applications for a variety of diseases including cancer, diabetes,
stroke, and myocardial dysfunction.
The Company currently has a collaboration with Perkin-Elmer Corporation
("Perkin-Elmer") to develop its Scanning Laser Digital Imaging ("SLDI")
technology and a Letter of Intent with Boehringer Mannheim Corporation
("Boehringer Mannheim") to evaluate Maspin, a protein implicated in breast
cancer and other types of highly metatastic tumors. Other research areas for
which the Company is seeking partners include Bak (a gene whose protein product
is present in heart, other muscle and brain tissue and may facilitate apoptosis
of muscle and nerve cells following ischemia or exposure to toxic drugs),
apoptosis drug screening technologies (which the Company has used to identify
compounds with apoptosis modulating ability), Urine DNA Analysis (a technology
which may permit the sex of a fetus to be determined based on an analysis of
maternal urine), and Fas (an apoptosis-signaling glycoprotein on the surface of
many cell types, including lymphocytes and cardiac cells).
The Company was incorporated in Delaware in April 1992. The term
"Company" or "LXR" refers to LXR Biotechnology Inc. and its wholly-owned
subsidiary Optical Analytic, Inc. ("OAI"). OAI was acquired by LXR in December
1993. The principal executive offices of the Company are located at 1401 Marina
Way South, Richmond, California 94804. The Company's telephone number is
(510) 412-9100, and its facsimile number is (510) 412-9109.
SCIENTIFIC BACKGROUND
Apoptosis
There are two forms of cell death, apoptosis and necrosis. Apoptosis is
an atraumatic, orderly and predictable self-destruction of cells in which they
shrink within their membranes while still in place in the tissue, and their DNA
is broken up into packets called nucleosomes for safe removal by other cells in
the body such as white blood cells. This process is under close genetic control
and is a normal physiological process. Necrosis is the traumatic destruction of
cells caused by catastrophic damage leading to the release into the surrounding
tissues of enzymes and intact DNA, which is then broken into random fragments.
The necrosis process releases degradative products and active enzymes directly
into the surrounding tissue and can cause severe inflammation and extensive
damage in those tissues. The clinical importance of apoptosis has only recently
been recognized by the scientific community, and its role in disease is just
beginning to be explored. Apoptosis is now understood to be the principal form
of cell death in healthy persons, and as critical to the normal functioning of
the immune system as well as to other processes such as the production of
healthy new red blood cells.
Apoptosis is a fundamental mechanism in the growth and development of
organisms and occurs throughout the stages of embryonic development in the early
formation of organs, substitution of one tissue by another, and resorption of
temporary tissues such as the webbing between embryonic fingers. The genetic
orchestration of cell division, differentiation and death dictates the ultimate
shape of the body. Apoptosis plays a complementary role to that of cell division
in the regulation of the size of cell populations. Apoptosis also enables the
body to replace older, presumably defective cells, such as skin cells, with
healthy new cells in an orderly fashion.
In the ordinary course of events, cells undergo apoptosis in response to
signals sent by other cells indicating a need for cell replacement, or perhaps
from internal signals indicating that the ongoing existence of the cell would be
damaging to the organism. The theoretical point at which cells decide, based on
the signals they receive, whether to undergo apoptosis or continue to grow or
proliferate is called the modulation point. In certain cases, the body
malfunctions and sends out aberrant apoptosis signals.
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These signals may cause sudden, inappropriate apoptosis resulting in severe
tissue damage. Conversely, these signals may lead to delayed or faulty control
of apoptosis resulting in overpopulation of certain cell types or the continued
existence of damaged or defective cells. Since apoptosis has been recognized as
an inherent part of the normal life cycle of cells, the dysregulation of normal
and timely apoptotic cell death is involved in a broad range of disease
conditions. Examples of disease conditions associated with inappropriate
apoptosis are heart tissue damage following a heart attack or brain damage
associated with stroke, as well as damage to the basal crypt epithelial region
in connection with the development of AIDS and in cancer patients who are
receiving chemotherapy and radiotherapy. Cancer is an example of a disease
associated with delayed or faulty control of apoptosis.
Because apoptosis can be temporarily modulated using drugs specifically
designed to increase or decrease the process, it may be possible to treat
diseases with biopharmaceutical therapies that suppress or stimulate apoptosis.
The Company believes that such therapies could substantially reduce tissue
damage and improve recovery from a number of major diseases.
Global Ischemia
Global ischemia is a condition caused by a lack of a combination of
critical factors including oxygen, glucose and other nutrients normally provided
by fresh blood flow. LXR believes that the global ischemia which occurs
following isolation of major organs from donors and the subsequent reperfusion
following transplantation lead to premature and inappropriate apoptosis among
critical cells of the organs, thereby leading to severe tissue damage and organ
dysfunction.
LXR scientists believe they have demonstrated that the heart retains its
ability to initiate cell death by apoptosis following ischemia. In organ
transplantation, an organ such as a heart or liver that is being removed from
the donor for transplantation is suddenly deprived of fresh blood flow and
becomes ischemic. Transplantation procedures are especially difficult because
the heart and liver cannot survive severe global ischemia for more than
approximately four to six hours. The resultant failure of a heart or liver is
believed to be a consequence of inappropriate and unwanted apoptotic cell death
in the organ -- a death that may be preventable by specific anti-apoptotic
agents.
LXR scientists believe that the current solutions used for organ
preservation prior to transplantation can be significantly improved, especially
for hearts, where donor organs generally must be transplanted within four hours
of organ harvest. LXR's organ preservation efforts are directed to its lead drug
candidates HK-Cardiosol and Elirex.
Global ischemia also occurs in Cardioplegia, which is defined as the
temporary electromechanical arrest of the beating heart. Cardioplegic solutions
are routinely infused during open heart surgical procedures to protect the
myocardium from ischemic insult. Several cardioplegic solutions are available to
improve the arrested state; however, LXR scientists believe problems remain with
all solutions currently in use. The Company's research and development of
CP-Cardiosol as a cardioplegic solution is focused on this market. See "Research
and Development - Cardiosol Technology" below.
Regional Ischemia
LXR believes that, similar to global ischemia, regional organ and tissue
ischemia, such as that encountered with heart attacks and strokes, results in
premature apoptosis and leads to severe organ damage.
Myocardial Infarction (Heart Attack). Heart attacks are a leading cause
of death and disability in humans. In the United States, approximately 1.3
million people suffer heart attacks each year and
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approximately one-third of those who have their first heart attack do not
survive. Heart attacks are caused by the obstruction of coronary arteries and
blockade of normal blood flow to small regions of the heart muscle. This can
lead to ischemia and eventually to permanent damage called a myocardial
infarction. Significant advances have been made in the treatment of heart
attacks with both advanced surgical techniques to replace damaged coronary
arteries or to clear them of obstruction, and with new drugs that dissolve blood
clots and open arteries to fresh blood flow. However, there has been no
comparable advance in the prevention of permanent damage to the heart muscle,
known as an acute myocardial infarction, which occurs in the first few hours or
days following a heart attack. Development of a means to prevent this tissue
damage would be an important step toward reducing death and disability from
heart attacks.
Ischemia and subsequent reperfusion ultimately lead to severe damage and
death of heart muscle cells that can be the primary cause of the death of up to
one-third of all patients who experience their first heart attack. Until
recently, scientists had assumed that this cell death was caused by the oxygen
starvation itself or even the reintroduction of toxic oxygen radicals during
reperfusion. LXR scientists have shown in in vitro and in animal studies that
oxygen starvation can ultimately lead to apoptotic cell death in the heart in
the critical hours following a heart attack. These findings have been confirmed
by research reports from several other investigators that subsequently appeared
in the medical literature. Accordingly, LXR believes that the primary reason
heart muscle cells die in connection with a heart attack is not because they can
no longer survive oxygen starvation, or because they are irreparably damaged by
oxygen radicals, but rather because the heart cells receive a signal to die
voluntarily. Paradoxically, not only does oxygen starvation appear to signal
cells to die following a blockage of coronary artery blood flow, but the return
of blood flow, called reperfusion, into the affected region of the heart
following the removal of the obstruction also causes oxidative damage to
proteins and DNA resulting in cell death. The Company believes that the cell
death caused by reperfusion is also a form of apoptosis, which can be considered
an inappropriate response on the part of the heart cells that react as if they
had received deliberate instructions to die. Before the cell undergoes
apoptosis, the DNA damage is actually repaired by the cell, but the cell
nonetheless undergoes apoptosis as a result of those instructions.
In the case of heart attacks, treatment with apoptosis inhibitors may
minimize the occurrence of persistent heart muscle damage and eventual formation
of non-functional scar tissue. LXR believes that there is a "window of
opportunity" for therapeutic intervention of between one to six hours following
a heart attack. During this window the cells of the heart may still be stopped
from dying and go on to live and function normally. This window for therapeutic
intervention creates an opportunity for the development of a therapy that blocks
apoptosis and could be combined effectively with existing treatments designed to
restore blood flow. Prevention of heart damage can reasonably be expected to
markedly improve the recovery and quality of life in patients who otherwise
would experience physical limitations related to the persistent organ damage.
The Company is developing Elirex, which may have applications for the inhibition
of ischemic damage following heart attack. See " Research and Development
Programs - Elirex" below.
Stroke. Stroke is one of the top three causes of death in the United
States, as well as a leading cause of death in many countries throughout the
world. However, mortality rates alone do not represent the true impact of
stroke, as many patients survive stroke with severe, permanent disability or
lesser, but significant, degrees of impairment. There are over 500,000 new
stroke victims per year in the U.S. alone.
Stroke is damage to a part of the brain caused by interruption to its
blood supply (ischemic stroke) or leakage of blood outside of vessel walls
(hemorrhagic stroke). There is increasing published evidence that apoptosis
plays an important role in determining the final size of the damaged brain
tissue, or infarct. FDA recently approved the use of new "clot buster" drugs, or
thrombolytics, to treat stroke by dissolving blood clots in the brain. However,
physicians have expressed substantial concern that such drugs may
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cause harm to some patients if the drugs are either administered more than a few
hours after the stroke or are administered to patients who have experienced a
hemorrhagic stroke rather than an ischemic one. LXR scientists believe that
drugs that could temporarily block induction of apoptosis could have a
beneficial effect in the final outcome of stroke either as an adjunct therapy
with thrombolytics or alone in cases where the physician may not know either
when the stroke occurred or whether or not it was an ischemic stroke. Elirex may
also have potential applications for the damage caused by Stroke. See "Research
and Development Programs - Elirex" below.
RESEARCH AND DEVELOPMENT PROGRAMS
CARDIOSOL
In 1996, LXR obtained patent and other rights to an experimental organ
preservation solution called Cardiosol. Before LXR acquired the technology,
Cardiosol had been compared to St. Thomas solution, a standard organ
preservation solution, in a small physician sponsored trial in 20 transplant
patients at the California Pacific Medical Center between 1988 and 1991.
Multivariable analysis demonstrated that a patient's rejection profile and the
composition of the preservation solution were major factors in influencing
patient survival. The incidence of chronic rejection per patient was reduced by
approximately 50% in the Cardiosol group. Survival was highest in the Cardiosol
patient group: 100% at over five years compared to 82% at one year and 68% at
five years for the control group. In additional physician sponsored studies
performed at the California Pacific Medical Center, 95 patients were treated
with Cardiosol as a cardioplegic solution in heart-lung bypass operations.
Compared to St. Thomas solution, Cardiosol resulted in an increase in cardiac
index, a measure of how well the heart was pumping after the operation.
The Company believes that it has improved the formulation of the
original Cardiosol solution, resulting in enhanced stability and a potentially
longer shelf life desirable for quality control in manufacturing and marketing.
In 1997, the Company filed patent applications on the closely related
formulations of CP-Cardiosol and HK-Cardiosol for use in cardioplgia and heart
transplantation, respectively.
During the third quarter of 1997, the Company engaged an independent
consultant to perform a marketing analysis for the Cardiosol technology. Based
on the results of this study, the Company believes there is a significant unmet
need for a cardioplegia solution to be used in open-heart surgery procedures.
Currently, there are approximately 650,000 open-heart procedures performed in
the United States and Europe with a growth rate expected to parallel that of the
aging population at approximately 2% annually. At present there are a number of
cardioplegia solutions available for open heart surgery, but the Company
believes there is no clear differentiation between these products. The Company
believes that, when used as a cardioplegic solution in open heart surgery,
CP-Cardiosol has the potential to decrease the incidence of myocardial
infarction, decrease the need for mechanical assistance and intropic drug
support and consequently decrease patient length of stay following surgery. The
marketing analysis done for the Company indicated that, because of its
advantages over other solutions, such a cardioplegic solution could capture a
large share of the market for such products and be sold at a premium price,
resulting in potential revenues between $200 and $500 million by 2005. There can
be no assurance that CP-Cardiosol can be successfully developed or
commercialized, that it would gain such a market share or result in such
revenues. Heart transplantation is a small (approximately 3,600 procedures in
the United States and Europe annually), high profile market which the Company
believes will serve to enhance visibility and aid the Company in the marketing
of CP-Cardiosol for cardioplegia.
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Due to their promising preclinical data, low toxicity, low manufacturing
costs and the potential to address large markets with unmet needs, the Company
is currently focusing its resources on the development of HK-Cardiosol and
CP-Cardiosol.
In late 1997, the Company received a notice from the FDA that its IDE
for use of HK-Cardiosol as a heart preservation solution has been approved. The
approval authorizes the Company to proceed with clinical trials in up to eight
medical centers and 150 heart transplant patients. The Company expects to
initiate clinical trials of HK-Cardiosol during 1998. If the trials are
successful, a 510K submission will be made in the United States and an
equivalent submission will be made in Europe. There can be no assurance that the
clinical trials of HK-Cardiosol will be successful, or if they are, that
HK-Cardiosol will be successfully commercialized. In the first quarter of 1998,
the Company filed an IND to begin clinical studies of a closely-related
formulation called CP-Cardiosol(TM) for use in hypothermic cardioplegia. There
can be no assurance that the Company's IND for CP-Cardiosol will be approved.
ELIREX
LXR has also demonstrated that a drug, LXR015, has anti-apoptotic
effects in in vitro tests. Further, in preclinical animal models, this drug
appears to be capable of significantly increasing the efficacy of conventional
organ preservation techniques in the heart and liver. LXR also believes that
LXR015 may be useful in suppression of multiple organ damage associated with
hypothermic cardioplegia and cardiopulmonary bypass applications. Based upon
published results of preclinical studies of this molecule, the Company believes
that it should be safe and well tolerated in human use. This technology has led
to the discovery and development of the Company's proprietary apoptosis
supressor compound named Elirex. Elirex is an investigational drug for
inhibition of heart damage following heart attack. The Company has investigated
the effect of Elirex in an ischemic heart attack and ischemic stroke model in
several animal studies. The Company is also presently performing research to
optimize the formulation and delivery of the drug.
LXR has also established scientific collaborations relating to Elirex
with organ transplant surgeons, cardiothoracic surgeons and cardiovascular
researchers at the Ohio State University Medical School, Cleveland Clinic, Emory
University Medical School, Henry Ford Hospital, Stanford Medical School,
University of California at San Francisco, California Pacific Medical Center in
San Francisco and University of Kentucky Medical Center.
SARP (SECRETED APOPTOSIS REGULATORY PROTEIN)
SARP, a Secreted Apoptosis Regulatory Protein, is a new family of genes
discovered by LXR scientists. SARP appears to control the process of genetically
programmed cell death, or apoptosis. Mounting evidence demonstrates that two of
the family members stimulate opposite effects on cells. SARP-1 is a potent
suppresser of apoptosis, whereas SARP-2 upregulation leads to substantial
enhancement of sensitivity to apoptosis induction. Furthermore, the findings
indicate that these proteins are secreted from cells and are capable of
influencing apoptosis regulation in a large number of regional cells in a tumor
or tissue.
SARPs are of particular interest because they are secreted out of cells,
in contrast to most known apoptosis related proteins which generally function
only within the cell producing them. This makes them resemble other
biotechnology compounds such as interferon or G-CSF. In addition, the expression
of SARPs is tissue specific which may give them the potential to target specific
disease sites.
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The SARP family of genes may be used to discover new drugs for a variety
of diseases including cancer, diabetes, brain stroke, and myocardial
dysfunction.
SCANNING LASER DIGITAL IMAGING TECHNOLOGY ("SLDI")
The recognition that apoptosis can be modulated has created an increased
need for fast computer-controlled robotic instruments that can perform
biological and molecular tests for apoptosis modulators. In addition, LXR
believes that conventional approaches to optical analysis, which are both
tedious and slow, will need to be replaced by advanced high-speed
computer-controlled techniques. The SLDI technology utilizes high-speed
three-dimensional scanning laser beams that cover the entire surface of any test
material, performing several different measurements simultaneously at each
position. The laser moves rapidly (in approximately one millionth of a second)
to new positions on the test material until the entire test area has been
analyzed and the measurements have been stored in the computer. These
measurements are then retrieved as digital images of the expression of genes in
tissues and cells. The Company believes that this technology will enable
researchers to perform remote, non-contact measurements of gene expression in
millions of individual cells within a few seconds, which the Company believes is
not possible with any current instrument.
The Company has entered into an exclusive license agreement with
Perkin-Elmer to further develop the SLDI technology. In partnership with
Perkin-Elmer, LXR is continuing to design and develop improved instrument
systems and has filed patent applications to protect certain improvements. The
Perkin-Elmer License Agreement may be terminated by Perkin-Elmer upon certain
conditions. Also, there can be no assurance that the Perkin-Elmer collaboration,
if continued, will be successful, that the Company will receive royalties or
technological advantages from the collaboration. To date the Company has
received license fee payments of approximately $600,000 and equipment with a
fair market value of approximately $343,000 from Perkin-Elmer. An additional
amount of equipment with a fair market value of approximately $57,000 is
expected to be received in 1998. See "License and Collaborative Research -
Perkin - Elmer License Agreement" below.
MASPIN
LXR's metastatic cancer program is focused on a recently discovered
protein known as Maspin (mammary serine proteinase inhibitor),which the Company
has designated LXR023. The patent on Maspin was recently issued, and LXR is the
exclusive licensee for use in therapeutics and co-exclusive licensee for use in
clinical diagnostics, as a metastasis prognostic marker in breast cancer and
other types of highly metastatic tumors such as prostate cancer.
LXR has entered into a letter of intent with Boehringer Mannheim
pursuant to which LXR is undertaking certain preclinical efficacy and toxicity
studies of Maspin. During the third quarter of 1997, the Company received
preliminary results of small scale efficacy studies for primary tumor growth and
metastatic breast cancer models. The preliminary results of these studies
indicated that Maspin was superior to Taxol, the leading treatment for cancer,
for inhibition of primary tumor growth in vivo. In November 1997, the Company
received preliminary results of dose escalation toxicity studies performed in
parallel, and no toxicity at any of the doses tested was observed. The Company
is currently examining the effect of an alternative drug regimen on primary
tumor growth and awaiting results regarding its efficacy in treating residual
metastatic disease. Based on the outcome of the final review of these studies,
the Company and Boehringer Mannheim will determine whether to proceed with
further research and development efforts. However, Boehringer Mannheim has no
obligation to proceed with the project, and there can be no assurance that
Boehringer Mannheim will do so. See "Licenses and Collaborative Research -
Boehringer Mannheim Letter of Intent for Maspin" below.
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BAK
Pursuant to their efforts to discover the genes that may be responsible
for control of apoptosis in cells of the heart and other organs, LXR scientists
have isolated a gene, designated Bak (for Bcl-2 homologous antagonist/killer,
formerly referred to as Cdi-1), whose protein product is present in heart,
muscle and brain tissues, and may facilitate apoptosis of muscle and nerve cells
following ischemia or exposure to toxic drugs and a second gene designated BBP
(for Bak binding protein), whose protein product associates with Bak and through
which Bak may exert its apoptotic effect. The Company is seeking a collaboration
partner to fund further research on BAK.
APOPTOSIS DRUG SCREENING
LXR's proprietary apoptosis screening assay ("ASA") measures the ability
of potential therapeutic agents to suppress or stimulate apoptosis. Unlike other
such assays, ASA utilizes an untransformed, non-tumorigenic cell strain that
retains many normal behavioral characteristics, including the regulation of
apoptotic death as well as the control of normal proliferation and
differentiation. ASA has been used by LXR to screen for drug candidates
resulting in Lexirin and Elirex.
SURROGATE APOPTOSIS MARKER ("SAM") ASSAYS
When cells in the body undergo normal apoptosis, the breakdown products
must be eliminated from the body safely and efficiently to prevent inflammation
and tissue damage. The Company has developed surrogate apoptosis marker ("SAM")
assays to measure the level of apoptosis by-products in the blood or excreted in
urine. As a result of this SAM research, the Company recently discovered a
technique, "Urine DNA Analysis" which may permit the sex of a fetus to be
determined as early as six weeks after conception. The Company believes Urine
DNA Analysis may also have applications in cancer detection and diagnosis. The
Company is seeking collaborative partners to fund further development of this
technology.
FAS(DELTA)TM
Fas is a apoptosis-signaling glycoprotein on the surface of many cell
types including lymphocytes and cardiac cells. LXR scientists have identified a
splice variant of the Fas gene that encodes a soluble form of Fas, termed
Fas(DELTA)TM, which appears in vitro to interfere with the mechanism of action
responsible for aberrantly high levels of apoptosis in lymphocytes from
HIV-infected AIDS patients. In February 1998, the Company entered into a
collaborative research agreement with Copernicus Gene Systems, Inc.
("Copernicus") to integrate Fas(DELTA)TM with the enabling DNA-compaction and
expression techniques of Copernicus for the purpose of developing potential
cancer gene therapy products for a variety of indications.
LEXIRIN
LXR has formulated a highly purified, orally administrable version of
LXR015, named Lexirin, for gastrointestinal disorders and has received patents
on Lexirin. The Company completed Phase I trials for Lexirin and final results
indicated it was well tolerated in AIDS patients and that no adverse reactions
were encountered. However, LXR has decided not to proceed with further clinical
trials of Lexirin at this time.
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Research and Development Expenses
Research and development expenses include 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. Research and development expenses amounted to $7,154,621,
$5,519,317 and $4,303,661 for the years ended December 31, 1997, 1996 and 1995,
respectively. Research and development expenses were born by third parties in
the amounts of $159,000 and $114,000 for the years ended December 31, 1997 and
1996, respectively. No research and development expenses were borne by third
parties in 1995.
LICENSES AND COLLABORATIVE RESEARCH
The Company has entered into license agreements and collaborative
research arrangements with a number of universities, research institutions and
collaborative partners. These include the following:
Dana-Farber Cancer Institute
The Company and Dana-Farber Cancer Institute, a teaching affiliate of
the Harvard Medical School, have entered into a license agreement whereby the
Company has obtained the exclusive right and license to make, use and sell
Maspin for therapeutic purposes and certain co-exclusive diagnostic rights. The
license pertains to one issued U.S. patent and two pending U.S. patent
applications filed as a result of the work of the late Dr. Ruth Sager. The
license agreement terminates upon the expiration of the last to expire of the
patents covered thereby. As partial consideration for the license, the Company
agreed to pay approximately $10,000 and granted Dana-Farber Cancer Institute a
warrant to purchase 5,000 shares of the Company's Common Stock at any time prior
to May 6, 1999 at an exercise price per share of $3.15. The license agreement
requires the Company to pay a minimum royalty per year beginning 12 months after
the completion of successful Phase II clinical trials. So long as the Company
diligently pursues the commercial development of licensed products, minimum
royalties will be waived until the successful completion of Phase III clinical
trials.
Ohio State University
The Company, through the acquisition of 100% of the outstanding stock of
Optical Analytic, Inc. in December 1993, acquired exclusive license rights in
three issued patents and related technology relating to SLDI developed in the
laboratory of Dr. L. David Tomei while he was a research scientist at Ohio State
University. The license agreement obligates the Company to make certain royalty
payments to the Ohio State University Research Foundation ("Ohio State") upon
the sale of any licensed products but not on the sale of any products developed
using the technology. The Company began paying minimum royalties to Ohio State
in 1996.
Perkin-Elmer
In August 1996, the Company and OAI entered into an agreement with
Perkin-Elmer whereby Perkin-Elmer was granted an exclusive worldwide license to
the SLDI technology for life sciences and clinical diagnostic applications.
Pursuant to the agreement, Perkin-Elmer agreed to (i) make up to $1.4 million of
cash milestone payments to the Company over a three-year period, (ii) contribute
up to $400,000 of equipment to the Company, (iii) make certain royalty payments
(which do not include minimums) to the Company on any sales of licensed product
and (iv) commit certain funds to the development of products covered by licensed
patents.
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Boehringer Mannheim
In July 1996, the Company entered into a letter of intent with
Boehringer Mannheim to jointly evaluate the development of Maspin for the
treatment of cancer (the "Maspin Letter of Intent"). In January 1997, pursuant
to the Maspin Letter of Intent, Boehringer Mannheim purchased 37,500 shares of
the Company's common stock at a price of $4.00 per share. If the results of the
preclinical efficacy and toxicity studies of Maspin currently being conducted by
the Company are favorable, it is contemplated that Boehringer Mannheim would
purchase additional shares of the Company's common stock, provide research and
development funding to the Company, and commit internal resources to the
development of Maspin, in exchange for an option to acquire an exclusive,
worldwide license to the Maspin protein for therapeutic uses. There can be no
assurance that the results of the preclinical testing of Maspin will be
successful, that Boehringer Mannheim will elect to proceed with this project or
that the parties will enter into an agreement.
University of Tennessee
In January 1997, the Company entered into a three-year research
agreement with the University of Tennessee and the University of Tennessee
Research Corporation (collectively, the "University of Tennessee") to support
research related to the LPA receptor (the "Tennessee Research Agreement"). The
Company agreed to pay $70,000 per year for three years, with the third year of
funding contingent upon the University of Tennessee meeting certain milestones.
In connection with the Tennessee Research Agreement, the Company and the
University of Tennessee entered into an agreement (the "Tennessee License
Agreement") whereby the University of Tennessee granted the Company an
exclusive, worldwide license, subject to certain exceptions, to related patent
rights and technology. As consideration for the Tennessee License Agreement, the
Company agreed to pay a license issue fee, annual license fee and royalties. The
license fee has been waived in consideration for the Company's research support
under the Tennessee Research Agreement.
Oxford Asymmetry, Limited
In April 1997, the Company entered into a research collaboration
agreement with Oxford Asymmetry, Limited ("Oxford") for the purpose of
discovering small molecule drug candidates that target specific apoptosis
pathways. The Company has paid $650,000 for research and is obligated to make
certain future royalty payments on certain products the Company may develop as a
result of the agreement.
PATENTS AND PROPRIETARY TECHNOLOGY
As of December 31, 1997, the Company owned eleven issued United States
patents, one covering the original Cardiosol technology, five related to
Lexirin, three related to the Company's apoptotic drug screening test, and two
related to Fas(DELTA)TM. In addition, the Company owned four allowed U.S. patent
applications, one related to Bak, one related to Lexirin, one related to a
method for the quantitative analysis of apoptosis, and one related to the SLDI
technology. The Company also has twenty five pending U.S. patent applications,
three related to Cardiosol, seven related to Elirex, two related to the
detection of fetal DNA in maternal urine samples, two related to Lexirin, two
related to improved components of the SLDI technology and nine related to
Bak/BPP and other research projects. The Company has also filed multiple
corresponding foreign patent applications. Subsequent to December 31, 1997, the
Company filed two U.S. patent applications, one relating to Cardiosol and one
relating to Elirex that claims priority to two previously pending U.S. patent
applications, which were provisional applications, and subsequently allowed
three of the provisional applications to expire.
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<PAGE> 13
Under license agreements and collaborative research arrangements with a
number of universities and research institutions, the Company has obtained
exclusive licenses (or options therefor) under seven issued United States
patents (three relating to SLDI, one relating to Maspin and three relating to
gingipain) one allowed U.S. patent application (relating to Maspin) and six
pending United States and foreign patent applications, to technology covered in
whole or in part by the claims in such patents and pending patent applications.
These licenses require the Company to pay royalties on sales, if any, of
patented inventions relating to licensed technologies and also require the
Company to make certain milestone payments. In some instances, the Company is
responsible for the costs relating to patent application filing and prosecution.
The Company anticipates that it will continue to seek to obtain licenses from
universities and other research institutions, where applicable technology
complements its research programs.
The Company intends to seek patent protection aggressively for its
potential products and key technologies and their use to modulate apoptosis and
treat other disorders. The Company also intends to seek patent protection or
rely upon trade secret rights to protect certain other enabling technologies
that will be used in discovering and evaluating new drugs which could become
marketable products. Finally, the Company intends to continue to seek patent
protection in areas that complement the Company's existing portfolio and may
provide future licensing opportunities for the Company. However, there can be no
assurance as to the breadth or degree 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 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.
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 (the "USPTO"), and no consistent policy has emerged from the USPTO and
the courts regarding the breadth of claims allowed or the degree of protection
afforded under biotechnology patents. Additionally, the USPTO may request data
demonstrating efficacy of potential therapeutic agents. The need to provide such
data, if required, could delay or adversely affect the Company's ability to
obtain patent protection for any of its potential products. There can be no
assurance that any patent applications relating to the Company's potential
products or processes will result in patents being issued, or that 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
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<PAGE> 14
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. 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,
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<PAGE> 15
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.
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, labeling, 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. 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 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 trials of HK-Cardiosol. In
December 1997, the Company announced it had rescheduled the filing of an IND to
conduct clinical studies for the use of CP-Cardiosol for improved organ
protection during heart/lung bypass operations for the first quarter of 1998.
The Company decided to reschedule these clinical trials and to do a number of
confirmatory animal experiments because of changes in the protocol of some
preclinical animal studies. The Company filed an IND in the first quarter of
1998. There can be no 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, 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 the clinical data from studies performed by
others will be available to the Company or acceptable to the FDA or other
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<PAGE> 16
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 the 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.
COMPETITION
Competition in the field of biotechnology is intense and is expected to
increase. Many companies, including biotechnology, pharmaceutical and nutrition
companies, are actively engaged in the research and development of products in
the Company's targeted areas, including the treatment of cardioplegia, heart
attack, stroke and metastatic cancers. Additionally, as the importance of
apoptosis becomes increasingly recognized, increasing numbers of companies are
devoting significant resources to understanding and developing products based on
or related to apoptosis. Many of these companies have substantially greater
financial, technical and marketing resources than the Company. In addition,
unlike the Company, some of them have considerable experience in preclinical
testing, human clinical trials and other regulatory approval procedures.
Moreover, certain academic institutions, governmental agencies and other
research organizations are conducting research in areas in which the Company is
working. These institutions are becoming increasingly aware of the commercial
value of their findings and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for the use of
technology that their scientists have developed. These institutions may also
market competitive commercial products on their own or through joint ventures
and compete with the Company in recruiting highly qualified scientific
personnel.
The Company is pursuing areas of product development in a relatively new
field in which there is a potential for extensive technological innovation in
relatively short periods of time. The Company's competitors may succeed in
developing technologies or products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's technology or proposed products becoming obsolete or noncompetitive.
HUMAN RESOURCES
As of December 31, 1997, the Company employed a total of 63 employees,
including 57 full-time employees, 18 of whom hold Ph.D. degrees. Most of these
employees are actively engaged in research and development activities. The
Company's employees are not represented by any collective bargaining unit, and
the Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently leases approximately 32,800 square feet of
laboratory and office space under a lease terminating June 30, 2010. The Company
believes that these facilities should be sufficient to meet its needs through
1998. In 1997, the Company completed constructing and equipping a small GMP
manufacturing facility at the Richmond site for use in process development,
quality control activities and the potential manufacturing of clinical material
of LXR compounds.
ITEM 3. LEGAL PROCEEDINGS
The Company and five of its past or present 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, 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, ("In re Blech"). In addition, L. Scott
Minick, a former director and former officer of the Company, James D. Coombs, a
former director and former officer, and Mark J. Tomei, a director and former
officer, are defendants in Katz and Degulis; and Christopher Henney, a former
director, is a defendant in Katz. The Company was previously named as a
defendant in In re Blech but was dismissed by the Court on June 6, 1996.
All three cases are brought on behalf of classes of persons purchasing
common shares of the Company prior to September 21, 1994, and assert claims
arising out to the Company's Initial Public Offering and subsequent trading of
those shares. The suits allege violations of Sections 11 and 12 of the
Securities Act of 1933 and Sections 10(b) and 20 of the Securities and 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 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 maintains officers and directors liability insurance under
policies providing aggregate coverage totaling $3 million, which cover (i) the
Company for amounts spent indemnifying directors and officers or (ii) directors
and officers directly if the Company fails to indemnify them. The policies do
not provide coverage to the Company itself with respect to its own defense costs
and liability. The Company and its insurance carriers are currently involved in
disputes relating to the deductibles and exclusions under the policies. Whether
or to what extent insurance covers any settlement or judgment in
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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. As a result, the Company cannot predict, at this time, the amount
of any insurance reimbursement that will be obtained. For the years December 31,
1997, 1996 and 1995, the Company incurred expenses of approximately $140,000,
$111,000 and $39,000, respectively, relating to this litigation. To date the
Company has received no reimbursement for these expenses. The failure of the
Company to obtain reimbursement for the amounts spent defending the indemnified
defendants, along with the Company's own defense costs and any judgment or
settlement payable by the Company, could have a material adverse effect on the
Company's, cash flows, results of operations and financial condition.
The Company denies any wrongdoing and is defending the above cases
vigorously. While it is possible that the litigation may have a material adverse
financial impact 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. An adverse judgment or settlement could have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The names of the executive officers of the Company and certain information
about them as of March 15, 1998 are set forth below:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATION
- ------------------------- --- --------------------
<S> <C> <C>
L. David Tomei................. 52 Chairman and Chief Executive Officer
Donald H. Picker............... 52 President and Chief Operating Officer
Samuil R. Umansky.............. 56 Chief Scientific Officer and Vice President,
Molecular Pharmacology
Shelli J. Geer................. 33 Chief Financial Officer, Secretary, Vice
President, Finance and Administration.
Michael C. Kiefer.............. 45 Vice President, Molecular Biology
Lawrence J. Rosania............ 47 Vice President, Regulatory and Clinical Affairs
</TABLE>
L. David Tomei, Ph.D. has been Chairman since August 1997, and Chief
Executive Officer of the Company since November 1995. He has also been a
Director of the Company since January 1996. Dr. Tomei was President of the
Company from November 1995 until October 1996 and Acting President and Chief
Executive Officer of the Company from July 1995 until November 1995. Dr. Tomei
served as Executive
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Vice President, Cell Biology of the Company from September 1992 to July 1995,
and was a director of the Company from October 1992 until April 1993. Before
joining the Company, Dr. Tomei was a research scientist at Ohio State University
from September 1981 until October 1992 when he invented the SLDI technology. Dr.
Tomei's research has focused primarily in the area of apoptosis. Dr. Tomei was
the first to publish that apoptosis could be blocked by drugs and has edited two
books and organized two international scientific conferences on apoptosis. Dr.
Tomei has published over 90 scientific articles in the field of biology and
optical engineering and has been granted four patents. Dr. Tomei received a B.S.
in biology and philosophy from Canisius College, an M.S. in biochemistry from
the State University of New York, Roswell Park Memorial Institute Division, and
a Ph.D. in biochemical pharmacology from the State University of New York at
Buffalo.
Donald H. Picker, Ph.D. has been the Company's President and Chief
Operating Officer since October 1996. Dr. Picker was Chief Operating Officer of
Corvas International, Inc., a biotechnology company, from March 1996 to June
1996. Prior to that, Dr. Picker served as Senior Vice President, Research &
Development, at Genta, Inc., an antisense technology company, from November 1991
to February 1996. Dr. Picker also held a senior management position at Johnson
Matthey, Inc., a biopharmaceutical company, from 1983 to 1991. Dr. Picker
received a B.S. in chemistry from Brooklyn Polytechnic Institute and a Ph.D. in
organic chemistry from the State University of New York at Albany. Dr. Picker
played a major role in the development of Paraplatin(TM), currently one of the
world's leading anti-cancer drugs, and has been involved in bringing many other
drugs from the research laboratory into clinical development and to the market.
Dr. Picker has also been involved with filing numerous INDs and running multiple
clinical trials of products in different stages of development.
Samuil R. Umansky, M.D., Ph.D., D.Sc., was appointed as Chief Scientific
Officer in August 1997 and has also been Vice President of Molecular
Pharmacology since January 1996. From February 1993 to January 1996, he served
as Director of Cell Biology. Prior to joining the Company, Dr. Umansky was a
professor at the Institute of Biological Physics, the USSR Academy of Science
from 1968 to 1993. In 1987, Dr. Umansky was awarded the Soviet State Prize for
his work in the field of radiation treatment induced cell death and is
recognized internationally for his research on apoptosis. His group at LXR has
proved the role of apoptosis in Acute Myocardial Infraction and discovered
SARPS, a new family of secreted proteins, involved in regulation of apoptosis.
He is founder of the USSR Radiobiological society. Dr. Umansky has published
numerous articles in both Soviet and Western journals, including the first
description of apoptosis-related DNA fragmentation. Dr. Umansky holds an M.D., a
Ph.D., and a Doctorate of Science in radiation biology from the highest
committee of Attestation of Scientists, awarded on the basis of his studies at
the Institute of Biological Physics, the USSR Academy of Science.
Shelli J. Geer was appointed Chief Financial Officer and Secretary in
November 1997, and has been the Company's Vice President, Finance and
Administration since October 1996. Ms. Geer had been the Company's Controller
since September 1994. Prior to joining the Company, Ms. Geer was an accountant
with KPMG Peat Marwick LLP since July 1988, most recently as Audit Manager. Ms.
Geer received a B.S. in Business Administration from California State University
at Chico and is a Certified Public Accountant in the State of California.
Michael C. Kiefer, Ph.D., was appointed Vice President of Molecular Biology
of the Company in January 1996. He served as Senior Scientist of the Company
from March 1993 to February 1995 and as a Director of Molecular Biology from
March 1995 to January 1996. His research group at LXR has discovered several
important apoptosis modulation genes. Prior to joining the Company, Dr. Kiefer
was a Senior Scientist at Chiron where he worked on the molecular biology of
bone growth and differentiation factors and related processes from July 1987 to
March 1993. Dr. Kiefer has published over 60 articles in the area of molecular
biology. Dr. Kiefer received a B.S. in zoology and a Ph.D. in biochemistry from
the University of California at Davis.
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Lawrence J. Rosania was appointed Vice President of Regulatory and Clinical
Affairs in February 1998. Before joining LXR, he had been Vice President,
Regulatory Affairs, for Athena Neurosciences Inc. since 1996. Formerly, Mr.
Rosania was Director, Regulatory Affairs and Quality Assurance for Novo Nordisk
Pharmaceuticals from 1992 to 1996. He was also Assistant Director, Worldwide
Regulatory Affairs, for Bristol-Myers Squibb from 1988 to 1992, and Manager of
Drug Regulatory Affairs for E.R. Squibb & Sons from 1986 to 1988. Mr. Rosania
received a B.A. in biology from Temple University and a M.S. in chemistry from
Drexel University, both in Philadelphia, PA.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information for Common Stock
The Company's common stock is traded on the American Stock Exchange. The
following table reflects the range of high and low sales prices of the Company's
common stock for the four quarters in each of 1996 and 1997. This information is
based on closing prices as reported by the American Stock Exchange.
<TABLE>
<CAPTION>
1996
---------------------
HIGH LOW
------ ------
<S> <C> <C>
First Quarter .................................... $ 7.88 $ 1.75
Second Quarter ................................... $ 6.75 $ 3.75
Third Quarter .................................... $ 4.31 $ 2.13
Fourth Quarter ................................... $ 2.69 $ 2.06
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------
HIGH LOW
------ ------
<S> <C> <C>
First Quarter .................................... $ 2.63 $ 1.63
Second Quarter ................................... $ 2.69 $ 1.75
Third Quarter .................................... $ 2.31 $ 1.69
Fourth Quarter ................................... $ 2.38 $ 1.75
</TABLE>
Recent Sales of Unregistered Securities
In December 1997 and January 1998, the Company sold 5,714,286 shares of
common stock at $1.75 per share through a private placement offering (the
"December 1997 Private Placement"), aggregating $10 million in total gross
proceeds and approximately $9.4 million in net proceeds. In February 1998, the
Company sold an additional 571,429 shares of the Company's Common Stock through
a private placement offering at a price of $1.75 per share. In connection with
the December 1997 Private Placement, the Company issued 91,106 shares of Common
Stock and warrants to purchase an additional 571,429 shares of the Company's
Common Stock, exercisable at $2.00 per share, to the placement agents as selling
commission.
The shares sold in the private placement were offered and sold to a
limited number of domestic and foreign accredited investors without registration
under the Securities Act of 1933, as amended, in reliance upon the exemptions
provided by Section 4(2) of the Securities Act and/or Rule 506 of Regulation D
promulgated by the Securities and Exchange Commission thereunder. Such shares
were also offered and sold in reliance upon exemptions from registration or
qualification under certain state securities laws.
Holders
As of February 24, 1998 there were approximately 309 stockholders of
record of the Company's common stock.
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<PAGE> 22
Dividends
The Company has neither declared nor paid cash dividends on its common
stock in the past. The Company intends to retain future earnings, if any, for
the development of its business and, therefore, does not anticipate that it will
declare or pay cash dividends on its common stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, PLAN OF
OPERATIONS AND RESULTS OF OPERATIONS
Except for historical information, the following Management's Discussion
and Analysis of Financial Condition and Plan of Operations contains forward
looking statements regarding, among other things, product development plans,
market projections, product efficacy and safety, and effectiveness, corporate
partnering, capital and other expenditures, timing of FDA filings, FDA approval
thereof and clinical trial progress, sufficiency of cash resources and the
ability of the Company to raise additional funding. These forward looking
statements concern matters that involve risks and uncertainties that could cause
actual results to differ materially from those projected in the forward looking
statements. Words such as "believe," "expects," "likely," "may" and "plans" are
intended to identify forward looking statements, although not all forward
looking statements contain these words. These risks and uncertainties are
discussed in the section "Factors Affecting Future Results" below and elsewhere
in this Annual Report and in other reports filed with the SEC.
Plan of Operations
The Company's resources are currently limited and therefore focused
primarily on the research and development of the Company's candidate systems to
preserve and protect organ function, including CP-Cardiosol, HK-Cardiosol and
Elirex.
In late 1997, the Company received a notice from the FDA that its IDE for
use of HK-Cardiosol as a heart preservation solution has been approved. The
approval authorizes the Company to proceed with clinical trials in up to eight
medical centers and 150 heart transplant patients. The Company expects to
initiate clinical trials of HK-Cardiosol during 1998. If the trial is
successful, a 510K submission will be made in the USA and an equivalent
submission will be made in Europe. There can be no assurance that the clinical
trial of HK-Cardiosol will be successful, or if it is, that HK-Cardiosol will be
successfully commercialized.
The Company filed an IND to begin studies of CP-Cardiosol for use in
cardioplegia in the first quarter of 1998.
The Company currently is conducting preclinical studies of Elirex in
animals for ischemic heart attack and stroke applications. Based on the results
to date of the preclinical studies for Elirex, the Company is seeking to enter
into a collaborative partnership for further research and development of Elirex,
with the objective of filing an IND to commence clinical studies of Elirex.
There can be no assurance that the Company will be able to secure a
collaborative partnership or commence clinical trials of Elirex.
The Company also intends to conduct further research on SARP due to its
potential indication for a variety of diseases including cancer, diabetes,
stroke, and myocardial infarction.
In August 1997, the Company achieved a milestone under the agreement with
Perkin-Elmer resulting in the recognition of $700,000 in revenue payable
$300,000 in cash and $400,000 in laboratory equipment. The Company received the
$300,000 cash in September 1997, and equipment with fair market value of
approximately $343,000 in
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<PAGE> 23
December 1997. The balance of the equipment is expected to be
received in the first quarter of 1998. The Company expects to continue to
support the efforts of Perkin-Elmer to develop the Company's SLDI technology.
The Company and Boehringer Mannheim are currently conducting preclinical
studies to assess the efficacy and toxicity of Maspin. During the third quarter
of 1997, the Company received preliminary results of small scale efficacy
studies for primary tumor growth and metastic breast cancer models. Based on the
outcome of the final review of these studies, the Company and Boehringer
Mannheim will determine whether to proceed with further research and development
efforts. However, Boehringer Mannheim has no obligation to proceed with the
project, and there can be no assurance that Boehringer Mannheim will do so.
Although the Company also conducts limited research related to BAK,
Fas(DELTA)TM, and Urine DNA Analysis, the Company's current resource constraints
have required the reallocation of certain research costs to the Company's lead
development projects in Cardiosol and Elirex. To further expand its remaining
research programs, the Company will continue to pursue business development
opportunities such as licensing and collaborative research agreements. The
Company entered into one such agreement in February 1998 with Copernicus Gene
Systems, focused on integrating a proprietary anticancer gene of LXR with the
enabling DNA - compaction and expression technologies of Copernicus.
The Company completed Phase I trials for Lexirin and final results
indicated it was well tolerated in AIDS patients and that no adverse reactions
were encountered. However, LXR has decided not to proceed with further clinical
trials of Lexirin at this time.
The Company plans to seek additional corporate partners for its research
and development activities. However, there can be no assurance that the Company
will be able to secure any new corporate partner relationships. In addition to
the studies mentioned above, the Company is currently funding research at the
University of Tennessee and may enter into research relationships with other
universities and research institutions. The Company also regularly evaluates the
possibility of licensing or otherwise acquiring technologies from third parties.
The Company has assessed its financial and operational systems and
developed a plan to modify its information systems to be year 2000 compliant.
The Company expects the project to be substantially complete by mid-1999 and the
cost of the project is not expected to have a material impact on the Company's
financial condition and results of operations.
As of December 31, 1997, the Company employed 63 employees, including 57
full-time employees. Over the next 12 months, the Company plans to increase its
number of employees to approximately 80 to support the Company's increased
research and development efforts and expanding manufacturing and clinical trial
activities. However the Company may not be able to implement these plans unless
it obtains additional financing. See "Liquidity and Capital Resources".
The Company's capital expenditures for 1997 were approximately $1.3
million, including the equipment received from Perkin-Elmer and the costs to
construct and equip the Company's pilot manufacturing facility. The Company
secured an equipment loan of $700,000 to finance a portion of its capital
expenditures for 1997. The Company expects that capital expenditures over the
next twelve months will approximate $470,000.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The Company had revenues of approximately $859,000 in 1997, compared to
$414,000 in 1996. The Company did not recognize any revenue in 1995. Revenues
for 1997 and 1996 resulted primarily
23
<PAGE> 24
from license fee revenue earned under the Perkin-Elmer License Agreement, and
other funded research. The increase in revenues from 1996 to 1997 is primarily
due to an increase in license fee revenue from $300,000 in 1996 to $700,000 in
1997. 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
$7,155,000 $5,519,000 and $4,304,000 for 1997, 1996 and 1995, 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 increase in research and development costs in 1997 as compared
to 1996 is primarily due to increased salary and benefits costs resulting from
an increase in the number of development personnel, increased research
collaboration costs resulting from the agreement with Oxford and increases in
clinical trial, toxicology and contract manufacturing costs. The increase in
research and development expenses was partially offset by a decrease in patent
legal fees, depreciation expense, and certain collaboration expenses resulting
from the termination of research agreements with the University of Kentucky and
the Dana Farber Cancer Institute. In addition, 1996 research and development
expenses included $675,000 for the acquisition of the Cardiosol technology.
There were no comparable charges in 1997 or 1995. The increase in 1996 as
compared to 1995 is primarily due to the acquisition of the Cardiosol
technology, increase in consulting fees, and an increase in legal costs due
primarily to increased patent activity, partially offset by the proceeds from
sale of the SLDI prototype to Perkin-Elmer recorded as a reduction in research
and development expenses.
The Company expects research and development expenses to continue to
increase in 1998, in particular to fund anticipated clinical trials of
HK-Cardiosol and CP-Cardiosol.
Although the Company plans for research and development spending to
continue to increase substantially over the next several years as the Company
expands its research and development efforts and undertakes clinical studies
with respect to certain of its projects, such expansion of operations remain
contingent upon the Company's ability to obtain additional 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
$3,335,000, $2,702,000 and $2,012,000 for the years ended in 1997, 1996, and
1995, respectively. The increase in costs from 1996 to 1997 is primarily due to
increased personnel costs, increased legal costs related to litigation,
increased facilities costs due to a larger facility, increased travel and
investor relations expenses. The increase in general and administrative expenses
from 1995 to 1996 can be attributed to increased personnel costs, increased
consulting fees primarily related to advice in connection with the financing,
development, operation and strategic direction of the Company's business and
increased investor relations expenses. The general and administrative expenses
are expected to increase further to support the Company's expansion of research
and development activities and increased legal expenses resulting from the
securities lawsuits currently pending against the Company and certain of its
past and present officers and directors.
Interest income was approximately $401,000, $244,000 and $89,000 for 1997,
1996 and 1995, respectively. The increases in the interest income were primarily
due to interest earned on a larger investment balance.
Interest expense was approximately $39,000, $59,000 and $89,000 for 1997,
1996 and 1995, respectively. The decrease in interest expense over the three
year period ended December 31, 1997 is primarily due to the decrease in balances
outstanding for obligations under capital leases. The Company
24
<PAGE> 25
expects interest expenses in 1998 will increase as a result of borrowings under
the Company's equipment loan.
The Company incurred net losses of approximately $9,270,000, $7,623,000
and $6,316,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. As of December 31,1997, the Company had an accumulated deficit of
approximately $32,786,000. The Company expects to continue to incur substantial
losses over the next several years as it expands its research and development
efforts and continues to undertake preclinical and clinical studies.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company funded its operations primarily through
approximately $10.1 million in net proceeds raised through the sale of 5,201,350
shares of the Company's Common Stock at a price of $2.00 per share in a private
placement in December 1996. (See Note 6 of the Consolidated Financial Statements
included with this Annual Report). In addition, the Company received
approximately $300,000 in license fee revenue from the Perkin-Elmer Corporation,
approximately $151,000 in other funded research, and approximately $700,000 in
financing under the Company's equipment loan, (See Note 4 of the Consolidated
Financial Statements included with this Report).
Between December 1997 and February 1998, the Company raised approximately
$10.4 million in net proceeds through the sale of 6,285,715 shares of the
Company's Common Stock at a price of $1.75 per share in private placements. See
Note 17 of the Notes to Consolidated Financial Statements included within this
Report.
As of December 31, 1997 the Company's sources of capital consist of
approximately $11.5 million in cash and cash equivalents, approximately $1.4
million in funding raised in 1998, interest from investments, and potential
milestone payments under the Company's collaborative arrangements. There can be
no assurance that the milestones will be achieved or payments made.
The Company and five of its past or present directors and officers are
defendants in class action lawsuits. (See "Item 3 - Legal proceedings".) The
Company maintains officers and directors liability insurance under policies
providing aggregate coverage totaling $3 million, which cover (i) the Company
for amounts spent indemnifying directors and officers or (ii) directors and
officers directly if the Company fails to indemnify them. The policies do not
provide coverage to the Company itself with respect to its own defense costs and
liability. The Company and its insurance carriers are currently involved in
disputes relating to the deductibles and exclusions under the policies. Whether
or to what extent insurance covers any settlement or judgment in the above
litigation will depend on the outcome of the disputes. 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.
As a result, the Company cannot predict, at this time, the amount of any
insurance reimbursement that will be obtained. For the years ended December 31,
1997, 1996 and 1995, the Company incurred expenses of approximately $140,000,
$111,000 and $39,000, respectively, relating to this litigation. To date the
Company has received no reimbursement for these expenses. The failure of the
Company to obtain reimbursement for the amounts spent defending the indemnified
defendants, along with the Company's own defense costs and any judgment or
settlement payable by the Company, could have a material adverse effect on the
Company's, cash flows, results of operations and financial condition.
The Company does not have any committed sources of future equity or debt
funding. The Company believes its existing capital resources are sufficient to
fund the Company's operations through the third quarter of 1998. However, there
can be no assurance that unanticipated events affecting the Company's resources
will not result in the Company's 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 expending significant
efforts to obtain the additional funding
25
<PAGE> 26
necessary to fund the Company's operations beyond the third quarter of 1998,
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
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
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. See Item 7 - "Financial
Statements."
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<PAGE> 27
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
LXR is at an early stage of development. Other than the SLDI microscope,
a prototype of which was sold to Perkin-Elmer, all of the Company's potential
pharmaceutical and medical device products are currently in research and
development, and no revenues from the sale of such potential products have been
generated to date. Substantially all of the Company's resources have been and
for the foreseeable future will continue to be dedicated to the Company's
research programs and the development of potential pharmaceutical and medical
device products emanating therefrom. There can be no assurance that the Company
will be able to develop a commercial product from these projects. 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 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.
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.
27
<PAGE> 28
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 "Perkin-Elmer Agreement",
payments under the Company's collaboration agreement with 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.
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 current
Chairman and Chief Executive Officer; Donald H. Picker, Ph.D., its President,
Chief Operating Officer and Director; 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 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.
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<PAGE> 29
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 cost 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.
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 chose 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. The Company has
29
<PAGE> 30
entered into a Clinical Services Agreement with Innovex, Inc. ("Innovex"), to
begin clinical studies of HK-Cardiosol for heart preservation in transplant
patients. There can be no assurance that Innovex will be able to provide the
data management necessary to conduct clinical trials and thus could result in
delays of clinical trials.
MANUFACTURING LIMITATIONS
Although the Company has received general approval from local
authorities to undertake manufacturing, it currently does not have the
capability to manufacture products under the 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, labeling 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 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 the 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.
30
<PAGE> 31
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by Item 7 are
set forth below on pages F-1 through F-29 of Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE> 32
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The section entitled "Proposal No. 1 - Election of Directors" appearing
in the Company's proxy statement for the 1998 annual meeting of stockholders
sets forth certain information with respect to the directors of the Company and
is incorporated herein by reference.
Certain information with respect to the executive officers of the
Company is set forth in Part I of this report in the section entitled "Executive
Officers of the Company."
The section entitled "Compliance under Section 16(a) of the Securities
Exchange Act of 1934" appearing in the Company's proxy statement for the 1998
annual meeting of stockholders sets forth the information concerning compliance
by officers, directors and 10% stockholders of the Company with Section 16 of
the Exchange Act and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Company's
proxy statement for the 1998 annual meeting of stockholders sets forth certain
information with respect to the compensation of management of the Company and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" appearing in the Company's proxy statement for the 1998 annual
meeting of stockholders sets forth certain information with respect to the
ownership of the Company's common stock and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Company's
proxy statement for the 1998 annual meeting of stockholders sets forth certain
information with respect to certain business relationships and transactions
between the Company and its directors, officers and principal stockholders and
is incorporated herein by reference.
32
<PAGE> 33
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are attached hereto or incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
Number Title
--------- ------------------------------------------------------------------
<S> <C>
3.01 Company's Certificate of Incorporation. (Incorporated by reference
to Exhibit Number 3.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
3.02 Company's Bylaws. (Incorporated by reference to Exhibit Number
3.02 to the Company's Registration Statement on Form S-1 (File No.
33-72814) declared effective by the Securities and Exchange
Commission on May 6, 1994 (the "Form S-1"))
3.03 Amendment to the Company's Certificate of Incorporation.
(Incorporated by reference to Exhibit Number 3.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
4.01 Form of Specimen Certificate for Company's Common Stock.
(Incorporated by reference to Exhibit Number 4.01 to the Form S-1)
*10.01 1993 Stock Option Plan, as amended to date, and related Stock
Option Agreement and Exercise Agreement. (Incorporated by
reference to Exhibit Number 10.01 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 and 1996
respectively)
*10.02 1993 Directors' Stock Option Plan and related Stock Option
Agreement and Exercise Agreement. (Incorporated by reference to
Exhibit Number 10.02 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
10.03 Sublease for Building C of Marina Bay Business Park, 1401 Marina
Way South, Richmond, California 94804 dated August 19, 1993
between the Company and Quick Response Services, Inc.
(Incorporated by reference to Exhibit Number 10.03 to the Form S-1)
10.04 Owner Consent and Agreement among the Company, Schooner Drive
Associates and Quick Response Services, Inc. (Incorporated by
reference to Exhibit Number 10.04 to the Form S-1)
*10.05 Form of Indemnification Agreement entered or to be entered into
between the Company and each of the Company's officers and
directors. (Incorporated by reference to Exhibit Number 10.05 to
the Form S-1)
*10.06 Form of Employment and Proprietary Information Agreement as
entered into between the Company and each of L. Scott Minick, Mark
J. Tomei, Philip J. Barr, Ph.D., and L. David Tomei, Ph.D.
(Incorporated by reference to Exhibit Number 10.06 to the Form S-1)
10.07 Master Lease Agreement dated May 26, 1993 and Equipment Financing
Agreement dated May 26, 1993, both between the Company and Lease
Management Services, Inc., and
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit
Number Title
--------- ------------------------------------------------------------------
<S> <C>
related documents. (Incorporated by reference to Exhibit
Number 10.08 to the Form S-1)
10.08 Series A Preferred Stock Purchase Agreement dated February 19,
1993 between the Company and certain of its stockholders, as
amended. (Incorporated by reference to Exhibit Number 10.09 to the
Form S-1)
10.09 Investors Rights Agreement dated February 19, 1993 between the
Company and certain of its stockholders, as amended. (Incorporated
by reference to Exhibit Number 10.10 to Amendment No. 1 to the
Form S-1 filed with the Securities and Exchange Commission on
December 22, 1993)
10.10 Letter agreement dated January 20, 1993 between the Company and D.
Blech & Company, Incorporated (the "Underwriter") regarding the
Company's retention of the Underwriter as a consultant.
(Incorporated by reference to Exhibit Number 10.11 to the Form
S-1)
10.11 Letter agreement dated January 22, 1993 and letter agreement dated
May 20, 1993, between the Company and David Blech, regarding (i)
the sale of equity securities to designees of David Blech, (ii)
composition of the Company's Board of Directors and (iii) future
financing of the Registrant. (Incorporated by reference to Exhibit
Number 10.12 to the Form S-1)
10.12 License Agreement dated August 16, 1991, and amended May 18, 1993
and November 29, 1993, among Optical Analytic, Inc., The Ohio
State Research Foundation and The Ohio State University, and
related documents. (Incorporated by reference to Exhibit Number
10.14 to the Form S-1)
**10.13 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.15 to the Form S-1)
**10.14 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.16 to the Form S-1)
**10.15 Licensing Agreement dated June 15, 1993 between the Company and
Dana-Farber Cancer Institute. (Incorporated by reference to
Exhibit Number 10.17 to the Form S-1)
**10.16 Research Support Agreement dated November 1, 1993 between the
Company and Dana Farber Cancer Institute. (Incorporated by
reference to Exhibit Number 10.18 to the Form S-1)
**10.17 Licensing Agreement dated June 21, 1994 between the Company and
UAB Research Foundation. (Incorporated by reference to Exhibit
Number 10.17 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994)
10.18 Agreement for Purchase and Sale of Shares dated November 29, 1993
among the Company and William K. Root, F. David Resch and James M.
McCormick. (Incorporated by reference to Exhibit Number 10.20 to
the Form S-1)
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit
Number Title
--------- ------------------------------------------------------------------
<S> <C>
10.19 Agreement for Purchase and Sale of Shares dated November 29, 1993
between the Company and L. David Tomei. (Incorporated by reference
to Exhibit Number 10.21 to the Form S-1)
10.20 Agreement for Purchase and Sale of Shares dated December 7, 1993
between the Company and Gregory J. Bergman. (Incorporated by
reference to Exhibit Number 10.22 to the Form S-1)
10.21 Agreement Between Owner and Design/Builder dated September 15,
1993 between the Company and Devcon Inc. (Incorporated by
reference to Exhibit Number 10.23 to the Form S-1)
10.22 Form of Warrant Agreement among the Company and the Underwriter.
(Incorporated by reference to Exhibit Number 10.24 to the Form
S-1)
10.23 Form of Indemnity Agreement among the Company, Shoenberg, Hieber
Inc. and the Underwriter. (Incorporated by reference to Exhibit
Number 10.29 to Amendment No. 5 to the Form S-1)
10.24 Warrant Agreement between the Company and Dana Farber Cancer
Institute. (Incorporated by reference to Exhibit Number 10.32 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994)
10.25 Sales Agency Agreement dated December 31, 1995 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
Number 1.02 to the Company's Current Report on Form 8-K dated
January 9, 1996 (the "January 1996 Form 8-K"))
10.26 Share Purchase Warrant of the Company. (Incorporated by reference
to Exhibit Number 4.02 to the January 1996 Form 8-K)
10.27 Registration Rights Agreement dated January 9, 1996. (Incorporated
by reference to Exhibit Number 4.03 to the January 1996 Form 8-K)
10.28 Registration Rights Agreement dated January 9, 1996 between the
Company and Biotechnology Investment Group L.L.C. (Incorporated by
reference to Exhibit Number 10.28 to the Company's Annual Report
on Form 10 - KSB for the year ended December 31, 1995)
10.29 First Amendment to Sublease for Building C of Marina Bay Business
Park, 1401 Marina Way South, Richmond, California 94804 dated
August 5, 1996 between the Company and Marina Westshore Partners.
(Incorporated by reference to Exhibit Number 10.29 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996 (the "September 1996 Form 10-QSB"))
10.30 Patent and Technology Transfer and Stock Purchase Agreement dated
as of August 8, 1996 among the Company, Geoffrey M. Collins and
Winston M. Wicomb. (Incorporated by reference to Exhibit Number
10.30 to the September 1996 Form 10-QSB)
10.31 Amendment effective as of July 10, 1996 to the License Agreement
among Optical Analytic, Inc., The Ohio State Research Foundation
and The Ohio State University.
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit
Number Title
--------- ------------------------------------------------------------------
<S> <C>
(Incorporated by reference to Exhibit Number 10.31 to the
September 1996 Form 10-QSB)
10.32 Amendment effective as of August 27, 1996 to the License Agreement
among Optical Analytic Inc., The Ohio State Research Foundation
and The Ohio State University. (Incorporated by reference to
Exhibit Number 10.32 to the September 1996 Form 10-QSB)
**10.33 License Agreement among the Company, on behalf of itself and
Optical Analytic, Inc., its wholly owned subsidiary, and The
Perkin-Elmer Corporation, dated as of August 29, 1996.
(Incorporated by reference to Exhibit Number 10.33 to the
September 1996 Form 10-QSB)
*10.34 President and Chief Operating Officer Letter Agreement dated
September 24, 1996. (Incorporated by reference to Exhibit Number
10.34 to the September 1996 Form 10-QSB)
10.35 Sales Agency Agreement dated December 11, 1996 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
No. 1.03 to the Company's Current Report on Form 8-K dated
January 31, 1997 (the "January 1997 Form 8-K"))
10.36 Form of Share Purchase Warrant of the Company (Incorporated by
reference to Exhibit No. 4.04 to the January 1997 Form 8-K)
10.37 Form of Registration Rights Agreement dated December 11, 1996.
(Incorporated by reference to Exhibit No. 4.05 to the January 1997
Form 8-K)
10.37 Form of Registration Rights Agreement dated December 12, 1996.
(Incorporated by reference to Exhibit No. 4.06 to the January 1997
Form 8-K)
10.38 Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation, dated May 13, 1997
(Incorporated by reference to Exhibit 10.38 to Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997 (the
"June 1997 Form 10-QSB))
10.39 Stock Subscription Warrant between the Company and Meier Mitchell
and Company, LLC, dated May 13, 1997 (Incorporated by reference to
Exhibit 10.39 to the June 1997 Form 10-QSB)
10.40 Stock Subscription Warrant between the Company and Transamerica
Business Credit Corporation, dated May 13, 1997 (Incorporated by
reference to Exhibit 10.40 to the June 1997 Form 10-QSB)
**10.41 Research and Development Agreement between the Company and Oxford
Asymmetry Limited, dated April 18, 1997 (Incorporated by reference
to Exhibit 10.41 to the June 1997 Form 10-QSB)
**10.42 Clinical Service Agreement between the Company and Innovex, Inc.,
dated June 6, 1997 (Incorporated by reference to Exhibit 10.42 to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997 (the "September 1997 Form 10-QSB"))
10.43 Subscription Agreement dated December 12, 1997 between the Company
and Grace Brothers Limited. (Incorporated by reference to Exhibit
No. 4 to the Company's Current
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit
Number Title
--------- ------------------------------------------------------------------
<S> <C>
Report on Form 8-K dated December 12, 1997.)
10.44 Amendment No. 1 dated December 23, 1997 to the Subscription
Agreement dated December 12, 1997 between the Company and Grace
Brothers Limited. (Incorporated by reference to Exhibit No. 10.1
to the Company Current Report on Form 8-K dated December 23,
1997.)
10.45 Form of Subscription Agreement. (Incorporated by reference to
Exhibit No. 10.2 to the Company's Current Report on Form 8-K
dated December 23, 1997.)
10.46 Amendment No. 2 dated December 31, 1997 to the Subscription
Agreement dated December 12, 1997 between the Company and Grace
Brothers Limited. (Incorporated by reference to Exhibit No. 10.1
to the Company's Current Report on Form 8-K dated December 31,
1997).
10.47 Consulting Agreement dated February 13, 1998 between the Company
and G. Kirk Raab.
11.01 Statement regarding computation of net loss per share.
21.01 Subsidiaries of the Company. (Incorporated by reference to Exhibit
Number 21.01 to the Form S-1)
23.01 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27.01 Financial Data Schedule
</TABLE>
- -----------
* Represents a management contract or compensatory plan or arrangement.
** Confidential treatment has been granted with respect to certain portions
of this document.
(b) Reports on Form 8-K.
On December 15, 1997, the Company filed a report on Form 8-K reporting
the first closing of its December 1997 private placement.
On December 23, 1997, the Company filed a report on Form 8-K reporting
the second closing of its December 1997 private placement.
On January 6, 1998, the Company filed a report on Form 8-K reporting the
final closing of its December 1997 private placement.
With the exception of the information incorporated herein by reference to
the Company's proxy statement for the 1998 annual meeting of stockholders in
Items 9, 10, 11 and 12 of Part III, the Proxy Statement is not deemed to be
filed with this Report.
37
<PAGE> 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LXR Biotechnology Inc.:
We have audited the accompanying consolidated balance sheets of LXR
Biotechnology Inc. and subsidiary, a development stage enterprise, as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1997, and for the period from April
20, 1992 (date of incorporation) through December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LXR Biotechnology
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, and for the period from April 20, 1992 (date of
incorporation) through December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans with regard to this matter are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
San Francisco, California
February 13, 1998
F-2
<PAGE> 40
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 11,536,687 $ 10,217,203
Prepaid expenses ................................................ 210,695 98,881
Private placement receivable .................................... -- 1,278,700
Other receivables ............................................... 40,237 39,500
------------ ------------
Total current assets ..................................... 11,787,619 11,634,284
Equipment and leasehold improvements, net ........................... 1,485,847 592,093
Notes receivable from related parties ............................... 205,000 160,000
Deposits and other assets ........................................... 96,633 32,315
------------ ------------
Total assets ............................................. $ 13,575,099 $ 12,418,692
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................................ $ 740,809 $ 698,450
Accrued private placement commission ............................ 467,789 --
Accrued payroll related expenses ................................ 161,280 181,414
Other accrued liabilities ....................................... 113,503 28,791
Deferred rent obligation ........................................ 290,408 259,975
Short-term portion of note payable .............................. 172,730 --
------------ ------------
Total current liabilities ................................ 1,946,519 1,168,630
Note payable, excluding short-term portion .......................... 409,707 --
------------ ------------
Total liabilities ........................................ 2,356,226 1,168,630
------------ ------------
Commitments and contingencies (notes 4, 5, 6, 7, 11, 12,
13, 15, 16, and 17)
Stockholders' equity :
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued or outstanding .................................... -- --
Common stock, $0.0001 par value; 45,000,000 shares authorized;
27,485,850 and 21,924,687 shares issued and outstanding in 1997
and 1996, respectively ........................................ 2,719 2,163
Common stock to be issued; 252,453 and 187,500 shares in 1997 and
1996, respectively ............................................ 26 19
Additional paid-in capital ...................................... 44,017,309 34,778,774
Deficit accumulated during the development stage ................ (32,786,006) (23,515,719)
Treasury stock, common stock; at cost; 182,012 shares
in 1997 and 1996 .............................................. (15,175) (15,175)
------------ ------------
Total stockholders' equity .................................. 11,218,873 11,250,062
------------ ------------
Total liabilities and stockholders' equity .................. $ 13,575,099 $ 12,418,692
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 41
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
April 20, 1992
(date of
Years ended incorporation)
December 31, through
---------------------------------------------------- December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Grant revenue $ 57,348 $ 114,396 $ -- $ 171,744
Funded Research 101,665 -- -- 101,665
License fee revenue 700,000 300,000 -- 1,000,000
------------ ------------ ------------ ------------
Total revenues 859,013 414,396 -- 1,273,409
------------ ------------ ------------ ------------
Research and development 7,154,621 5,519,317 4,303,661 24,063,328
General and administrative 3,335,167 2,702,390 2,012,017 10,602,611
------------ ------------ ------------ ------------
Total expenses 10,489,788 8,221,707 6,315,678 34,665,939
------------ ------------ ------------ ------------
Loss from operations (9,630,775) (7,807,311) (6,315,678) (33,392,530)
------------ ------------ ------------ ------------
Interest income, net:
Interest income 400,720 244,476 89,127 1,006,178
Interest expense (38,632) (58,564) (88,596) (393,249)
------------ ------------ ------------ ------------
Interest income, net 362,088 185,912 531 612,929
------------ ------------ ------------ ------------
Loss before income taxes (9,268,687) (7,621,399) (6,315,147) (32,779,601)
Income taxes 1,600 1,600 800 6,400
------------ ------------ ------------ ------------
Net loss $ (9,270,287) $ (7,622,999) $ (6,315,947) $(32,786,001)
============ ============ ============ ============
Net loss per share $ (.42) $ (.48) $ (.84)
============ ============ ============
Weighted average shares used to
compute net loss per share 22,177,991 15,815,495 7,513,541
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
April 20, 1992 (date of incorporation) through December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK COMMON STOCK TO BE ISSUED
----------------------------- ----------------------=------ ----------------------
SHARES ISSUED AMOUNT SHARES ISSUED AMOUNT SHARES AMOUNT
------------- ------------ ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock -- $ -- 758,333 $ 76 -- $ --
Issuance of Series A preferred stock 1,059,000 10,590 -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------ ---- ---------
Balances as of December 31, 1992 1,059,000 10,590 758,333 76 -- --
Issuance of Series A preferred stock 191,000 1,910 -- -- -- --
Issuance of 2% common stock dividend -- -- 15,167 1 -- --
Conversion of Series A preferred
stock to common stock (1,250,000) (12,500) 625,000 63 -- --
Issuance of common stock per
agreement with D. Blech
and others -- -- 2,000,000 200 -- --
Issuance of common stock -- -- 551,650 55 -- --
Forgiveness of notes receivable
from stockholders -- -- -- -- -- --
Issuance of stock warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ----- ---------
Balances as of December 31, 1993 -- -- 3,950,150 395 -- --
Issuance of common stock -- -- 2,875,000 288 -- --
Conversion of note payable to
D. Blech and others into
common stock -- -- 798,778 80 -- --
Payment of notes receivable and
repurchase of common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ---- ---------
Balances as of December 31, 1994 -- -- 7,623,928 763 -- --
Issuance of common stock -- -- 100,000 10 -- --
Payment of notes receivable -- -- -- -- -- --
Stock options exercised -- -- 1,475 -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ---- ---------
Balances as of December 31, 1995 -- $ -- 7,725,403 $ 773 $ --
</TABLE>
<TABLE>
<CAPTION>
NOTES DEFICIT
RECEIVABLE ACCUMULATED TREASURY STOCK
ADDITIONAL FROM DURING THE -------------------------- TOTAL STOCK-
PAID-IN STOCK- DEVELOPMENT SHARES EQUITY HOLDERS' EQUITY
CAPITAL HOLDERS STAGE REPURCHASED AMOUNT (DEFICIT)
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock $ 113,674 $(91,000) $ -- -- $ -- $ 22,750
Issuance of Series A preferred stock 518,910 -- -- -- -- 529,500
Net loss -- -- (222,213) -- -- (222,213)
------------ ------------ ------------ ------------ ------------ ------------
Balances as of December 31, 1992 632,584 (91,000) (222,213) -- -- 330,037
Issuance of Series A preferred stock 93,590 -- -- -- -- 95,500
Issuance of 2% common stock dividend 4 -- (5) -- -- --
Conversion of Series A preferred
stock to common stock 12,437 -- -- -- -- --
Issuance of common stock per
agreement with D. Blech
and others 400 -- -- -- -- 600
Issuance of common stock 16,495 (16,385) -- -- -- 165
Forgiveness of notes receivable
from stockholders -- 16,385 -- -- -- 16,385
Issuance of stock warrants 10,500 -- -- -- -- 10,500
Net loss -- -- (3,441,014) -- -- (3,441,014)
------------ ------------ ------------ ------------ ---------- ------------
Balances as of December 31, 1993 766,010 (91,000) (3,663,232) -- -- (2,987,827)
Issuance of common stock 10,921,607 -- -- -- -- 10,921,895
Conversion of note payable to
D. Blech and others into
common stock 3,594,420 -- -- -- -- 3,594,500
Payment of notes receivable and
repurchase of common stock -- 10,743 -- (128,978) (9,853) 890
Net loss -- -- (5,913,541) -- -- (5,913,541)
------------ ------------ ------------ ------------ ---------- ------------
Balances as of December 31, 1994 15,282,037 (80,257) (9,576,773) (128,978) (9,853) 5,615,917
Issuance of common stock 114,168 -- -- -- -- 114,178
Payment of notes receivable -- 1,257 -- -- -- 1,257
Stock options exercised 44 -- -- -- -- 44
Net loss -- -- (6,315,947) -- -- (6,315,947)
------------ ------------ ------------ ------------ ---------- ------------
Balances as of December 31, 1995 15,396,249 $ (79,000) $(15,892,720) (128,978 $ (9,853) $ (584,551)
</TABLE>
(CONTINUED)
F-5
<PAGE> 43
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
April 20, 1992 (date of incorporation) through December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK COMMON STOCK TO BE ISSUED
-------------------------- -------------------------- ----------------------
SHARES ISSUED AMOUNT SHARES ISSUED AMOUNT SHARES AMOUNT
------------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995 -- -- 7,725,403 $ 773 -- $ --
Private placement of common stock
(net of issuance costs) -- -- 8,096,000 810 -- --
Stock options exercised -- -- 10,169 1 -- --
Repurchase of common stock -- -- -- -- -- --
Warrant exercised -- -- 319,880 1 -- --
Acquisition of Cardiosol technology -- -- 37,500 4 187,500 19
Issuance of warrant -- -- -- -- -- --
Cancellation of notes receivable
from stockholders -- -- -- -- -- --
Private placement of common stock
(net of issuance costs) -- -- 5,735,735 574 -- --
Stock options granted -- -- -- -- -- --
Net loss -- -- -- -- -- --
-- -- ------------ ------- --------- --------
Balances as of December 31, 1996 -- -- 21,924,687 2,163 187,500 19
Issuance of common stock to
Boehringer Mannheim in connection
with private placement -- -- 37,500 4 -- --
Common stock to be issued -- -- -- -- 102,453 11
Stock options exercised -- -- 1,000 -- -- --
Issuance of warrants -- -- -- -- -- --
Issuance of common stock subscribed
on acquisition of Cardiosol technology -- -- 37,500 4 (37,500) (4)
Private placement of common stock
(net of issuance costs) -- -- 5,485,163 548 -- --
Net loss -- -- -- -- -- --
-- -- ------------ ------- --------- --------
Balances at December 31, 1997 -- -- 27,485,850 $ 2,719 252,453 $ 26
=========== ========== ============ ======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
NOTES DEFICIT
RECEIVABLE ACCUMULATED TREASURY STOCK
ADDITIONAL FROM DURING THE ------------------------ TOTAL STOCK-
PAID-IN STOCK- DEVELOPMENT SHARES EQUITY HOLDERS' EQUITY
CAPITAL HOLDERS STAGE REPURCHASED AMOUNT (DEFICIT)
------------ ---------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995 $ 15,396,249 $ (79,000) $(15,892,720) (128,978) $ (9,853) $ (584,551)
Private placement of common stock
(net of issuance costs) 8,630,157 -- -- -- -- 8,630,967
Stock options exercised 1,798 -- -- -- -- 1,799
Repurchase of common stock -- 3,812 -- (53,034) (5,322) (1,510)
Warrant exercised 19,504 -- -- -- -- 19,505
Acquisition of Cardiosol technology 576,540 -- -- -- -- 576,563
Issuance of warrant 6,572 -- -- -- -- 6,572
Cancellation of notes receivable
from stockholders -- 75,188 -- -- -- 75,188
Private placement of common stock
(net of issuance costs) 10,116,079 -- -- -- -- 10,116,653
Stock options granted 31,875 -- -- -- -- 31,875
Net loss -- -- (7,622,999) -- -- (7,622,999)
------------ ---------- ----------- --------- ------- ------------
Balances as of December 31, 1996 34,778,774 -- (23,515,719) (182,012) (15,175) 11,250,062
Issuance of common stock to
Boehringer Mannheim in connection
with private placement 149,996 -- -- -- -- 150,000
Common stock to be issued 29,052 -- -- -- -- 29,063
Stock options exercised 1,563 -- -- -- -- 1,563
Issuance of warrants 56,988 -- -- -- -- 56,988
Issuance of common stock subscribed
on acquisition of Cardiosol technology -- -- -- -- -- --
Private placement of common stock
(net of issuance costs) 9,000,936 -- -- -- -- 9,001,484
Net loss -- -- (9,270,287) -- -- (9,270,287)
------------ ---------- ----------- --------- ------- ------------
Balances at December 31, 1997 $ 44,017,309 $ -- $(32,786,006) (182,012) $(15,175) $ 11,218,873
============ ========== ============ ========= ======== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 44
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
April 20, 1992
(date of
Years ended incorporation)
December 31, through
---------------------------------------------------- December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,270,287) $ (7,622,999) $ (6,315,947) $(32,786,001)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 288,669 275,140 291,181 1,198,521
Amortization 119,049 215,029 248,861 879,575
Amortization of discount on investments -- -- (22,568) (89,850)
Loss on disposal of assets 712 -- -- 4,788
Cancellation of notes receivable
from stockholders -- 75,188 -- 91,573
Cost of acquired research and
development related to OAI
acquisition in exchange for note
receivable -- -- -- 106,111
Cost of acquired technology related
to Cardiosol in exchange for common
stock -- 576,563 -- 576,563
Equity instruments issued for
fees and services 86,051 6,572 -- 103,123
Stock options granted -- 31,875 -- 31,875
License fee revenue resulting from
equipment received (342,992) -- -- (400,000)
Changes in operating assets and
liabilities:
Prepaid expenses and other receivables (112,551) 78,665 (32,666) (250,302)
Deposits and other assets (70,318) 190,823 -- (85,255)
Accounts payable 42,359 (97,649) 199,793 366,965
Accrued expenses and deferred rent
obligation 562,800 280,791 156,775 1,406,824
------------ ------------ ------------ ------------
Net cash used in operating activities (8,696,508) (5,990,002) (5,474,571) (28,845,490)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- -- (3,910,150)
Purchase of equipment and leasehold
improvements (953,192) (182,794) (55,045) (2,404,226)
Proceeds from maturity of investments -- -- 3,000,000 4,000,000
Loans to related parties (45,000) (160,000) -- (205,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (998,192) (342,794) 2,944,955 (2,519,376)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 10,430,184 17,468,920 114,178 39,583,692
Proceeds from notes payable to related
parties -- -- 600,000 4,694,500
Proceeds from line of credit -- -- -- 375,000
Proceeds from equipment loan 701,249 -- -- 701,249
Repayment of notes payable and line of
credit (118,812) (600,000) -- (1,699,923)
Principal payments for obligations under
capital lease -- (406,960) (189,282) (776,513)
Payments received for notes receivable
from stockholders -- -- 1,257 2,147
Net proceeds from exercise of stock options 1,563 1,799 44 3,406
Repurchase of common stock -- (1,510) -- (1,510)
Proceeds from exercise of warrants -- 19,505 -- 19,505
------------ ------------ ------------ ------------
Net cash provided by financing
activities 11,014,184 16,481,754 526,197 42,901,553
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,319,484 10,148,958 (2,003,419) 11,536,687
Cash and cash equivalents at beginning of
period 10,217,203 68,245 2,071,664 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 11,536,687 $ 10,217,203 $ 68,245 $ 11,536,687
============ ============ ============ ============
</TABLE>
(Continued)
F-7
<PAGE> 45
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
April 20, 1992
(date of
Years ended incorporation)
December 31, through
-------------------------------------------------- December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid for income taxes $ 1,600 $ 1,600 $ 1,000 $ 5,800
============ ============ ============ ============
Cash paid for interest $ 38,632 $ 68,890 $ 78,270 $ 393,771
============ ============ ============ ============
Noncash investing and financing activities:
Common stock issued in exchange for
notes receivable from stockholders $ -- $ -- $ -- $ 107,385
============ ============ ============ ============
Equipment purchased under capital
lease obligation $ -- $ -- $ -- $ 855,022
============ ============ ============ ============
Stock dividend $ -- $ -- $ -- $ 5
============ ============ ============ ============
Common stock issued in exchange for
note payable to D. Blech and others $ -- $ -- $ -- $ 3,594,500
============ ============ ============ ============
Repurchase of common stock in exchange
for notes receivable from
stockholders $ -- $ 3,812 $ -- $ 13,665
============ ============ ============ ============
Receivable for common stock issued in
Private Placement $ -- $ 1,278,700 $ -- $ 1,278,700
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 46
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
LXR Biotechnology Inc. ("LXR" or the "Company") is a biopharmaceutical
company engaged in the research and development of therapeutics to treat
diseases where the dysregulation of apoptosis, naturally occurring
programmed cell death, can play a key role in the onset of or damage
caused by such diseases. Apoptosis is a form of cell death that occurs in
a timely and atraumatic fashion in the normal development and maintenance
of healthy tissue and organs. The Company was founded and incorporated in
Delaware in April 1992.
The Company is presently working on a number of long-term development
projects that involve experimental and unproven technology, which may
require many years and substantial expenditures to complete, and which may
be unsuccessful. All of the Company's potential pharmaceutical and medical
device products are currently in research and development, and no revenues
from the sale of pharmaceutical or medical device products have been
generated to date. There can be no assurance that the Company will be able
to develop, manufacture, or market a commercial product from these
projects. In addition, there can be no assurance that future revenues will
be significant, that any sales will be profitable, or that the Company
will have sufficient funds available to complete its research and
development programs or market any products it may develop.
Liquidity
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. 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. 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
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 consummated, the Company may
have to seek alternative sources of capital or reevaluate its operating
plans.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1997 and 1996 includes cash on
hand and short term investments with original maturities of three months
or less.
(Continued)
F-9
<PAGE> 47
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost, net of
accumulated depreciation. Equipment is depreciated on the straight line
basis over the estimated useful lives of the respective assets, which
range from three to five years. Leasehold improvements are amortized on a
straight line basis over the shorter of the lease term or the useful life
of the improvement.
Fair Value of Financial Instruments
Financial assets and liabilities have carrying values which approximate
their fair values for all periods presented. The carrying amounts of cash
and cash equivalents, prepaid assets, other receivables and current
liabilities approximate fair value because of their short term nature. The
fair value of notes receivable from related parties are not readily
determinable due to their related party nature. The carrying amount of the
notes payable are reasonable estimates of fair values as the notes bear
interest based on the market rates currently available for debt with
similar terms.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,
the Company reviews, as circumstances dictate, the carrying amount of its
long-lived assets. The purpose of these reviews is to determine whether
the carrying amounts are recoverable. Recoverability is determined by
comparing the projected undiscounted net cash flows of the long-lived
assets against their respective carrying amounts. The amount of
impairment, if any, is measured based upon the excess of the carrying
value over the fair value.
Revenue Recognition
For contracts under which the Company is reimbursed for expenses,
including grants, revenue is recognized as the related expenses are
incurred. Non-refundable fees or milestone payments received in connection
with research and development or license agreements are recognized as
revenue when they are earned in accordance with the applicable performance
requirements and contractual terms of the agreements. Payments received
related to future performance are deferred and recognized as revenue as
the services are performed.
Research and Development
All research and development costs are expensed as incurred. Costs related
to the acquisition of technology rights and patents, for which development
work is in process, are expensed and considered a component of research
and development costs.
Income Taxes
The Company accounts for income taxes under the asset and liability method
as prescribed by Statement of Financial Accounting Standard No. 109,
Accounting for Income Taxes, with deferred income tax assets and
liabilities recognized for the future tax consequences of differences
between the
(Continued)
F-10
<PAGE> 48
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes, Continued
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled.
Deferred tax assets are recognized for deductible temporary differences,
with a valuation allowance established against the resulting assets to the
extent it is more likely than not that the related tax benefit will not be
realized.
Net Loss Per Share
Net loss per share has been computed using the weighted average number of
common shares, outstanding during each period presented. In 1997, the
Company adopted the provisions of Statement of Financial Accounting
Standard No. 128, Earnings Per Share (SFAS No. 128). SFAS No. 128 requires
companies to present basic earnings per share (EPS) and diluted EPS,
instead of the primary and fully diluted EPS previously required. The new
standard requires additional informational disclosures, and also makes
certain modifications to the currently applicable EPS calculation defined
in Accounting Principles Board No. 15. Adoption of this statement requires
restatement of previously reported EPS data. Adoption of this statement
did not have any impact on the Company's net loss per share calculation.
Stock Option Plans
On January 1, 1996, the Company adopted the disclosure - only provisions
of Statement of Financial Accounting Standard No.123, Accounting for Stock
Based Compensation (SFAS No. 123). As allowed under the provisions of the
statement, the Company applies Accounting Principals Board Opinion No. 25
(APB Opinion No. 25) and related interpretation in accounting for its
stock option plans.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Optical Analytic, Inc. (OAI).
All significant intercompany balances and transactions have been
eliminated in consolidation.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting
(Continued)
F-11
<PAGE> 49
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
New Accounting Standards, Continued
Standards Nos. 130 and 131, Reporting Comprehensive Income (SFAS No. 130)
and Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131), respectively (collectively, the Statements). The
Statements are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting of comprehensive
income and its components in annual financial statements. SFAS No. 131
establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of
SFAS No. 130 and SFAS No. 131, respectively. Application of the
Statements' disclosure requirements will have no impact on the Company's
consolidated financial position or results of operations as currently
reported.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
(2) PRIVATE PLACEMENT RECEIVABLE
The private placement receivable represents a portion of the proceeds from
the December 1996 Private Placement (note 6) which were held in a
designated escrow account at December 31, 1996, pursuant to legally
binding contracts between the Company and purchasers of common stock
effective as of December 31, 1996. These proceeds were not transferred to
the Company's account until January 1997. All stock related to the
proceeds had been issued and was outstanding as of December 31, 1996.
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Laboratory equipment $ 1,809,592 $ 1,075,033
Computer and other office equipment 193,239 147,013
Furniture and fixtures 576,414 480,736
Leasehold improvements 937,847 519,833
----------- -----------
3,517,092 2,222,615
Accumulated depreciation and amortization (2,031,245) (1,630,522)
----------- -----------
Equipment and leasehold improvements, net $ 1,485,847 $ 592,093
=========== ===========
</TABLE>
Depreciation and amortization expense amounted to approximately $402,000,
$481,000 and $531,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
(Continued)
F-12
<PAGE> 50
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(4) NOTE PAYABLE
In May 1997, the Company entered into an agreement providing for a loan of
$200,000 secured by existing equipment and a loan of $500,000 for the
purchase of new equipment ("Equipment Loan"). In accordance with the
Equipment Loan, loan payments will be made monthly over a three year term
with a final balloon payment equal to 10% of the original loan. As of
December 31, 1997 there was $582,437 outstanding under the Equipment Loan
at an effective interest rate of approximately 15.36%. In connection with
the Equipment Loan, the Company issued warrants to purchase 27,000 shares
of the Company's common stock at $2.1875 per share. The warrants expire in
May 2004 (Note 7).
The Equipment Loan is secured by equipment and leasehold improvements with
a net book value of $1,485,847 at December 31, 1997.
Future minimum payments under the Equipment Loan as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1998 $172,730
1999 216,248
2000 193,459
--------
$582,437
========
</TABLE>
(5) OPERATING LEASE
The Company leases its facility under a noncancelable operating lease
which expires in June 2010.
Future minimum lease payments under the noncancelable operating lease as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending Operating
December 31, Lease
------------ -----
<S> <C>
1998 $ 314,918
1999 314,918
2000 314,918
2001 314,918
2002 354,283
Thereafter 2,952,360
----------
Total minimum lease payments $4,566,315
==========
</TABLE>
The Company recognizes rent expense on a straight-line basis over the term
of the lease. Rental expense for operating leases was approximately
$339,000, $344,000 and $230,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
(Continued)
F-13
<PAGE> 51
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(6) CAPITAL STOCK
Preferred Stock
During 1992, the Company issued 1,059,000 shares of Series A preferred
stock in exchange for $529,500.
In February 1993, the Company issued 191,000 shares of preferred stock in
exchange for $95,500.
In April 1993, all the outstanding shares of preferred stock, totaling
1,250,000 shares, were converted to 625,000 shares of the Company's common
stock.
Common Stock
During 1992, the Company issued 758,333 shares of common stock in exchange
for $22,750 in cash and $91,000 in notes receivable from stockholders. On
their respective dates of purchase, a total of 481,250 of these shares
were subject to certain vesting provisions. Unvested shares can be
repurchased by the Company at the issuance price. As of December 31, 1997,
all remaining shares are fully vested.
In March 1993, the Company declared a 2% stock dividend to all common
stockholders of record. A total of 9,625 of the 15,167 shares granted as a
stock dividend were subject to certain vesting provisions. As of December
31, 1997, all remaining shares are fully vested.
On April 5, 1993, the Company issued the Edward Blech Trust , an affiliate
of D. Blech Incorporated, the Underwriter for the Company's Initial Public
Offering (the Underwriter), and Mark Germain (formerly a managing director
of the Underwriter and Chairman of the Company's Board of Directors), an
aggregate of 2,000,000 shares of common stock in exchange for $600.
In June 1993, the Company issued 551,650 shares of common stock in
exchange for $165 in cash and notes receivable from stockholders totaling
$16,385. In December 1993, the Board of Directors forgave the $16,385 of
indebtedness. On their respective dates of purchase, a total of 444,817 of
these shares were subject to certain vesting provisions. As of December
31, 1997, a total of 1,948 of such shares remain subject to vesting.
In May 1994, the Company raised approximately $10,922,000 (net of
underwriting discounts and offering expenses), through an initial public
offering and sale of 2,875,000 shares of common stock at $4.50 per share
(the Initial Public Offering). Upon consummation of the Initial Public
Offering, the Blech Lenders, affiliates of the Underwriter, converted the
principal balance owed by the Company under a line of credit provided by
such persons and entities into 798,778 shares of common stock at a
conversion price per share equal to the Initial Public Offering price of
$4.50.
In October 1995, the Company engaged in an offshore private placement of
the Company's common stock and raised $114,178 (net of offering costs)
through the issuance of 100,000 shares of common stock at a price of $1.50
per share. The issuance is exempt from registration pursuant to the
exemption provided by Regulation S of the Securities Act of 1993, as
amended.
In January 1996, the Company raised approximately $8.6 million (net of
offering costs) through a private placement offering (the January 1996
Private Placement) and sale of 7,360,000 shares of the Company's common
stock at a price of $1.25 per share. The Company also issued 736,000
shares of
(Continued)
F-14
<PAGE> 52
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(6) CAPITAL STOCK, CONTINUED
Common Stock, Continued
common stock and warrants to purchase an additional 736,000 shares of the
Company's common stock to the placement agents as a selling commission for
the January 1996 Private Placement (note 7). The Company filed a
registration statement on Form S-3 covering resale of the 8,832,000 shares
of common stock issued or issuable in connection with the January 1996
Private Placement and 3,004,839 other shares of common stock issued or
issuable by the Company.
In August 1996, in connection with the Cardiosol Acquisition (note 13),
the Company committed to issue 225,000 shares of its common stock to the
sellers over a period of four years, of which 75,000 shares have been
issued and are outstanding as of December 31, 1997. The remaining 150,000
shares are recorded as common stock to be issued. These 225,000 shares
were valued at $2.56 per share, the fair market value on the date the
agreement was entered into. An additional 75,000 shares of common stock
may be issued to the sellers upon the attainment of certain milestones
related to Cardiosol.
In December 1996, the Company raised approximately $10.1 million (net of
offering costs) through a private placement offering (the December 1996
Private Placement) and sale of 5,201,350 shares of the Company's common
stock at a price of $2.00 Per Share. The Company also issued 534,385
shares of common stock and warrants to purchase an additional 458,858
shares of the Company's common stock to the placement agents as a selling
commission for the December 1996 Private Placement (note 7). The Company
filed a registration statement on Form S-3 covering resale of the
6,194,593 shares of common stock issued or issuable in connection with the
December 1996 Private Placement and 310,037 other shares of common stock
issued or issuable by the Company.
In January 1997, the Company received $150,000 from Boehringer Mannheim
Corporation ("Boehringer") for the purchase of 37,500 shares of the
Company's common stock at a price of $4.00 per share pursuant to a binding
obligation to purchase such shares in accordance with a letter of intent
for a research collaboration with Boehringer related to Maspin (the
"Boehringer Letter of Intent") (Note 11).
In September 1997, the Company committed to issue 15,000 shares of
Company's common stock to a consultant of the Company as consideration for
rendering certain advisory services. The Company recognized consulting
expense of approximately $29,000 representing the fair market value of the
shares on the date of the grant. These expenses are included in general
and administrative expenses for the year ended December 31, 1997. The
shares are included in common stock to be issued at December 31, 1997.
In December 1997, the Company raised approximately $9 million (net of
offering costs) through a private placement offering (the December 1997
Private Placement) and sale of 5,485,163 shares of the Company's common
stock at a price of $1.75 per share. In connection with the December 1997
Private Placement, the Company is obligated to issue 87,453 shares of
common stock and warrants to purchase an additional 548,516 shares of the
Company's common stock, exercisable at $2.00 per share to the placement
agents as selling commission. The December 1997 Private Placement was
completed in January 1998 (notes 7 and 17).
(Continued)
F-15
<PAGE> 53
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(6) CAPITAL STOCK, CONTINUED
Treasury Stock
During 1994, the Company exercised its option to repurchase 128,978
unvested shares of common stock for a total repurchase price of $9,853.
During 1996, the Company exercised its option to repurchase 53,034
unvested shares of common stock for a total repurchase price of $5,322.
(7) COMMON STOCK WARRANTS
During November 1993, in connection with a licensing agreement (note 11),
the Company issued a warrant to purchase 5,000 shares of the Company's
common stock at any time within five years of an initial public offering
of the Company's common stock at a price per share equal to $3.15.
Upon consummation of the Initial Public Offering in May 1994, the Company
issued to the Underwriter a warrant to purchase approximately 250,000
shares of common stock at an exercise price of $6.30. The warrants are
subject to certain antidilution provisions. As of December 31, 1997, the
number of shares issuable under this warrant was 315,631 at an exercise
price of $4.99. The warrants expire in May 1999.
In October 1995, the Company issued warrants to purchase 40,000 shares of
the Company's common stock in connection with short-term borrowings from
related parties (Note 15). The warrants have an exercise price of $2.25
per share and expire in January 2001.
In December 1995, the Company issued a warrant to purchase 8,000 shares of
the Company's common stock in connection with short-term borrowings from
Kenneth McGuire, a shareholder of the Company subject to SEC Schedule 13D
reporting requirements (note 15). The warrant has an exercise price of
$2.25 per share and expires in January 2001.
In connection with the January 1996 Private Placement (note 6), the
Company issued warrants to purchase 736,000 shares of the Company's common
stock at an exercise price of $1.375 per share. The warrants expire
January 2001. In May 1996, the Company issued 305,694 shares of common
stock upon exercise of a portion of these warrants. The warrant holder
elected a cashless exercise of this 404,789 share warrant resulting in a
reduction of the shares issuable under the warrant by 99,095. In July
1996, another warrant holder exercised his option to purchase 14,186
shares of the Company's common stock at a purchase price of $19,505.
In connection with the December 1996 Private Placement (note 6), the
Company issued warrants to purchase 458,858 shares of the Company's common
stock at an exercise price of $2.20 per share. The warrants expire in
December 2001.
In May 1997, the Company issued a warrant to purchase 27,000 shares of the
Company's common stock in connection with the Equipment Loan (note 4). The
warrant has an exercise price of $2.1875 per share and expires in May
2004. The estimated fair value of the warrant was included in general and
administrative expenses for the year ended December 31, 1997.
(Continued)
F-16
<PAGE> 54
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) COMMON STOCK WARRANTS, CONTINUED
In August 1997 and 1996, pursuant to the License Agreement with
Perkin-Elmer Corporation related to the Scanning Laser Digital Imaging
("SLDI") technology, the Company incurred an obligation to pay a success
fee and issue warrants to purchase approximately 7,500 shares and 3,600
shares of the Company's common stock at a price per share equal to
approximately $1.87 and $2.51, respectively. The warrants, which have not
been issued, will expire in August 2003 and 2002, respectively (notes 12
and 15). The estimated fair value of the warrants is included in general
and administrative expense for the years ended December 31, 1997 and 1996,
respectively.
In connection with the December 1997 Private Placement (note 6), the
Company became obligated to issue warrants to purchase 548,516 shares of
the Company's common stock at an exercise price of $2.00 per share. The
warrants were issued in January 1998 and expire in January 2003.
Additional warrants were issued in 1998 related to the December 1997
Private Placement (Note 17).
As of December 31, 1997, warrants to purchase approximately 1,731,130
shares of the Company's common stock remained outstanding or to be issued.
(8) STOCK OPTION PLANS
1993 Stock Option Plan
The Company has a Stock Option Plan (the Option Plan), which was approved
by the Board of Directors in May 1993 and approved by its stockholders in
August 1993. Options granted under the Option Plan may be incentive stock
options or nonqualified stock options. Under the Option Plan 1,849,850
shares of common stock are authorized and remain reserved for issuance,
and options to purchase shares may be granted to employees, officers,
directors, consultants, independent contractors, and advisers of the
Company. The exercise price of an option granted under the Option Plan
must be not less than 100% of the fair market value of the shares on the
date the option is granted. The exercise price of any option granted to a
person owning more than 10% of the total combined voting power of the
Company's common stock must not be less than 110% of the fair market value
of the shares on the date the option is granted. Options granted under the
Option Plan are nontransferable.
The fair value of each stock option grant is estimated using the
Black-Schole's option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: expected
dividend yield of 0.0% for all of the three years; expected volatility of
97.6% in 1997 and 107.5% in 1996 and 1995; risk-free interest rates of
6.20%, 6.51% and 6.42%; and expected lives of 7.8, 8.6 and 8.4 years.
As of December 31, 1997, options to purchase 1,330,701 shares were
outstanding and options to purchase 506,506 shares were reserved and
unissued under the Option Plan. Options granted pursuant to the Option
Plan prior to March 10, 1996 generally vest 20% after one year and as to
1.67% of the shares each month thereafter. Options granted pursuant to the
Option Plan after March 10, 1996 generally vest 25% after one year and as
to 2.08% of the shares each month thereafter. The options expire ten years
from date of grant. As of December 31, 1997, options to purchase 506,762
shares, were exercisable under the Option Plan and the weighted average
exercise price of those options was $1.68.
(Continued)
F-17
<PAGE> 55
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(8) STOCK OPTION PLANS, CONTINUED
1993 Stock Option Plan, Continued
The following summarizes the activity under the Option Plan:
<TABLE>
<CAPTION>
Stock options outstanding
---------------------------------------
Number of Weighted-average exercise
shares price per share
------ ---------------
<S> <C> <C>
Balance as of December 31, 1994 224,916 $ 1.85
Options granted 304,833 1.62
Options canceled or expired (48,889) 4.22
Options exercised (1,475) 0.03
----------
Balance as of December 31, 1995 479,385 1.47
Options granted 543,005 2.61
Options canceled or expired (59,081) 1.95
Options exercised (10,169) 0.18
----------
Balance as of December 31, 1996 953,140 2.10
Options granted 424,550 1.95
Options canceled or expired (45,989) 2.05
Options exercised (1,000) 1.56
----------
Balance as of December 31, 1997 1,330,701 $ 1.89
==========
</TABLE>
An additional 150,000 options were issued outside of the 1993 stock option
plan (Note 15) at an exercise price of $2.063 of which options to purchase
43,749 shares were exercisable at December 31, 1997. These options are
subject to all provisions of the 1993 Option Plan and have been included
in the disclosures which follow.
The weighted-average fair value of options granted during 1997, 1996 and
1995 was $1.64, $2.28 and $1.47, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------ ----------------------------------------------
Range of Number Weighted-average Weighted-average Number Weighted-average
exercise outstanding remaining years exercise exercisable exercise
prices at 12/31/97 to expiration price at 12/31/97 price
------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.03 29,124 5.20 $ 0.03 27,490 $ 0.03
1.00 to 1.50 207,484 5.68 1.29 203,185 1.29
1.56 to 2.44 1,203,509 8.56 2.00 311,528 2.04
2.50 to 4.81 38,750 8.78 2.42 7,200 2.78
5.25 to 6.19 1,834 7.20 5.76 1,108 5.60
-------- -------
1,480,701 8.25 $ 1.89 550,511 $ 1.68
========= =======
</TABLE>
(Continued)
F-18
<PAGE> 56
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(8) STOCK OPTION PLANS, CONTINUED
1993 Stock Option Plan, Continued
On November 20, 1996, the Board of Directors approved the repricing of the
exercise price from $4.125 to $2.125 per share for the 1996 grant of
options for the purchase of 125,000 shares of common stock.
Directors Stock Option Plan
In December 1993, the Board of Directors approved the 1993 Directors Stock
Option Plan (the Directors Option Plan) under which 200,000 shares of
common stock are authorized, reserved, and available for issuance. The
Directors Option Plan provides for the automatic grant to each nonemployee
director of the Company of an option to purchase 5,000 shares of common
stock on the date the nonemployee director becomes a member of the Board
of Directors and on each anniversary date of joining the Board. Such
options will have an exercise price equal to the fair market value of the
Company's common stock at the date of grant.
In December 1995, the Board of Directors approved an amendment, subject to
shareholder approval, to the Directors Option Plan to grant the Chairman
of the Board an additional option to purchase 10,000 shares of the
Company's common stock. The shareholders approved this amendment at the
June 1996 shareholder meeting.
The fair value of each stock option grant is estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: expected
dividend yield 0.0% and an expected life of nine years for all of the
three years; expected volatility of 97.7% in 1997 and 107.5% in 1996 and
1995; risk-free interest rates of 5.48%, 6.53% and 6.50%.
As of December 31 1997, options to purchase 60,000 shares were outstanding
and options to purchase 140,000 shares were reserved and unissued under
the Directors Option Plan. Options granted pursuant to the Directors
Option Plan generally vest as to 20% of the shares one year after their
respective dates of grant and as to 1.67% of the shares each month
thereafter. Options granted pursuant to the Option Plan after August 12,
1997 generally vest 25% after one year and as to 2.08% of the shares each
month thereafter. The options expire ten years from date of grant. As of
December 31, 1997, options to purchase 16,996 shares were exercisable
under the Directors Option Plan and the weighted average exercise price
was $1.66.
The following summarizes the activity in the Directors Option Plan:
<TABLE>
<CAPTION>
Stock options outstanding
------------------------------------------
Number of Weighted-average exercise
shares price per share
------ ---------------
<S> <C> <C>
Balance as of December 31, 1994 10,000 $ 1.38
Options granted 25,000 1.58
--------
Balance as of December 31, 1995 35,000 1.52
</TABLE>
(Continued)
F-19
<PAGE> 57
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(8) STOCK OPTION PLANS, CONTINUED
Directors Stock Option Plan, Continued
<TABLE>
<CAPTION>
Stock options outstanding
------------------------------------------
Number of Weighted-average exercise
shares price per share
------ ---------------
<S> <C> <C>
Balance as of December 31, 1995 35,000 $1.52
Options granted 15,000 3.27
Options canceled or expired (10,000) 3.22
--------
Balance as of December 31, 1996 40,000 1.75
Options granted 20,000 2.00
--------
Balance as of December 31, 1997 60,000 $1.83
========
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 was $1.77, $3.01, and $1.45, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------------------------- ---------------------------------
Range of Number Weighted-average Weighted-average Number Weighted-average
exercise outstanding remaining exercise exercisable exercise
prices at 12/31/97 contractual life price at 12/31/97 price
------------ ----------- ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$ 1.38 10,000 6.75 years $ 1.38 6,332 $ 1.38
1.56 - 1.88 25,000 8.20 1.75 8,332 1.72
2.00 - 2.19 25,000 9.42 2.10 2,332 2.19
--------- ---------
60,000 8.47 $ 1.83 16,996 $ 1.66
======= ======
</TABLE>
Pro Forma Disclosure
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for stock
options granted to employees or board members in the financial statements.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net loss As reported $ (9,270,287) $ (7,622,999) $ (6,315,947)
Pro forma $ (9,800,387) $ (7,881,884) $ (6,360,650)
Net loss per share As reported $ (.42) $ (.48) $ (.84)
Pro forma $ (.44) $ (.50) $ (.85)
</TABLE>
(Continued)
F-20
<PAGE> 58
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(8) STOCK OPTION PLANS, CONTINUED
Pro Forma Disclosure, Continued
Pro forma net loss reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of four to five years and compensation cost for
options granted prior to January 1, 1995 is not considered.
(9) EMPLOYEE BENEFIT PLAN
In January 1996, the Company adopted a qualified savings plan (the Savings
Plan) under Internal Revenue Services Code 401(K). The plan provides for
tax deferred salary deductions whereby employees, 18 years of age or
above, can elect to contribute up to 15% of their compensation (subject to
current statutory limits) to the Savings Plan. The Company is not required
to make any contributions under the Savings Plan.
(10) INCOME TAXES
Income tax expense represents minimum state franchise tax.
As of December 31, 1997, the Company had research and experimentation
credit carryforwards of approximately $620,000 and $466,000 for federal
and state purposes, respectively. Under current tax law, the federal
credits expire during the years beginning 2007 through 2012 and the state
credits carryforward indefinitely.
There are approximately $2,897,000 of federal and $2,897,000 of state net
operating loss carryforwards as of December 31, 1997. Under current tax
law, the carryforwards expire during the years beginning 2010 through
2012, and 2000 through 2002, for federal and state tax purposes,
respectively.
The tax effect of the temporary differences that give rise to a
significant portion of the deferred tax asset as of December 31, 1997 and
1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Start-up and research costs capitalized
for tax purposes $ 11,459,000 $ 10,179,000
Research and experimentation credit 928,000 713,000
Net operating loss carryforward 1,159,000 43,000
------------ ------------
Total gross deferred tax assets 13,546,000 10,935,000
Less valuation allowance (13,546,000) (10,935,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
The change in the valuation allowance for the years ended December 31,
1997, 1996, and 1995 was approximately $2,769,000, $3,947,000 and
$2,751,000, respectively.
(Continued)
F-21
<PAGE> 59
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(11) AGREEMENTS RELATED TO MASPIN TECHNOLOGY
Dana-Farber Cancer Institute, Inc.
During 1993, the Company entered into exclusive license and research
agreements with Dana-Farber Cancer Institute, Inc. (DFCI) related to
certain patent applications and technology, including the exclusive right
and license to make, use and sell Maspin(TM), a possible tumor suppressor
molecule, for therapeutic purposes. Under the terms of the DFCI licensing
agreement (the DFCI Agreement), the Company may enter into sublicensing
agreements subject to sublicensing and royalty fees. As partial
consideration for the license, the Company agreed to pay DFCI
approximately $10,000 and granted DFCI a warrant to buy 5,000 shares of
the Company's common stock at any time prior to May 6, 1999 (note 7).
The DFCI Agreement obligates the Company to use its diligent efforts to
bring one or more licensed products to the marketplace and to make certain
additional payments to DFCI contingent upon completion of certain
milestones occurring in the clinical trials and regulatory approval of
each licensed product. A portion of such payments are to be construed as
an advance on royalties due to DFCI subject to certain limitations. The
DFCI Agreement requires the Company to pay royalties to DFCI on net sales
of licensed products that incorporate or use the patent rights.
The DFCI Agreement requires the Company to pay a minimum royalty per year
beginning 12 months after the completion of successful Phase II clinical
trials. So long as the Company diligently pursues the commercial
development of licensed products, minimum royalties will be waived until
the successful completion of Phase III clinical trials. The Company must
also pay all costs relating to the filing, prosecution, and maintenance of
the patent applications related to Maspin, whether such fees were incurred
before or after the date of the DFCI Agreement. During 1997, 1996 and
1995, the Company paid approximately $10,000, $6,000 and $42,000,
respectively, to DFCI for costs associated with patents.
Effective November 1993, the Company entered into a separate agreement
with DFCI to support the research of Maspin in return for certain rights
to inventions and discoveries from the funded research. During 1997, 1996
and 1995 the Company paid approximately $14,000, $200,000 and $172,000,
respectively, to fund the Maspin research. The research agreement was
terminated effective January 1997.
Boehringer Mannheim
In July 1996, the Company entered into a letter of intent with Boehringer
to jointly evaluate the development of Maspin for the treatment of cancer.
In January 1997, the Company received $150,000 from Boehringer for the
purchase of 37,500 shares of the Company's common stock at a price of
$4.00 per share pursuant to a binding obligation to purchase such shares
in accordance with the letter of intent. In addition, in connection with
the letter of intent, LXR is currently conducting preclinical efficacy and
toxicity studies of Maspin. If the results of the studies are favorable,
it is contemplated that Boehringer would purchase additional shares of the
Company's common stock at a premium over market price, provide research
and development funding to the Company, and commit internal resources to
the development of Maspin. In addition, the Company would grant Boehringer
an option to acquire an exclusive worldwide license to the Maspin protein
for therapeutic uses. There can be no assurance that the results of the
preclinical testing undertaken pursuant to the letter of intent will be
successful, that Boehringer will elect to proceed with this project or
that the parties will enter into any additional agreements.
(Continued)
F-22
<PAGE> 60
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(12) AGREEMENTS RELATED TO OAI
OAI Acquisition
In December 1993, the Company consummated agreements to purchase 100% of
the issued and outstanding stock of OAI for $200,000. Consideration for
the stock was comprised of $93,889 in cash paid upon closing of such
purchase and $106,111 in promissory notes and other indebtedness. The
promissory notes bore interest at a rate of 6% and both principal and
interest were paid in 1994. An executive officer and stockholder of the
Company owned approximately 35% of the total issued and outstanding stock
of OAI prior to the acquisition and received $77,778 in cash and notes for
his shares.
OAI's only asset consisted of a technology license from Ohio State
University related to research in process (see below), and OAI had not
commenced operations. Accordingly, the Company expensed the $200,000
purchase price as research and development expense at the date of
purchase.
Ohio State University License Agreement
The Company, through the acquisition of OAI, in December 1993, has
acquired exclusive license rights to patents and technology related to
Scanning Laser Digital Imaging (SLDI). This agreement obligates the
Company to make certain royalty payments to the Ohio State University
Research Foundation upon the sale of licensed products. In addition, under
the terms of the license agreement, the Company is required to satisfy
certain performance conditions.
Perkin Elmer License Agreement
In August 1996, the Company and OAI entered into an agreement with Perkin
Elmer (the Perkin Elmer Agreement) whereby Perkin Elmer was granted an
exclusive worldwide license to the patents OAI had licensed from Ohio
State University related to the SLDI microscope, for life sciences and
clinical diagnostic applications, for the life of any of the patent
claims. The Company also licensed certain related software, technical
information and rights to ongoing technological developments. In
connection therewith, Perkin Elmer agreed to (i) make up to $1.4 million
of cash milestone payments to the Company over a three-year period, (ii)
contribute up to $400,000 of equipment to the Company; (iii) make certain
royalty payments (which do not include minimums) to the Company on any
sales of licensed product and (iv) commit certain funds to the development
of products covered by licensed patents. The agreement may be terminated
by Perkin Elmer, in its discretion, subject to payment of certain amounts
to the Company in certain circumstances. Upon signing of the agreement,
Perkin Elmer paid the Company $300,000 of the cash milestone payments,
which was included in the Company's revenues for the year ended December
31, 1996. In 1997, the Company recognized as license fee revenue under the
Perkin Elmer Agreement a milestone payment consisting of $300,000 in cash
and equipment with a fair market value of $400,000. The cash was received
in September 1997 and approximately $343,000 in equipment was received in
December 1997. The balance of approximately $57,000 in equipment is
expected to be received in the first quarter of 1998 and is included in
other assets at December 31, 1997.
In connection with this agreement, the Company incurred an obligation to
pay a success fee and issue a warrant to purchase approximately 11,100
shares of the Company's common stock to the Olmsted Group, a consultant of
the Company (notes 7 and 15). Mark Germain is a managing director of the
Olmsted Group.
(Continued)
F-23
<PAGE> 61
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(13) OTHER AGREEMENTS
Cardiosol Acquisition
In August 1996, the Company acquired certain patent and other rights
related to Cardiosol, a preservation solution for use during heart
transplantation (the Cardiosol Acquisition). In connection with such
acquisition, the Company paid $98,000 in cash and committed to
issue 225,000 shares of its common stock to the sellers (note 6). An
additional 75,000 shares may be issued upon the attainment of certain
milestones. The total cost of the acquisition, including cash and shares,
amounted to approximately $675,000 and is included in research and
development expenses for the year ended December 31, 1996.
Pursuant to the Cardiosol Acquisition, the Company entered into a
consulting agreement with one of the co-inventors of the Cardiosol
solution to serve on the Company's Scientific Advisory Board, and an
employment agreement with the other co-inventor to serve as Director of
Pre-Clinical Affairs. During 1997 and 1996 the Company paid $119,500 and
$65,000, respectively under these agreements. These agreements were
terminated in January 1998.
University of Tennessee
In January 1997, the Company entered into an exclusive license and three
year research agreement with the University of Tennessee and the
University of Tennessee Research Corporation related to certain patent
applications and technology. As consideration for the agreement, the
Company agreed to fund research in the amount of $70,000 per year for
three years, with the third year funding contingent upon meeting certain
milestones.
Oxford Asymmetry, Limited
In April 1997, the Company entered into a research collaboration agreement
with Oxford Asymmetry, Limited ("Oxford") for the purpose of discovering
small molecule drug candidates that target specific apoptosis pathways. In
exchange for the services to be provided by Oxford, the Company has agreed
to make payments totaling $650,000 on certain dates specified in the
agreement through February 1998 and is obligated to make certain future
royalty payments on any products the Company may develop under the
agreement. As of December 31, 1997, the Company has made payments of
$487,500 related to the Oxford agreement of which approximately $451,000
is included in research and development expenses for the year ended
December 31, 1997.
Innovex, Inc.
In July 1997, the Company entered into a clinical services agreement with
Innovex, Inc. (Innovex), to begin clinical studies of HK-Cardiosol for
heart preservation in transplant patients. As consideration for the
agreement, the Company agreed to pay Innovex fees and expenses amounting
to approximately $565,000. Subject to certain rights of early termination
the agreement will continue until June 1, 1999. As of December 31, 1997
the Company paid an initial deposit of approximately $48,000 and incurred
fees of approximately $95,300. The fees are included in research and
development expenses for the year ended December 31, 1997 and the initial
deposit is included in prepaid expenses at December 31, 1997.
(Continued)
F-24
<PAGE> 62
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(13) OTHER AGREEMENTS, CONTINUED
Other
The Company has entered into various other research agreements requiring
future payments totaling approximately $192,000 as of December 31, 1997.
(14) GRANT AWARD
In September 1995, the Company received notice from the National Institute
of Health of a grant award in the amount of $100,000 for its research on
the role of the FAS/CD95 antigen in HIV infection. The Company recognized
$100,000 in grant revenue related to this grant for the year ended
December 31, 1996.
In September 1996, the Company received notice from the National Institute
of Health of a grant award in the amount of approximately $72,000 for its
research on the evaluation of Maspin as a widespread tumor suppresser. The
Company recognized $57,348 and $14,396 in grant revenue related to this
grant for the year ended December 31, 1997 and 1996, respectively.
(15) RELATED PARTY TRANSACTIONS
(a) Financing Transactions
In October 1995, the Company received $250,000 in short term borrowings
from BIO and $250,000 in short term borrowings from the Blech Family Trust
(the Holders). The notes payable accrued interest at an annual rate of
10.5% and both of the notes payable and accrued interest were paid in
January 1996. In addition, in connection with this borrowing, the Company
issued warrants to the Holders to purchase 40,000 shares of the Company's
common stock at the price of $2.25 per share (note 7).
In December 1995, the Company received $100,000 in short-term borrowings
from Kenneth McGuire, a shareholder who beneficially owns more than 5% of
the Company's common stock at December 31, 1997 and is subject to SEC
Schedule 13D requirements. The note payable accrued interest at a rate of
10.5% and both the note payable and accrued interest were paid in January
1996. In connection with this borrowing, the Company also issued warrants
to the debt holder to purchase 8,000 shares of the Company's common stock
at an exercise price of $2.25 per share (note 7).
(b) Consulting Agreements
In October 1995, the Company entered into a consulting agreement with the
Olmsted Group, L.L.C. (the Consultant) for services to be provided in
connection with the management of the Company's business. As consideration
for the agreement, the Company agreed to pay $10,000 per month through
October 1996. The agreement also provides for the payment of additional
fees in cash and warrants based on a percentage of the consideration
derived from certain transactions on which the Consultant has worked. Mark
Germain is managing director of the Olmstead Group, LLC. As of December
31, 1997, the Company has incurred an obligation to pay a success fee and
issue a warrant to purchase approximately 11,100 shares of the Company's
common stock to the Consultant in connection with the Perkin Elmer
Agreement (note 7).
During 1995, the Company paid David A. Blech $25,000 for consulting
services provided in connection with the Company's debt financing.
(Continued)
F-25
<PAGE> 63
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(15) RELATED PARTY TRANSACTIONS, CONTINUED
(c) Executive Officer Agreements
The Company has entered into an employment agreement with the Company's
Chief Executive Officer (CEO) to provide an annual base compensation of
$240,000. In the event of termination of this agreement, the CEO will be
entitled to severance compensation in an amount equal to two times the
annual base compensation. In January 1997, the Company advanced $30,000 to
the Company's CEO, and the entire amount is outstanding and included in
notes receivable from related parties as of December 31, 1997. The note
bore interest at a rate of approximately 5.85% during 1997 and is
repayable on January 6, 2002.
In October 1996, the Company entered into an employment agreement with
its President and Chief Operating Officer (COO) for an annual salary of
$225,000 and one time recruitment bonus of $15,000. This agreement
provided for an initial stock option grant for the right to purchase
310,000 shares of the Company's common stock, of which the right to
purchase 150,000 of these shares was granted outside of the Company's
Stock Option Plan (note 8). This agreement also provided for reimbursement
of certain relocation costs and a loan of $175,000, which may be
forgiven over an eight year period in the amount of $25,000 per year
beginning December 31, 1997, subject to certain conditions. The balance of
the loan will become due and payable if the COO resigns or is terminated
for cause. If the Company terminates the COO without cause, he will be
entitled to receive severance equal to one year's salary. As of December
31, 1997, the Company paid $67,400 towards the COO's temporary living
expenses and advanced $175,000 under this agreement, all of which is
outstanding as of December 31, 1997. The note bore interest at a rate of
approximately 5.85% during 1997, and is included in notes receivable from
related parties at December 31, 1997.
In January 1995, the Company entered into an Independent Consulting
Agreement with Mark J. Tomei (the "Consultant Agreement"). The Consultant
Agreement has a term of five years and provides for compensation to Mr.
Tomei in an amount of $145,000 per year. The Consultant Agreement may be
terminated by the Company with or without cause with ten day's notice. If
the Company terminates the Consultant Agreement, Mr. Tomei is entitled to
severance compensation in the amount of twice his annual compensation. In
November 1997, the Company accepted Mark J. Tomei's resignation as the
Chief Financial Officer of the Company. Mr. Tomei remains a director of
and a consultant to the Company (note 17).
(16) LITIGATION
The Company and five of its past or present 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 director and former
officer, are defendants in Katz and Degulis; and Christopher Henney, a
former director, is a defendant in Katz. The Company was previously named
as a defendant in In re Blech but was dismissed by the Court on June 6,
1996.
(Continued)
F-26
<PAGE> 64
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(16) LITIGATION, CONTINUED
All three cases are brought on behalf of classes of persons purchasing
common shares of the Company prior to September 21, 1994, and assert
claims arising out to the Company's Initial Public Offering and subsequent
trading of those shares. The suits allege violations of Sections 11 and 12
of the Securities Act of 1933 and Sections 10(b) and 20 of the Securities
and 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 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 maintains officers and directors liability insurance under
policies providing aggregate coverage totaling $3 million, which cover (i)
the Company for amounts spent indemnifying directors and officers or (ii)
directors and officers directly if the Company fails to indemnify them.
The policies do not provide coverage to the Company itself with respect to
its own defense costs and liability. The Company and its insurance
carriers are currently involved in disputes relating to the deductibles
and exclusions under the policies. Whether or to what extent insurance
covers any settlement or judgment in the above litigation will depend on
the outcome of the disputes. 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.
As a result, the Company cannot predict, at this time, the amount of
insurance reimbursement that will be obtained. For the years December 31,
1997, 1996 and 1995, the Company incurred expenses of approximately
$140,000, $111,000 and $39,000, 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
(Continued)
F-27
<PAGE> 65
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(16) LITIGATION, CONTINUED
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 financial impact 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. An adverse judgment or
settlement could have a material adverse effect on the Company.
(17) SUBSEQUENT EVENTS
In January 1998, the Company sold an additional 229,123 shares of the
Company's common stock at a price of $1.75 per share and completed its
December 1997 Private Placement for a total of 5,714,286 shares of Common
Stock aggregating a total of $10 million in gross proceeds and
approximately $9.4 million in net proceeds. In connection with the shares
sold in January 1998, the Company is obligated to issue an additional
3,653 shares for a total of 91,106 shares of the Company's common stock
and warrants to purchase an additional 22,912 shares for a total of
571,428 shares of the Company's Common Stock to the placement agents as
selling commission for the December 1997 Private Placement (note 7). The
warrants are exercisable at $2 per share. In January 1998, the Company
filed a registration statement on Form S-3 covering resale of the
6,401,568 shares of the common stock issued or issuable in connection with
the December 1997 Private Placement and other transactions.
In February 1998, the Company appointed Kirk Raab to the Board of
Directors of the Company and also entered into a three year consulting
agreement (Consulting Agreement) with him. Under the Consulting Agreement,
Mr. Raab received an option 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 grant. Options to purchase 50,000 shares of
the Company's common stock vested immediately upon signing the contract
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. The fair value of these 250,000
options, using the Black Scholes model, is estimated at approximately
$565,000. Based on the three year term of the consulting agreement and the
vesting schedule of the options, the Company expects to recognize
consulting expense of approximately $245,000, $151,000, $151,000 and
$18,000 in the years ending December 31, 1998, 1999, 2000 and 2001,
respectively.
In February 1998, the Company raised $1,000,000 through a private
placement offering and sale of 571,428 shares of the Company's common
stock at a price of $1.75 per share to a related party.
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
3,049,850.
(Continued)
F-28
<PAGE> 66
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(17) SUBSEQUENT EVENTS, CONTINUED
In February 1998, the Board of Directors approved a proposal to terminate
the Company's Independent Consulting agreement with Mark Tomei and settle
the severance of approximately $290,000 due to him upon termination of
the agreement in cash or by issuance of the common stock of the Company
or both (note 15).
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.
F-29
<PAGE> 67
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Richmond, State of California, on this
27th day of April, 1998.
LXR BIOTECHNOLOGY INC.
By: /s/ SHELLI GEER
-------------------------------------
Shelli Geer, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ G. Kirk Raab Chief Executive Officer and April 27, 1998
- ----------------------------------- Chairman of the Board
G. Kirk Raab (Principal Executive Officer)
/s/ L. David Tomei Executive Vice President, Chief April 27, 1998
- ----------------------------------- Scientific Officer and Director
L. David Tomei
/s/ Shelli Geer Chief Financial Officer, April 27, 1998
- ----------------------------------- (Principal Accounting and Financial
Shelli Geer Officer)
* Director April 27, 1998
- -----------------------------------
Eugene Eidenberg
* Director April 27, 1998
- -----------------------------------
Neil Flanzraich
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
* Director April 27, 1998
- -----------------------------------
Brian D. Brookover
* Director April 27, 1998
- -----------------------------------
Kenneth R. McGuire
* Director April 27, 1998
- -----------------------------------
William R. Hambrecht
* /s/ SHELLI GEER
---------------------------------
Shelli Geer
Attorney-in-Fact
</TABLE>
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
--------- ------------------------------------------------------------------ -------------
<S> <C>
3.01 Company's Certificate of Incorporation. (Incorporated by reference
to Exhibit Number 3.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
3.02 Company's Bylaws. (Incorporated by reference to Exhibit Number
3.02 to the Company's Registration Statement on Form S-1 (File No.
33-72814) declared effective by the Securities and Exchange
Commission on May 6, 1994 (the "Form S-1"))
3.03 Amendment to the Company's Certificate of Incorporation.
(Incorporated by reference to Exhibit Number 3.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
4.01 Form of Specimen Certificate for Company's Common Stock.
(Incorporated by reference to Exhibit Number 4.01 to the Form S-1)
*10.01 1993 Stock Option Plan, as amended to date, and related Stock
Option Agreement and Exercise Agreement. (Incorporated by
reference to Exhibit Number 10.01 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 and 1996
respectively)
*10.02 1993 Directors' Stock Option Plan and related Stock Option
Agreement and Exercise Agreement. (Incorporated by reference to
Exhibit Number 10.02 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
10.03 Sublease for Building C of Marina Bay Business Park, 1401 Marina
Way South, Richmond, California 94804 dated August 19, 1993
between the Company and Quick Response Services, Inc.
(Incorporated by reference to Exhibit Number 10.03 to the Form S-1)
10.04 Owner Consent and Agreement among the Company, Schooner Drive
Associates and Quick Response Services, Inc. (Incorporated by
reference to Exhibit Number 10.04 to the Form S-1)
*10.05 Form of Indemnification Agreement entered or to be entered into
between the Company and each of the Company's officers and
directors. (Incorporated by reference to Exhibit Number 10.05 to
the Form S-1)
*10.06 Form of Employment and Proprietary Information Agreement as
entered into between the Company and each of L. Scott Minick, Mark
J. Tomei, Philip J. Barr, Ph.D., and L. David Tomei, Ph.D.
(Incorporated by reference to Exhibit Number 10.06 to the Form S-1)
10.07 Master Lease Agreement dated May 26, 1993 and Equipment Financing
Agreement dated May 26, 1993, both between the Company and Lease
Management Services, Inc., and related documents. (Incorporated by
reference to Exhibit Number 10.08 to the Form S-1)
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
--------- ------------------------------------------------------------------ -------------
<S> <C>
10.08 Series A Preferred Stock Purchase Agreement dated February 19,
1993 between the Company and certain of its stockholders, as
amended. (Incorporated by reference to Exhibit Number 10.09 to the
Form S-1)
10.09 Investors Rights Agreement dated February 19, 1993 between the
Company and certain of its stockholders, as amended. (Incorporated
by reference to Exhibit Number 10.10 to Amendment No. 1 to the
Form S-1 filed with the Securities and Exchange Commission on
December 22, 1993)
10.10 Letter agreement dated January 20, 1993 between the Company and
D. Blech & Company, Incorporated (the "Underwriter") regarding the
Company's retention of the Underwriter as a consultant.
(Incorporated by reference to Exhibit Number 10.11 to the Form
S-1)
10.11 Letter agreement dated January 22, 1993 and letter agreement dated
May 20, 1993, between the Company and David Blech, regarding (i)
the sale of equity securities to designees of David Blech, (ii)
composition of the Company's Board of Directors and (iii) future
financing of the Registrant. (Incorporated by reference to Exhibit
Number 10.12 to the Form S-1)
10.12 License Agreement dated August 16, 1991, and amended May 18, 1993
and November 29, 1993, among Optical Analytic, Inc., The Ohio
State Research Foundation and The Ohio State University, and
related documents. (Incorporated by reference to Exhibit Number
10.14 to the Form S-1)
**10.13 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.15 to the Form S-1)
**10.14 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.16 to the Form S-1)
**10.15 Licensing Agreement dated June 15, 1993 between the Company and
Dana-Farber Cancer Institute. (Incorporated by reference to
Exhibit Number 10.17 to the Form S-1)
**10.16 Research Support Agreement dated November 1, 1993 between the
Company and Dana Farber Cancer Institute. (Incorporated by
reference to Exhibit Number 10.18 to the Form S-1)
**10.17 Licensing Agreement dated June 21, 1994 between the Company and
UAB Research Foundation. (Incorporated by reference to Exhibit
Number 10.17 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994)
10.18 Agreement for Purchase and Sale of Shares dated November 29, 1993
among the Company and William K. Root, F. David Resch and James M.
McCormick. (Incorporated by reference to Exhibit Number 10.20 to
the Form S-1)
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
--------- ------------------------------------------------------------------ -------------
<S> <C>
10.19 Agreement for Purchase and Sale of Shares dated November 29, 1993
between the Company and L. David Tomei. (Incorporated by reference
to Exhibit Number 10.21 to the Form S-1)
10.20 Agreement for Purchase and Sale of Shares dated December 7, 1993
between the Company and Gregory J. Bergman. (Incorporated by
reference to Exhibit Number 10.22 to the Form S-1)
10.21 Agreement Between Owner and Design/Builder dated September 15,
1993 between the Company and Devcon Inc. (Incorporated by
reference to Exhibit Number 10.23 to the Form S-1)
10.22 Form of Warrant Agreement among the Company and the Underwriter.
(Incorporated by reference to Exhibit Number 10.24 to the Form
S-1)
10.23 Form of Indemnity Agreement among the Company, Shoenberg, Hieber
Inc. and the Underwriter. (Incorporated by reference to Exhibit
Number 10.29 to Amendment No. 5 to the Form S-1)
10.24 Warrant Agreement between the Company and Dana Farber Cancer
Institute. (Incorporated by reference to Exhibit Number 10.32 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994)
10.25 Sales Agency Agreement dated December 31, 1995 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
Number 1.02 to the Company's Current Report on Form 8-K dated
January 9, 1996 (the "January 1996 Form 8-K"))
10.26 Share Purchase Warrant of the Company. (Incorporated by reference
to Exhibit Number 4.02 to the January 1996 Form 8-K)
10.27 Registration Rights Agreement dated January 9, 1996. (Incorporated
by reference to Exhibit Number 4.03 to the January 1996 Form 8-K)
10.28 Registration Rights Agreement dated January 9, 1996 between the
Company and Biotechnology Investment Group L.L.C. (Incorporated by
reference to Exhibit Number 10.28 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995)
10.29 First Amendment to Sublease for Building C of Marina Bay Business
Park, 1401 Marina Way South, Richmond, California 94804 dated
August 5, 1996 between the Company and Marina Westshore Partners.
(Incorporated by reference to Exhibit Number 10.29 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996 (the "September 1996 Form 10-QSB"))
10.30 Patent and Technology Transfer and Stock Purchase Agreement dated
as of August 8, 1996 among the Company, Geoffrey M. Collins and
Winston M. Wicomb. (Incorporated by reference to Exhibit Number
10.30 to the September 1996 Form 10-QSB)
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
--------- ------------------------------------------------------------------ -------------
<S> <C>
10.31 Amendment effective as of July 10, 1996 to the License Agreement
among Optical Analytic, Inc., The Ohio State Research Foundation
and The Ohio State University. (Incorporated by reference to
Exhibit Number 10.31 to the September 1996 Form 10-QSB)
10.32 Amendment effective as of August 27, 1996 to the License Agreement
among Optical Analytic Inc., The Ohio State Research Foundation
and The Ohio State University. (Incorporated by reference to
Exhibit Number 10.32 to the September 1996 Form 10-QSB)
**10.33 License Agreement among the Company, on behalf of itself and
Optical Analytic, Inc., its wholly owned subsidiary, and The
Perkin-Elmer Corporation, dated as of August 29, 1996.
(Incorporated by reference to Exhibit Number 10.33 to the
September 1996 Form 10-QSB)
*10.34 President and Chief Operating Officer Letter Agreement dated
September 24, 1996. (Incorporated by reference to Exhibit Number
10.34 to the September 1996 Form 10-QSB)
10.35 Sales Agency Agreement dated December 11, 1996 between the Company
and Sunrise Securities Corp. (Incorporated by reference to Exhibit
No. 1.03 to the Company's Current Report on Form 8-K dated
January 31, 1997 (the "January 1997 Form 8-K"))
10.36 Form of Share Purchase Warrant of the Company (Incorporated by
reference to Exhibit No. 4.04 to the January 1997 Form 8-K)
10.37 Form of Registration Rights Agreement dated December 11, 1996.
(Incorporated by reference to Exhibit No. 4.05 to the January 1997
Form 8-K)
10.37 Form of Registration Rights Agreement dated December 12, 1996.
(Incorporated by reference to Exhibit No. 4.06 to the January 1997
Form 8-K)
10.38 Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation, dated May 13, 1997
(Incorporated by reference to Exhibit 10.38 to Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997 (the
"June 1997 Form 10-QSB))
10.39 Stock Subscription Warrant between the Company and Meier Mitchell
and Company, LLC, dated May 13, 1997 (Incorporated by reference to
Exhibit 10.39 to the June 1997 Form 10-QSB)
10.40 Stock Subscription Warrant between the Company and Transamerica
Business Credit Corporation, dated May 13, 1997 (Incorporated by
reference to Exhibit 10.40 to the June 1997 Form 10-QSB)
**10.41 Research and Development Agreement between the Company and Oxford
Asymmetry Limited, dated April 18, 1997 (Incorporated by reference
to Exhibit 10.41 to the June 1997 Form 10-QSB)
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE PAGE NO.
--------- ------------------------------------------------------------------ -------------
<S> <C>
**10.42 Clinical Service Agreement between the Company and Innovex, Inc.,
dated June 6, 1997 (Incorporated by reference to Exhibit 10.42 to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997 (the "September 1997 Form 10-QSB"))
10.43 Subscription Agreement dated December 12, 1997 between the Company
and Grace Brothers Limited. (Incorporated by reference to Exhibit
No. 4 to the Company's Current Report on Form 8-K dated
December 12, 1997.)
10.44 Amendment No. 1 dated December 23, 1997 to the Subscription
Agreement dated December 12, 1997 between the Company and Grace
Brothers Limited. (Incorporated by reference to Exhibit No. 10.1
to the Company Current Report on Form 8-K dated December 23,
1997.)
10.45 Form of Subscription Agreement. (Incorporated by reference to
Exhibit No. 10.2 to the Company's Current Report on Form 8-K
dated December 23, 1997.)
10.46 Amendment No. 2 dated December 31, 1997 to the Subscription
Agreement dated December 12, 1997 between the Company and Grace
Brothers Limited. (Incorporated by reference to Exhibit No. 10.1
to the Company's Current Report on Form 8-K dated December 31,
1997).
10.47 Consulting Agreement dated February 13, 1998 between the Company
and G. Kirk Raab.
11.01 Statement regarding computation of net loss per share.
21.01 Subsidiaries of the Company. (Incorporated by reference to Exhibit
Number 21.01 to the Form S-1)
23.01 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27.01 Financial Data Schedule
</TABLE>
- -----------
* Represents a management contract or compensatory plan or arrangement.
** Confidential treatment has been granted with respect to certain portions
of this document.
<PAGE> 1
EXHIBIT 10.47
LXR Biotechnology Inc.
CONSULTING AGREEMENT
This agreement is made and entered into this _____ day of _____________, 1998
(the "Effective Date") by and between LXR Biotechnology Inc., a Delaware
corporation having its principal place of business at 1401 Marina Way South,
Richmond, California 94804 (the "Company") and G. Kirk Raab, residing at 999
Mountain Home Road, Woodside, California 94062 ("Consultant").
AGREEMENT
In consideration of the mutual covenants set forth below, the parties hereby
agree as follows:
1. Engagement of Services.
Consultant, pursuant to the provisions of this Agreement, is hereby retained by
the Company to perform services for the Company, including working closely with
the CEO and other key management to provide guidance with respect to potential
strategic transactions, partnering arrangements and public and investor
relations. Consultant shall perform services as requested by the Company from
time to time to the best of his ability, such services to be performed at such
place or places and at such times as shall be mutually agreeable to the Company
and Consultant.
It is understood that Consultant is presently affiliated with several other
companies in the field of biotechnology. Consultant represents and warrants that
the performance of his duties under this Agreement will not conflict with
Consultant's responsibilities and obligations to such other companies and as
such shall not create any rights of such other companies in any contributions
hereunder. The Consultant has informed the Company that certain restrictions
imposed on him by an existing agreement between Consultant and Genentech (the
"Genentech Agreement") affect his ability to be involved with a company
developing products which are in direct competition with certain of Genentech's
products or to actively recruit employees from Genentech. The Company agrees to
not actively recruit or hire any employees from Genentech prior to the earlier
of July 31, 2000 or the termination of this Agreement, unless Consultant is
first able to obtain release from Genentech to take such action. The Company
further agrees to permit Consultant to immediately terminate this Agreement to
dissociate himself from the Company where Consultant's affiliation with the
Company could give rise to a conflict with Consultant's obligations arising
from any of Consultant's previous affiliations. Consultant agrees to indemnify,
defend and hold
1
<PAGE> 2
CONFIDENTIAL
harmless the Company and its officers, directors, employees and agents from and
against losses, damages, costs, claims, suits and expenses, including the cost
and expense of handling and defending such claims and suits, that are
attributable to the breach by Consultant of his representations and warranties
set forth in this paragraph, provided that such losses, damages, costs, claims,
suits and expenses are not directly attributable to: a) the Company actively
recruiting or hiring any employees from Genentech prior to the earlier of July
31, 2000 or the termination of this Agreement; or b) an action the Company
takes despite adequate advanced written notice from Consultant that such action
will give rise to a conflict with Consultant's obligations under the Genentech
Agreement.
2. Compensation.
As full and complete compensation for Consultant's services and for the
discharge of all Consultant's obligations hereunder, the Company shall pay
Consultant according to the following schedule:
(a) As of the Effective Date of this Agreement, and subject to the approval of
its Board of Directors, the Company hereby grants to Consultant an option to
purchase shares of the common stock of the Company ("Common Stock"). The total
number of shares of Common Stock subject to this option is Two Hundred Fifty
Thousand (250,000) (the "Stock Option"). This Stock Option is subject to the
limitations contained in the 1993 Stock Option Plan, as amended, attached hereto
as Exhibit A, and hereby incorporated by reference. Unless sooner terminated as
set forth herein or in the 1993 Stock Option Plan, this Stock Option terminates
ten (10) years from the date the Stock Option is granted. This Stock Option
shall become exercisable on the following vesting schedule: 1/5th of the shares
of stock shall vest upon the close of business on the Effective Date of this
Agreement, and, thereafter, the remaining stock shall vest at a rate of 1/36th
per month for every month after the Vesting Start Date (the Effective Date of
this Agreement being considered for purposes of this agreement the "Vesting
Start Date"). Vesting will occur on the same day of the month as the day set
forth in the Vesting Start Date. The exercise price of this option shall be
equal to the fair market value of the Company's Common Stock on the Vesting
Start Date. The fair market value is deemed to be the closing price on the
American Stock Exchange as of the last trading day prior to the Vesting Start
Date (or the average closing price over the number of consecutive working days
preceding the option grant date as the Board of Directors of the Company shall
deem appropriate).
(b) If the Company enters into a cooperative development agreement or other
strategic alliance with a significant pharmaceutical or biotechnology company
relating to one or more of the Company's products, and the Board of Directors
determines that Consultant has contributed in a significant way either to
introducing the companies or to successfully negotiating and entering into such
agreement, then 100,000 shares of the Stock Option shall vest immediately upon
such determination by the Board of Directors.
2
<PAGE> 3
CONFIDENTIAL
(c) In addition to such compensation, the Company will reimburse the Consultant
for travel and other out-of-pocket costs reasonably incurred by him in the
course of performing services under this Agreement; provided however, that the
Company shall not be obligated hereunder unless (i) the Company has agreed in
advance to reimburse such costs, and (ii) consultant provides the company with
appropriate receipts or other relevant documentation for all such costs as part
of any submission by consultant for reimbursement.
3. Independent Contractor.
It is understood and agreed that in his role as a consultant to the company
Consultant is an independent contractor and not an employee of the Company.
Consultant has no authority to obligate the Company by contract or otherwise.
Consultant will not be eligible for any employee benefits, nor will the Company
make deductions from Consultant's fees for taxes. Taxes shall be the sole
responsibility of Consultant. This Paragraph 3 shall have no bearing on
Consultant's role as a member of the Board of Directors of the Company, which
shall be defined by prevailing law as it may be supplemented by additional
agreement between Consultant and the Company.
4. Proprietary Information Agreement.
Consultant is bound by a Proprietary Information Agreement entered into with the
Company applicable to Consultant's activities under this Agreement.
5. Term and Termination.
This Agreement commences on the Effective Date of this Agreement, and, unless
terminated earlier as provided herein, shall continue for a term of three years.
5.1 During the term of this Agreement, either party can terminate
this Agreement without cause upon the herein specified period
of notice. The Company can termination this Agreement on six
(6) months written notice. Consultant can terminate this
Agreement on three (3) months written notice.
5.2 Upon termination of this Agreement by either party according
to paragraph 5.1, vesting of the Stock Option will terminate
and Consultant shall have the right to exercise his option to
the extent his right to exercise such option has accrued and
had not previously been exercised as of the date of such
termination.
6. Assignment.
3
<PAGE> 4
CONFIDENTIAL
The rights and liabilities of the parties hereto shall bind and insure to the
benefit of their respective successors, heirs, executors and administrators, as
the case may be; provided that, as the Company has specifically contracted for
Consultant's services, Consultant may not assign or delegate Consultant's
obligations under this Agreement either in whole or in part without prior
written consent of the Company.
7. Governing Law; Severability.
This agreement shall be governed by the laws of the State of California. If any
provision of this Agreement is found by a court of competent jurisdiction to be
severed and the remainder of this Agreement shall continue in full force and
effect.
8. Complete Understanding; Modification
This agreement, and all other documents mentioned herein, constitute the final,
exclusive and complete understanding and agreement of the parties hereto and
supersede all prior understandings and agreements. Any waiver, modification or
amendment of any provision of this Agreement shall be effective only if in
writing and signed by the parties hereto.
9. Notices.
Any notices required or permitted hereunder shall be given to the appropriate
party at the address specified below or at such other address as the party shall
specify in writing. Such notice shall be deemed given upon personal delivery to
the appropriate address or sent by certified or registered mail, three days
after the date of mailing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
LXR Biotechnology Inc. CONSULTANT:
1401 Marina Way South
Richmond, CA 94804
By:_____________________________ ____________________________
L. David Tomei G. Kirk Raab
Chairman and CEO
4
<PAGE> 1
EXHIBIT 11.01
LXR BIOTECHNOLOGY INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss $ (9,270,287) $ (7,622,999) $ (6,315,947)
============ ============ ============
Weighted average number of
shares outstanding:
Common stock 22,020,391 15,762,729 7,513,541
Common stock to be issued 157,600 52,766 --
------------ ------------ ------------
22,177,991 15,815,495 7,513,541
============ ============ ============
Net loss per share $ (.42) $ (.48) $ (.84)
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
LXR Biotechnology Inc.:
We consent to incorporation by reference in the registration statement (No.
33-92488) on Form S-8 of LXR Biotechnology Inc. of our report dated February
13, 1998, relating to the consolidated balance sheets of LXR Biotechnology Inc.
and subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1997, and for the
period from April 20, 1992 (date of incorporation) through December 31, 1997,
which report appears in the December 31, 1997, annual report on Form 10-KSB/A of
LXR Biotechnology Inc.
Our report dated February 13, 1998, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations that
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result form the outcome of that uncertainty.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10KSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,536,687
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,787,619
<PP&E> 3,517,092
<DEPRECIATION> 2,031,245
<TOTAL-ASSETS> 13,575,099
<CURRENT-LIABILITIES> 1,946,519
<BONDS> 0
0
0
<COMMON> 2,719
<OTHER-SE> 11,216,154
<TOTAL-LIABILITY-AND-EQUITY> 13,575,099
<SALES> 0
<TOTAL-REVENUES> 859,013
<CGS> 0
<TOTAL-COSTS> 10,489,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,632
<INCOME-PRETAX> (9,268,687)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,270,287)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
