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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0282856
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
1401 MARINA WAY SOUTH 94804
RICHMOND, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'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
------------------- -------------------
Common Stock, $0.0001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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-K or any
amendment to this Form 10-K. [ ]
As of February 24, 1999, there were outstanding 28,510,323 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, 1999) was approximately $18,180,276. This
excludes 10,330,047 shares of common stock held by directors, officers and
stockholders whose ownership exceeded five percent of the shares outstanding at
February 24, 1999. 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 10, 1999, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1998.
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LXR BIOTECHNOLOGY INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 1998
TABLE OF CONTENTS
<TABLE>
PART I
<S> <C> <C>
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... 19
Item 6 Selected Financial Data..................................................... 20
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk.................. 28
Item 8 Financial Statements........................................................ 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 29
PART III
Item 10 Directors and Executive Officers............................................ 29
Item 11 Executive Compensation...................................................... 30
Item 12 Security Ownership of Certain Beneficial Owners and Management.............. 30
Item 13 Certain Relationships and Related Transactions.............................. 30
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 31
Financial Statements.................................................................... F-1
</TABLE>
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Except for historical information, this Annual Report contains
forward-looking statements. These forward-looking statements may be affected by
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in any of these forward-looking statements.
These risks and uncertainties are difficult to predict and many are beyond our
control, including without limitation, developing new technologies, product
development plans, market projections, our early stage of development, product
efficacy and safety, corporate partnering, timing of filings with the United
States Food and Drug Administration ("FDA"), progress of clinical trials, FDA
approval of clinical trials, sufficiency of cash resources and overall resource
allocation and ability to raise additional funding. We expect our existing
capital resources to be sufficient to fund our operations until the middle of
the third quarter of 1999. Therefore, the inability to obtain additional
financial resources could lead to suspension of our operation and the inability
to further develop our technology. Words such as "believe," "expects," "likely,"
"predict," "could," "might," "may" "potentially," 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 Item 7
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part II below and elsewhere in this Annual Report and
in other periodic reports and registration statements filed with the Securities
and Exchange Commission ("SEC").
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
LXR Biotechnology Inc. (a development stage company) was incorporated in
Delaware in April 1992. When referring to the "Company," "LXR," "we," "us," or
"our" throughout this Annual Report, we mean LXR Biotechnology Inc. and its
wholly-owned subsidiary, Optical Analytic, Inc. ("OAI"), which we acquired in
December 1993. Our principal executive offices are located at 1401 Marina Way
South, Richmond, California 94804. Our telephone number is (510) 412-9100 and
our facsimile number is (510) 412-9109.
LXR is a biopharmaceutical company engaged in the research and
development of therapeutics to treat diseases caused by or associated with
apoptosis. Apoptosis is a form of programmed cell death that occurs as part of
the natural development and maintenance of healthy tissues and organs. The field
of apoptosis is relatively new and received little attention before 1993. Since
that time, apoptosis has received growing attention and acceptance in the fields
of basic biological sciences, medicine and biotechnology. We believe several of
our principal scientists have been in the forefront of the discovery,
understanding and acceptance of apoptosis as a biological phenomenon. We also
believe our scientists have had a significant role in developing new and
promising therapeutics for controlling apoptosis.
In 1998, we implemented a strategic plan to direct our resources
primarily toward developing Elirex(TM) and finding a corporate partner for the
further development and commercialization of CP-Cardiosol(TM) and
HK-Cardiosol(TM). We are also allocating limited resources for the further
development of SARPs and Lexirin(TM), while focusing less on Bak,
Fas((DELTA))(TM) and Urine DNA Analysis. In addition, we decided in 1998, not to
continue with the Scanning Laser Digital Imaging Technology ("SLDI") and have
recently decided to discontinue the Maspin project as well.
Although we plan to seek corporate partners for all our ongoing research
projects at some point, one of our immediate priorities is to find a corporate
partner for CP-Cardiosol(TM) and HK-Cardiosol(TM). In late 1997, we received
notice from the Food and Drug Administration ("FDA") that our Investigational
Device Exemption application ("IDE") for HK-Cardiosol(TM) as a heart
preservation solution was approved. In March 1998, we filed an Investigational
New Drug application ("IND") with the FDA to begin clinical studies of
CP-Cardiosol(TM) for
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use in cardioplegia (heart bypass surgery), and in April 1998 we received a
request from the FDA for additional preclinical studies. We plan to complete and
analyze all requested studies within the second quarter of 1999, after which
time we plan to file an amended IND.
Based on encouraging preliminary animal data, we have decided to focus
our resources primarily on Elirex(TM), which is a compound that potentially
reduces heart tissue damagE following a heart attack. Our current plan is to
conduct additional animal studies to test this compound. Depending on the
outcome of these studies, we will consider a further strategy for developing
Elirex(TM) that may include seeking a corporate partner or waitinG until we have
results from early phase clinical trials.
We currently are conducting limited research on SARPs (Secreted
Apoptosis Regulatory Proteins), primarily through research conducted by outside
scientists. Although we are not funding many of these research projects, we have
rights to the results. We believe these proteins have potential applications for
a variety of diseases, including cancer, diabetes, stroke and heart attack.
We also are actively seeking a collaborative partner in the medical
foods industry for the use of Lexirin(TM) as an anti-apoptotic ingredient to
protect against gastrointestinaL disorders. Several medical foods and
nutriceutical companies have expressed an interest in Lexirin(TM) and
discussions are ongoing with these companies.
SCIENTIFIC BACKGROUND
APOPTOSIS
There are two known forms of cell death: necrosis and apoptosis.
Necrosis is the traumatic destruction of cells caused by catastrophic damage and
disruption of cell membranes. The necrosis process releases degradative
products, active enzymes and intact DNA (which is then broken into random
fragments) directly into the surrounding tissue, causing severe inflammation and
extensive damage in those tissues.
In contrast, apoptosis under normal conditions is an orderly and
predictable deconstruction of cells. During apoptosis, the cells 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.
The scientific community only recently recognized the clinical
importance of apoptosis. Apoptosis is now understood to be the principal form of
cell death in healthy individuals and is recognized as being critical to the
normal functioning of the immune system as well as other processes, such as the
production of new red blood cells. It occurs throughout the various 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. Genetic control of cell division, differentiation and
death dictates the ultimate shape of the body. As part of this process,
apoptosis regulates the size of cell populations and replaces older, presumably
defective cells, with healthy new cells.
Under normal conditions, cells undergo apoptosis in response to signals
sent by other cells indicating a need for cell replacement or from internal cell
signals indicating that the cell would be damaging to the organism. Certain
diseases are caused when the wrong signal is sent. These wrong signals may cause
either sudden, inappropriate cell death resulting in severe tissue damage or
delayed cell death resulting in overpopulation of certain cell types or the
continued existence of damaged or defective cells. Examples of disease
conditions associated with inappropriate cell death are heart tissue damage
following a heart attack and, brain damage associated with stroke. The growth of
cancer cells is an example of a disease associated with reduced apoptosis.
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Because apoptosis can be temporarily controlled using drugs specifically
designed to stimulate or suppress the process, we believe it is possible to
treat diseases with biopharmaceutical therapies that similarly suppress or
stimulate apoptosis. The use of these biopharmaceutical therapies may lead to
reduced tissue damage and improved recovery from a number of these diseases.
Global Ischemia
Global ischemia is caused by a lack of oxygen, glucose and other
nutrients normally provided by fresh blood flow. For example, in organ
transplantation, an organ such as a heart or liver is suddenly deprived of fresh
blood flow when removed from the donor and becomes ischemic. Transplantation
procedures are especially difficult because the heart or liver cannot survive
severe global ischemia for more than about four to six hours. Transplantation
failure is generally believed to be caused by inappropriate apoptosis in the
organ - a failure that may be preventable by anti-apoptotic agents.
We believe the current organ preservation solutions used to keep the
donor organ healthy before transplantation can be significantly improved,
especially for hearts, where donor organs must usually be transplanted within
four hours of organ harvest. Our lead candidate for organ preservation is
HK-Cardiosol(TM).
Global ischemia also occurs during cardioplegia, when a heart is stopped
from beating just before open heart surgery. Cardioplegic solutions are
routinely infused during heart surgery to protect the heart from ischemia.
Although several cardioplegic solutions currently are available, we believe a
need exists for improved solutions that overcome the limitations of all these
available solutions. Our research and development of CP-Cardiosol(TM) as a
cardioplegic solution is focused on this market. For a more detailed discussion
of our plans, see "Research and Development Programs - Cardiosol" below.
Regional Ischemia
We believe that localized (i.e., regional) organ and tissue ischemia,
associated for example with heart attacks and strokes, also results in premature
apoptosis and leads to severe organ damage similar to global ischemia.
Heart Attack. Heart attack is a leading cause of death and disability in
the United States. According to the American Heart Association, about 1.5
million people suffer heart attacks each year in the United States and about
one-third of those who have their first heart attack do not survive. Heart
attack is caused by blocked coronary arteries resulting in significantly reduced
blood flow to small regions of the heart muscle. This blockage can lead to
ischemia and eventually to permanent damage known as myocardial infarction.
Significant advances have been made in the treatment of heart attack using
advanced surgical techniques to replace or clear damaged coronary arteries and
with new drugs that dissolve blood clots and re-open arteries. However, there
are no comparable advances in preventing permanent damage to the heart muscle
that occurs in the first few hours or days following a heart attack. Preventing
this tissue damage is important in reducing death and disability caused by heart
attack.
Ischemia and subsequent reperfusion (the return of blood flow) can lead
to severe damage and death of heart muscle cells, resulting in the death of up
to one-third of all patients who experience their first heart attack. Until
recently, this cell death was assumed to be caused by the oxygen starvation
itself or the introduction of toxic oxygen radicals during reperfusion. However,
our results from in vitro and animal studies suggest the primary reason heart
muscle cells die in connection with a heart attack is because the heart cells
receive a signal to die by apoptosis, and not because they can no longer survive
oxygen starvation, or because they are irreparably damaged by toxic oxygen
radicals. Several other investigators have now confirmed our findings in
published reports. Not only does oxygen starvation appear to signal cells to die
following a blockage of coronary artery
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blood flow, but the return of blood flow after removing the blockage into the
affected region of the heart also causes oxidative damage to proteins and DNA
resulting in cell death. We believe the cell death caused by reperfusion is also
a form of apoptosis, in which the heart cells 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, apoptosis inhibitors may minimize heart
muscle damage and eventual formation of non-functional scar tissue following a
heart attack. We believe a "window of opportunity" exists for therapeutic
intervention from between one to six hours following a heart attack to minimize
this damage and allow normal functioning. This window creates an opportunity for
the development of a therapy that blocks apoptosis and could be combined with
existing treatments designed to restore blood flow. We further believe
minimizing heart damage could markedly improve the recovery and quality of life
in patients who would otherwise be physically impaired. One of our leading
compounds, Elirex(TM), may be useful for reducing heart tissue damage following
heart attack. For a more detailed discussion of this compound, see "Research and
Development Programs - Elirex(TM)" below.
Stroke. Stroke is one of the top three causes of death in the United
States, as well 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 a stroke with severe, permanent disability or lesser, but
significant, degrees of impairment.
Stroke results in damage to a part of the brain caused by disruption of
its blood supply (ischemic stroke) or leakage of blood outside of vessel walls
(hemorrhagic stroke). According to published reports, apoptosis plays an
important role in determining the final size of damaged brain tissue or infarct.
The FDA recently approved the use of new "clot buster" drugs (i.e.,
thrombolytics) to treat stroke by dissolving blood clots in the brain. However,
physicians have expressed substantial concern that such drugs may cause harm to
some patients if the drugs are either administered more than a few hours after
the stroke or are administered to patients who have experienced a hemorrhagic
stroke rather than an ischemic one. We believe therapeutics, such as Elirex(TM),
that temporarily block apoptosis may have a beneficial effect after stroke,
either in combination with thrombolytics or alone in cases when a physician may
not know when the stroke occurred or whether it was an ischemic or hemorrhagic
stroke. Elirex(TM) may also reduce tissue damage caused by stroke. For a further
discussion of Elirex(TM), see "Research and Development Programs - Elirex(TM)"
below.
RESEARCH AND DEVELOPMENT PROGRAMS
Elirex(TM)
In 1998, we gave Elirex(TM) our highest priority, and we are allocating
a substantial portion of our resources toward its development. Elirex(TM) is a
project involving compounds that prevent or reduce tissue damage following heart
attack and stroke. The original formulation of Elirex(TM), known as Active
Phospholipid Mixture or APM, gave encouraging results in four different animal
models of myocardial infarction. In dog, pig and rat studies, Elirex(TM) was
given after the ischemic period and prior to the onset of reperfusion.
This original formulation demonstrated:
- A 53% reduction in infarct size, improved heart muscle function
and reduced inflammation (neutrophil accumulation) in a canine
treatment model at the Cleveland Clinic;
- A 42% reduction in infarct size in a rat model at the University
of California San Francisco;
- A 36% reduction in infarct size in a rabbit model performed at
Good Samaritan Hospital in Los Angeles;
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- A 63% reduction in infarct size in a Yucatan mini-pig model
performed at Emory University; and
- Reduction of inflammation and protection of heart function in
animal studies.
Because the original formulation contained a complex mixture of
phospholipids, we identified the individual components of the mixture that were
believed to be responsible for the anti-apoptotic activity. We collaborated with
Oxford Diversity, a division of Oxford Asymmetry International in England, to
identify the components that have greater anti-apoptotic activities than the
original formulation. During the collaboration, we identified LXR 1035. This
compound is an analog of lysophosphatidic acid (LPA) and one of several LPA
analogs that we designed and tested during the course of this project. LXR 1035
has demonstrated anti-apoptotic effects in cell cultures that are 10-100 times
more potent than the original formulation. A joint patent application was filed
in March 1998 covering the analogs jointly discovered during the collaboration
with Oxford Diversity.
We now are conducting collaborations with several outside groups to
study the efficacy of LXR 1035 and other Elirex(TM) compounds in four different
animal models of heart attack. The studies also include a number of confirmatory
animal models of ischemia/reperfusion to compare the original APM formulation
and the new LXR 1035 compound. Our collaborators include highly regarded
academic groups at the University of Michigan Ann Arbor, the University of
California San Francisco, and selected contract research organizations. The use
of multiple animal species and modes of drug delivery should allow us to
optimize formulation and dosing regimens. We have also established a
cardiovascular advisory board to help us supervise these studies and design
future clinical trials.
We plan to continue testing LXR 1035 simultaneously in other disease
models where ischemia and reperfusion contribute to the pathology of the
disease. Our plan is to have these studies conducted by outside collaborators.
After completing these studies, we plan to re-evaluate our development
strategy for Elirex(TM), which may include seeking a corporate partner. However,
we may not seek a corporate partner until clinical trials have been initiated.
Cardiosol(TM)
In 1996, we obtained patent and other rights to an experimental organ
preservation solution known as Cardiosol. Before we acquired the technology, the
original Cardiosol formulation was compared to a modified St. Thomas solution, a
standard organ preservation solution, in a small physician-sponsored study in 20
human transplant patients at the California Pacific Medical Center between 1988
and 1991. The results of this study showed that the composition of the
preservation solution was a significant factor in the patients' rejection
profile and patient survival. Chronic rejection per patient was about 50% less
in the Cardiosol group. Survival was highest in the Cardiosol patient group:
100% survival at seven years compared to 82% at one year and 68% at five years
for the control group. In later physician-sponsored studies performed at the
California Pacific Medical Center, 95 patients were treated with the original
Cardiosol formulation 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 an
operation.
Since obtaining the rights to Cardiosol, we developed an improved
Cardiosol formulation with increased stability and a potentially longer shelf
life desirable for quality control in manufacturing and marketing. In 1997, we
filed for patent protection on the closely related formulations of
CP-Cardiosol(TM) for use in cardioplegia and HK-Cardiosol(TM) for use in heart
transplantation.
During the third quarter of 1997, we engaged an independent consultant
to perform a marketing analysis for Cardiosol. Based on the results of this
analysis, we believe a significant unmet need exists for a tissue
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preservation solution. According to the American Heart Association,
approximately 750,000 open heart surgeries are performed each year in the United
States and Europe, with a growth rate expected to parallel that of the aging
population at about 2% annually. Although a number of cardioplegia solutions are
currently available for open heart surgery, we believe there is no clear
difference among them. When used as a cardioplegic solution, we believe
CP-Cardiosol(TM) has the following potential benefits:
- decreased damage to heart muscle;
- decreased need for mechanical assistance and drug support; and
- decreased patient length of hospital stay after surgery.
The marketing analysis done by our consultant suggests that, because of
its advantages over other available solutions, CP-Cardiosol(TM) has the
potential of capturing a large share of the market for cardioplegic solutions
and could be sold at a premium price, resulting in potential revenues between
$200 and $500 million. We cannot guarantee that CP-Cardiosol(TM) will be
successfully developed or commercialized or that it will gain a meaningful
market share or result in any revenues even if it is commercialized. Although
heart transplantation is a small, but high profile market (about 3,600
procedures in the United States and Europe annually), we believe our increased
visibility in the area of heart transplantation would help us in the marketing
of CP-Cardiosol(TM) for cardioplegia.
In late 1997, the FDA approved our IDE for HK-Cardiosol(TM) as a heart
preservation solution. We can proceed with clinical trials in up to eight
medical centers and 150 heart transplant patients at any time. Although we
initially expected to start clinical trials of HK-Cardiosol(TM) during 1998, we
have since decided to seek a corporate partner to help fund these trials before
proceeding.
In March 1998, we filed an IND with the FDA to begin a clinical trial of
CP-Cardiosol(TM) for use in cardioplegia. In April 1998, we received a request
from the FDA for additional preclinical studies. The studies included a 28-day
toxicology period, which was the first of its kind for cardioplegic or
preservation solution. We have completed this preclinical study and are
analyzing the data in response to the FDA's request. We expect to file an
amended IND in the second quarter of 1999. We cannot guarantee that the FDA will
accept the results of these studies or approve an amended IND for
CP-Cardiosol(TM).
Because our immediate priority is the Elirex(TM) project, we are
actively seeking a corporate partner to develop and commercialize
HK-Cardiosol(TM) and CP-Cardiosol(TM) and we are engaged in discussions with
companies interested in the Cardiosol programs. We cannot guarantee that we will
identify a corporate partner to develop and/or commercialize these products. In
addition, we cannot predict when or if the clinical trials of HK-Cardiosol(TM)
or CP-Cardiosol(TM) will begin or whether they will be successful, or if they
are, that either will be successfully commercialized.
SARP (Secreted Apoptosis Regulatory Protein)
SARPs belong to a family of proteins expressed by genes discovered by
our scientists. SARP proteins appear to control the process of genetically
programmed cell death (apoptosis). Evidence suggests that the family members
stimulate opposite effects on cells. For example, SARP-1 is a potent suppressor
of apoptosis, whereas SARP-2 increases apoptosis. These proteins are secreted
from cells and are, therefore, capable of influencing apoptosis regulation in a
large number of cells in a tumor or tissue.
SARPs are secreted out of cells, unlike most known apoptosis-related
proteins, which only control apoptosis within the cell producing them. As
secreted proteins, SARPs resemble other commercialized biotechnology compounds
such as interferon or G-CSF and, therefore, have the potential to be developed
as
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therapeutic compounds. In addition, the expression of SARPs is tissue specific,
which gives them the potential to target specific disease sites.
We currently are conducting limited research on SARPs. Rhone-Poulenc
Rorer Gencell is conducting a feasibility study of SARP-1 in a model of
myocardial ischemia and heart failure under an agreement that gives them the
right of first negotiation for a license to develop SARP-1 in cardiovascular
disease. We are also collaborating with scientists from other institutions,
including:
- The Jackson Institute, to analyze the potential involvement of
SARPs in diabetes;
- Iowa State University, to demonstrate the ability of SARP-2 to
sensitize tumor cells to the human immune system; and
- Other collaborators, to demonstrate the ability of SARP-1 to
protect transplanted cells against a recipient's immune system.
All of this research is early stage. Therefore, we cannot guarantee that
the results of these studies will lead to the further development and
commercialization of SARPs nor can we predict whether we will secure a corporate
partner to develop and commercialize SARPs.
Lexirin(TM)
We formulated a purified, orally administrable version of an
anti-apoptotic mixture extracted from soy protein (named "Lexirin") for
gastrointestinal disorders. We completed Phase I clinical trials for
Lexirin(TM), which indicated it was well tolerated in HIV-infected patients
without adverse reactions. We have issued patents covering Lexirin(TM) and have
recently filed a patent application for improved methods for producing
Lexirin(TM).
Due to its low manufacturing cost, positive scientific data and
successful Phase I clinical trial for safety, Lexirin(TM) has attracted the
attention of certain nutriceutical and medical food companies. We currently are
engaged in discussions with these companies to develop Lexirin(TM) as an
ingredient in dietary supplements, nutriceuticals or medical foods. Although we
believe these discussions might generate royalties for LXR, we cannot guarantee
that a corporate partner will be secured or that Lexirin will be successfully
commercialized.
Urine DNA Analysis
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. Our scientists developed surrogate apoptosis marker ("SAM")
assays to measure the level of apoptosis by-products in blood or excreted in
urine. As a result of this technology, we discovered a technique called "Urine
DNA Analysis" that can be used to determine the sex of an unborn fetus as early
as six weeks after conception. We believe this technology may also have
applications in cancer detection and diagnosis. We are actively seeking
collaborative partners to fund further development and commercialization of this
technology.
LPA Receptor Assay
We have developed an assay to identify compounds that affect the
activity of an LPA receptor within the EDG family. We believe this assay may
have licensing potential for companies interested in identifying inhibitors or
stimulators of an EDG receptor. The use of this assay for commercial purposes
may be affected by an issued U.S. patent to another group.
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Bak
Our scientists discovered and isolated a gene, designated Bak (for Bcl-2
homologous antagonist/killer), whose protein product is present in heart, muscle
and brain tissues. Bak may facilitate apoptosis of muscle and nerve cells
following ischemia or exposure to toxic drugs. Our scientists also discovered a
second gene, designated BBP (for Bak binding protein), whose protein product
associates with the Bak protein and through which Bak may exert its apoptotic
effect.
In September 1998, the Company entered into an Evaluation and Exclusive
Option Agreement with Introgen Therapeutics, Inc. ("Introgen")for the Bak gene.
This agreement enables Introgen to assess the anti-tumor activity of the Bak
gene and also gives Introgen an option to enter into an exclusive license
agreement for the Bak gene. In February 1999, we were informed that this
agreement was assigned by Introgen to an affiliated company, Gendux Inc.
Fas(DELTA)TM
Fas is an apoptosis-signaling glycoprotein receptor on the surface of
many cell types, including lymphocytes and cardiac cells. Our scientists
identified a splice variant of the Fas gene that encodes a soluble form of Fas,
termed Fas((DELTA))TM, which appears in vitro to correlate with abnormally high
levels of apoptosis in lymphocytes from HIV-infected AIDS patients. In February
1998, we 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 to develop potential
cancer gene therapy products for a variety of indications.
Apoptosis Drug Screening
Our proprietary apoptosis screening assay ("ASA") measures the ability
of potential therapeutic agents to suppress or stimulate apoptosis. Unlike other
such assays, ASA uses an untransformed, non-tumorigenic cell strain that retains
many normal behavior characteristics, including the regulation of apoptotic
death as well as the control of normal proliferation and differentiation. We
have used ASA to screen for drug candidates and have identified Lexirin(TM) and
Elirex(TM) compounds using this assay.
Scanning Laser Digital Imaging Technology ("SLDI")
The recognition that apoptosis can be controlled created an increased
need for a fast computer-based robotic instrument that can identify apoptosis
modulators. The SLDI technology uses high speed three-dimensional scanning laser
beams that cover the entire surface of a test material, while 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. We believe this
technology could enable researchers to perform remote, non-contact measurements
of proteins in millions of individual cells within a few seconds that we believe
is not possible with any current instrument.
We obtained exclusive license rights to this technology from Ohio State
University when we acquired OAI in December 1993. In August 1996, we entered
into an exclusive license agreement with Perkin-Elmer to further develop the
SLDI technology. To date, we have received license fee payments of $600,000 and
equipment with a fair market value of approximately $400,000 from Perkin-Elmer.
In July 1998, Perkin-Elmer terminated the license agreement. As a result of this
termination, we terminated the license agreement with Ohio State
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University in August 1998. See "License and Collaborative Research -
Perkin-Elmer and Ohio State University" below. We do not intend to allocate
resources for the further development of SLDI.
Maspin
Our metastatic cancer program has focused on a protein known as Maspin
(mammary serine proteinase inhibitor), which we have designated as LXR023. We
are the exclusive licensee for therapeutics and co-exclusive licensee for use in
clinical diagnostics of the issued patent owned by the Dana-Farber Cancer
Institute ("Dana-Farber"). The co-exclusive license for clinical diagnostics
relates to the use of Maspin as a metastasis prognostic marker in breast cancer
and other types of highly metastatic tumors such as prostate cancer.
In July 1996, we entered into a Letter of Intent with Boehringer
Mannheim under which we conducted certain preclinical efficacy and toxicity
studies of Maspin. The Letter of Intent was amended in November 1996 and July
1997, and in October 1998, Boehringer Mannheim informed us of its intent to
terminate the collaboration as a result of reassessing its research program
after being acquired by Hoffman La Roche. We are negotiating the terms of the
final settlement under the Letter of Intent. See also "Licenses and
Collaborative Research - Boehringer Mannheim" below.
RESEARCH AND DEVELOPMENT
Research and development expenses amounted to $6,132,258, $7,154,621 and
$5,519,317 for the years ended December 31, 1998, 1997 and 1996, respectively.
Research and development expenses were borne by third parties in the amounts of
$114,038, $159,013 and $114,396 for the years ended December 31, 1998, 1997 and
1996, respectively.
LICENSES AND COLLABORATIVE RESEARCH
We have entered into license agreements and collaborative research
arrangements with a number of universities, research institutions and
collaborative partners. These agreements include, but are not limited to, the
following:
Dana-Farber Cancer Institute
In 1993, we entered into a license agreement with Dana-Farber Cancer
Institute, a teaching affiliate of the Harvard Medical School, for the exclusive
license to make, use and sell Maspin for therapeutic purposes and a co-exclusive
license for certain diagnostic purposes. The license relates to one issued U.S.
patent and three pending U.S. patent applications filed as a result of the work
by the late Dr. Ruth Sager. As partial consideration for the license, we agreed
to pay approximately $10,000 and granted Dana-Farber Cancer Institute a warrant
to purchase 5,000 shares of LXR Common Stock at any time before May 6, 1999 at
an exercise price of $3.15 per share.
Boehringer Mannheim
In July 1996, we entered into a Letter of Intent with Boehringer
Mannheim ("Boehringer") to jointly evaluate the development of Maspin for the
treatment of cancer. In January 1997, Boehringer purchased 37,500 shares of LXR
common stock at a price of $4.00 per share pursuant to the Letter of Intent. In
November 1996, we
11
<PAGE> 12
agreed to amend the Letter of Intent to specify certain research milestones.
This amendment was later supplemented by another agreement under which
Boehringer agreed to purchase additional shares of LXR common stock if it
terminated the collaboration under certain conditions. In October 1998, we
received a notice of termination from Boehringer as a result of reassessing its
research program after being acquired by Hoffman La Roche. We are negotiating
the terms of the final settlement under the original Letter of Intent and
amendments.
Ohio State University
Through the acquisition of 100% of the outstanding stock of OAI in
December 1993, we acquired exclusive license rights in three issued patents and
know-how relating to SLDI developed in the laboratory of Dr. L. David Tomei
while he was a research scientist at Ohio State University. We began paying
minimum royalties to Ohio State University in 1996. In August 1998, we
terminated the license agreement, and as a result, do not owe any future royalty
payments to Ohio State University.
Perkin-Elmer
In August 1996, we entered into an agreement with Perkin-Elmer under
which we granted Perkin-Elmer an exclusive worldwide license to the SLDI
technology for life sciences and clinical diagnostic applications. Under the
agreement, we received license fee payments of $600,000 and equipment with a
fair market value of approximately $400,000 from Perkin-Elmer. In July 1998,
Perkin-Elmer terminated the license agreement. As a result of this termination,
we will not receive any future payments from Perkin-Elmer relating to SLDI.
University of Tennessee
In January 1997, we 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 LPA
receptors. We 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. At the same time, we entered into a license agreement with the
University of Tennessee under which we were granted an exclusive, worldwide
license, subject to certain exceptions, to patent rights and technology relating
to LPA receptors. As consideration for the license agreement, we agreed to pay
an initial license fee, annual license fee and royalties. The University of
Tennessee waived the license fee in consideration for our research support under
the research agreement.
In September 1998, we gave notice to terminate the license and research
agreements with the University of Tennessee. We may be obligated to pay $70,000
for the third year of research under the agreement.
Oxford Asymmetry, Limited
In April 1997, we entered into a research collaboration agreement with
Oxford Asymmetry, Limited ("Oxford") to discover small molecule drug candidates
that target specific apoptosis pathways. We paid $650,000 for research services
and are obligated to make certain future royalty payments on certain products we
may develop and commercialize as a result of the collaboration.
Innovex, Inc.
In July 1997, we entered into a clinical services agreement with
Innovex, Inc. ("Innovex") to begin clinical studies of HK-Cardiosol(TM) for
heart transplantation. In June 1998, we terminated the clinical service
agreement and, as of September 30, 1998, we had no further commitments under
this agreement.
12
<PAGE> 13
Introgen Therapeutics, Inc.
In September 1998, we entered into an Evaluation and Exclusive Option
Agreement with Introgen Therapeutics, Inc. Under the agreement, Introgen agreed
to assess the anti-tumor activity of the Bak gene and received an option to
enter into an exclusive license for the Bak gene. We received a non-refundable
upfront payment of $50,000, which was included in revenues for the year ended
December 31, 1998. Certain other milestone payments and royalties will be due to
LXR as the technology progresses through development. In February 1999, we
received a notice from Introgen that it has assigned the agreement to an
affiliate, Gendux Inc.
Rhone-Poulenc Rorer Gencell
In January 1999, we entered into an agreement with Rhone-Poulenc Rorer
Gencell that gives it the right of first negotiation for a license to develop
and commercialize SARP-1 in cardiovascular disease. Rhone-Poulenc Rorer Gencell
currently is conducting a feasibility study of SARP-1 in a model of myocardial
ischemia.
PATENTS AND PROPRIETARY TECHNOLOGY
As of December 31, 1998, we held 14 issued United States patents and 27
pending U.S. and PCT patent applications, including the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Project Issued Pending
--------------------------------------------------------------------
<S> <C> <C>
Cardiosol 1 2
--------------------------------------------------------------------
Elirex 6
--------------------------------------------------------------------
Lexirin 6 1
--------------------------------------------------------------------
SARPs 2
--------------------------------------------------------------------
Bak 1 6
--------------------------------------------------------------------
Others 6 10
--------------------------------------------------------------------
</TABLE>
We also have filed multiple corresponding foreign patent applications.
We also have exclusive licenses or options under several issued patents
and pending patent applications with a number of universities and research
institutions. Under the license agreements, we are required to pay royalties, if
any, on sales of licensed products and in certain agreements to make milestone
payments. In some instances, we are also responsible for the cost of filing,
prosecuting and maintaining the licensed patents and applications. We may seek
licenses from universities and other research institutions when applicable
technology complements our research programs.
We also intend to seek patent protection for our potential products and
key technologies for controlling apoptosis and the treatment of other disorders.
In addition, we intend to seek patent protection or rely on trade secrets to
protect certain other enabling technologies that will be used in discovering and
evaluating new drugs that could become marketable products. Finally, we intend
to seek patent protection in areas that complement our existing portfolio or
that may provide future licensing opportunities.
To the extent economically feasible, our policy is to seek protection of
our proprietary position by filing patent applications worldwide that are
important to our business. Proprietary rights relating to our planned and
potential products will be protected from unauthorized use by third parties only
to the extent they are covered by valid and enforceable patents or are
effectively maintained as trade secrets. Therefore, our success will depend in
part on our ability to do the following:
13
<PAGE> 14
- obtain patent protection for our technology;
- obtain appropriate licenses from others;
- protect trade secrets;
- operate without infringing on the proprietary rights of others;
and
- prevent others from infringing on our proprietary rights.
The actual protection we obtain for our products and technologies may be
inadequate. We may not choose to prosecute all of the pending patent
applications to issuance or maintain all of the issued patents that we now own
or license. Some of our patent applications do not cover compositions of matter,
but rather only claim methods of using specific compounds for certain disease
indications, or methods of identifying compositions of matter. Consequently, the
scope of potential patent protection for these applications may not be as broad
as it is for applications containing composition of matter claims.
The patent position of biotechnology companies is highly uncertain,
involves complex legal and factual questions, and is the subject of frequent
litigation. There is also a substantial backlog of biotechnology-related patent
applications at the United States Patent and Trademark Office ("USPTO"). In
addition, neither the USPTO nor courts have set forth a consistent policy
regarding the breadth of allowed claims or the degree of protection given under
biotechnology patents. Moreover, the USPTO may request data demonstrating
efficacy of potential therapeutic agents. The need to provide this data, if
required, could delay or adversely affect our ability to obtain patent
protection for our potential products. Therefore, we cannot guarantee that any
of our pending patent applications will result in an issued patent. Even if a
patent issues, competitors may successfully challenge our patents, obtain
patents that may harm our ability to conduct business or design around our
patents.
A substantial number of patents have been applied for and issued to
other pharmaceutical, biotechnology and biopharmaceutical companies. We have
conducted limited database searches for the existence of patents owned by others
and to determine the state of the art of our inventions, but these searches may
not be comprehensive or conclusive. We are aware of at least one case where
other parties have published papers and/or filed applications on subjects
similar to certain claims in our pending patent applications. In April 1995, we
and two other scientific groups simultaneously published (in separate articles)
the sequence of the Bak gene. Furthermore, International Publication No. WO
96/35951, filed by a third party, claims a Bak protein similar to a protein
claimed in one of our pending patent applications. We believe our priority date
is prior to the date the other parties made their discoveries, but we cannot
guarantee our ability to claim priority over these other groups. In addition,
others may independently develop pharmaceutical products identical or similar to
our potential products or that can compete effectively with our potential
products.
Interference proceedings in the USPTO may be necessary to determine the
priority of inventions between our patents and applications and those of others.
We have received a notice from the USPTO that we may be involved in an
interference proceeding involving a Bak-related application.
In addition, litigation may be necessary to:
- defend against a claim of infringement;
- enforce our issued patents;
- protect our trade secrets or know-how; or
- determine the scope and validity of the proprietary rights of
others.
Litigation or interference proceedings could result in substantial costs and
significantly divert our efforts.
14
<PAGE> 15
Because of the time delay in obtaining an issued patent and the secrecy
of patent applications in the United States, we do not know and may be unable to
determine if patent applications belonging to others exist that have priority
over our applications or issued patents. Furthermore, some or all of each patent
application could be rejected if patents or other prior art exist or if patent
applications exist that have priority over any of our patent applications. In
addition, other companies or institutions may have issued patents or filed
patent applications for products or processes similar in function or effect to
ours. These third parties may also have products covered by issued patents or
pending applications that treat conditions that may be treated by our potential
products. We cannot predict whether these patents, patent applications or other
proprietary rights will lead to the development of products competitive with our
potential products. If competitive products are developed and successfully
commercialized, they could harm our ability to commercialize our potential
products. If the USPTO determines that any third-party issued patent or pending
patent application claims the same subject matter as any of our pending patent
applications or issued patent, and such third-party patent or application was
invented first, we could be prevented from obtaining patent protection
altogether or the scope of our patent protection could be significantly
narrowed.
Due to the extensive time required for the development, testing and
regulatory review of potential products, it is possible that one or more of our
products will be introduced into the market after the relevant patent has
expired or at a time when only a short period of unexpired time remains on the
relevant patent. This would reduce the advantages of a patent and harm our
ability to protect future product development.
Our competitive position also is dependent on unpatented trade secrets.
We are developing a substantial database of information concerning our research
and development. Trade secrets, however, are difficult to protect. Consequently,
we cannot guarantee that:
- others will not independently develop substantially equivalent
proprietary information and techniques;
- others will not gain access to our trade secrets;
- our trade secrets will not be disclosed without our approval; or
- we can effectively protect our rights to unpatented trade
secrets.
We require our employees, consultants, advisors and, when appropriate,
Scientific Advisory Board members to execute proprietary information and
invention assignment agreements at the beginning of their employment or
consulting relationship. These agreements require all confidential information
developed or made known to the individual during the course of the relationship
must be kept confidential except in specified circumstances. These agreements
may not provide meaningful protection for our trade secrets or other
confidential information in the event of unauthorized use or disclosure.
Invention assignment agreements executed by Scientific Advisory Board members,
consultants and advisors may conflict with, or be subject to, the rights of
others with whom these individuals may have employment or consulting
relationships.
We may be required to obtain licenses to patents or proprietary rights
of others. As the biotechnology and pharmaceutical industry expands and more
patents are issued, the risk increases that our potential products may give rise
to claims that they infringe the patents of others. Any licenses required under
these circumstances may not be available on acceptable terms or at all. If we do
not obtain required licenses, we could encounter delays in product market
introductions while we attempt to design around such patents to avoid
infringement or we may be unable to develop, manufacture or sell products
requiring these licenses. Litigation may be necessary to defend against claims
of infringement or to determine the scope and validity of the proprietary rights
of others. Litigation could result in substantial costs and significant
diversion of our efforts and our efforts may not be successful.
15
<PAGE> 16
GOVERNMENT REGULATION AND PRODUCT APPROVAL
The FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose significant testing, labeling, distribution and
marketing of therapeutics and diagnostics before approving a product. Such
requirements are satisfied through extensive preclinical studies and clinical
human trials, premarket approval or other clearance requirements, manufacturing
standards, sampling activities and other costly and time consuming procedures
and requirements. Satisfaction of these requirements typically takes several
years (five to ten years or more for a drug or biological product) and varies
substantially depending on the type, complexity and technological novelty of the
product.
In late 1997, we received notice from the FDA that our IDE for the use
of HK-Cardiosol(TM) as a heart preservation solution had been approved. Although
we can proceeD with clinical trials in up to eight medical centers and 150 heart
transplant patients at any time, we have decided to seek a corporate partner to
help fund these trials. We cannot predict when or if the clinical trials will
begin or whether a corporate partner will be secured on terms acceptable to us.
In March 1998, we filed an IND with the FDA to begin clinical studies of
CP-Cardiosol(TM) for use in cardioplegia. In April 1998, we received a request
from the FDA foR additional preclinical studies. We have completed all requested
studies and plan to file an amended IND in the second quarter of 1999. We cannot
guarantee that the FDA will accept the results of these studies or approve an
amended IND for CP-Cardiosol(TM).
We have relied on scientific, technical commercial and other data
supplied or disclosed by others, including our academic collaborators, in
obtaining the FDA's approval to begin clinical trials of HK-Cardiosol(TM). We
also relied on this data to support the IND to enter clinical trials for
CP-Cardiosol(TM), and we may rely on this data to support the amended IND as
well as other INDs to enter human clinical trials for our other potential
products. We have no reason to believe this information contains errors or
omissions, but it may. Errors or omissions in data we have relied upon could
reduce the likelihood of our obtaining FDA approval for or achieving commercial
viability of our potential products. In addition, clinical data from studies
performed by others may not be available to us or may not be acceptable to the
FDA or other regulatory agencies in support of our applications for market
approval. The FDA or other regulatory agencies may require us to collect
additional data and conduct controlled clinical studies before accepting any
applications for market approval. The potential effects of complying with
government regulation include the following:
- delaying the marketing of a product for a considerable period of
time;
- preventing the marketing of a product; and
- imposing costly requests for additional animal, human or other
data.
The FDA or other regulatory agencies may not grant us approval to market or
clinically test any products we develop on a timely basis or at all. Even if
approval is granted, it may later be suspended or withdrawn. Any delay in
obtaining or failure to obtain required approvals would harm our ability to
market our potential products, secure a corporate partner and earn product
revenues or royalties. Additional governmental regulations may be enacted that
could further delay marketing approval of our potential products. We 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
our targeted areas, including the treatment of cardioplegia, heart attack,
stroke and metastatic cancers. Additionally, as the importance of apoptosis
becomes increasingly recognized, increasing
16
<PAGE> 17
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 we
do. In addition, some of them have considerably more experience in preclinical
testing, human clinical trials and other regulatory approval procedures than we
do. Moreover, certain academic institutions, governmental agencies and other
research organizations are conducting research in areas in which we are working.
These institutions are becoming increasingly aware of the commercial value of
their technology and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for their technology. These
institutions also may market competitive commercial products on their own or
through joint ventures and compete with us in recruiting highly qualified
scientific personnel.
We are 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. Our competitors may succeed in developing
technologies or products that are more effective than our products. Rapid
technological change or developments by others may make our technology or
proposed products obsolete or noncompetitive.
HUMAN RESOURCES
As of December 31, 1998, we employed a total of 27 employees,
including 25 full-time employees, eight of whom hold Ph.D. degrees. Most of
these employees are actively engaged in research and development activities. Our
employees are not represented by any collective bargaining unit, and we have
never experienced a work stoppage. We believe that our employee relations are
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently leases approximately 32,800 square feet of
laboratory and office space in Richmond, California under a lease terminating
June 30, 2010. The Company believes that these facilities should be sufficient
to meet its needs through 2000.
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, a 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,
James D. Coombs and Mark J. Tomei, all former directors and former officers, 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 principal 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
17
<PAGE> 18
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.
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.
On January 25, 1999, we announced that an agreement in principle was
reached to settle these cases. The agreement in principle provides for dismissal
of all claims against LXR and the five former LXR officers and directors named
as defendants. The settlement amount is $500,000, of which we will pay
approximately $155,000 and our insurer will pay approximately $345,000. The
agreement to settle is subject to several steps, including the following:
- negotiation and execution of a detailed stipulation of
settlement between the parties;
- submission of the stipulation of settlement to the court;
- notice to class members of the settlement terms;
- a fairness hearing; and
- final approval of the settlement by the court.
Discussions are ongoing with plaintiffs' counsel as to the schedule for
completing these steps. However, we expect the final dismissal to take place no
sooner than the end of April 1999. We cannot, however, predict exactly when a
final dismissal will be obtained. By entering into a settlement agreement, we do
not acknowledge any wrongdoing by LXR or our former officers and directors.
In addition, we have negotiated a settlement agreement and mutual
release with Shoenberg Hieber, Inc. ("Shoenberg"), which was named as a
defendant in Degulis v. LXR Biotechnology, Inc. Shoenberg acted as an
independent underwriter in the initial public offering and asserted claims for
indemnity against us under the underwriting agreement. We have agreed to settle
this claim for $12,500.
We incurred expenses of approximately $256,000 in 1998, $140,000 in 1997
and $111,000 in 1996, relating to this litigation. At December 31, 1998, we had
an accrual of $170,000 for payment of the proposed settlements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended December 31, 1998.
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<PAGE> 19
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 1997 and 1998. This information is
based on closing prices as reported by the American Stock Exchange.
<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>
<TABLE>
<CAPTION>
1998
---------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter $ 3.94 $ 1.94
Second Quarter $ 3.63 $ 1.94
Third Quarter $ 2.13 $ 1.06
Fourth Quarter $ 1.75 $ 0.88
</TABLE>
HOLDERS
As of February 24, 1999 there were approximately 282 stockholders of
record of the Company's common stock.
DIVIDENDS
The Company has neither declared nor paid cash dividends on its common
stock in the past. The Company intends to retain future earnings, if any, for
the development of its business and does not anticipate that it will declare or
pay cash dividends on its common stock in the foreseeable future.
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<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATE AND
NUMBER OF EMPLOYEES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Total revenue $ 164 $ 859 $ 414 $ -- $ --
Research and development
expenses $ 6,132 $ 7,155 $ 5,519 $ 4,304 $ 4,255
Net loss $ (9,800) $ (9,270) $ (7,623) $ (6,316) $ (5,914)
Net loss per share
(basic & diluted) $ (0.34) $ (0.42) $ (0.48) $ (0.84) $ (0.94)
Weighted average shares
outstanding (basic & diluted) 28,422 22,178 15,815 7,514 6,267
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents,
and investments $ 3,496 $ 11,537 $ 10,217 $ 68 $ 5,049
Working capital $ 2,576 $ 9,841 $ 10,466 $ (1,524) $ 4,415
Total assets $ 4,919 $ 13,575 $ 12,419 $ 1,408 $ 6,841
Long-term obligations, excluding
current installments $ 193 $ 410 $ -- $ 184 $ 407
Accumulated deficit $(42,586) $(32,786) $(23,516) $(15,893) $ (9,577)
Total stockholders equity (deficit) $ 3,579 $ 11,219 $ 11,250 $ (585) $ 5,616
Number of employees 27 63 50 41 44
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenues
We had revenues of approximately $164,000 in 1998, compared to $859,000
in 1997 and $414,000 in 1996. Revenues in 1998 resulted from option fee
revenue earned under the Introgen Option Agreement and reimbursement of costs
incurred for Maspin studies under the Boehringer agreement. Revenues in 1997 and
1996 resulted primarily from license fee revenue earned under the Perkin-Elmer
License Agreement and other funded research. The decrease in revenues in 1998
was primarily due to the termination of the Perkin-Elmer License Agreement. The
increase in revenues in 1997 from 1996 resulted from an increase in license fee
revenue under the Perkin-Elmer Agreement from $300,000 in 1996 to $700,000 in
1997. We do not have any commercially available products, and we do not
anticipate generating any significant product revenues for at least the next
several years.
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<PAGE> 21
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. We incurred research and development expenses of
approximately $6,132,000 in 1998, $7,155,000 in 1997 and $5,519,000 in 1996. The
decrease in research and development expenses in 1998 from 1997 was primarily
due to a decrease in salaries and benefits resulting from the restructuring in
June 1998, a corresponding decrease in research supplies, a decrease in
collaboration costs as a result of the Oxford agreement ending in April 1998 and
a decrease in clinical trial costs as a result of delaying the Cardiosol
clinical trials. These decreases were partially offset by an increase in
preclinical animal costs as a result of the additional studies required to get
CP-Cardiosol off clinical hold. The increase in research and development costs
in 1997 from 1996 was primarily due to increased salaries and benefits 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 in 1997 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 1998 or 1997.
Our research and development spending can be expected to increase
substantially over the next several years to the extent we obtain the financial
resources necessary to expand our development efforts and undertake clinical
studies with respect to certain of our projects. This expansion of operations
will depend on our ability to obtain additional capital resources. Unless and
until such funds are received, research and development activities will be
limited by our available resources. See "Liquidity and Capital Resources" below.
General and Administrative Expenses
General and administrative expenses consist of salaries and related
benefits, legal expenses for litigation and general corporate matters,
depreciation of office furniture and equipment, facility costs, consulting fees
and other administrative expenses. We incurred general and administrative
expenses of approximately $4,160,000 in 1998, $3,335,000 in 1997 and $2,702,000
in 1996. The increase in general and administrative expenses from 1997 to 1998
resulted primarily from severance payments made to two former officers,
increased legal fees and expenses related to the proposed litigation settlement.
These increases were partially offset by decreases in investor relations costs,
consulting fees related to a marketing survey and expenses related to road-show
presentations. The increase in costs from 1996 to 1997 was primarily due to
increased personnel costs, increased legal costs related to litigation,
increased facilities costs due to a larger facility, increased travel costs and
increased investor relations expenses. General and administrative expenses can
be expected to increase further to support our expansion of research and
development activities. This increase will also depend on our ability to obtain
additional financial resources.
Interest Income and Expense
Interest income was approximately $407,000 in 1998, $401,000 in 1997 and
$244,000 in 1996. The increases in interest income were primarily due to
interest earned on a larger investment balance.
Interest expense was approximately $78,000 in 1998, $39,000 in 1997 and
$59,000 in 1996. Interest expense increased in 1998 as a result of a full year
of payments due under the equipment loan. Interest expense decreased in 1997
from 1996 due to the payoff of the capital lease obligation in 1996 partially
offset by the drawdowns under the equipment loan from May through December of
1997. We expect interest expenses in 1999 to decrease as a result of the paydown
of borrowings under the Company's equipment loan.
21
<PAGE> 22
Net Loss
We incurred net losses of approximately $9,800,000 in 1998, $9,270,000
in 1997 and $7,623,000 in 1996. As of December 31, 1998, we had an accumulated
deficit of approximately $42,586,000. We expect to continue to incur substantial
losses over the next several years to the extent we are able to obtain the
financial resources necessary to expand our research and development efforts and
continue to undertake preclinical and clinical studies.
YEAR 2000
We have completed our assessment of the impact of the "year 2000"
problem and believe our systems that are critical to our business operations
will be able to recognize a date using "00" as the year 2000. We have tested and
are currently in the process of upgrading, where necessary, our laboratory
instruments to address the year 2000 issue. We intend to complete upgrading all
of our current laboratory instruments by mid-1999.
In addition, we have asked our vendors that provide certain outside
services we rely upon, such as payroll, banking services and research
organizations, to determine their year 2000 readiness. While we believe these
service providers will be ready for the year 2000, failure of them to be ready
for the year 2000 could be disruptive to our business operations if their
systems are unavailable for an extended period of time. However, we believe our
business operations would not be materially adversely affected by the disruption
of such services. We continuously evaluate our vendors for year 2000 compliance.
We believe if our systems are not year 2000 compliant, our technical personnel
would be able to address and resolve any non-compliance before a material
adverse effect occurs on our business operations. Our key processes could be
manually performed for a sufficient period of time.
To date, we have not incurred substantial costs to address the year 2000
issue. We estimate additional costs, if any, for actions we take to address the
year 2000 problem would not be material. Despite our efforts to address the year
2000 impact on our systems and business operations, if the year 2000 problems
are more disruptive than we reasonably expect and our plans prove inadequate,
the year 2000 problem could result in a material disruption of our business or
it could have a material adverse effect on our business, financial condition or
results of operation.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for all
quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Application of SFAS 133 will have no impact on our consolidated financial
position or results of operations as currently reported.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, we funded our operations primarily through approximately
$10.4 million in net proceeds raised through the sale of 6,285,715 shares of our
Common Stock at a price of $1.75 per share in private placements in December
1997 and February 1998. (See Note 6 of Notes to Consolidated Financial
Statements). In addition, we received approximately $50,000 in option fees in
1998.
As of December 31, 1998, our sources of capital consisted of
approximately $3.5 million in cash and cash equivalents, approximately $116,000
in funded research receivable, interest from investments and $1.0 million in
gross proceeds from a private placement of common stock in March 1999.
22
<PAGE> 23
We do not have any committed sources of future equity or debt funding.
We believe our existing capital resources are only sufficient to fund our
operations into the middle of the third quarter of 1999. Unanticipated events
affecting our resources could result in us depleting our capital resources even
before that time. Accordingly, we will need to raise substantial additional
capital to fund our operations. Although we are currently exploring potential
alternatives to obtain the additional financial resources necessary to fund our
operations beyond the middle of the third quarter of 1999, additional funding
may not be available on favorable terms, or at all. If additional financial
resources are not obtained, we may have to suspend our operations and may not be
able to continue to develop our technology.
The report of our independent auditors on our 1998 Consolidated
Financial Statements states in part that we have suffered recurring losses and
have limited liquidity, both of which raise substantial doubt about our
ability to continue as a going concern.
The Company and five of our past or present directors and officers are
defendants in class action lawsuits. (See "Item 3 - Legal Proceedings".) We
maintain 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 we fail to indemnify them. The policies do not provide coverage to
the Company itself with respect to our own defense costs and liability. On
January 25, 1999, we announced that we reached an agreement in principle with
the plaintiffs' class action counsel to settle the above litigation against the
Company and the five former officers and directors. The agreement provides for
payment of $500,000, of which approximately $155,00 will be paid by us and
approximately $345,000 will be paid by our insurer. We incurred expenses of
approximately $256,000 in 1998, $140,000 in 1997, and $111,000 in 1996, relating
to this litigation.
The settlement agreement is subject to negotiation and execution of a
detailed stipulation of settlement between the parties, submission of the
stipulation of settlement to the court, provisions of notice to class members of
the settlement terms, a fairness hearing, and financial approval of the
settlement by the court. We cannot predict exactly how long these procedures
will take or when final dismissal will be obtained.
We also negotiated a settlement agreement and mutual release
with Shoenberg Hieber, Inc., which was named as a defendant in Degulis v. LXR
Biotechnology Inc. Shoenberg acted as an independent underwriter in the initial
public offering and asserted claims for indemnity against us under the
underwriting agreement. We have agreed to pay $12,500 to settle this
claim.
FACTORS AFFECTING FUTURE RESULTS
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
We will require substantial additional funds to continue our research
and development programs and preclinical and clinical testing of our potential
pharmaceutical products. We will also require substantial additional funds to
conduct marketing of any pharmaceutical products that may be developed. Our
capital requirements depend on numerous factors, including the following:
- the progress of 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;
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<PAGE> 24
- the cost of obtaining technological rights;
- competing technological and market developments;
- changes in our existing research relationships;
- our ability 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 us and certain of our
past and present directors and officers.
Based upon our current plans, we believe we have sufficient funds to
meet our operating expenses and capital requirements through the middle of the
third quarter of 1999. The factors identified above may result in the
expenditure of all available funds before then.
We intend to seek additional funding through public or private
financings or collaborative or other arrangements with corporate partners.
Additional financing may not be available from any of these sources, or may not
be available on favorable or acceptable terms.
Additional financings may result in substantial dilution to our security
holders. If we obtain funds by entering into arrangements with collaborative
partners or others, we may be required to relinquish rights to certain of our
technologies or potential products that we would not otherwise relinquish. If
adequate funds are not available, we may be required to delay, scale back or
eliminate the development of our potential products to an even greater extent
than we have done to date.
Our failure to obtain needed funds would have a material adverse effect
on our operations. This could result in the need to suspend our operations and
could prevent us from continuing to develop our technology.
Our independent auditors' report on our 1998 Consolidated Financial
Statements states in part that we have suffered recurring losses and have
limited liquidity, both of which raise substantial doubt about our ability to
continue as a going concern.
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
We are at an early stage of development. All of our potential
pharmaceutical and medical device products are currently in research and
development. No revenues from the sale of potential products have ever been
generated. Substantially all of our resources have been, and for the foreseeable
future will continue to be, dedicated to our research programs and the
development of potential pharmaceutical, medical device, and medical
food/nutriceutical products resulting from the research programs. We may be
unable to develop a commercial product from these projects.
All of our drug and medical device candidates are in preclinical
development, except for HK-Cardiosol(TM), which received approval to begin
clinical trials, and CP-Cardiosol(TM), which was placed on clinical trial hold
pending the outcome of additional preclinical studies.
We believe that the results attained to date in our preclinical studies
generally support further research and development of our potential products.
Results attained in preclinical studies, however, are not necessarily indicative
of results that will be obtained in human clinical testing. Additionally, we
have not previously met our forecasted schedule for introducing products into
clinical trials.
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<PAGE> 25
Assessments of market opportunities and priorities for allocating
available resources may affect development of our potential products.
The potential products we are developing will require significant
additional research and development and preclinical testing and will require
extensive clinical testing prior to submission of any regulatory application for
commercial use. Our potential pharmaceutical products are subject to the risks
of failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the following:
- our novel approach to diagnosis and therapy may not be
successful;
- any or all of our potential pharmaceutical products may be found
to be unsafe, ineffective or toxic, or otherwise fail to receive
necessary regulatory clearances;
- the products, if safe and effective, will be difficult to
manufacture on a large scale or uneconomical to market;
- proprietary rights of third parties could preclude us from
marketing products; or
- third parties could market superior or equivalent products.
As a result of the above risks:
- our research and development activities may not be successfully
completed;
- clinical trials may not be allowed by the FDA or other
regulatory authorities;
- clinical trials may not commence as planned;
- required U.S. or foreign regulatory approvals may not be
obtained on a timely basis, if at all; and
- products for which approval is obtained may not result in any
commercially viable products.
RELIANCE ON NOVEL SCIENTIFIC APPROACH
Our product development efforts are based on the novel scientific
approach of therapeutic apoptosis modulation, which is a process of regulating
genetically programmed cell death. This process has not been widely studied and
there is substantial risk that this approach will not be successful.
Moreover, we are applying this novel approach to discover new treatments
for a variety of diseases that are also the subject of research and development
efforts by other companies. Many of these other companies are much larger and
better funded than we are.
Biotechnology in general and apoptosis modulation in particular are
relatively new fields in which there is a potential for extensive technological
innovation in relatively short periods of time. Our competitors may succeed in
developing technologies or products that are more effective than ours. Rapid
technological change or developments by others may result in our technology or
proposed products becoming obsolete or noncompetitive.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
We have incurred significant operating losses since our inception in
1992. At December 31, 1998, we had an accumulated deficit of approximately $42.6
million. Our research, development, testing and regulatory compliance activities
and our projected general and administrative expenses are expected to result in
significant operating losses for at least the next several years.
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<PAGE> 26
Revenues, if any, that we may receive in the next few years will be
limited to payments from the following sources:
- our agreement with Introgen related to the Bak gene, provided
Introgen exercises its option to enter into a license agreement
with us;
- payments under research or product development relationships
that we may establish in the future;
- payments under license agreements that we may establish in the
future;
- sales of products that we may develop in the future; and
- interest payments.
We may not receive the above payments because we may not be able to (i)
establish any additional collaborative relationships, (ii) enter into any
license agreements, or (iii) develop or acquire any products in the future.
Our ability to achieve profitability also will depend upon the
following:
- our ability to successfully compete either alone or with others;
- development of our potential products;
- clinical trial results regulatory approvals; and
- our ability to manufacture and market our products or to enter
into license agreements on acceptable terms.
DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS
We are highly dependent on the principal members of our management and
scientific staff, including: G. Kirk Raab, Chairman of the Board of Directors;
and Paul J. Hastings, President and Chief Executive Officer. The departure of
one of these persons or any other members of our staff could have a material
adverse effect on operations.
We recently entered into employment agreements with Paul J. Hastings and
Mr. Raab. We also recently entered into a consulting agreement with L. David
Tomei. Any of these people, however, may terminate his relationship with the
Company at any time. Dr. Donald H. Picker, the Company's Chief Operating
Officer, recently resigned from the Company. The laws of the State of California
generally restrict or prohibit post-employment noncompetition covenants and,
therefore, none of our employees are subject to any restriction on competition
in the future. Any employees that leave the Company could organize competitive
businesses or accept employment with companies competitive with us.
We are dependent on collaborators at research institutions and our
advisors and consultants. Recruiting and retaining qualified personnel,
collaborators, advisors and consultants will be critical to our success. There
is intense competition for such qualified personnel, and we may not be able to
continue to attract and retain the personnel necessary for the development of
our business.
Our planned activities will require additional expertise in areas such
as preclinical testing, clinical trial management, regulatory affairs,
manufacturing and marketing. These activities will require additional expertise
by existing management personnel, the hiring of additional personnel, or the
hiring outside consultants. If we are unable to hire new qualified personnel or
otherwise develop such expertise, our operations could be harmed.
DEPENDENCE ON OTHERS; COLLABORATIONS
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<PAGE> 27
Our strategy for the research, development and commercialization of our
potential pharmaceutical products requires that we enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others, in addition to those already established. Our success may therefore be
dependent upon the subsequent success of outside parties in performing their
responsibilities.
For example, we entered into an Evaluation and Exclusive Option
Agreement with Introgen Therapeutics Inc., enabling Introgen to assess the
anti-tumor activity of the Bak gene. The agreement also grants Introgen an
option to enter into an exclusive license agreement with us related to the Bak
gene, however. Introgen is not obligated to enter into a license agreement with
us. Introgen subsequently assigned this agreement to an affiliate, Gendux Inc.
We may be unable to establish additional collaborative arrangements or
license agreements that we consider necessary or acceptable. Additionally, we
may be unable to develop and commercialize our potential products, and our
collaborative arrangements or license agreements may not be successful.
Some of our future collaborative arrangements may place responsibility
for preclinical testing and human clinical trials and for preparing and
submitting applications for regulatory approval for potential products on our
collaborative partner. Our business may be adversely affected if a collaborative
partner fails to develop or commercialize successfully any potential product to
which it has rights. Our collaborators may pursue alternative technologies or
develop products either on their own or in collaboration with others.
RISKS ASSOCIATED WITH LICENSES
We have licensed technologies developed by various research institutes
and universities. Pursuant to the terms of these agreements, we may be obligated
to make royalty payments on the sales, if any, of licensed products or milestone
payments. In some instances, we are responsible for the cost of filing and
prosecuting patent applications. Some of our license agreements also require
that we exercise diligence in bringing potential products to market. In the
event that we are unable to meet our obligations under the license agreements,
we could lose our rights to our technologies under the license agreements.
LIMITED MARKETING, SALES, CLINICAL TESTING OR REGULATORY COMPLIANCE ACTIVITIES
We have restricted our hiring to scientists and a small administrative
staff and have made only a small investment in clinical testing or regulatory
compliance resources. If we successfully develop any commercially marketable
pharmaceutical products, we may seek to enter joint venture, sublicense or other
marketing arrangements with parties that have an established marketing
capability. Alternatively, we may choose to pursue the commercialization of
products on our own. We be unable to enter into marketing arrangements on
acceptable terms, or at all.
We also may need to hire additional personnel skilled in the clinical
testing and regulatory compliance process and in marketing or product sales if
we develop pharmaceutical products with commercial potential that we decide to
commercialize without the help of others. We may be unable to hire these people.
MANUFACTURING LIMITATIONS
We currently do not have the capability to manufacture products under
the current Good Manufacturing Practices ("GMP") requirements prescribed by the
FDA. We will need this capability in order to independently manufacture,
package, label and distribute our potential pharmaceutical or other products.
Alternatively, we may seek arrangements with contract manufacturers or contract
packagers to do the following:
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<PAGE> 28
- supply sufficient quantities of products to conduct clinical
trials, and
- manufacture, packaging, labeling and distribution of finished
pharmaceutical products.
If we are unable to manufacture or contract for a sufficient supply of
potential pharmaceutical products on acceptable terms, our preclinical and human
clinical testing schedule may be delayed. A delay in the testing schedule would
result in the delay of submission of products for regulatory approval and
initiation of new development programs.
Delays or difficulties in establishing relationships with manufacturers
to produce, package, label and distribute our finished pharmaceutical or other
products could delay the market introduction and subsequent sales of those
products. In addition, contract manufacturers that we may use must adhere to GMP
required by the FDA.
We have entered into a manufacturing agreement with Chesapeake
Biological Laboratories, Inc. ("CBL") to manufacture HK-Cardiosol(TM) and
CP-Cardiosol(TM) for clinical trials. CBL may be unable to manufacture
sufficient quantities of HK-Cardiosol(TM) and CP-Cardiosol(TM).
California manufacturing companies are required to obtain a license from
the State of California to distribute any investigational products. This license
will be issued to us only if we are in compliance with the GMP regulations, as
determined by an inspection conducted by the State of California. If we are
unable to manufacture our potential products independently or to obtain or
retain third-party manufacturing on commercially acceptable terms, we may be
unable to commercialize our products as planned. Our potential dependence upon
third parties for the manufacture of our products could harm our profit margins
and our ability to develop and deliver products on a timely and competitive
basis.
We have no experience in the manufacture of pharmaceutical products or
medical devices in clinical quantities or for commercial purposes. If we decide
to manufacture products ourselves, the following would occur:
- we would be subject to the regulatory requirements described
above;
- we would be subject to similar risks regarding delays or
difficulties encountered in manufacturing those products; and
- we would require substantial additional capital.
Because of these risks, we may not be able to manufacture any products
successfully or in a cost effective manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. We do not have exposure to market risks
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<PAGE> 29
associated with changes in interest rates as we have no variable interest rate
debt outstanding. We do not believe we have any other material exposure to
market risks associated with interest rates.
ITEM 8. FINANCIAL STATEMENTS
The financial statements and supplementary data required by Item 8 are
set forth below on pages F-1 through F-29 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers of the Company
The names of the executive officers of the Company and certain
information about them as of March 15, 1999 are set forth below:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATION
- ------------------------- --- --------------------
<S> <C> <C>
Paul J. Hastings........................ 39 President and Chief Executive Officer
Samuil R. Umansky....................... 57 Chief Scientific Officer and Vice
President, Molecular Pharmacology
Patti M. Childs......................... 31 Director, Finance and Administration
and Corporate Secretary
</TABLE>
Paul J. Hastings was appointed President and Chief Executive Officer in
August 1998. Mr. Hastings was President of Genzyme Therapeutics Worldwide from
January 1997 to July 1998, responsible for Genzyme's largest and most profitable
division marketing enzyme replacement therapy for rare genetic diseases. Mr.
Hastings was President of Genzyme Therapeutics, Europe from January 1996 to
January 1997, Vice President, General Manager, Genzyme Therapeutics, Europe from
April 1995 to January 1996, and Vice President, Global Marketing, Genzyme
Therapeutics from August 1994 to April 1995. Prior to that, Mr. Hastings was
Vice President, Marketing and Sales, Vice President, General Manager, Synergen
Europe from 1991 to 1994, Director of Market Planning 1989 to 1991. Prior to
that, Mr. Hastings was Senior Product Manager at Hoffman La Roche from 1987 to
1989. Mr. Hastings holds a B.S. degree in Pharmacy from the University of Rhode
Island.
Samuil R. Umansky, 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 Infarction and discovered SARPS, a new family of secreted
proteins, involved in regulation of
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<PAGE> 30
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 D.Sc. degree 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.
Patti M. Childs, was appointed Director, Finance and Administration, and
Corporate Secretary in December 1998, and was Assistant Controller from January
1996 to December 1998. Prior to joining the Company, Ms. Childs was at KPMG Peat
Marwick LLP , from August 1989 to January 1996, most recently as an Audit
Manager. She received a B.S. degree in business administration from St. Mary's
College of California in Moraga and is a Certified Public Accountant in the
State of California.
Election of Directors
The section entitled "Proposal No. 1 - Election of Directors" appearing
in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders
sets forth certain information with respect to the directors of the Company and
is incorporated herein by reference.
Beneficial Ownership Compliance
The section entitled " Section 16(a) Beneficial Ownership Compliance"
appearing in the Company's Proxy Statement for the 1999 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 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Company's
Proxy Statement for the 1999 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 12. 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 1999 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders sets forth certain
information with respect to certain business relationships and transactions
between the Company and its directors, officers and principal stockholders and
is incorporated herein by reference.
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<PAGE> 31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) Financial Statements (see Item 8 and pages F-1 through F-29 of this Report)
<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>
(b) Financial Statement Schedules
All schedules are omitted as the required information is not
applicable or has been included in the consolidated financial
statements or the notes thereto.
(c) Exhibits.
<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-QSB 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-QSB for the quarter ended
June 30, 1996)
3.04 Certificate of Amendment of Restated Certificate of
Incorporation. (Incorporated by reference to Exhibit Number 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (the "September 1998 Form 10-Q"))
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, 1998 and
Exhibit Number 10.01 to the Company's Quarterly Report on Form
10-QSB for the quarter
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
ended June 30, 1997)
*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-QSB 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)
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
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
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)
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)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
10.28 Registration Rights Agreement dated January 9, 1996 between the
Company and Biotechnology Investment Group L.L.C. (Incorporated
by reference to Exhibit Number 10.28 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
10.29 First Amendment to Sublease for Building C of Marina Bay
Business Park, 1401 Marina Way South, Richmond, California 94804
dated August 5, 1996 between the Company and Marina Westshore
Partners. (Incorporated by reference to Exhibit Number 10.29 to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1996 (the "September 1996 Form 10-QSB"))
10.30 Patent and Technology Transfer and Stock Purchase Agreement
dated as of August 8, 1996 among the Company, Geoffrey M.
Collins and Winston M. Wicomb. (Incorporated by reference to
Exhibit Number 10.30 to the September 1996 Form 10-QSB)
10.31 Amendment effective as of July 10, 1996 to the License Agreement
among Optical Analytic, Inc., The Ohio State Research Foundation
and The Ohio State University. (Incorporated by reference to
Exhibit Number 10.31 to the September 1996 Form 10-QSB)
10.32 Amendment effective as of August 27, 1996 to the License
Agreement among Optical Analytic Inc., The Ohio State Research
Foundation and The Ohio State University. (Incorporated by
reference to Exhibit Number 10.32 to the September 1996 Form
10-QSB)
**10.33 License Agreement among the Company, on behalf of itself and
Optical Analytic, Inc., its wholly owned subsidiary, and The
Perkin-Elmer Corporation, dated as of August 29, 1996.
(Incorporated by reference to Exhibit Number 10.33 to the
September 1996 Form 10-QSB)
*10.34 President and Chief Operating Officer Letter Agreement dated
September 24, 1996. (Incorporated by reference to Exhibit Number
10.34 to the September 1996 Form 10-QSB)
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
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
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 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. (Incorporated by reference to Exhibit
Number 10.47 to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997 (the "1997 Form 10-KSB"))
*10.48 Service Agreement dated April 20, 1998 between the Company and
G. Kirk Raab. (Incorporated by reference to Exhibit Number 10.48
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (the "June 1998 Form 10-Q"))
*10.49 Consulting Agreement dated July 29, 1998 between the Company and
Dr. L. David Tomei. (Incorporated by reference to Exhibit Number
10.49 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (the "September 1998 Form
10-Q"))
*10.50 Employment Agreement dated August 13, 1998 between the Company
and Paul J. Hastings. (Incorporated by reference to Exhibit
Number 10.50 to the September 1998 Form 10-Q)
*10.51 Release Letter Agreement dated October 7, 1998 between the
Company and Dr. Donald H. Picker. (Incorporated by reference to
Exhibit Number 10.51 to the September 1998 Form 10-Q)
*10.52 Employment Agreement dated October 12, 1998 between the Company
and Dr. Samuil R. Umansky.
11.01 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 LLP, Independent Auditors.
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
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.
*** Confidential treatment has been requested with respect to certain
portions of this document.
(d) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended December 31, 1998.
36
<PAGE> 37
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>
F-1
<PAGE> 38
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, 1998 and 1997, 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, 1998, and for the period from April
20, 1992 (date of incorporation) through December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, and for the period from April 20, 1992 (date of
incorporation) through December 31, 1998, 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 and has limited liquidity, both of which 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 to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/KPMG LLP
San Francisco, California
February 22, 1999
F-2
<PAGE> 39
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,495,582 $ 11,536,687
Prepaid expenses 93,811 210,695
Other receivables 133,339 40,237
------------ ------------
Total current assets 3,722,732 11,787,619
Equipment and leasehold improvements, net 975,284 1,485,847
Notes receivable from related parties 180,000 205,000
Deposits and other assets 40,898 96,633
------------ ------------
Total assets $ 4,918,914 $ 13,575,099
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 289,542 $ 740,809
Accrued private placement commission -- 467,789
Accrued payroll related expenses 133,635 161,280
Other accrued liabilities 36,777 113,503
Litigation settlement payable 170,000 --
Deferred rent obligation 317,564 290,408
Short-term portion of note payable 199,388 172,730
------------ ------------
Total current liabilities 1,146,906 1,946,519
Note payable, excluding short-term portion 193,459 409,707
------------ ------------
Total liabilities 1,340,365 2,356,226
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.0001 par value; 60,000,000 shares
authorized; 28,691,669 and 27,485,850 shares issued
and outstanding in 1998 and 1997, respectively 2,839 2,719
Common stock to be issued; 75,000 and 252,453 shares in
1998 and 1997, respectively 8 26
Additional paid-in capital 46,176,875 44,017,309
Deficit accumulated during the development stage (42,585,998) (32,786,006)
Treasury stock, common stock; at cost; 182,012 shares in
1998 and 1997 (15,175) (15,175)
------------ ------------
Total stockholders' equity 3,578,549 11,218,873
------------ ------------
Total liabilities and stockholders' equity $ 4,918,914 $ 13,575,099
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 40
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,
1998 1997 1996 1998
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues:
Grant revenue $ -- $ 57,348 $ 114,396 $ 171,744
Funded Research 114,038 101,665 -- 215,703
License fee and option revenue 50,000 700,000 300,000 1,050,000
------------ ------------ ------------ ------------
Total revenues 164,038 859,013 414,396 1,437,447
------------ ------------ ------------ ------------
Research and development 6,132,258 7,154,621 5,519,317 30,195,586
General and administrative 4,159,527 3,335,167 2,702,390 14,762,138
------------ ------------ ------------ ------------
Total expenses 10,291,785 10,489,788 8,221,707 44,957,724
------------ ------------ ------------ ------------
Loss from operations (10,127,747) (9,630,775) (7,807,311) (43,520,277)
------------ ------------ ------------ ------------
Interest income, net:
Interest income 407,428 400,720 244,476 1,413,606
Interest expense (78,073) (38,632) (58,564) (471,322)
------------ ------------ ------------ ------------
Interest income, net 329,355 362,088 185,912 942,284
------------ ------------ ------------ ------------
Loss before income taxes (9,798,392) (9,268,687) (7,621,399) (42,577,993)
Income taxes 1,600 1,600 1,600 8,000
------------ ------------ ------------ ------------
Net loss $ (9,799,992) $ (9,270,287) $(7,622,999) $ (42,585,993)
============ ============ ============ ============
Net loss per share (basic & diluted) $ (.34) $ (.42) $ (.48)
============ ============ ============
Weighted average shares used to
compute net loss per share
(basic & diluted) 28,422,415 22,177,991 15,815,495
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
April 20, 1992 (date of incorporation) through December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK COMMON STOCK TO BE ISSUED
------------------------- ------------------------ -----------------
SHARES SHARES
ISSUED AMOUNT 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>
DEFICIT TOTAL
NOTES ACCUMULATED TREASURY STOCK STOCK-
ADDITIONAL RECEIVABLE DURING THE ---------------------------- HOLDERS'
PAID-IN FROM DEVELOPMENT SHARES EQUITY
CAPITAL STOCKHOLDERS 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> 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, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------- ------------ TO BE ISSUED
SHARES SHARES SHARES ------------
ISSUED AMOUNT 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 -- -- 37,500 4 -- --
in connection with private placement
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
Common stock issued for services -- -- 105,000 11 (15,000) (2)
Stock options exercised -- -- 68,362 6 -- --
Issuance of warrants -- -- 64,077 6 -- --
Issuance of common stock subscribed on acquisition of
Cardiosol technology -- -- 75,000 7 (75,000) (7)
Private placement of common stock (net of issuance costs) -- -- 893,380 90 (87,453) (9)
Stock options granted -- -- -- -- -- --
Net loss -- -- -- -- -- --
-- ---- ---------- ---------- ---------- -------
Balances at December 31, 1998 -- $ -- 28,691,669 $ 2,839 75,000 $ 8
== ==== ========== ========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
NOTES ACCUMULATED TREASURY STOCK TOTAL STOCK-
ADDITIONAL RECEIVABLE DURING THE --------------------------- HOLDERS'
PAID-IN FROM DEVELOPMENT SHARES EQUITY
CAPITAL STOCKHOLDERS 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
Common stock issued for services 211,491 -- -- -- -- 211,500
Stock options exercised 100,641 -- -- -- -- 100,647
Issuance of warrants 92,213 -- -- -- -- 92,219
Issuance of common stock subscribed
on acquisition of Cardiosol technology -- -- -- -- -- --
Private placement of common stock
(net of issuance costs) 1,368,169 -- -- -- -- 1,368,250
Stock options granted 387,052 -- -- -- -- 387,052
Net loss -- -- (9,799,992) -- -- (9,799,992)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 $ 46,176,875 $ -- $(42,585,998) (182,012) $ (15,175) $ 3,578,549
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 43
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,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,799,992) $ (9,270,287) $ (7,622,999) $(42,585,993)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 635,308 407,718 490,169 2,713,404
Amortization of discount on
investments -- -- -- (89,850)
Loss on disposal of assets -- 712 -- 4,788
Cancellation of notes receivable
from stockholders -- -- 75,188 91,573
Forgiveness of loans to related
parties 50,000 -- -- 50,000
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 211,500 86,051 6,572 314,623
Stock options granted 387,052 -- 31,875 418,927
License fee revenue resulting
from equipment received (57,008) (342,992) -- (400,000)
Changes in operating assets and
liabilities:
Prepaid expenses and other
receivables 80,790 (112,551) 78,665 (169,512)
Deposits and other assets (1,273) (70,318) 190,823 (143,536)
Accounts payable (83,528) 42,359 (97,649) 283,437
Accrued expenses and deferred
rent obligation (742,743) 562,800 280,791 664,081
------------ ------------ ------------ ------------
Net cash used in operating
activities (9,319,894) (8,696,508) (5,990,002) (38,165,384)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- -- (3,910,150)
Purchase of equipment and leasehold
improvements (67,737) (953,192) (182,794) (2,471,963)
Proceeds from maturity of investments -- -- -- 4,000,000
Loans to related parties (150,000) (45,000) (160,000) (355,000)
Repayment of loans to related parties 125,000 -- -- 125,000
------------ ------------ ------------ ------------
Net cash used in investing
activities (92,737) (998,192) (342,794) (2,612,113)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common
stock 1,368,250 10,430,184 17,468,920 40,951,942
Proceeds from notes payable to
related parties -- -- -- 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 (189,590) (118,812) (600,000) (1,889,513)
Principal payments for obligations
under capital lease -- -- (406,960) (776,513)
Payments received for notes
receivable from stockholders -- -- -- 2,147
Net proceeds from exercise of stock
options 100,647 1,563 1,799 104,053
Repurchase of common stock -- -- (1,510) (1,510)
Proceeds from exercise of warrants 92,219 -- 19,505 111,724
------------ ------------ ------------ ------------
Net cash provided by
financing activities 1,371,526 11,014,184 16,481,754 44,273,079
------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (8,041,105) 1,319,484 10,148,958 3,495,582
Cash and cash equivalents at beginning
of period 11,536,687 10,217,203 68,245 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period $ 3,495,582 $ 11,536,687 $ 10,217,203 $ 3,495,582
============ ============ ============ ============
</TABLE>
(continued)
F-7
<PAGE> 44
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,
1998 1997 1996 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid for income taxes $ 1,600 $ 1,600 $ 1,600 $ 7,400
=========== =========== =========== ==========
Cash paid for interest $ 78,073 $ 38,632 $ 68,890 $ 471,844
=========== =========== =========== ==========
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
=========== =========== =========== ==========
Forgiveness of notes receivable
from related parties $ 50,000 $ -- $ -- $ 50,000
=========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 45
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 tissues 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, medical
device and medical food/nutriceutical products are currently in research
and development, and no revenues from the sale of such 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 middle of the third quarter
of 1999. 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, 1998 and 1997 includes cash on
hand and short term investments with original maturities of three months
or less.
(Continued)
F-9
<PAGE> 46
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 and amortization. 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 (SFAS) 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 for the purpose of determining 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.
(Continued)
F-10
<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
Income Taxes
The Company accounts for income taxes under the asset and liability method
as prescribed by SFAS No. 109, Accounting for Income Taxes, with deferred
income tax assets and liabilities recognized for the future tax
consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Deferred tax assets are recognized for deductible temporary differences,
with a valuation allowance established against the resulting assets to the
extent it is more likely than not that the related tax benefit will not be
realized.
Net Loss Per Share
Net loss per share has been computed using the weighted average number of
common shares, outstanding during each period presented in accordance with
SFAS No.128, Earnings Per Share.
Stock Option Plans
As allowed under the provisions of SFAS No.123, Accounting for Stock Based
Compensation, the Company applies Accounting Principals Board Opinion No.
25 (APB Opinion No. 25) and related interpretations in accounting for its
stock option plans for grants issued to employees. SFAS No. 123 is
applied for all non-employee grants.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Optical Analytic, Inc. (OAI).
All significant intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
(Continued)
F-11
<PAGE> 48
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Laboratory equipment $ 1,901,174 $ 1,809,592
Computer and other office equipment 198,818 193,239
Furniture and fixtures 577,117 576,414
Leasehold improvements 946,669 937,847
----------- -----------
3,623,778 3,517,092
Accumulated depreciation and amortization (2,648,494) (2,031,245)
----------- -----------
Equipment and leasehold improvements, net $ 975,284 $ 1,485,847
=========== ===========
</TABLE>
Depreciation and amortization expense amounted to approximately $635,000 ,
$402,000 and $481,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
(3) 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, 1998 there was $392,847 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 6).
The Equipment Loan is secured by equipment and leasehold improvements with
a net book value of $975,284 at December 31, 1998.
Future minimum principal payments under the Equipment Loan as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------
<S> <C>
1999 $199,388
2000 193,459
--------
$392,847
========
</TABLE>
(4) 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, 1998 are as follows:
(Continued)
F-12
<PAGE> 49
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(4) OPERATING LEASE (CONTINUED)
<TABLE>
<CAPTION>
Year ending Operating
December 31, Lease
------------ ----------
<S> <C>
1999 $ 288,675
2000 314,918
2001 314,918
2002 354,283
2003 393,648
Thereafter 2,558,712
----------
Total minimum lease payments $4,225,154
==========
</TABLE>
The Company recognizes rent expense on a straight-line basis over the term
of the lease. Rental expense for operating leases was approximately
$342,000, $339,000, and $344,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
(5) 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. As of December 31, 1998, all
outstanding 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, 1998, all outstanding shares are fully vested.
On April 5, 1993, the Company issued to 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.
(Continued)
F-13
<PAGE> 50
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(5) CAPITAL STOCK, CONTINUED
Common Stock, Continued
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, 1998, all outstanding shares are fully vested.
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 a price of $1.25 per share. The Company also issued 736,000 shares
of common stock and warrants to purchase an additional 736,000 shares of
the Company's common stock to the placement agents as a selling commission
for the January 1996 Private Placement (note 6). The Company filed a
registration statement on Form S-3 covering resale of the 8,832,000 shares
of common stock issued or issuable in connection with the January 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 12),
the Company committed to issue 225,000 shares of its common stock to the
sellers over a period of four years, of which 150,000 shares have been
issued and are outstanding as of December 31, 1998. The remaining 75,000
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 6). The Company filed a registration statement on Form S-3 covering
resale of the 6,194,593 shares of common stock issued or issuable in
connection with the December 1996 Private Placement and 310,037 other
shares of common stock issued or issuable by the Company.
(Continued)
F-14
<PAGE> 51
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(5) CAPITAL STOCK, CONTINUED
Common Stock, Continued
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 and the
shares were issued in January 1998.
In December 1997 and January 1998, the Company raised approximately $9.4
million (net of offering costs) through a private placement offering (the
December 1997 Private Placement) and sale of 5,714,286 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 issued 92,828 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 Company
filed a registration statement on Form S-3 covering resale of the
6,376,821 of the shares issued or issuable in connection with the December
1997 Private Placement and 24,747 other shares of common stock issued or
issuable by the Company.
In February 1998, the Company raised $1,000,000 through a private
placement offering and sale of 571,429 shares of the Company's common
stock at a price of $1.75 per share to a related party.
In February 1998, the Company issued an option to purchase 250,000 shares
of the Company's common stock to G. Kirk Raab for consulting services. In
April 1998, Mr. Raab was granted additional options to purchase 500,000
shares of the Company's common stock in connection with an employment
agreement. The Company recorded compensation expense of approximately
$174,000 for the year ended December 31, 1998 related to the 250,000
option grant (notes 7 and 14).
In April 1998, the Company committed to issue 90,000 shares of the
Company's common stock to Mark Tomei as partial consideration of the
severance due to him upon termination of his Independent Consulting
Agreement with the Company (note 14). The fair value of these shares of
approximately$211,500 is based on the average closing price of the
Company's common stock during the ten days prior to the termination of the
Independent Consulting Agreement and was included in general and
administrative expense for the year ended December 31, 1998. These shares
were issued in July 1998.
In June 1998, the Company terminated Dr. Kiefer's employment with the
Company, and entered into a separate Consulting Agreement (the "Kiefer
Consulting Agreement") with him. Under the terms of the Kiefer Consulting
Agreement, options to purchase 108,500 shares of the Company's common
stock, previously granted to Dr. Kiefer as an employee of the Company,
continue to vest and vested options
(Continued)
F-15
<PAGE> 52
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(5) CAPITAL STOCK, CONTINUED
Common Stock, Continued
continue to be exercisable. The Company recorded compensation expense of
approximately $85,690 for the year ended December 31,1998 related to these
options (note 7).
In July 1998, the Company terminated the employment agreement with Dr. L.
David Tomei (Dr. Tomei) and entered into a separate Consulting Agreement
(the "Tomei Consulting Agreement") with him. Under the terms of the Tomei
Consulting Agreement, options to purchase 418,800 shares of the Company's
common stock, previously granted to him, continue to vest and vested
options continue to be exercisable. In addition, Dr. Tomei was granted
options to purchase 300,000 shares of the Company's common stock under the
Tomei Consulting Agreement. The Company recorded compensation expense of
approximately $127,139 for the year ended December 31, 1998 related to
these options (notes 7 and 14).
During the year ended December 31, 1998, the Company issued 64,077 shares
of the Company's common stock upon exercise of warrants issued at a
purchase price of $92,219. As of December 31, 1998, warrants to purchase
1,689,958 shares of stock remain outstanding.
In June 1998, the Company's stockholders approved a proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
shares of common stock authorized for issuance from 45,000,000 to
60,000,000.
Treasury Stock
During 1994, the Company exercised its option to repurchase 128,978
unvested shares of common stock for a total repurchase price of $9,853.
During 1996, the Company exercised its option to repurchase 53,034
unvested shares of common stock for a total repurchase price of $5,322.
(6) COMMON STOCK WARRANTS
During November 1993, in connection with a license 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 14). The warrants have an exercise price of $2.25
per share and expire in January 2001.
(Continued)
F-16
<PAGE> 53
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(6) COMMON STOCK WARRANTS, CONTINUED
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 14). 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 5), the
Company issued warrants to purchase 736,000 shares of the Company's common
stock at an exercise price of $1.375 per share. The warrants expire
January 2001. In May 1996, the Company issued 305,694 shares of common
stock upon exercise of a portion of these warrants. The warrant holder
elected a cashless exercise of this 404,789 share warrant resulting in a
reduction of the shares issuable under the warrant by 99,095. In July
1996, another warrant holder exercised his option to purchase 14,186
shares of the Company's common stock at a purchase price of $19,505.
In connection with the December 1996 Private Placement (note 5), the
Company issued warrants to purchase 458,858 shares of the Company's common
stock at an exercise price
of $2.20 per share. The warrants expire in December 2001. In March 1998,
the Company issued 64,077 shares of common stock upon exercise of a
portion of these warrants at a purchase price of $92,219.
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 3). 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.
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 11
and 14). 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 5), the
Company issued warrants to purchase 571,429 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.
As of December 31, 1998, warrants to purchase approximately 1,689,958
shares of the Company's common stock remained outstanding.
(7) STOCK OPTION PLANS
The Company has two stock option plans that provide for the granting of
either incentive stock options or nonqualified stock options to employees,
non-employee members of the Company's Board of Directors and consultants.
Options outstanding under the stock option plans have been granted at
prices which are either equal to or above the market value of the stock on
the date of grant, vest over a four or five year period, and expire ten
years from the date of grant.
(Continued)
F-17
<PAGE> 54
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) STOCK OPTION PLANS (CONTINUED)
The Company is authorized to grant options for up to 3,849,850 common
shares under the 1993 Stock Option Plan, of which 459,984 remain unissued
under the plan at December 31, 1998.
The Company is authorized to grant options for up to 200,000 common shares
under the Directors Stock Option Plan (Directors Plan), of which 120,000
remain unissued under the Plan at December 31, 1998. The Directors Plan
provides for the automatic grant to each non-employee director of the
Company an option to purchase 5,000 shares of common stock on the date the
non-employee becomes a member of the Board of Directors and on each
anniversary date of joining the Board.
In March 1998, the Board of Directors approved a resolution to grant each
non-employee director an option to purchase 10,000 shares at the end of
each full year of service on the board. The Board of Directors also
approved a resolution to grant each director who was not an employee or
substantial shareholder an option to acquire 40,000 shares of the
Company's common stock. These options were granted outside of the
Company's stock option plans.
The following table summarizes the Company's stock
option activity for the three year period ended December 31, 1998:
<TABLE>
<CAPTION>
Stock options outstanding
-------------------------
Number of Weighted-average exercise
shares price per share
---------- ----------
<S> <C> <C>
Balance as of December 31, 1995 514,385 $ 1.47
Options granted 708,005 2.15
Options canceled or expired (69,081) 2.13
Options exercised (10,169) 0.18
----------
Balance as of December 31, 1996 1,143,140 1.87
Options granted 444,550 1.95
Options canceled or expired (45,989) 2.05
Options exercised (1,000) 1.56
----------
Balance as of December 31, 1997 1,540,701 1.89
Options granted 5,677,548 1.78
Options canceled or expired (3,289,158) 2.30
Options exercised (68,362) 1.47
----------
Balance as of December 31, 1998 3,860,729 $ 1.38
==========
</TABLE>
The fair value of each stock option grant is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate 4.80% 6.17% 6.51%
Expected dividend yield 0% 0% 0%
Expected volatility 86.8% 97.6% 107.5%
Expected life in years 5.9 7.9 8.7
Weighted-average fair value
of options granted $ 1.40 $ 1.65 $ 2.29
</TABLE>
(Continued)
F-18
<PAGE> 55
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(7) STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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 12/31/98 to expiration price at 12/31/98 price
------ ----------- ------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.03 12,832 4.24 $ 0.03 12,832 $ 0.03
0.88 2,472,482 9.37 .88 55,555 0.88
1.00 to 1.56 248,684 5.41 1.29 212,849 1.30
1.88 to 2.19 573,731 7.71 2.02 389,723 2.04
2.31 to 3.31 553,000 9.21 3.05 15,936 2.53
--------- ---------
3,860,729 8.82 $ 1.38 686,895 $ 1.69
========= =========
</TABLE>
In November 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.
In October 1998, the Company's Board of Directors adopted a stock option
re-pricing program pursuant to which the Company took action to re-price
outstanding options held by employees of the Company to purchase common
stock of the Company to $0.875 per share and to restart the vesting
schedule for all options so re-priced. Under this program, options to
purchase 2,472,482 shares of the Company's common stock were re-priced.
Options held by non-employee directors and other non-employees were not
repriced.
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss As reported $ (9,799,992) $ (9,270,287) $ (7,622,999)
Pro forma $(10,651,993) $ (9,800,387) $ (7,881,884)
Net loss per share As reported $ (.34) $ (.42) $ (.48)
Pro forma $ (.37) $ (.44) $ (.50)
</TABLE>
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net loss and net loss
per share in future years, since the disclosures do not reflect
compensation expense for options granted prior to 1995. In addition,
valuations are based on highly subjective assumptions about the future,
including stock price volatility and exercise patterns.
(Continued)
F-19
<PAGE> 56
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(8) RESTRUCTURING CHARGES
In June 1998, the Company implemented a strategic plan to manage cash to
provide for operations through approximately the first quarter of 1999.
Under the plan, the Company reallocated its resources to the research and
development of its lead compounds, suspended most pure research at the
Company and eliminated certain positions. In connection with the
implementation of the strategic plan, the Company incurred and paid
restructuring charges of approximately $145,000, primarily related to
employee lay offs of 22 employees. These charges are included in general
and administrative expenses for the year ended December 31, 1998.
(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, 1998, the Company had research and experimentation
credit carryforwards of approximately $824,000 and $606,000 for federal
and state purposes, respectively. Under current tax law, the federal
credits expire during the years beginning 2007 through 2018 and the state
credits carry forward indefinitely.
There are approximately $6,352,000 of federal and $1,577,000 of state net
operating loss carryforwards as of December 31, 1998. Under current tax
law, the carryforwards expire during the years beginning 2010 through
2018, and 2000 through 2003, for federal and state tax purposes,
respectively.
There may have been changes in stock ownership in prior years of more than
50%. Accordingly the Company's ability to utilize net operating losses and
research and experimentation credits, generated prior to the change dates,
may be limited.
The tax effect of the temporary differences that give rise to a
significant portion of the deferred tax asset as of December 31, 1998 and
1997 is presented below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Start-up and research costs
capitalized for tax purposes $ 14,494,000 $ 11,459,000
Research and experimentation credit 1,223,000 928,000
Net operating loss carryforward 2,541,000 1,159,000
------------ ------------
Total gross deferred tax assets 18,258,000 13,546,000
Less valuation allowance (18,258,000) (13,546,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
(Continued)
F-20
<PAGE> 57
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(10) INCOME TAXES (CONTINUED)
The change in the valuation allowance for the years ended December 31,
1998, 1997, and 1996 was approximately $4,712,000, $2,611,000, and
$3,947,000, respectively.
(11) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS
Dana-Farber Cancer Institute, Inc.
During 1993, the Company entered into exclusive license and research
agreements with Dana-Farber Cancer Institute, Inc. (DFCI) related to
certain patent applications and technology, including the exclusive right
and license to make, use and sell Maspin(TM), a possible tumor suppressor
molecule, for therapeutic purposes. Under the terms of the DFCI licensing
agreement (the DFCI Agreement), the Company may enter into sublicensing
agreements subject to sublicensing and royalty fees. As partial
consideration for the license, the Company agreed to pay DFCI
approximately $10,000 and granted DFCI a warrant to buy 5,000 shares of
the Company's common stock at any time prior to May 6, 1999 (note 6).
The DFCI Agreement obligates the Company to use its diligent efforts to
bring one or more licensed products to the marketplace and to make certain
additional payments to DFCI contingent upon completion of certain
milestones occurring in the clinical trials and regulatory approval of
each licensed product. A portion of such payments are to be construed as
an advance on royalties due to DFCI subject to certain limitations. The
DFCI Agreement requires the Company to pay royalties to DFCI on net sales
of licensed products that incorporate or use the patent rights.
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 1998, 1997, and
1996, the Company paid approximately $12,000, $10,000, and $6,000,
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 and
1996 the Company paid approximately $14,000 and $200,000, 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, the Company conducted preclinical efficacy
(Continued)
F-21
<PAGE> 58
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(11) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS
Boehringer Mannheim (Continued)
and toxicity studies of Maspin. Boehringer Mannheim later supplemented the
letter of intent to include an agreement to buy additional shares of LXR
common stock if the collaboration was terminated under certain conditions.
In October 1998, Boehringer terminated the agreement as a result of
reassessing its research program after being acquired by Hoffman La Roche.
Negotiations are currently underway regarding the final settlement under
the agreement.
Ohio State University License Agreement
The Company, through the acquisition of OAI, in December 1993, acquired
exclusive license rights to patents and technology related to Scanning
Laser Digital Imaging (SLDI). This agreement obligated 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 was required to satisfy certain performance
conditions. This agreement was terminated by the Company in August 1998.
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 with the agreement the Company received cash payments of
$300,000 in both 1997 and 1996. The Company also received equipment valued
at approximately $57,000 and $343,000 in 1998 and 1997, respectively. In
July, 1998, Perkin-Elmer terminated the license agreement, and as a
result, the Company will not receive any future payments related to this
agreement.
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 6 and 14).
University of Tennessee
In January 1997, the Company entered into an exclusive license agreement
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 research 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. The Company terminated the license agreement in September 1998
and gave notice to terminate the Research Agreement. However, the Company
may be obligated to pay $70,000 for research to be performed in 1999 under
the agreement.
(Continued)
F-22
<PAGE> 59
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(11) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS, CONTINUED
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 provided by Oxford, the Company made payments
totaling $650,000 and is obligated to make certain future royalty payments
on any products the Company may develop under the agreement. In connection
with this agreement, the Company recognized research and development
expenses of approximately $199,000 and $451,000 for the years ended
December 31, 1998 and 1997, respectively.
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. The Company incurred fees of approximately
$72,338 and $95,300 for the years ended December 31, 1998 and 1997,
respectively. The Company terminated this agreement in June 1998 and has
no further obligations under this agreement.
Introgen Therapeutics, Inc.
In September 1998, the Company entered into an Evaluation and Exclusive
Option Agreement with Introgen Therapeutics Inc. to assess the anti-tumor
activity of the Bak gene. Under the agreement the Company received an
up-front payment of $50,000, which was included in revenues for the year
ended December 31, 1998. Introgen has assigned this agreement to an
affiliate, Gendux Inc.
Other
The Company has entered into various other research agreements requiring
future payments totaling approximately $225,000 as of December 31, 1998.
(12) ACQUISITION OF TECHNOLOGY
OAI Acquisition
In December 1993, the Company consummated agreements to purchase 100% of
the issued and outstanding stock of OAI for $200,000. Consideration for
the stock was comprised of $93,889 in cash paid upon closing of such
purchase and $106,111 in promissory notes and other indebtedness. The
promissory notes bore interest at a rate of 6% and both principal and
interest were paid in 1994. An executive officer and stockholder of the
Company owned approximately 35% of the total issued and outstanding stock
of OAI prior to the acquisition and received $77,778 in cash and notes for
his shares.
OAI's only asset consisted of a technology license from Ohio State
University related to research in process (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.
(Continued)
F-23
<PAGE> 60
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(12) ACQUISITION OF TECHNOLOGY (CONTINUED)
Cardiosol Acquisition
In August 1996, the Company acquired certain patent and other rights
related to Cardiosol, a preservation solution for use during heart
transplantation (the Cardiosol Acquisition). In connection with such
acquisition, the Company paid $98,000 in cash and committed to issue
225,000 shares of its common stock to the sellers (note 5). An additional
75,000 shares may be issued upon the attainment of certain milestones. The
total cost of the acquisition, including cash and shares, amounted to
approximately $675,000 and is included in research and development
expenses for the year ended December 31, 1996.
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 1998, 1997 and 1996 the Company paid
approximately $10,600, $119,500 and $65,000, respectively under these
agreements. These agreements were terminated in January 1998.
(13) 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.
(14) 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 6).
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 6).
(Continued)
F-24
<PAGE> 61
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
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 6).
c) Executive Officer Agreements
In February 1998, the Company appointed G. Kirk Raab to the Board of
Directors of the Company and also entered into a three year consulting
agreement (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 the 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.
In April 1998, G. Kirk Raab was appointed as the Company's Chairman and
Interim Chief Executive Officer. Pursuant to this change in position, the
Company terminated the Raab Consulting Agreement and entered into an
Employment Agreement with him. Under the Employment Agreement, Mr. Raab
will receive a base compensation of $180,000, options to purchase 500,000
shares of the Company's common stock and the options to purchase 250,000
shares of the Company's Common Stock previously granted to him under the
Raab Consulting Agreement will continue to vest under the Employment
Agreement. As of April 20, 1998 options to purchase 61,110 shares of the
Company's common stock had vested under the Consulting Agreement. The fair
value of these 61,110 vested options, using the Black Scholes pricing
model, with an expected dividend yield of 0.0%, expected life of ten
years, expected volatility of 95.8% and risk-free interest rate of 5.73%,
was estimated at approximately $138,000 and was included in general and
administrative expense for the year ending December 31, 1998. In
accordance with APB Opinion No. 25 (APB 25), the intrinsic value of the
remaining 188,890 unvested options that continue to vest under the
Employment Agreement is estimated at approximately $153,000 representing
the difference between the exercise price and the fair market value of the
Company's common stock on the date of the Employment Agreement. As of
December 31, 1998, the Company recognized expense of approximately $36,000
related to these unvested shares. Based on the three year vesting schedule
of these options, the Company expects to recognize total expense of
approximately $174,000, $54,000, $54,000 and $9,000 in the years ending
December 31, 1998, 1999, 2000 and 2001, respectively, related to these
options.
In August 1998, the Company entered into an employment agreement with its
new President and Chief Executive Officer (CEO) which provides for an
annual salary of $250,000. Under the agreement, the CEO was granted
options to purchase 1,000,000 shares of the Company's common stock under
the provisions of the Company's 1993 Stock Option Plan. This agreement
also provides for reimbursement
(Continued)
F-25
<PAGE> 62
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
c) Executive Officer Agreements (Continued)
of certain relocation costs and a loan of $150,000, which may be forgiven
over a three year period, subject to certain conditions. The loan bears
interest at the minimum rate required by the Internal Revenue Service. Any
remaining balance of the loan will become due and payable if the CEO
resigns or is terminated. If the Company terminates the CEO without cause,
he will be entitled to receive severance equal to one year's salary. As of
December 31, 1998, the Company has advanced $150,000 under this agreement,
all of which is outstanding and is included in notes receivable from
related parties at December 31, 1998. Also, as of December 31, 1998, the
Company has paid approximately $38,000 in relocation and temporary living
expenses under this agreement.
In July 1998, the Company terminated its employment agreement with its
former Chief Executive Officer (CEO) and entered into a consulting
agreement to complete existing projects and other projects as mutually
agreed with the Company over a three year period. Under the terms of the
Consulting Agreement, the consultant will receive cash compensation of
$20,000 per month over the three year term of the Consulting Agreement and
options to purchase 418,800 shares of the Company's common stock granted
to him as an employee of the Company will continue to vest during the term
of the Consulting Agreement. In addition, the consultant was granted
options to purchase 300,000 shares of the Company's common stock under the
Consulting Agreement. In January 1997, the Company advanced $30,000 to the
former CEO, and the entire amount is outstanding and included in notes
receivable from related parties as of December 31, 1998 and 1997. The note
bore interest at a rate of approximately 5.63% and 5.85% during 1998 and
1997, respectively, and the principal and interest are repayable on
January 6, 2002.
In October 1998, the Company terminated its employment agreement with its
former President and Chief Operating Officer (COO). Under the terms of the
termination agreement, the Company paid severance of $225,000, of which
approximately $145,000 was used to repay the note receivable and accrued
interest owed by the former President and COO. For the years ended
December 31, 1998 and 1997 the Company had paid approximately $62,000 and
$67,000 respectively, for relocation and temporary living expenses under
the employment agreement.
In February 1998, the Board of Directors approved a proposal to terminate
the Company's Independent Consulting agreement with its former Chief
Financial Officer and settle the severance of $290,000 by payment of
$78,500 in cash and issuing 90,000 shares of common stock valued at
$211,500. As of December 31, 1998, the shares have been issued,
approximately $56,500 has been paid in cash, the remaining $22,000 is
included in accrued liabilities, and the entire $290,000 is included in
general and administrative expenses.
(15) 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, James D.
Coombes and Mark J. Tomei, all former directors and former officers of the
Company, are
(Continued)
F-26
<PAGE> 63
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(15) LITIGATION (CONTINUED)
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 Company announced on January 25, 1999, that it has reached an
agreement in principle with plaintiffs' class action counsel to settle the
above litigation against the Company and the five former officers and
directors. The agreement provides for payment of $500,000, of which
approximately $155,000 will be paid by the Company and approximately
$345,000 will be paid by the Company's insurer.
The settlement agreement is subject to negotiation and execution of a
detailed stipulation of settlement between the parties, submission of the
stipulation of settlement to the court, provision of notice to class
members of the settlement terms, a fairness hearing, and financial
approval of the settlement by the court. The Company cannot predict
exactly how long these procedures will take or when final dismissal will
be obtained.
The above settlement agreement does not constitute an acknowledgement of
wrongdoing by the Company or its former officers and directors.
The Company has also agreed to settle a claim for indemnity from the
independent underwriter in the initial public offering for $12,500.
For the years December 31, 1998, 1997, and 1996, the Company incurred
expenses of approximately $256,000, $140,000, and $111,000, respectively,
relating to this litigation. As of December 31, 1998, $170,000 has been
reserved for payment of the proposed settlements.
(16) SUBSEQUENT EVENTS
In March 1999, the Company sold 1,000,000 shares of the Company's common
stock at a price of $1.00 per share in a private placement offering. In
connection with the sale of stock, the Company is obligated to issue an
additional 60,000 shares as a selling commission for the private
placement.
F-27
<PAGE> 64
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 29th day of
March, 1999.
LXR BIOTECHNOLOGY INC.
By: /s/ Paul J. Hastings
---------------------------------
Paul J. Hastings
President and Chief Executive
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/ Paul J. Hastings President and Chief Executive March 29, 1999
- ------------------------- Officer
Paul J. Hastings (Principal Executive Officer)
/s/ Patti M. Childs Director, Finance and Administration March 29, 1999
- ------------------------- (Principal Accounting Officer)
Patti M. Childs
/s/ G. Kirk Raab Chairman of the Board March 29, 1999
- -------------------------
G. Kirk Raab
/s/ L. David Tomei Director March 29, 1999
- -------------------------
L. David Tomei, Ph.D.
/s/ Eugene Eidenberg Director March 29, 1999
- -------------------------
Eugene Eidenberg
/s/ Neil Flanzraich Director March 29, 1999
- -------------------------
Neil Flanzraich
/s/ Brian D. Brookover Director March 29, 1999
- -------------------------
Brian D. Brookover
/s/ Kenneth R. McGuire Director March 29, 1999
- -------------------------
Kenneth R. McGuire
/s/ William R. Hambrecht Director March 29, 1999
- -------------------------
William R. Hambrecht
/s/ John C. Kane Director March 29, 1999
- -------------------------
John C. Kane
</TABLE>
37
<PAGE> 65
EXHIBIT INDEX
(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-QSB
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-QSB for the quarter ended June 30, 1996)
3.04 Certificate of Amendment of Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit Number 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
(the "September 1998 Form 10-Q"))
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, 1998 and Exhibit Number 10.01 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1997)
*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-QSB 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)
</TABLE>
38
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ ----------------------------------------------------------------------
<S> <C>
10.07 Master Lease Agreement dated May 26, 1993 and Equipment Financing
Agreement dated May 26, 1993, both between the Company and Lease
Management Services, Inc., and related documents. (Incorporated by
reference to Exhibit Number 10.08 to the Form S-1)
10.08 Series A Preferred Stock Purchase Agreement dated February 19, 1993
between the Company and certain of its stockholders, as amended.
(Incorporated by reference to Exhibit Number 10.09 to the Form S-1)
10.09 Investors Rights Agreement dated February 19, 1993 between the Company
and certain of its stockholders, as amended. (Incorporated by
reference to Exhibit Number 10.10 to Amendment No. 1 to the Form S-1
filed with the Securities and Exchange Commission on December 22,
1993)
10.10 Letter Agreement dated January 20, 1993 between the Company and D.
Blech & Company, Incorporated (the "Underwriter") regarding the
Company's retention of the Underwriter as a consultant. (Incorporated
by reference to Exhibit Number 10.11 to the Form S-1)
10.11 Letter Agreement dated January 22, 1993 and Letter Agreement dated May
20, 1993, between the Company and David Blech, regarding (i) the sale
of equity securities to designees of David Blech, (ii) composition of
the Company's Board of Directors and (iii) future financing of the
Registrant. (Incorporated by reference to Exhibit Number 10.12 to the
Form S-1)
10.12 License Agreement dated August 16, 1991, and amended May 18, 1993 and
November 29, 1993, among Optical Analytic, Inc., The Ohio State
Research Foundation and The Ohio State University, and related
documents. (Incorporated by reference to Exhibit Number 10.14 to the
Form S-1)
**10.13 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.15 to the Form S-1)
**10.14 License Agreement dated June 1, 1993 between the Company and the
University of Georgia Research Foundation, Inc. (Incorporated by
reference to Exhibit Number 10.16 to the Form S-1)
**10.15 Licensing Agreement dated June 15, 1993 between the Company and
Dana-Farber Cancer Institute. (Incorporated by reference to Exhibit
Number 10.17 to the Form S-1)
**10.16 Research Support Agreement dated November 1, 1993 between the Company
and Dana Farber Cancer Institute. (Incorporated by reference to
Exhibit Number 10.18 to the Form S-1)
**10.17 Licensing Agreement dated June 21, 1994 between the Company and UAB
Research Foundation. (Incorporated by reference to Exhibit Number
10.17 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994)
10.18 Agreement for Purchase and Sale of Shares dated November 29, 1993
among the Company and William K. Root, F. David Resch and James M.
McCormick. (Incorporated by reference to Exhibit Number 10.20 to the
Form S-1)
10.19 Agreement for Purchase and Sale of Shares dated November 29, 1993
between the Company and L. David Tomei. (Incorporated by reference to
Exhibit Number 10.21 to the Form S-1)
</TABLE>
39
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ ----------------------------------------------------------------------
<S> <C>
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. (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)
</TABLE>
40
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ ----------------------------------------------------------------------
<S> <C>
*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 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).
</TABLE>
41
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ ----------------------------------------------------------------------
<S> <C>
***10.47 Consulting Agreement dated February 13, 1998 between the Company and
G. Kirk Raab. (Incorporated by reference to Exhibit Number 10.47 to
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997 (the "1997 Form 10-KSB"))
*10.48 Service Agreement dated April 20, 1998 between the Company and G. Kirk
Raab. (Incorporated by reference to Exhibit Number 10.48 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (the "June 1998 Form 10-Q"))
*10.49 Consulting Agreement dated July 29, 1998 between the Company and Dr.
L. David Tomei. (Incorporated by reference to Exhibit Number 10.49 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 (the "September 1998 Form 10-Q"))
*10.50 Employment Agreement dated August 13, 1998 between the Company and
Paul J. Hastings. (Incorporated by reference to Exhibit Number 10.50
to the September 1998 Form 10-Q)
*10.51 Release Letter Agreement dated October 7, 1998 between the Company and
Dr. Donald H. Picker. (Incorporated by reference to Exhibit Number
10.51 to the September 1998 Form 10-Q)
*10.52 Employment Agreement dated October 12, 1998 between the Company and
Dr. Samuil R. Umansky.
11.01 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 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.
*** Confidential treatment has been requested with respect to certain
portions of this document.
42
<PAGE> 1
Exhibit 10.52
EMPLOYMENT AGREEMENT
(Dr. Samuil R. Umansky)
This Employment Agreement ("Agreement") is made and entered into as of
the 12 day of October, 1998 (the "Effective Date") by and between LXR
Biotechnology Inc. ("LXR"), a Delaware corporation with its principal offices at
1401 Marina Way South, Richmond, CA 94804 and Dr. Samuil R. Umansky
("Executive") residing at 6034 Monterey Avenue, Richmond, CA 94805. This
Agreement supersedes any prior agreement or understanding relating to
Executive's employment with or compensation by LXR.
LXR desires to appoint the Executive as the Chief Scientific Officer and
Vice President of Molecular Pharmacology of LXR, for the period and upon the
terms and conditions hereinafter set forth.
Executive desires to serve in such capacities for such period and upon
such terms and conditions hereinafter set forth.
Accordingly, the parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF EXECUTIVE.
1.1. Employment. Subject to the terms and conditions of this Agreement,
LXR agrees to employ Executive as Chief Scientific Officer and Vice President of
Molecular Pharmacology of LXR. Executive shall have such responsibilities and
shall perform such specific duties as are commensurate with such positions, and
as may reasonably be assigned to the Executive from time to time by the Board of
Directors and/or the President and Chief Executive Officer of LXR, for the
period commencing on the date hereof until terminated as herein provided.
Executive hereby accepts such employment. Executive shall devote all of his
business time, energy, and skill to the affairs of LXR; provided, however, that
reasonable time for personal business, charitable or professional activities
shall be permitted, so long as such activities do not materially interfere with
the Executive's performance of services under this Agreement.
1
<PAGE> 2
SECTION 2. COMPENSATION. For all services to be rendered by Executive to
LXR during the term of this Agreement, LXR shall pay to, and provide the
Executive with, the following compensation and benefits. Except as expressly set
forth in this Section 2, all benefits and amounts payable under this Agreement
shall be subject to, and shall be reduced for, applicable federal, state and
local taxes, and LXR will withhold from payments to Executive all such taxes and
other withholdings subject to withholding obligations.
2.1. Base Salary and Bonus. For the period beginning January 1, 1998,
LXR shall pay to Executive a base salary of $153,000 per year, payable in
substantially equal biweekly installments in accordance with LXR payroll
practice. In addition, commencing 12 months from January 1, 1998, Executive will
be eligible for an incentive bonus of up to $17,000 to be paid after such 12
month period. The amount of such bonus, if any, shall be determined at the sole
discretion of LXR and shall be payable within 60 days after such 12 month
period. Such bonus, if any, shall be pro-rated for any partial year and shall be
based upon, among other things, performance of the Company and other factors
established at the sole discretion of the Board of Directors and/or the
Compensation Committee. LXR will review Executive's base salary and bonus from
time to time and may make adjustments to such base salary and determine such
bonus based upon, among other factors: (a) Executive's performance, (b) LXR's
performance, (c) changes in costs of living, (d) changes in Executive's
responsibilities, and (e) the benefit to LXR of Executive's efforts on its
behalf; provided that Executive's base salary shall not be less than $153,000
per year during the term of this Agreement.
2.2. Initial and Subsequent Option Grants. As of the effective date of
the agreement, the Executive has been granted Stock Options pursuant to the
terms and conditions of, LXR's 1993 Stock Option Plan (the "Plan"), as listed in
Exhibit A. From time to time at the sole discretion of the Board of Directors,
LXR may grant Executive additional stock options under LXR's stock option plans.
2.3. Participation in Benefit Plans. Executive shall be entitled to
immediate participation in all employee benefit plans or programs of LXR,
subject to eligibility requirements required by law or the written provisions of
any such plans or programs. LXR does not guarantee the adoption or continuance
of any particular employee benefit or stock plan or other program during the
term of this Agreement, and Executive's participation in any such plan or
program shall be subject to provisions, rules and regulations applicable
thereto. Executive shall be entitled to paid vacation each year in an amount
available to other senior executive officers and in accordance with applicable
LXR policy. Health and dental plans available to Executive pursuant to this
Section 2.3 shall be available to the Executive and his eligible dependents.
2
<PAGE> 3
2.4. Expense Reimbursement. LXR shall reimburse Executive for all
ordinary, reasonable and necessary business expenses incurred in the performance
of Executive's duties under this Agreement, in accordance with LXR's policies
and practices, provided that Executive accounts properly for such expenses to
LXR in accordance with the general corporate policies of LXR and in accordance
with the requirements of the Internal Revenue Service regulations relating to
substantiation of expenses.
SECTION 3. INTELLECTUAL PROPERTY AND CONFIDENTIAL INFORMATION AGREEMENT.
As a condition to LXR's obligations hereunder, the Executive is bound by the
Intellectual Property and Confidential Information Agreement entered into with
the Company and attached hereto as Exhibit B.
The obligations of Executive under this section and the agreements
referenced in the preceding paragraph shall survive termination of this
Agreement for any reason.
SECTION 4. TERMINATION AND SEVERANCE PAYMENT.
4.1. Termination. The employment of the Executive by LXR is "at will"
and may be terminated as follows:
(a) Executive's employment hereunder shall terminate upon
Executive's death, or his failure or inability by reason of physical or mental
impairment to perform substantially all of Executive's duties as contemplated
herein for a continuous period of 120 days or more.
(b) Executive's employment hereunder may be terminated by LXR or
Executive for any reason and without cause (hereinafter, termination pursuant to
this Section 4.1(b) is referred to as "Termination Without Cause"). A
substantial reduction of the responsibilities of Executive, including but not
limited to removal of the Executive as the Chief Scientific Officer of LXR
except for the reasons specified in Section 4.1(c), shall be deemed a
Termination Without Cause by LXR.
(c) Executive's employment hereunder may be terminated by LXR in
the event of Executive's breach of any material duty or obligation hereunder, or
any established policy of LXR applicable to other executive officers,
intentional or grossly negligent conduct that is materially injurious to LXR,
failure to follow the reasonable directions of LXR's Board of Directors,
dishonesty of or fraud by Executive, or commission of a crime involving moral
turpitude, in each case as reasonably determined by LXR's Board of Directors
(termination because of any such event is referred to herein as "Termination for
Cause").
3
<PAGE> 4
4.2. Severance Payment; Benefits.
(a) Termination Events Resulting in Severance Payments. In the
event of the Termination Without Cause by LXR under Section 4.1(b) then LXR
shall make severance payment(s) to Executive equal to six (6) months of the
Executive's base salary as of the date of such termination (the "Base Salary
Payment"). Such severance amount shall be payable in installments in accordance
with LXR's payroll practice.
(b) Termination Events Not Resulting in Severance. In the event
of the termination of Executive's employment by Executive, or by the Company
pursuant to Section 4.1(c), the Executive shall not be entitled to any further
payments or benefits after the date of such termination.
(c) Benefits. Executive's coverage under LXR's life, health,
dental insurance plans will remain in effect, at LXR's expense, during the six
(6) month period following Termination Without Cause by LXR, unless Executive
notifies LXR in writing that such coverage is no longer necessary or if
Executive is no longer eligible under COBRA. If, because of limitations required
by third parties or imposed by law, Executive cannot be provided such benefits
through LXR's plans, then LXR will provide Executive with substantially
equivalent benefits on an aggregate basis, at its expense. Executive shall not
be entitled to any further benefits after the date of any termination by
Executive, or after any Termination For Cause.
4.3. Accelerated Vesting of Options Upon a Change of Control. Vesting of
the Options shall accelerate upon a change in control of LXR in accordance with
the Plan.
SECTION 5. MISCELLANEOUS.
5.1. Assignment. This Agreement may not be assigned, in whole or in
part, by any party without the prior written consent of the other party, except
that LXR may, without the consent of the Executive, assign its rights and
obligations under this Agreement to any corporation, firm or other business
entity with or into which LXR may merge or consolidate, or to which LXR may sell
or transfer all or substantially all of its assets, or of which 50% or more of
the equity investment and of the voting control is owned, directly or
indirectly, by, or is under common ownership with, LXR. After any such
assignment by LXR, LXR shall be discharged from all further liability hereunder
and such assignee shall have all the rights and obligations of LXR under this
Agreement.
4
<PAGE> 5
5.2. Notices. All notices, requests, demands and other communications to
be given pursuant to this Agreement shall be in writing and shall be deemed to
have been duly given if delivered by hand or mailed by registered or certified
mail, return receipt requested, postage prepaid, to the addresses set forth at
the beginning of this Agreement or such other address as a party shall have
designated by notice in writing to the other party, provided that notice of any
change in address must actually have been received to be effective hereunder.
5.3. Integration. This Agreement and the Exhibits hereto are the entire
agreement of the parties with respect to the subject matter hereof and
supersedes any prior agreement or understanding relating to Executive's
employment with or compensation by LXR. Any waiver, modification or amendment of
any provision of this Agreement shall be effective only if in writing and signed
by the parties hereto.
5.4. Binding Effect. Subject to Section 5.1, this Agreement shall inure
to the benefit of and be binding upon the parties hereto and their successors,
assigns, heirs and personal representatives.
5.5. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original and shall together constitute one and
the same instrument.
5.6. Severability. If any provision hereof shall, for any reason, be
held to be invalid or unenforceable in any respect, such invalidity or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid or unenforceable provision had not been
included herein. If any provision hereof shall for any reason be held by a court
to be excessively broad as to duration, geographical scope, activity or subject
matter, it shall be construed by limiting and reducing it to make it enforceable
to the extent compatible with applicable law as then in effect.
5.7. Governing Law. This Agreement shall be governed by the laws of the
California state, without regard to its conflict of law provisions.
5.8. Arbitration. Any controversy or claim arising out of, or relating
to, this Agreement or the breach of this Agreement will be settled by
arbitration by, and in accordance with the applicable National Rules for the
Resolution of Employment Disputes of the American Arbitration Association and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction. The arbitrator(s) will have the right to assess,
against a party or among the parties, as the arbitrator(s) deem reasonable, (a)
administrative fees of the American Arbitration Association, (b) compensation,
if any, to the arbitrator(s)
5
<PAGE> 6
and (c) attorneys' fees incurred by a party. Arbitration hearings will be held
in San Francisco, Contra Costa or Alameda County, California. The provisions of
California Code of Civil Procedure Section 1283.05 will apply to any
arbitration.
5.9. Expiration of Agreement. Unless extended in writing by the parties
hereto or terminated earlier by a party hereto, this Agreement shall expire on
October 12, 2001. Executive may terminate this Agreement prior to such date upon
thirty (30) days notice to LXR. This Agreement may be terminated by LXR without
notice.
5.10. Headings. The section headings used in this Agreement are intended
for convenience of reference and shall not by themselves determine the
construction or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as of the date first written above.
EXECUTIVE LXR BIOTECHNOLOGY INC.
/s/ Samuil R. Umansky /s/ Paul J. Hastings
- ----------------------------------- -------------------------------------
Samuil R. Umansky Paul J. Hastings
Vice President of Molecular President and Chief Executive Officer
Pharmacology and Chief Scientific
Officer
6
<PAGE> 1
EXHIBIT 11.01
LXR BIOTECHNOLOGY INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
<S> <C> <C> <C>
Net loss $ (9,799,992) $ (9,270,287) $ (7,622,999)
Weighted average number of
shares outstanding:
Common stock 28,437,415 22,020,391 15,762,729
Common stock to be issued 75,000 157,600 52,766
------------ ------------ ------------
28,512,415 22,177,991 15,815,495
============ ============ ============
Net loss per share $ (0.34) $ (0.42) $ (0.48)
============ ============ ============
</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. and subsidiary, a development
stage enterprise, of our report dated February 22, 1999, relating to the
consolidated balance sheets of LXR Biotechnology Inc. and subsidiary as of
December 31, 1998 and 1997, 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, 1998 and for the period from April
20, 1992 (date of incorporation) through December 31, 1998, which report appears
in the December 31, 1998 annual report on Form 10-K of LXR Biotechnology Inc.
Our report dated February 22, 1999, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations and has
limited liquidity, both of which raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP
San Francisco, California
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,495,582
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,722,732
<PP&E> 3,623,778
<DEPRECIATION> 2,648,494
<TOTAL-ASSETS> 4,918,914
<CURRENT-LIABILITIES> 1,146,906
<BONDS> 0
0
0
<COMMON> 2,839
<OTHER-SE> 3,575,710
<TOTAL-LIABILITY-AND-EQUITY> 4,918,914
<SALES> 0
<TOTAL-REVENUES> 164,038
<CGS> 0
<TOTAL-COSTS> 10,291,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,073
<INCOME-PRETAX> (9,798,392)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,799,992)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> 0
</TABLE>
