<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 31, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LA JOLLA PHARMACEUTICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
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DELAWARE 33-0361285
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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6455 NANCY RIDGE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 452-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN B. ENGLE
CHIEF EXECUTIVE OFFICER
LA JOLLA PHARMACEUTICAL COMPANY
6455 NANCY RIDGE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 452-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
BRIAN W. COPPLE, ESQ. ALAN C. MENDELSON, ESQ.
GIBSON, DUNN & CRUTCHER LLP D. BRADLEY PECK, ESQ.
4 PARK PLAZA, SUITE 1700 COOLEY GODWARD CASTRO HUDDLESON & TATUM
IRVINE, CALIFORNIA 92714 4365 EXECUTIVE DRIVE, SUITE 1100
(714) 451-3874 SAN DIEGO, CALIFORNIA 92121-2128
(619) 550-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(2)
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Common Stock, par value $0.01 per
share.................................. 3,450,000 $6.9375 $23,934,375 $8,254
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</TABLE>
(1) Includes 450,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) The proposed maximum offering price per share and proposed maximum aggregate
offering price are estimated based upon the average of the high and low
prices for the Company's Common Stock reported on the Nasdaq National Market
on May 29, 1996. The amount of the registration fee is calculated upon the
basis of such average pursuant to Rule 457(c).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 31, 1996
LOGO
LA JOLLA PHARMACEUTICAL COMPANY
3,000,000 SHARES
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being issued
and sold by La Jolla Pharmaceutical Company ("LJP" or the "Company"). On May 30,
1996, the last sale price of the Company's Common Stock, as reported on the
Nasdaq National Market, was $7.00 per share. See "Price Range of Common Stock."
The Common Stock of the Company is traded on the Nasdaq National Market under
the symbol "LJPC."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
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<S> <C> <C> <C>
Per Share.............................. $ $ $
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Total (2).............................. $ $ $
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</TABLE>
(1) Before deducting expenses payable by the Company estimated at $300,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
---------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
PACIFIC GROWTH EQUITIES, INC.
VECTOR SECURITIES INTERNATIONAL, INC.
VAN KASPER & COMPANY
The date of this Prospectus is , 1996
<PAGE> 3
LJP'S TOLERANCE TECHNOLOGY
TARGETED DISEASES:
- LUPUS
- ANTIBODY-MEDIATED
STROKE
- RECURRENT FETAL LOSS
B CELL [PHOTO] - RH HEMOLYTIC DISEASE
- MYASTHENIA GRAVIS
- GRAVES' DISEASE
DISEASE-CAUSING
ANTIBODIES
In antibody-mediated diseases, B cells produce antibodies that
bind to tissue and cause disease
TOLERAGEN
B CELL [PHOTO]
LJP's Toleragens are designed to arrest the production of
disease-causing antibodies
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10b-6a UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Price Range of Common Stock........................................................... 16
Capitalization........................................................................ 17
Dilution.............................................................................. 18
Selected Financial Data............................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 20
Business.............................................................................. 24
Management............................................................................ 35
Principal Stockholders................................................................ 40
Description of Capital Stock.......................................................... 42
Shares Eligible for Future Sale....................................................... 45
Underwriting.......................................................................... 47
Legal Matters......................................................................... 48
Experts............................................................................... 48
Available Information................................................................. 48
Incorporation of Certain Documents by Reference....................................... 49
Index to Financial Statements......................................................... F-1
</TABLE>
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Tolerance Technology(R) is a registered trademark, and Toleragen(TM) and
the LJP(TM) logo are trademarks, of La Jolla Pharmaceutical Company. All other
trademarks and registered trademarks used in this Prospectus are the property of
their respective owners.
3
<PAGE> 5
SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
La Jolla Pharmaceutical Company is a leading biopharmaceutical company
focused on the research and development of highly specific therapeutics for the
treatment of certain life-threatening antibody-mediated diseases. These
diseases, including autoimmune conditions such as systemic lupus erythematosus
("lupus") and antibody-mediated stroke, are caused by abnormal B cell production
of antibodies that attack healthy tissues. Current therapies for these
autoimmune disorders only address symptoms of the disease or nonspecifically
suppress the normal operation of the immune system, which often results in
severe, adverse side effects and hospitalization. The Company believes that its
drug candidates, called Toleragens, will treat the underlying cause of many
antibody-mediated diseases without these severe, adverse side effects. The
Company plans to initiate a Phase IIb clinical trial in the second half of 1996
for its lupus drug candidate, LJP 394.
The Company is utilizing its proprietary Tolerance Technology to design
Toleragens, a novel class of therapeutics that suppress the production of
disease-causing antibodies without affecting the protective functions of the
immune system. Toleragens are designed to bind to targeted B cells in order to
"tolerize" or inhibit them from producing disease-causing antibodies. These
molecules are developed using the Company's proprietary combinatorial epitope
libraries, molecular modeling capabilities, disease-specific screening methods
and chemical optimization expertise. The Company owns five issued patents and
has filed 25 patent applications covering the Company's Tolerance Technology and
its lupus and antibody-mediated stroke drug candidates.
LJP 394 is a Toleragen for the treatment of lupus, a chronic and
potentially fatal autoimmune disease that the Company estimates affected 500,000
people in the United States in 1995. Antibodies to double-stranded DNA ("dsDNA")
are widely thought to cause lupus kidney disease, a major cause of morbidity and
mortality in lupus patients. Currently, lupus patients with severe symptoms are
treated with nonspecific and often toxic steroid and anti-cancer therapies which
may leave patients susceptible to serious infections, another major cause of
morbidity and mortality.
The Company recently announced results from a dose-ranging study conducted
as part of its Phase II clinical trials of LJP 394. LJP 394 reduced antibodies
to dsDNA when the highest dose levels were administered weekly. The
double-blind, placebo-controlled dose-ranging study was conducted in the United
States at eight clinical centers in 58 patients at three dose levels and three
frequencies of administration. The drug was well tolerated with no clinically
significant dose-related adverse reactions observed.
In addition to lupus and antibody-mediated stroke, the Company is
developing Toleragens for a number of autoimmune and other antibody-mediated
diseases, including deep vein thrombosis, recurrent fetal loss and Rh hemolytic
disease of the newborn (two life-threatening diseases of the fetus), myasthenia
gravis and Graves' disease.
The Company's business strategy includes the following key elements:
complete clinical development of LJP 394 to treat lupus; apply Tolerance
Technology to other life-threatening antibody-mediated diseases; form strategic
alliances to develop and commercialize product candidates; exploit proprietary
manufacturing technology; and expand the Company's intellectual property
leadership position.
The Company was incorporated in Delaware in May 1989. Its offices are
located at 6455 Nancy Ridge Drive, San Diego, California 92121, and its
telephone number is (619)452-6600.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company..................... 3,000,000 shares
Common Stock Outstanding after the Offering............. 17,072,732 shares(1)
Use of Proceeds......................................... To fund clinical trials, research
and development and manufacturing
scale-up and for working capital
and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol........................... LJPC
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $ -- $ 3,000 $ -- $ --
Operating expenses:
Research and development..................... 6,737 8,499 9,804 2,105 2,560
General and administrative................... 1,386 2,049 2,390 429 588
-------- -------- -------- ------- -------
Total operating expenses.................. 8,123 10,548 12,194 2,534 3,148
-------- -------- -------- ------- -------
Loss from operations........................... (8,123) (10,548) (9,194) (2,534) (3,148)
Interest income (net).......................... 176 235 640 104 229
-------- -------- -------- ------- -------
Net loss....................................... $(7,947) $(10,313) $ (8,554) $(2,430) $(2,919)
======== ======== ======== ======= =======
Net loss per share (2)......................... $ (1.58) $ (1.44) $ (0.79) $ (0.28) $ (0.21)
======== ======== ======== ======= =======
Number of shares used in computing net loss per
share (2).................................... 5,016 7,137 10,883 8,618 14,060
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED (3)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................... $20,360 $39,800
Total assets........................................................ 23,082 42,522
Deficit accumulated during the development stage.................... (41,696) (41,696)
Total stockholders' equity.......................................... 20,739 40,179
</TABLE>
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(1) Excludes an aggregate of 3,917,646 shares of Common Stock issuable upon
exercise of warrants and stock options outstanding as of March 31, 1996, as
follows: (i) 1,495,000 shares issuable upon exercise of the Company's
publicly traded Redeemable Common Stock Purchase Warrants at an exercise
price of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise of
various privately held warrants and options at a weighted average exercise
price of $6.55 per share; and (iii) 1,420,738 shares issuable upon exercise
of stock options outstanding under the Company's various stock option plans
at a weighted average exercise price of $2.55 per share. See "Dilution" and
"Description of Capital Stock."
(2) See Note 1 of Notes to Financial Statements for an explanation of the
computation of per share data.
(3) Adjusted to reflect the sale by the Company of the 3,000,000 shares of
Common Stock offered hereby at an assumed offering price of $7.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
Except as otherwise indicated, the information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option.
5
<PAGE> 7
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
The following risk factors should be considered carefully in evaluating the
Company and its business before purchasing shares of the Common Stock offered
hereby.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
The Company must demonstrate through preclinical testing and clinical
trials that LJP 394, the Company's only drug candidate in clinical trials, is
safe and effective for use in each target indication prior to applying for any
regulatory approvals. The results from preclinical testing and clinical trials
of LJP 394 conducted to date may not be indicative of results that may be
obtained in further clinical trials. A number of companies in the
biopharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. The rate of
completion of the Company's clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment, a slower timetable as
determined by the Company or a collaborative partner, or any other adverse
event. During the course of clinical trials, patients can die or suffer other
adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested but which can nevertheless affect clinical
trial results. There can be no assurance that the Company will be permitted by
regulatory authorities to undertake additional clinical trials of LJP 394 or to
initiate clinical trials of any other drug candidates, or that any clinical
trials undertaken by the Company will be completed successfully within any
particular time period, if at all. Any delays in, or termination of, the
Company's clinical trial efforts would have a material adverse effect on the
Company's business, financial condition and results of operations. There also
can be no assurance that LJP 394 or any other drug candidate of the Company will
prove to be safe or effective in clinical trials, that LJP 394 or any other drug
candidate of the Company will receive regulatory approval for any indication, or
that any clinical trials undertaken by the Company will result in marketable
products. If LJP 394 is not shown to be safe and effective in clinical trials,
the resulting delays in developing any other drug candidate and conducting
related preclinical testing and clinical trials, as well as the need for
additional financing, would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Products Under Development -- Results of Clinical Trials."
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES
All of the Company's product development efforts are based upon unproven
technologies and therapeutic approaches that have not been widely tested or
used. To date, the Company's Tolerance Technology has been used only in the
preclinical tests and clinical trials of LJP 394 conducted by the Company.
Application of Tolerance Technology to antibody-mediated diseases other than
lupus is in earlier discovery or preclinical research stages. LJP 394 and any
other potential drug candidate of the Company will require significant
additional research and development and are subject to significant risks.
Potential products that appear to be promising at early stages of development
may be ineffective or cause harmful side effects during preclinical testing or
clinical trials, fail to receive necessary regulatory approvals, be difficult to
manufacture, be uneconomical to produce particularly if high dosages are
required, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's product development efforts with respect to LJP 394
or any other drug candidate will be successfully completed, that required
regulatory approvals will be obtained or that any product, if introduced, will
be successfully marketed or achieve commercial acceptance.
The mechanism of action utilized by LJP 394 is unproven in humans, and to
date, no therapeutic products have been developed that target the activity of
specific B cells. There can be no assurance
6
<PAGE> 8
that LJP 394 will reliably induce or sustain suppression of disease-causing
antibodies, or that LJP 394 will prove to be safe or effective. Furthermore,
clinical trials of LJP 394 may be viewed as a test of the Company's entire
Tolerance Technology approach. If these clinical trials encounter problems or
are otherwise unsuccessful, the applicability of the Company's Tolerance
Technology to other antibody-mediated diseases will be highly uncertain.
Therefore, there is significant risk that the Company's therapeutic approaches
will not prove to be successful, and there can be no assurance that the
Company's drug discovery technologies will result in any commercially successful
products. See "Business -- Products Under Development."
UNCERTAINTY OF COLLABORATIVE ARRANGEMENTS
As part of its business strategy, the Company pursues collaborations with
pharmaceutical companies in an effort to access their research, drug
development, manufacturing, marketing and financial resources. In September
1995, the Company entered into a collaborative agreement with Leo Pharmaceutical
Products, Ltd. of Denmark ("Leo Pharmaceutical"), pursuant to which the Company
granted to Leo Pharmaceutical the exclusive right to distribute LJP 394 in
Europe and the Middle East. In May 1996, the Company terminated the
collaborative agreement because the Company and Leo Pharmaceutical could not
reach agreement regarding the timing and allocation of resources with respect to
further clinical trials of LJP 394. As a result of the termination of the
collaborative relationship with Leo Pharmaceutical, the Company will be required
to fund all development costs of LJP 394. The Company intends to pursue
collaborative arrangements with other pharmaceutical companies to assist in its
research programs and the clinical development and commercialization of LJP 394
and its other drug candidates. There can be no assurance that the Company will
be able to negotiate arrangements with any other collaborative partners on
acceptable terms, if at all, or that any such collaborations will be successful.
Failure to establish or maintain collaborative arrangements will require the
Company to fund all of its research and development activities, resulting in
accelerated depletion of the Company's capital, and will require the Company to
develop its own marketing capabilities for any drug candidate that may receive
regulatory approval. As a result, failure to establish or maintain collaborative
arrangements could have a material adverse effect on the Company's business,
financial condition and results of operations.
Even if the Company is successful in establishing new collaborative
arrangements, there can be no assurance that any future collaborative partner
will continue funding any particular program or will not pursue alternative
technologies or develop alternative drug candidates, either individually or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by the Company. Furthermore,
competing products, either developed by a collaborative partner or to which a
collaborative partner has rights, may result in the withdrawal of support by the
collaborative partner with respect to all or a portion of the Company's
technology. The failure of any collaborative partner to continue funding any
particular program of the Company or to commercialize successfully any product
could delay or halt the development or commercialization of any products
involved in such program and could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Collaborative Arrangements."
NEED FOR ADDITIONAL FUNDING; UNCERTAIN ACCESS TO CAPITAL
The Company's operations to date have consumed substantial capital
resources, and LJP will continue to expend substantial and increasing amounts of
capital to support research, product development, preclinical testing and
clinical trials of its drug candidates, to establish commercial-scale
manufacturing capabilities, and to market its potential products. The Company's
future capital requirements will depend on many factors, including continued
scientific progress in its research and development programs, the size and
complexity of these programs, the scope and results of preclinical testing and
clinical trials, the time and costs involved in applying for regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, competing techno-
7
<PAGE> 9
logical and market developments, the ability of the Company to establish and
maintain collaborative research and development arrangements and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. The Company expects to incur substantial and increasing losses
each year for at least the next several years as its clinical trial, research,
development and manufacturing scale-up activities increase. The Company expects
its existing capital resources, together with the net proceeds of this offering
and interest thereon, to be sufficient to fund the Company's activities, as
currently planned, for at least the next 24 months. However, the amounts
expended by the Company for various purposes may vary significantly, and it is
possible that the Company's cash requirements will exceed current projections
and that the Company will therefore need additional financing sooner than
currently expected. There can be no assurance that the Company will have
adequate resources to support its existing or future business activities.
The Company actively seeks additional funding, including through
collaborative arrangements and public and private financings. The Company's
choice of financing alternatives may vary from time to time depending upon
various factors, including the market price of the Company's securities,
conditions in the financial markets, and the interest of other entities in
strategic transactions with the Company. There can be no assurance that
additional financing will be available on acceptable terms, if at all, whether
through collaborative arrangement, issuance of securities, or otherwise. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its research and development programs or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies or
potential products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred operating losses each year since its inception in
1989 and had an accumulated deficit of approximately $41.7 million as of March
31, 1996. The continued development of the Company's products will require the
commitment of substantial resources to conduct expanded research and preclinical
and clinical development programs, to enhance manufacturing capabilities, and to
establish additional quality control, regulatory, administrative and marketing
and sales capabilities. The Company expects to incur substantial and increasing
losses each year for at least the next several years as its research,
development, clinical trial and manufacturing scale-up activities increase. To
achieve profitability the Company must, among other things, complete development
of its products, obtain regulatory approvals and establish commercial
manufacturing and marketing capabilities. The amount of net losses and the time
required by the Company to reach sustained profitability are highly uncertain,
and the Company does not expect to generate revenues from the sale of products,
if any, for at least several years. There can be no assurance that the Company
will obtain required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that the Company will ever achieve product
revenues or profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Prior to marketing, any potential product developed by the Company must
undergo an extensive regulatory approval process that includes preclinical
testing and clinical trials and may include post-marketing surveillance of each
compound to establish its safety and efficacy. This regulatory process can take
many years and require the expenditure of substantial resources. Data obtained
from the Company's preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejections may be encountered based upon changes in
policies of the United States Food and Drug Administration ("FDA") for drug
approval during the period of product development and FDA regulatory review of
each submitted new drug application ("NDA"). Similar delays may also be
encountered in foreign countries. Regulatory
8
<PAGE> 10
approval may entail limitations on the indicated uses of the drug. In addition,
the Company will be required to obtain separate regulatory approval for each
indicated use of a drug. Even if regulatory approval is obtained, a marketed
drug and its manufacturer are subject to continuing review, and discovery of
previously unknown problems with a product or manufacturer may have adverse
effects on the Company's business, financial condition and results of
operations, including withdrawal of the product from the market. Violations of
regulatory requirements at any stage, including preclinical testing and clinical
trials, the approval process or post-approval surveillance, may result in
various adverse consequences including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of criminal penalties against the manufacturer and NDA
holder. The Company has not submitted any Investigational New Drug ("IND")
application for any drug candidate other than LJP 394, and none of the Company's
drug candidates has been approved for commercialization in the United States or
elsewhere. There can be no assurance that regulatory approval will be obtained
for any drugs developed by the Company. Failure to obtain requisite government
approvals or approvals of the scope requested would delay or preclude the
Company or any licensees or marketing partners from marketing the Company's
potential products or limit the commercial use of such products and will have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is also subject to numerous and varying
foreign regulatory requirements governing the design and conduct of clinical
trials and marketing approval for pharmaceutical products to be marketed outside
of the United States. The regulatory procedures vary among countries and can
involve additional testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign regulatory approval
process includes all of the risks associated with obtaining FDA approval, and if
approval by the FDA were granted, such approval does not ensure approval by the
health authorities of any other country. See "Business -- Government
Regulation."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend heavily upon its ability to obtain patent
protection for its therapeutic approach and for any developed products, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. While the Company has received four United States
patents and one Australian patent covering certain aspects of its technology,
there can be no assurance that any additional patents will be issued, or that
the scope of any patent protection will be sufficient, or that any current or
future issued patent will be held valid if subsequently challenged. There is a
substantial backlog of biotechnology patent applications at the United States
Patent and Trademark Office ("USPTO") that may delay the review and issuance of
any patents. The patent position of biotechnology firms generally is highly
uncertain and involves complex legal and factual questions, and no consistent
policy has emerged regarding the breadth of claims covered in biotechnology
patents or protection afforded by such patents. To date, the Company has rights
to certain United States and foreign issued patents and has filed or
participated as a licensee in the filing of a number of patent applications in
the United States relating to the Company's technology, as well as foreign
counterparts of certain of these applications in certain countries. The Company
intends to continue to file applications as appropriate for patents covering
both its products and processes. There can be no assurance that patents will
issue from any of these applications, or that claims allowed under issued
patents will be sufficient to protect the Company's technology. Patent
applications in the United States are maintained in secrecy until a patent
issues, and the Company cannot be certain that others have not filed patent
applications for technology covered by the Company's pending applications or
that the Company was the first to invent, or to file patent applications for,
such technology. Competitors may have filed applications for, or may have
received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes that block or compete with those of the
Company.
9
<PAGE> 11
A number of pharmaceutical and biotechnology companies and research and
academic institutions have filed or may file patent applications, and have
received or may receive patents, in the fields being pursued by the Company.
Certain of these applications or patents may be competitive with the Company's
applications or conflict in certain respects with claims made under the
Company's applications. In particular, the Company is aware of one currently
pending United States patent application that, if allowed, may contain claims
covering subject matter that may be competitive or conflicting with certain of
the Company's patents and patent applications. Any conflict between the
Company's patents and patent applications, and patents or patent applications of
third parties, could result in a significant reduction of the coverage of the
Company's existing patents or any future patents that may be issued. In
addition, to determine the priority of inventions, the Company may have to
participate in interference proceedings declared by the USPTO or in opposition,
nullity or other proceedings before foreign agencies with respect to any of its
existing patents or patent applications or any future patents or applications,
which could result in substantial cost to the Company. Further, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of goods which would compete unfairly with
products of the Company. If patents containing competitive or conflicting claims
are issued to other parties and such claims are ultimately determined to be
valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost, if at all, or be able to develop
or obtain alternative technology.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain consultants. There can be no assurance
that relevant inventions will not be developed by a person not bound by an
invention assignment agreement, or that binding agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. In addition, the Company could incur substantial
costs in defending against suits brought against it by others for infringement
of intellectual property rights or in prosecuting suits which the Company might
bring against other parties to protect its intellectual property rights. See
"Business -- Patents and Proprietary Technologies."
COMPETITION AND TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are subject to rapid
technological change. Competition from domestic and foreign biotechnology
companies, large pharmaceutical companies and other institutions is intense and
expected to increase. A number of companies are pursuing the development of
pharmaceuticals in the Company's targeted areas. These include Genelabs
Technologies, Inc., which has initiated Phase III clinical trials of a hormone
for the treatment of lupus, and other competitors that are working on
third-generation steroids. Many other companies are in earlier stages of
developing other potential therapies for lupus.
In addition, there are many academic institutions, both public and private,
engaged in activities relating to research and development of therapeutics for
autoimmune, inflammatory and other diseases. Most of these companies and
institutions have substantially greater facilities, resources, research and
development capabilities, regulatory compliance expertise, and manufacturing and
marketing capabilities than the Company. In addition, other technologies may in
the future be the basis of competitive products. There can be no assurance that
the Company's competitors will not develop or obtain regulatory approval for
products more rapidly than the Company, or develop and market technologies and
products that are more effective than those being developed by the Company or
that would render the Company's technology and proposed products obsolete or
noncompetitive. See "Business -- Competition."
10
<PAGE> 12
LIMITED MANUFACTURING CAPABILITIES
The manufacture of the Company's potential products for clinical trials and
the manufacture of any approved products for commercial purposes is subject to
current Good Manufacturing Practices ("cGMP") as defined by the FDA. While the
Company is producing limited quantities of LJP 394 for clinical trials, its
current facilities are not adequate for commercial production of its potential
products. The Company will be required to invest substantial amounts of capital
in the expansion and build-out of its facilities to enable manufacture of any
products in commercial quantities. The Company has never operated an
FDA-approved manufacturing facility, and there can be no assurance that it will
obtain necessary approvals. The Company has limited manufacturing experience,
and no assurance can be given that it will be able to make the transition to
commercial production successfully. The Company may enter into arrangements with
contract manufacturing companies to expand its own production capacity in order
to meet requirements for its products, or to attempt to improve manufacturing
efficiency. If the Company chooses to contract for manufacturing services and
encounters delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished products, clinical
trials, market introduction and subsequent sales of such products would be
adversely affected. Moreover, contract manufacturers must operate in compliance
with the FDA's cGMP requirements. The Company's potential dependence upon third
parties for the manufacture of its products may adversely affect the Company's
profit margins and its ability to develop and deliver such products on a timely
and competitive basis. See "Business -- Manufacturing."
LACK OF MARKETING EXPERIENCE
In order to commercialize any drug candidate approved by the FDA, the
Company must either develop a marketing and sales force or enter into marketing
arrangements with third parties. The Company currently has no such third-party
arrangements, and there can be no assurance that the Company will be able to
enter into any marketing agreements on terms favorable to the Company, if at
all, or that any such agreements that the Company may enter into will result in
payments to the Company. To the extent that the Company enters into co-promotion
or other marketing and sales arrangements with other companies, any revenues to
be received by the Company will be dependent on the efforts of others and there
can be no assurance that such efforts will be successful. If the Company chooses
to attempt to develop its own marketing and sales capabilities, it will compete
with other companies that currently have experienced and well-funded marketing
and sales operations. Furthermore, there can be no assurance that the Company
will be able to establish sales and distribution capabilities without undue
delays or expenditures or that it will be successful in gaining market
acceptance for any of its drug candidates. See "Business -- Marketing and
Sales."
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means may have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in certain foreign markets, pricing and/or
profitability of prescription pharmaceuticals are subject to government control.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement similar government control.
In addition, increasing emphasis on managed care in the United States will
continue to put pressure on pharmaceutical pricing. Cost control initiatives
could decrease the price that the Company receives for any products it may
develop and sell in the future and have a material adverse effect on the
Company's business, financial condition and results of operations. Further, to
the extent that cost control initiatives have a material adverse effect on the
Company's commercial partners, the Company's ability to commercialize its
products may be adversely affected.
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the products will be available
from government health administra-
11
<PAGE> 13
tion authorities, private health insurers and other third-party payors.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and third-party payors, including Medicare, are
increasingly challenging the prices charged for medical products and services.
There can be no assurance that any third-party insurance coverage will be
available to patients for any products developed by the Company. Government and
other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new
therapeutic products and by refusing in some cases to provide coverage for uses
of approved products for disease indications for which the FDA has not granted
labeling approval. If adequate coverage and reimbursement levels are not
provided by government and other third-party payors for the Company's products,
the market acceptance of these products would be adversely affected.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE
The Company has not received marketing approval from the FDA for any of its
drug candidates and currently uses LJP 394 only in clinical trials. The use of
LJP 394 or any of the Company's other potential products in such clinical trials
and the sale of any approved products may expose the Company to liability claims
resulting from the use of products or product candidates and associated negative
publicity. These claims might be made directly by consumers, pharmaceutical
companies or others. The Company maintains product liability insurance coverage
for claims arising from the use of its products in clinical trials in the amount
of $3.0 million. However, coverage is becoming increasingly expensive, and there
can be no assurance that the Company will be able to maintain insurance or, if
maintained, that insurance can be acquired at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability that could have a
material adverse effect on the Company's business, financial conditions and
results of operations. There can be no assurance that the Company will be able
to obtain product liability insurance on commercially reasonable terms for any
product approved for marketing in the future or that insurance coverage and the
resources of the Company would be sufficient to satisfy any liability resulting
from product liability claims. A successful product liability claim or series of
claims brought against the Company could have a material adverse effect on its
business, financial condition and results of operations.
DEPENDENCE UPON KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent upon the principal members of its
scientific and management staff, the loss of whose services would delay the
achievement of its research and development objectives. The Company's
anticipated growth and expansion into areas and activities requiring additional
expertise, such as clinical trials, government approvals, manufacturing, and
marketing, are expected to place increased demands on the Company's resources
and require the addition of new management personnel as well as the development
of additional expertise by existing management personnel. Retaining the
Company's current key employees and recruiting additional qualified scientific
personnel to perform research and development work in the future will also be
critical to the Company's success. Because competition for experienced
scientists among numerous pharmaceutical and biotechnology companies and
research and academic institutions is intense, there can be no assurance that
the Company will be able to attract and retain such personnel.
In addition, the Company relies upon consultants and advisors to assist the
Company in formulating its research and development, clinical, regulatory and
manufacturing strategies. All of the Company's consultants and advisors are
employed outside the Company and may have commitments or consulting or advisory
contracts with other entities that may affect their ability to contribute to the
Company.
ENVIRONMENTAL MATTERS AND HAZARDOUS MATERIALS
Due to the nature of its manufacturing processes, the Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. There can be
no assurance that the Company will not be required to incur significant costs to
comply with
12
<PAGE> 14
environmental regulations as manufacturing is increased to commercial volumes,
or that the operations, business or assets of the Company will not be materially
and adversely affected by current or future environmental laws, rules,
regulations and policies or by any releases or discharges of hazardous material.
In its research activities, the Company utilizes radioactive and other
materials that could be hazardous to human health, safety or the environment.
These materials and various wastes resulting from their use are stored at the
Company's facility pending ultimate use and disposal. The risk of accidental
injury or contamination from these materials cannot be eliminated. In the event
of such an accident, the Company could be held liable for any resulting damages,
and any such liability could exceed the Company's resources.
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of biotechnology and pharmaceutical
companies, including the Company, have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products by the
Company or others, clinical trial results, developments concerning agreements
with collaborators, government regulation, developments in patent or other
proprietary rights, public concern as to the safety of drugs discovered or
developed by the Company or others, future sales of substantial amounts of
Common Stock by existing stockholders, comments by securities analysts and
general market conditions can have an adverse effect on the market price of the
Common Stock. The realization of any of the risks described in these "Risk
Factors" could have an adverse effect on market price of the Company's Common
Stock. See "Price Range of Common Stock."
DILUTION
Purchasers of the Common Stock offered pursuant to this Prospectus will
incur immediate and substantial dilution in net tangible book value per share.
Based on the net tangible book value of the Common Stock at March 31, 1996 and
an assumed offering price of $7.00, dilution in net tangible book value for
purchasers in the offering would be $4.68 per share. See "Dilution."
POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Stock in the public market, or the perception
that such sales could occur, could adversely affect the prevailing market price
of the Company's securities and impair the Company's ability to complete equity
financings. In addition to the shares to be sold in this offering, the Company
has outstanding 6,390,000 shares of Common Stock that have been issued in
registered public offerings and are freely tradable in the public markets, and
approximately 5,600,000 shares of Common Stock currently eligible for resale in
the public market pursuant to Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"). An additional 2,000,000 shares issued to an
overseas investor pursuant to Regulation S under the Securities Act may also be
resold. In addition, an aggregate of 3,917,646 shares of Common Stock are
issuable upon exercise of warrants and stock options outstanding as of March 31,
1996, as follows: (i) 1,495,000 shares issuable upon exercise of the Company's
publicly traded Redeemable Common Stock Purchase Warrants at an exercise price
of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise of various
privately held warrants and options at a weighted average exercise price of
$6.55 per share, and (iii) 1,420,738 shares issuable upon exercise of stock
options outstanding under the Company's various stock option plans at a weighted
average exercise price of $2.55 per share. The Company has in effect or intends
to file registration statements under the Securities Act registering
approximately 1,600,000 shares of Common Stock reserved under its employee stock
option and purchase plans, up to 1,495,000 shares of Common Stock reserved for
issuance upon exercise of the Company's publicly traded Redeemable Common Stock
Purchase Warrants, and resale of approximately 625,000 shares of Common Stock
issuable upon
13
<PAGE> 15
exercise of privately held warrants. Approximately 806,000 shares of Common
Stock issuable upon future exercise of outstanding stock options will be
available for public resale under Rule 144 pursuant to Rule 701 under the
Securities Act. The Company is unable to estimate the number of shares of Common
Stock that may actually be resold in the public market since this will depend
upon the market price for the Common Stock, the individual circumstances of the
sellers and other factors. The Company has a number of institutional
stockholders that own significant blocks of the Company's Common Stock. If such
stockholders sell large portions of their holdings in a relatively short time,
for liquidity or other reasons, the prevailing market price of the Company's
Common Stock could be negatively affected. See "Principal Stockholders" and
"Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCES OF PREFERRED STOCK
Certain provisions of the Delaware General Corporation Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in the
control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over
then-current market prices. The Company may also issue shares of Preferred Stock
without stockholder approval and upon such terms as the Company's Board of
Directors may determine. The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
Company's outstanding stock, and the holders of such Preferred Stock could have
voting, dividend, liquidation and other rights superior to those of holders of
the Common Stock. See "Description of Capital Stock -- Preferred Stock" and
"-- Delaware Anti-Takeover Law."
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends since its inception and does
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby, at an assumed public offering price of $7.00 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $19.4 million ($22.4
million if the Underwriters' over-allotment option is exercised in full).
The Company estimates that more than 80% of the net proceeds from the
offering will be used to fund clinical trials, research and development
activities and manufacturing scale-up, and the balance will be used for working
capital and general corporate purposes. The amounts actually expended for each
purpose may vary significantly and are subject to change at the Company's
discretion depending upon numerous factors, including the progress of the
Company's research, drug discovery and development programs, the results of
preclinical studies and clinical trials, the timing of regulatory approvals,
technological advances, determinations as to commercial potential of the
Company's drug candidates and the status of competitive products. In addition,
expenditures will also depend upon other factors including the establishment of,
and compliance with, collaborative arrangements, the development of
manufacturing and marketing capabilities, the availability of other financing
and other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company believes that its available cash, cash equivalents and
short-term investments, together with the net proceeds of this offering and
interest earned thereon, will be sufficient to satisfy its current and projected
capital needs for at least the next 24 months. Pending application of the
proceeds as described above, the Company intends to invest the net proceeds of
this offering in investment-grade, interest-bearing instruments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain its earnings for future
growth and therefore does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be determined by the
Company's Board of Directors.
15
<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "LJPC." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for the Common Stock of the
Company on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
Second Quarter (from June 3, 1994)................................ $53/4 $5
Third Quarter..................................................... 53/8 2
Fourth Quarter.................................................... 23/4 1 1/2
1995
First Quarter..................................................... 37/8 1 3/4
Second Quarter.................................................... 41/4 2 3/4
Third Quarter..................................................... 57/8 3 1/2
Fourth Quarter.................................................... 53/16 3 5/8
1996
First Quarter..................................................... 93/8 4 7/8
Second Quarter (through May 30, 1996)............................. 87/8 6 3/4
</TABLE>
On May 30, 1996, the last price reported on the Nasdaq National Market for
the Company's Common Stock was $7.00 per share. As of such date, there were 246
holders of record of the Common Stock.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996, and as adjusted to reflect the receipt of the estimated
proceeds from the sale of 3,000,000 shares of Common Stock offered hereby at an
assumed offering price of $7.00 per share and the application of the estimated
net proceeds therefrom:
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Long-term obligations under capital leases............................. $ 641 $ 641
-------- --------
Stockholders' equity:
Preferred Stock $0.01 par value, 8,000,000 authorized; none issued... -- --
Common Stock $0.01 par value, 32,000,000 shares authorized;
14,072,732 shares issued and outstanding; 17,072,732 shares issued
and outstanding, as adjusted(1)................................... 141 171
Additional paid-in capital........................................... 62,626 82,036
Note receivable from stockholder..................................... (14) (14)
Deferred compensation................................................ (318) (318)
Deficit accumulated during the development stage..................... (41,696) (41,696)
-------- --------
Total stockholders' equity........................................ 20,739 40,179
-------- --------
Total capitalization......................................... $ 21,380 $ 40,820
======== ========
</TABLE>
- ---------------
(1) Excludes an aggregate of 3,917,646 shares of Common Stock issuable upon
exercise of warrants and stock options outstanding as of March 31, 1996, as
follows: (i) 1,495,000 shares issuable upon exercise of the Company's
publicly traded Redeemable Common Stock Purchase Warrants at an exercise
price of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise of
various privately held warrants and options at a weighted average exercise
price of $6.55 per share; and (iii) 1,420,738 shares issuable upon exercise
of stock options outstanding under the Company's various stock option plans
at a weighted average exercise price of $2.55 per share. See "Dilution" and
"Description of Capital Stock."
17
<PAGE> 19
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
approximately $20.2 million, or $1.43 per share of Common Stock, based upon
14,072,732 shares outstanding. After giving effect to the sale by the Company of
the 3,000,000 shares of Common Stock offered hereby at an assumed offering price
of $7.00 per share and the receipt of the net proceeds therefrom, the pro forma
net tangible book value of the Company as of March 31, 1996 would have been
approximately $39.6 million, or $2.32 per share of Common Stock, based upon
17,072,732 shares outstanding. This represents an immediate increase in net
tangible book value of approximately $0.89 per share to existing stockholders
and an immediate dilution in net tangible book value of $4.68 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price(1)............................................ $7.00
Net tangible book value before offering(2)......................... $1.43
Increase attributable to new investors............................. 0.89
-----
Pro forma net tangible book value after offering..................... 2.32
-----
Dilution to new investors............................................ $4.68
=====
</TABLE>
The foregoing computations exclude an aggregate of 3,917,646 shares of
Common Stock issuable upon exercise of warrants and stock options outstanding as
of March 31, 1996, as follows: (i) 1,495,000 shares issuable upon exercise of
the Company's publicly traded Redeemable Common Stock Purchase Warrants at an
exercise price of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise
of various privately held warrants and options at a weighted average exercise
price of $6.55 per share, and (iii) 1,420,738 shares issuable upon exercise of
stock options outstanding under the Company's various stock option plans at a
weighted average exercise price of $2.55 per share. See "Description of Capital
Stock."
- ---------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Net tangible book value per share is equal to total tangible assets of the
Company less total liabilities divided by the number of shares of Common
Stock outstanding.
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following table presents selected financial data for the Company. The
selected financial data as of December 31, 1994 and 1995, and for each of the
three years in the period ended December 31, 1995, are derived from the
Company's financial statements which have been audited by Ernst & Young LLP,
independent auditors, which financial statements are included elsewhere in this
Prospectus. The selected financial data set forth below as of December 31, 1991,
1992 and 1993, and for each of the two years in the period ended December 31,
1992, are derived from audited financial statements, which financial statements
are not included or incorporated by reference in this Prospectus. The statement
of operations data for the three months ended March 31, 1995 and 1996 and the
balance sheet data at March 31, 1996 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited financial data
have been prepared on a basis consistent with the audited financial statements
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
condition and results of operations for the periods presented. The results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. This
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ -- $ -- $ -- $ -- $ 3,000 $ -- $ --
Operating expenses:
Research and development................... 2,712 4,425 6,737 8,499 9,804 2,105 2,560
General and administrative................. 1,089 1,052 1,386 2,049 2,390 429 588
------- ------- ------- -------- ------- ------ ------
Total operating expenses............ 3,801 5,477 8,123 10,548 12,194 2,534 3,148
------- ------- ------- -------- ------- ------ ------
Loss from operations......................... (3,801) (5,477) (8,123) (10,548) (9,194) (2,534) (3,148)
Interest income (net)........................ 475 705 176 235 640 104 229
------- ------- ------- -------- ------- ------ ------
Net loss..................................... $(3,326) $(4,772) $(7,947) $(10,313) $(8,554) $(2,430) $(2,919)
======= ======= ======= ======== ======= ====== ======
Net loss per share........................... $ (0.96) $ (1.58) $ (1.44) $ (0.79) $ (0.28) $ (0.21)
======= ======= ======== ======= ====== ======
Number of shares used in computing net loss
per share(1)............................... 4,949 5,016 7,137 10,883 8,618 14,060
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $ 16,974 $ 13,449 $ 7,699 $ 13,960 $ 23,651 $ 20,360
Total assets................................ 18,008 15,269 10,102 17,094 26,375 23,082
Obligations under capital leases............ -- -- 1,595 1,628 892 641
Deficit accumulated during the development
stage..................................... (7,191) (11,963) (19,910) (30,223) (38,777) (41,696)
Total stockholders' equity.................. 17,638 14,855 6,938 13,810 23,568 20,739
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
computation of per share data.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from the those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Since its inception in May 1989, the Company has devoted substantially all
of its resources to the research and development of technology and potential
drugs to treat antibody-mediated diseases. The Company has never generated any
revenue from product sales and has relied upon private and public investors,
equipment lease financings, a payment from its former collaborative partner, and
interest income on invested cash balances for its working capital. The Company
has been unprofitable since inception and expects to incur substantial and
increasing operating losses for at least the next several years as it increases
expenditures on research and development and allocates significant and
increasing resources to its clinical trials, manufacturing and marketing
activities. The Company's activities to date are not as broad in depth or scope
as the activities it must undertake in the future, and the Company's historical
operations and the financial information included in this Prospectus are not
indicative of its future operating results or financial condition or its ability
to operate profitably as a commercial enterprise when and if it succeeds in
bringing any product to market.
In September 1995, the Company entered into a collaborative agreement with
Leo Pharmaceutical, pursuant to which the Company granted to Leo Pharmaceutical
the exclusive right to distribute LJP 394 in Europe and the Middle East. In May
1996, the Company terminated the collaborative agreement because the Company and
Leo Pharmaceutical could not reach agreement regarding the timing and allocation
of resources with respect to further clinical trials of LJP 394. Under the
termination provisions of the agreement, the Company retained a $3.0 million
payment previously received from Leo Pharmaceutical, and neither the Company nor
Leo Pharmaceutical has any further obligations. As a result of the termination
of the collaborative agreement with Leo Pharmaceutical, the Company will be
required to fund all development costs of LJP 394. The Company intends to pursue
collaborative arrangements with other pharmaceutical companies to assist in its
research programs and the clinical development and commercialization of LJP 394
and its other drug candidates. There can be no assurance that the Company will
be able to negotiate arrangements with any other collaborative partners on
acceptable terms, if at all, or that any such collaborations will be successful.
Failure to establish or maintain collaborative arrangements will require the
Company to fund all of its research and development activities, resulting in
accelerated depletion of the Company's capital, and will require the Company to
develop its own marketing capabilities for any drug candidate that may receive
regulatory approval. As a result, failure to establish or maintain collaborative
arrangements could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Collaborative
Arrangements."
The Company expects that losses will fluctuate from quarter to quarter as a
result of differences in the timing of expenses incurred and potential revenues
from collaborative arrangements, if any, and such fluctuations may be
significant. The Company's research and development expenses are expected to
increase significantly in the future as the Company increases its development
efforts. As of March 31, 1996, the Company's accumulated deficit was
approximately $41.7 million.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Revenue
The Company had no revenue in the first quarter of 1996 or 1995.
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Research and Development Expenses
Research and development expenses increased to $2.6 million for the three
months ended March 31, 1996 from $2.1 million for the same period in 1995. The
increase was due primarily to manufacturing scale-up activities for the
Company's clinical trials of LJP 394, additions to research and development
personnel, expansion of the Company's research and development programs, and
increased facilities expenditures. The Company's research and development
expenses are expected to increase significantly in the future as the Company
increases its development efforts on various drug candidates.
General and Administrative Expenses
General and administrative expenses increased to $588,000 for the three
months ended March 31, 1996 from $429,000 for the same period in 1995. The
increase was primarily attributable to increased personnel to support increased
research and development and clinical activities, and increased facilities
expenditures.
Interest Income and Expense
Interest income increased to $286,000 for the three months ended March 31,
1996 from $190,000 for the same period in 1995. The increase was due to higher
investment balances following receipt of the net proceeds of the Company's
public offering in June 1995, its sale of stock to a private investor in October
1995, and the payment from Leo Pharmaceutical in September 1995. Interest
expense decreased to $57,000 for the three months ended March 31, 1996 from
$86,000 for the same period in 1995. The decrease was the result of decreases in
the Company's capital lease obligations as compared to the same period in 1995.
Years Ended December 31, 1995, 1994 and 1993
Revenue
The Company had revenue of $3.0 million in the year ended December 31, 1995
and no revenue in the years ended December 31, 1994 and 1993 (or at any other
time since inception). Revenue in 1995 was attributable solely to the payment
received upon the execution of the agreement with Leo Pharmaceutical.
Research and Development Expenses
Research and development expenses increased to $9.8 million for the year
ended December 31, 1995 from $8.5 million in 1994 and $6.7 million in 1993.
Several factors contributed to this increase, including additions to research
and development personnel, expansion of the Company's research and development
programs, manufacturing scale-up activities, conduct of the Company's toxicology
and clinical programs, including Phase II clinical trials of LJP 394, and
increased facilities expenditures.
General and Administrative Expenses
General and administrative expenses increased to $2.4 million for the year
ended December 31, 1995 from $2.0 million in 1994 and $1.4 million in 1993.
Several factors contributed to this increase, including increased personnel to
support increased research and development and clinical activities, increased
facilities expenditures, and expanded business development activities.
Interest Income and Expense
Interest income increased to $941,000 for the year ended December 31, 1995
from $599,000 in 1994 and $321,000 in 1993. The increase in interest income in
1995 as compared to 1994 was due to higher investment balances following receipt
of the net proceeds from the Company's public offering in June 1995, its sale of
stock to a private investor in October 1995, and the payment from Leo
Pharmaceutical in September 1995. The increase in interest income in 1994 as
compared to 1993 was due to interest income from the investment of the proceeds
from the Company's bridge financing and initial public
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offering completed in June 1994. Interest expense decreased to $301,000 in 1995
from $364,000 in 1994. Interest expense was $145,000 in 1993. The decrease in
interest expense from 1994 to 1995 resulted from decreases in the Company's
capital lease line. The increase in interest expense from 1993 to 1994 was the
result of additions to the Company's capital lease line.
Net Operating Loss Carryforwards
At December 31, 1995, the Company had available net operating loss
carryforwards and research credit carryforwards of approximately $36.3 million
and $2.0 million, respectively, for federal income tax purposes. Because of
"change of ownership" provisions of the Tax Reform Act of 1986, the Company's
net operating loss and tax credit carryforwards will be subject to an annual
limitation regarding utilization against taxable income in future periods. The
Company believes that such limitation will not have a material adverse impact on
the benefits that may arise out of its net operating loss and tax credit
carryforwards, but there can be no assurance that additional limitations arising
from any future changes in ownership will not have a material adverse impact on
the Company.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, the Company has incurred a
cumulative net loss of approximately $41.7 million, and has financed its
operations through private and public offerings of its securities, capital and
operating lease transactions, the payment from Leo Pharmaceutical, and interest
income on its invested cash balances. As of March 31, 1996, the Company had
raised $61.8 million in net proceeds since inception from sales of equity
securities.
At March 31, 1996, the Company had $20.4 million in cash, cash equivalents
and short-term investments, as compared to $23.7 million at December 31, 1995.
The Company's working capital at March 31, 1996 was $19.0 million, as compared
to $21.9 million at December 31, 1995. The decreases in cash, cash equivalents
and short-term investments and in working capital resulted from the continued
use of the Company's cash toward expenses of ongoing research and development
and clinical programs and related general and administrative expenses. The
Company invests its cash in investment-grade, interest-bearing instruments.
As of March 31, 1996, the Company had acquired an aggregate of $4.4 million
in equipment, furniture and fixtures, of which approximately $3.2 million had
been acquired through capital lease obligations. In addition, the Company leases
its office and laboratory facilities under operating leases. The Company has no
material commitments for the acquisition of property and equipment.
The Company intends to use its financial resources to fund clinical trials,
research and development, manufacturing scale-up, and for working capital and
other general corporate purposes. Anticipated near-term expenses include costs
of additional clinical trials for LJP 394, the production of LJP 394 for
toxicology studies and clinical trials, and the expansion of research
activities. The Company anticipates that its existing capital and the net
proceeds of this offering and interest earned thereon will be sufficient to fund
the Company's operations as currently planned for at least the next 24 months.
However, the amounts expended by the Company for various purposes may vary
significantly, and it is possible that the Company's cash requirements will
exceed current projections and that the Company will therefore need additional
financing sooner than currently expected. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the size and complexity of
these programs, the scope and results of preclinical testing and clinical
trials, the time and costs involved in applying for regulatory approvals, the
costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, competing technological and market developments, the ability of
the Company to establish and maintain collaborative arrangements and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. The Company expects to incur substantial and increasing losses
each year for at least the next several years as it expands its current research
and development programs and invests increasing amounts of capital in clinical
trials, manufacturing scale-
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up, establishment of marketing and sales capabilities, and administration of a
more complex organization.
The Company has no current means of generating cash flow from operations,
and LJP 394 will not generate revenues, if at all, until it has been proven safe
and effective, has received regulatory approval, and has been successfully
commercialized, a process that is expected to take at least the next several
years. The Company's other drug candidates are much less developed than LJP 394.
There can be no assurance that the Company's product development efforts with
respect to LJP 394 or any other drug candidate will be successfully completed,
that required regulatory approvals will be obtained, or that any product, if
introduced, will be successfully marketed or achieve commercial acceptance.
Accordingly, the Company must continue to rely upon outside sources of financing
to meet its capital needs for the foreseeable future.
The Company will continue to seek capital through any appropriate means,
including the issuance of its securities and establishment of collaborative
arrangements. However, there can be no assurance that additional financing will
be available on acceptable terms, and the Company's negotiating position in its
capital-raising efforts may worsen as it continues to use its existing
resources. There also can be no assurance that the Company will be able to
negotiate arrangements with any collaborative partners on acceptable terms, if
at all, or that any such collaborations will be successful.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
La Jolla Pharmaceutical Company is a leading biopharmaceutical company
focused on the research and development of highly specific therapeutics for the
treatment of certain life-threatening antibody-mediated diseases. These
diseases, including autoimmune conditions such as lupus and antibody-mediated
stroke, are caused by abnormal B cell production of antibodies that attack
healthy tissues. Current therapies for these autoimmune disorders only address
symptoms of the disease or nonspecifically suppress the normal operation of the
immune system, which often results in severe, adverse side effects and
hospitalization. The Company believes that its drug candidates, called
Toleragens, will treat the underlying cause of many antibody-mediated diseases
without these severe, adverse side effects. The Company plans to initiate a
Phase IIb clinical trial in the second half of 1996 for its lupus drug
candidate, LJP 394.
ANTIBODY-MEDIATED DISEASES
The immune system is the major biological defense mechanism responsible for
recognizing and fighting disease. The immune system identifies antigens, such as
bacteria, viruses and other disease-causing substances, and seeks to rid the
body of these antigens. There are two fundamental types of immune responses:
cell-mediated and antibody-mediated. Cell-mediated immunity is primarily
responsible for ridding the body of cells that have become infected.
Antibody-mediated immunity is primarily responsible for eliminating circulating
antigens. These immune responses are controlled by the activities of white blood
cells called T cells and B cells. T cells provide cell-mediated immunity and
regulate B cells. B cells produce antibodies that recognize and help to
eliminate antigens.
Each B cell produces antibodies against a specific structure on the
antigen's surface called an epitope. The B cell is triggered to produce
antibodies when the specific epitope is recognized by and binds to the antibody
receptors on the surface of the B cell and only when the B cell receives an
appropriate signal from a T cell. When an epitope binds to the B cell with no
corresponding T cell signal, the B cell may become "tolerized" and cease to
produce antibodies.
A properly functioning immune system distinguishes between antigens and the
body's healthy tissues. In a malfunctioning immune system, healthy tissue may
trigger an immune response that causes B cells to produce disease-causing
antibodies that attack the body's healthy tissue, resulting in anti-
body-mediated autoimmune disease. For example, B cells can produce
disease-causing antibodies that are associated with the destruction of the
kidneys in lupus and the wasting of muscles in myasthenia gravis. Other
antibody-mediated disorders include antibody-mediated stroke, recurrent fetal
loss, Rh hemolytic disease of the newborn and Graves' disease.
Current therapies for antibody-mediated diseases have significant
shortcomings, including severe side effects and a lack of specificity. Mild
forms of antibody-mediated diseases are generally treated with drugs that
address only the disease symptoms and fail to suppress disease progression
because they do not control the production of disease-causing antibodies. Severe
antibody-mediated diseases are generally treated with high levels of steroids
and immunosuppressive therapy (primarily anti-cancer drugs) which broadly
suppress the normal function of the entire immune system. These therapies can
leave patients susceptible to potentially life-threatening infections that may
require hospitalization. Repeated dosing with steroids may cause other serious
conditions, including diabetes, hypertension, cataracts, osteoporosis and
psychosis, that may limit the use of this therapy. The use of chemotherapy may
lead to acute problems, including weight loss and nausea, and long-term adverse
effects, including sterility and an increased risk of malignancies.
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LJP'S TOLERANCE TECHNOLOGY PROGRAM
The Company's Tolerance Technology program focuses on the discovery and
development of proprietary therapeutics, called Toleragens, which target and
suppress the production of specific disease-causing antibodies without affecting
the protective functions of the immune system. The Company believes that its
Toleragens will treat the underlying causes of antibody-mediated diseases, and
that its Tolerance Technology can be applied broadly wherever antibodies are
involved in the disease process.
Toleragens are composed of disease-specific epitopes and a carrier
platform, which are proprietary chemical structures developed and synthesized by
the Company. To mimic the unique epitopes on an antigen's surface, LJP
identifies and synthesizes epitopes specific to particular antibody-mediated
diseases and attaches or conjugates these epitopes to the carrier platform,
which serves as a vehicle for presenting the epitopes to the antibody receptors
on the targeted B cell. When the epitope binds to the antibody receptors on the
B cell in the absence of a T cell signal, the B cell may become tolerized and
cease to produce disease-causing antibodies. The Company believes that the
Toleragen carrier platform, or a modification thereof, can be used with epitopes
specific to other diseases to create additional therapeutics targeted at
different antibody-mediated diseases.
The Company designs its Toleragens to bind selectively to disease-causing B
cells without affecting the function of disease-fighting B cells. This process
involves: (i) collecting and purifying the disease-causing antibodies from
patients with the targeted disease; (ii) generating and selecting an epitope
that strongly binds to the purified antibodies; (iii) modifying the epitope's
structure to maximize its binding properties (optimization) and (iv) linking the
optimized epitope to the carrier platform. The Company believes this process
enables the Company to create Toleragens that will preferentially tolerize and
shut down B cells that generate antibodies with the highest binding affinity,
which are believed to be the most harmful. To achieve this process, the Company
utilizes advanced technologies in order to identify suitable epitopes that will
bind to targeted disease-causing B cells. These technologies include:
Combinatorial Epitope Libraries. Since 1991, the Company has been
developing epitope libraries to provide a large and diverse pool of epitope
candidates for screening. Each library is a collection of billions of different
epitopes that are created by introducing random sequences of DNA into bacterial
viruses. These DNA sequences direct the viruses to express a wide variety of
epitopes on their surfaces. LJP has used these libraries in the development of
drug candidates for lupus, antibody-mediated stroke, recurrent fetal loss, Rh
hemolytic disease and myasthenia gravis.
Molecular Modeling Capabilities. The Company uses nuclear magnetic
resonance spectroscopy (NMR) and molecular modeling software to determine and
analyze important three-dimensional structural features of epitopes and the
related disease-causing antibodies. These capabilities permit further
optimization of epitopes to increase their binding to targeted B cells.
Disease-Specific Screening Methods and Assays. The Company clones and
expresses receptors that are associated with the targeted disease to screen the
disease-causing antibodies from patient blood. After screening, these antibodies
are presented to the epitope libraries through a series of assays in order to
identify suitable epitope candidates. Using these methods, the Company rapidly
and efficiently selects lead epitope candidates with the highest antibody
binding affinity.
Chemical Optimization Expertise. The Company optimizes each lead epitope
candidate by changing its chemical structure. These changes to the molecule
increase its binding affinity and stability. The Company then attaches multiple
copies of the lead epitope to the carrier platform to create a Toleragen. The
Company's carrier platform technology provides a stable presentation of multiple
copies of the epitope in an optimal configuration that increases binding
affinity and thus tolerization of B cells.
BUSINESS STRATEGY
The Company's objective is to become the leading developer of highly
specific therapeutics for the treatment of life-threatening antibody-mediated
disorders such as lupus, antibody-mediated stroke,
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recurrent fetal loss, Rh hemolytic disease of the newborn, myasthenia gravis and
Graves' disease. The Company's strategy includes the following key elements:
Complete Clinical Development of LJP 394. The Company's primary near-term
goal is to complete development of LJP 394 to treat lupus. The Company plans to
initiate Phase IIb clinical trials in the second half of 1996 to explore
preliminary indications of its efficacy in a larger population of patients.
Apply Tolerance Technology to Life-threatening Antibody-mediated
Diseases. The Company is focusing on chronic, life-threatening
antibody-mediated diseases, such as lupus, for which there are no existing
treatments or for which current therapeutics have significant limitations. The
Company intends to use its Tolerance Technology to design therapeutics that
specifically address other targeted antibody-mediated diseases without adversely
affecting normal immune system function.
Form Strategic Alliances to Develop and Commercialize Product
Candidates. The Company intends to establish collaborations with pharmaceutical
companies to provide support for its research programs and the clinical
development and commercialization of its drug candidates.
Exploit Proprietary Manufacturing Technology. Through the production of
LJP 394 for clinical trials, the Company has developed proprietary synthesis and
conjugation technologies that can be used in the development of its Toleragens.
The Company intends to further develop these technologies in order to increase
manufacturing efficiencies and to apply its know-how to the development and
manufacture of other potential products.
Expand Intellectual Property Leadership Position. The Company owns five
issued patents and has filed 25 patent applications covering the Company's
Tolerance Technology and its lupus and antibody-mediated stroke drug candidates.
The Company plans to broaden this position with further discoveries and patent
filings.
PRODUCTS UNDER DEVELOPMENT
The Lupus Program
Lupus is a life-threatening antibody-mediated disease in which
disease-causing antibodies damage various tissues. The Company estimates that
there are over 500,000 lupus patients in the United States. Approximately nine
out of 10 lupus patients are women, who usually develop the disease during their
childbearing years. Lupus is characterized by a number of symptoms, including
chronic kidney inflamation, which can lead to kidney failure, and serious
episodes of cardiac and central nervous system inflammation, as well as
arthritis and rashes. Approximately 80% of patients will progress to more
serious disease symptoms, and approximately 50% of lupus patients have renal
involvement.
Antibodies to double-stranded DNA ("dsDNA") can be detected in
approximately 90% of untreated lupus patients, and are widely believed to cause
kidney disease (nephritis), often resulting in morbidity and mortality in lupus
patients. These antibodies are also associated with episodes of potentially
life-threatening inflammation called flares, which may occur more than once per
year and usually require intensive care hospitalization. Significant kidney
destruction occurs during flares. Lupus nephritis can lead to deterioration of
kidney function and end-stage kidney disease, requiring long-term renal dialysis
or kidney transplantation.
Current treatments for lupus patients with kidney disease and other serious
symptoms usually include repeated administration of steroids, often at high
levels that can have toxic effects when used as a chronic treatment regimen.
Many patients with advanced disease are also treated with immunosuppressive
therapy, including anti-cancer drugs, that have a general suppressive effect on
the immune system and may be carcinogenic. This immunosuppressive treatment
leaves the patient vulnerable to serious infection and is a significant cause of
morbidity and mortality.
The Company has designed LJP 394 to suppress the production of antibodies
to dsDNA in lupus patients without suppressing the normal function of the immune
system. The design of LJP 394 is based upon scientific evidence of the role of
antibodies to dsDNA in lupus. A recent study indicated that a
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rise in the level of antibodies to dsDNA may be predictive of flares in lupus
patients with renal involvement, and that suppressing antibodies to dsDNA by
treating these patients with steroids that non-specifically lower antibody
levels prevents relapses in a majority of patients. In a mouse model of lupus
nephritis that generates elevated levels of antibodies to dsDNA, administration
of LJP 394 reduced the production of antibodies to dsDNA, reduced the number of
antibody forming cells, and reduced kidney disease while extending the life of
the animals. The Company believes that its own and other studies provide
evidence that inhibiting antibodies to dsDNA may provide an effective therapy
for lupus nephritis.
Certain studies of lupus patients indicate that antibodies to dsDNA with
the highest binding affinity are associated with the most damage to the kidneys.
The Company believes that its Tolerance Technology process preferentially
targets these antibodies.
Results of Clinical Trials
Based on its preclinical findings, the Company filed an IND application for
LJP 394 with the FDA in August 1994. In a double-blind, placebo-controlled Phase
I clinical trial in December 1994, healthy volunteers received LJP 394 and
displayed no significant drug-related adverse effects and no immune reaction to
the drug.
To date, the Company's Phase II clinical trials have included a single-dose
trial, a repeat escalating-dose trial, and a dose-ranging trial.
The single-dose clinical trial evaluated the safety of a single, 100 mg
intravenous dose of LJP 394 in four female lupus patients by monitoring antibody
levels, blood chemistry, vital signs and complement (inflammation-promoting
proteins) levels for 28 days after dosing. LJP 394 was well tolerated by all
four patients, with no drug-related adverse clinical symptoms and no clinically
significant complement level changes. In addition, no clinically significant
immune complex formation (inflammation-promoting accumulation of antibodies and
antigens) was observed, indicating the absence of an adverse immune response to
LJP 394. A transient reduction in dsDNA antibody levels was also observed. These
results were presented at the American College of Rheumatology Conference in
October 1995.
The repeat escalating-dose clinical trial involved two female patients,
each receiving doses of 10, 10, 50, 50, 100 and 100 mg of LJP 394 at two-week
intervals. After the 10-week dosing regimen, patients were followed for six
weeks. LJP 394 was well tolerated with no drug-related adverse clinical
symptoms, no clinically significant complement changes, and no significant
immune complex formation. Six weeks after the last dose, the antibody levels in
both patients remained suppressed below baseline levels.
The dose-ranging clinical trial evaluated 58 patients with mild lupus
symptoms (53 females and five males). All patients were clinically stable and
had dsDNA antibody levels exceeding those generally found in healthy
individuals. In this clinical trial, the drug was well tolerated with no
clinically significant dose-related adverse reactions observed. The patients
were organized into nine treatment groups at three dose levels (1 mg, 10 mg and
50 mg), and three frequencies (once per week, once every two weeks and once
every four weeks). Patients were randomized to one of the nine treatment groups
so that at each dose and frequency four to seven patients received LJP 394 and
one patient received a placebo. In patients receiving weekly 10 mg or 50 mg
doses of LJP 394, antibodies to dsDNA were reduced and remained suppressed in
certain patients for up to two months after the last dose. Three patients who
began the study experienced lupus flares, and three other patients were
hospitalized as a result of adverse events that the treating clinicians believed
were related to the underlying disease or remotely related to therapy, such as
heartburn, diarrhea and phlebitis. Two of the patients with flares withdrew from
the study, as did four patients who experienced exacerbations of lupus and one
patient with herpes rash. However, no relationship was observed between the
development of an adverse event and the dose or frequency of administration of
LJP 394 or the age, race or gender of the patient.
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The Company plans to initiate Phase IIb clinical trials later this year to
explore preliminary indications of the efficacy of LJP 394 in a larger
population of patients with moderate disease symptoms. There can be no assurance
that the Company will be permitted by regulatory authorities to undertake
additional clinical trials for LJP 394, that any interim clinical results can be
replicated in further clinical testing or that LJP 394 will be effective in
inducing and sustaining antibody suppression, will prove to be clinically safe
or effective, or will receive required regulatory approvals.
Antibody-Mediated Stroke and Recurrent Fetal Loss
Stroke is a leading cause of death in the United States. In 1994, there
were approximately two million stroke patients in the United States,
approximately 500,000 new episodes occurred and approximately 150,000 people
died from stroke. This debilitating condition results from acute neurological
injury caused by the blockage or rupture of blood vessels in the brain. Many of
the blockages are caused by thromboses (blood clots), which clinicians believe
may be caused by a number of factors including a class of antibodies called
anticardiolipin antibodies, which can be identified and measured by a clinical
laboratory assay. It is estimated that 5 to 10% of the strokes in the United
States (affecting 100,000 to 200,000 patients) are caused by these antibodies.
Antibody-mediated stroke is thought to occur in younger individuals and with
greater frequency than non-antibody-mediated stroke. The cost of treatment for a
survivor of serious stroke is approximately $30,000 per year for life.
Anticardiolipin antibodies are also strongly associated with recurrent
fetal loss, a major cause of repeated miscarriage. Published clinical reports
estimate that many women with elevated anticardiolipin antibody levels
experience multiple miscarriages, delayed fetal development or premature
childbirth. Elevated levels of anticardiolipin antibodies are also found in
20-30% of patients with other clotting disorders, including deep vein
thrombosis, thrombocytopenia (platelet deficiency), cardiac valve lesion and
myocardial infarction (heart attack), as well as in approximately 30% of lupus
patients.
Current treatments for antibody-mediated thrombosis involve the use of
steroids and chronic, potentially life-long anticoagulant therapy with drugs
such as heparin or warfarin to prevent the formation of blood clots. Patients
must be carefully monitored to minimize serious bleeding episodes which can
occur because of the therapy. If patients are removed from anticoagulant
therapy, they are at an increased risk of stroke or another thrombotic episode.
Warfarin is not recommended in the treatment of recurrent fetal loss because it
is toxic to the developing fetus.
The Company believes that a Toleragen that binds to B cells producing
anticardiolipin antibodies may suppress antibody production and prevent or
reduce antibody-associated blood clots. To develop such a Toleragen, the Company
established a supply of blood samples from representative stroke and recurrent
fetal loss patients and purified antibodies from these samples. The Company then
used its epitope libraries to discover and optimize a number of epitopes
recognized by anticardiolipin antibodies. In late 1995, the Company identified a
single, broadly reactive epitope that was capable of binding to the antibodies
in the blood samples of 61 of the 65 stroke and recurrent fetal loss patients
tested. This epitope is currently being optimized in an effort to increase its
stability and binding affinity for targeted B cells. If these optimization and
other development efforts are successful, the Company intends to incorporate the
optimized epitope into a Toleragen to begin preclinical testing. However, there
can be no assurance that the Company will successfully optimize the epitope or
that the Company's development efforts will lead to clinical trials.
Rh Hemolytic Disease of the Newborn
Rh hemolytic disease of the newborn is a life-threatening fetal condition
characterized by the hemolysis (destruction) of fetal red blood cells. This
condition occurs in Rh incompatible pregnancies in which maternal antibodies to
Rh cross the placenta, bind to fetal red blood cells and cause their
destruction. Rh is a family of proteins on the surface of red blood cells. When
the most common form of these proteins is present, the blood type is Rh(+), and
when it is absent, the blood type is Rh(-). A pregnancy is "Rh incompatible"
when the fetus is Rh(+) and the mother is Rh(-).
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There are approximately 500,000 Rh incompatible pregnancies in the United
States each year. Despite current treatment that attempt to control maternal
immune systems with Rh immunoglobulin, over 5,000 women each year in the United
States begin producing antibodies against fetal red blood cells. Once a mother
begins producing these antibodies, the Rh immunoglobulin therapy can no longer
be used and she has a significant risk of developing Rh hemolytic disease in a
later pregnancy. Severe cases of Rh hemolytic disease can then be treated only
by giving the fetus blood transfusions in the womb, a high-risk procedure
usually repeated several times prior to birth. These blood transfusions and
associated amniocentesis procedures can be risky to the fetus and mother, and
according to the Company's estimates can cost more than $30,000 during the
course of a pregnancy.
The Company believes that a Toleragen that binds to the appropriate
maternal B cells will suppress Rh antibody production, and that once the level
of antibodies to Rh(+) red blood cells is reduced, the risk of life-threatening
hemolysis will be eliminated. LJP has purified antibodies to Rh from blood
samples taken from sensitized patients and has identified several epitopes bound
by antibodies to Rh. The Company is currently using its epitope libraries to
screen and further define these epitopes, with the expectation of using selected
epitopes to synthesize lead Toleragens.
Other Antibody-Mediated Diseases
The Company believes its Tolerance Technology may be applicable to many
diseases and conditions caused by the production of disease-causing antibodies,
including myasthenia gravis and Graves' disease. Myasthenia gravis is a form of
muscular paralysis in which neuromuscular receptors are attacked by antibodies,
which can lead to a wasting of muscles, progressive loss of strength and
life-threatening respiratory arrest. This disease affected an estimated 20,000
people in the United States in 1994. Graves' disease is caused by antibodies
that bind to the thyroid stimulating hormone receptor and stimulate excessive
production of thyroid hormones, which results in hyperthyroidism (including
potentially life-threatening increases in heart rate, blood pressure and body
temperature). Graves' disease affected over one million people in the United
States in 1987. The Company has cloned human receptors for acetylcholine
(myasthenia gravis) and thyroid stimulating hormone (Graves' disease), which can
be used to purify antibodies from the blood of patients in order to identify
potential epitope candidates.
Inflammation
LJP's inflammation technology targets a family of enzymes, phospholipase
A(2) (PLA2), critical to the inflammation process. Inflammation is another
important defense mechanism that works in parallel with the body's immune system
to eliminate foreign substances from the body. However, when inflammatory cells
and chemical mediators called prostaglandins and leukotrienes are
inappropriately activated, they may attack healthy tissue, resulting in
disorders such as rheumatoid arthritis, inflammatory bowel disease and asthma.
These disorders are currently treated with anti-inflammatory agents such as
steroids, which can have severe side effects. PLA2 enzymes play a critical role
in this process by catalyzing the formation of prostaglandins and leukotrienes.
The Company believes that a drug that inhibits PLA2 enzymes could selectively
reduce the production of the inflammatory mediators and provide the
anti-inflammatory benefits of steroids without their serious side effects. LJP
has established in vitro assays to measure the activity of potential PLA2
inhibitors and has cloned, expressed and purified PLA2 enzymes from human tissue
and a blood cell line. The Company's efforts in the inflammation area have been
scaled back to enable the Company to focus its resources on the Tolerance
Technology program for the foreseeable future. To retain its exclusive license
rights to certain PLA2 inhibitor technology licensed from The Regents of the
University of California, the Company must meet and satisfy certain development
milestones in addition to its royalty and other obligations under the agreement.
These milestones include submission of an IND application with the FDA for a
potential product utilizing the licensed technology by 1999, and other standards
designed to promote diligent development and marketing of potential products.
There can be no assurance that the Company will meet these milestones, and the
Company may decide to discontinue the inflammation program at any time.
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COLLABORATIVE ARRANGEMENTS
As part of its business strategy, the Company pursues collaborations with
pharmaceutical companies in an effort to access their research, drug
development, manufacturing, marketing and financial resources. In September
1995, the Company entered into a collaborative agreement with Leo
Pharmaceutical, pursuant to which the Company granted to Leo Pharmaceutical the
exclusive right to distribute LJP 394 in Europe and the Middle East. In May
1996, the Company terminated the collaborative agreement because the Company and
Leo Pharmaceutical could not reach agreement regarding the timing and allocation
of resources with respect to further clinical trials of LJP 394. As a result of
the termination of the collaborative relationship with Leo Pharmaceutical, the
Company will be required to fund all development costs of LJP 394. The Company
intends to pursue collaborative arrangements with other pharmaceutical companies
to assist in its research programs and the clinical development and
commercialization of LJP 394 and its other drug candidates. There can be no
assurance that the Company will be able to negotiate arrangements with any other
collaborative partners on acceptable terms, if at all, or that any such
collaborations will be successful. Failure to establish or maintain
collaborative arrangements will require the Company to fund all of its research
and development activities, resulting in accelerated depletion of the Company's
capital, and will require the Company to develop its own marketing capabilities
for any drug candidate that may receive regulatory approval. As a result,
failure to establish or maintain collaborative arrangements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Even if the Company is successful in establishing new collaborative
arrangements, there can be no assurance that any future collaborative partner
will continue funding any particular program or will not pursue alternative
technologies or develop alternative drug candidates, either individually or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by the Company. Furthermore,
competing products, either developed by a collaborative partner or to which a
collaborative partner has rights, may result in the withdrawal of support by the
collaborative partner with respect to all or a portion of the Company's
technology. The failure of any collaborative partner to continue funding any
particular program of the Company or to commercialize successfully any product
could delay or halt the development or commercialization of any products
involved in such program and could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANUFACTURING
The Company has constructed and is presently operating a pilot production
plant for the manufacture of LJP 394 for clinical trials. Through internal
development programs and external collaborations, the Company has made several
improvements to the manufacturing process for LJP 394 that have reduced costs
and increased capacity. The Company believes sufficient capacity exists to meet
its anticipated research and clinical trial needs for LJP 394. The Company has
developed proprietary synthesis and conjugation technologies that can be used in
the development of its Toleragens. The Company intends to further develop these
technologies and plans to manufacture any potential products using internal
capabilities and third-party sources. The Company intends to use its
manufacturing technologies to increase manufacturing efficiencies and apply its
know-how to the development and manufacture of other potential products.
The manufacture of the Company's potential products for clinical trials and
the manufacture of any resulting products for commercial purposes is subject to
cGMP as defined by the FDA. While the Company is producing limited quantities of
LJP 394 for clinical trials, its current facilities are not adequate for
commercial production of its potential products. The Company will be required to
invest substantial amounts of capital in the expansion of its facilities to
enable manufacture of any products in commercial quantities. The Company has
never operated an FDA-approved manufacturing facility, and there can be no
assurance that it will obtain necessary approvals. The Company has limited
manufacturing experience, and no assurance can be given that it will be able to
make the transition to commercial production successfully. The Company may enter
into arrangements with contract
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<PAGE> 32
manufacturers to expand its own production capacity in order to meet
requirements for its products, or to attempt to improve manufacturing
efficiency. If the Company chooses to contract for manufacturing services and
encounters delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished products, clinical
trials, market introduction and subsequent sales of such products would be
adversely affected. Moreover, contract manufacturers must operate in compliance
with the FDA's cGMP requirements. The Company's potential dependence upon third
parties for the manufacture of its products may adversely affect the Company's
profit margins and its ability to develop and deliver such products on a timely
and competitive basis.
MARKETING AND SALES
In order to commercialize any drug candidate approved by the FDA, the
Company must either develop a marketing and sales force or enter into marketing
arrangements with third parties. Such arrangements may be exclusive or
nonexclusive and may provide for marketing rights worldwide or in a specific
market. The Company currently has no such third-party arrangements, and there
can be no assurance that the Company will be able to enter into any marketing
agreements on terms favorable to the Company, if at all, or that any such
agreements that the Company may enter into will result in payments to the
Company. To the extent that the Company enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues to be
received by the Company will be dependent on the efforts of others and there can
be no assurance that such efforts will be successful. If the Company chooses to
attempt to develop its own marketing and sales capability, it will compete with
other companies that currently have experienced and well-funded marketing and
sales operations. Furthermore, there can be no assurance that the Company will
be able to establish sales and distribution capabilities without undue delays or
expenditures or that it will be successful in gaining market acceptance for any
of its drug candidates.
PATENTS AND PROPRIETARY TECHNOLOGIES
The Company files patent applications in the United States and in foreign
countries, as it deems appropriate, for protection of its proprietary
technologies and drug candidates. The Company has received two issued United
States patents and one issued Australian patent concerning its lupus Toleragens
(expiring in 2009, 2011 and 2007, respectively) and one issued United States
patent concerning its overall Tolerance Technology (expiring in 2010). The
Company has received Notices of Intent to grant a European patent (expiring in
2011) on its lupus Toleragens and a European patent (expiring in 2012) on its
overall Tolerance Technology. The Company has also received one United States
patent (expiring in 2012) on linkage chemistries for its Toleragens. The Company
has filed 25 patent applications concerning its Tolerance Technology and lupus
Toleragens in the United States, Canada, Europe, Japan and several other
countries. The Company also has an option to obtain the exclusive license to
several issued United States patents and related technology concerning compounds
that may be used in the potential treatment of muscular dystrophies or
myasthenia gravis. The Company's decision to exercise the option, which will
require payment of a nonrefundable advance against future royalties of $100,000,
will be made based upon the results of future studies of this technology.
The Company's success will depend upon its ability to obtain patent
protection for its therapeutic approaches and for any developed products, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. While the Company has received patents covering certain
aspects of its technology, there can be no assurance that any additional patents
will be issued, that the scope of any patent protection will be sufficient, or
that any current or future issued patents will be held valid if subsequently
challenged.
There is a substantial backlog of biotechnology patent applications at the
USPTO that may delay the review and issuance of any patents. The patent position
of biotechnology firms generally is highly uncertain and involves complex legal
and factual questions, and no consistent policy has emerged regarding the
breadth of claims covered in biotechnology patents or protection afforded by
such patents. To date, the Company has rights to certain United States and
foreign issued patents and has
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filed or participated as a licensee in the filing of a number of patent
applications in the United States relating to the Company's technology, as well
as foreign counterparts of certain of these applications in certain countries.
The Company intends to continue to file applications as appropriate for patents
covering both its products and processes. There can be no assurance that patents
will issue from any of these applications, or that claims allowed under issued
patents will be sufficient to protect the Company's technology. Patent
applications in the United States are maintained in secrecy until a patent
issues, and the Company cannot be certain that others have not filed patent
applications for technology covered by the Company's pending applications or
that the Company was the first to invent, or to file patent applications for,
such technology. Competitors may have filed applications for, or may have
received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes that block or compete with those of the
Company.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have filed or may file patent applications, and have
received or may receive patents, in the fields being pursued by the Company.
Certain of these applications or patents may be competitive with the Company's
applications or conflict in certain respects with claims made under the
Company's applications. In particular, the Company is aware of one currently
pending United States patent application that, if allowed, may contain claims
covering subject matter that may be competitive or conflicting with the
Company's patents and patent applications. Any conflict between the Company's
patents and patent applications and patents or patent applications of third
parties could result in a significant reduction of the coverage of the Company's
existing patents or any future patents that may be issued. In addition, to
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO or in opposition, nullity or
other proceedings before foreign agencies with respect to any of its existing
patents or patent applications or any future patents or applications, which
could result in substantial cost to the Company. Further, the Company may have
to participate at substantial cost in International Trade Commission proceedings
to abate importation of goods which would compete unfairly with products of the
Company. If patents containing competitive or conflicting claims are issued to
other parties and such claims are ultimately determined to be valid, there can
be no assurance that the Company would be able to obtain licenses to these
patents at a reasonable cost, if at all, or be able to develop or obtain
alternative technology.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain consultants. There can be no assurance
that relevant inventions will not be developed by a person not bound by an
invention assignment agreement, or that binding agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. In addition, the Company could incur substantial
costs in defending against suits brought against it by others for infringement
of intellectual property rights or in prosecuting suits which the Company might
bring against other parties to protect its intellectual property rights.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid
technological change. Competition from domestic and foreign biotechnology
companies, large pharmaceutical companies and other institutions is intense and
expected to increase. A number of companies are pursuing the development of
pharmaceuticals in the Company's targeted areas. These include Genelabs
Technologies, Inc., which has initiated Phase III clinical trials of a hormone
for the treatment of lupus, and other competitors that are working on
third-generation steroids. Many other companies are in earlier stages of
developing other potential therapies for lupus.
In addition, there are many academic institutions, both public and private,
engaged in activities relating to research and development of therapeutics for
autoimmune, inflammatory and other
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diseases. Most of these companies and institutions have substantially greater
facilities, resources, research and development capabilities, regulatory
compliance expertise, and manufacturing and marketing capabilities than the
Company. In addition, other technologies may in the future be the basis of
competitive products. There can be no assurance that the Company's competitors
will not develop or obtain regulatory approval for products more rapidly than
the Company, or develop and market technologies and products that are more
effective than those being developed by the Company or that would render the
Company's technology and proposed products obsolete or noncompetitive.
The Company believes that its ability to compete successfully will depend
upon its ability to attract and retain experienced scientists, develop patented
or proprietary technologies and products, obtain regulatory approvals,
manufacture and market products either alone or through third parties, and
secure additional capital resources to fund anticipated net losses for at least
the next several years. The Company expects that competition among products
approved for marketing will be based in large part upon product safety,
efficacy, reliability, availability, price and patent position.
GOVERNMENT REGULATION
The Company's research and development activities and the future
manufacturing and marketing of any products developed by the Company are subject
to significant regulation by numerous government authorities in the United
States and other countries. In the United States, the Federal Food, Drug and
Cosmetic Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of any products the Company may develop. In addition to FDA
regulations, the Company is subject to other federal, state and local
regulations such as the Occupational Safety and Health Act and the Environmental
Protection Act as well as regulations governing the handling, use and disposal
of radioactive and other hazardous materials used by the Company in its research
activities. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
In addition, this regulatory framework is subject to changes that may affect
approval, delay an application or require additional expenditures by the
Company.
The steps required before a pharmaceutical compound may be marketed in the
United States include (i) preclinical laboratory and animal testing, (ii)
submission to the FDA of an IND application, which must become effective before
clinical trials may commence, (iii) adequate and well-controlled clinical trials
to establish the safety and efficacy of the drug, (iv) submission to the FDA of
an NDA and (v) FDA approval of the NDA prior to any commercial sale or shipment
of the drug. In addition to obtaining FDA approval for each product, each
domestic drug manufacturing establishment must be registered with, and approved
by, the FDA. Drug product manufacturing establishments located in California
also must be licensed by the State of California in compliance with separate
regulatory requirements.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of preclinical testing are submitted to the FDA as part
of an IND and, unless the FDA objects, the IND will become effective 30 days
following its receipt by the FDA.
Clinical trials involve administration of the drug to healthy volunteers or
to patients diagnosed with the condition for which the drug is being tested
under the supervision of a qualified clinical investigator. Clinical trials are
conducted in accordance with protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol is submitted to the FDA as part of the IND. Each
clinical trial is conducted under the auspices of an independent Institutional
Review Board (the "IRB"). The IRB will consider, among other matters, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves trials in a limited patient population to (i) characterize the
actions of the drug in
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targeted indications, (ii) determine drug tolerance and optimal dosage and (iii)
identify possible adverse side effects and safety risks. When a compound is
found to be effective and to have an acceptable safety profile in Phase II
clinical trials, Phase III clinical trials are undertaken to further evaluate
and confirm clinical efficacy and safety within an expanded patient population
at multiple clinical trial sites. The FDA reviews both the clinical plans and
the results of the trials and may discontinue the trials at any time if
significant safety issues arise.
The results of preclinical testing and clinical trials are submitted to the
FDA in the form of an NDA or Product License Application for marketing approval.
The testing and approval process is likely to require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. In addition, the Company will be required to obtain
separate regulatory approval for each indicated use of a drug. The approval
process is affected by a number of factors, including the severity of the
disease, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials.
Additional preclinical testing or clinical trials may be requested during
the FDA review period and may delay marketing approval. After FDA approval for
the initial indications, further clinical trials may be necessary to gain
approval for the use of the product for additional indications. The FDA mandates
that adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Among the conditions for FDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirements. Domestic manufacturing facilities are subject to
biennial FDA inspections and foreign manufacturing facilities are subject to
periodic inspections by the FDA or foreign regulatory authorities.
The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and marketing
approval for pharmaceutical products to be marketed outside of the United
States. The approval procedure varies among countries and can involve additional
testing, and the time required to obtain approval may differ from that required
to obtain FDA approval. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval, and approval by the FDA does
not ensure approval by the health authorities of any other country.
EMPLOYEES
The Company has 76 full-time employees (including 15 Ph.D.s and M.D.s.), 57
of whom are involved full-time in research, development and manufacturing
scale-up activities. All of the Company's management have had prior experience
with pharmaceutical, biotechnology or medical product companies. The Company
believes that it has been successful in attracting skilled and experienced
scientific personnel, but competition for such personnel is intense and there
can be no assurance that the Company will be able to attract and retain the
individuals needed. None of the Company's employees is covered by collective
bargaining agreements, and management considers relations with the Company's
employees to be good.
FACILITIES
The Company leases a 35,000 square-foot facility in San Diego, California.
This facility is subject to a lease that expires in 2004 and includes an option
exercisable by the Company to extend the term of the agreement for an additional
five years, as well as an option to lease an adjacent 19,000 square foot
facility. The Company believes that these facilities will be adequate to meet
its needs for the near term. Over the longer term, management believes
additional space can be secured at commercially reasonable rates.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information with respect to the executive officers and directors of the
Company as of March 31, 1996 is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Steven B. Engle............... 41 President, Chief Executive Officer and Director
Stephen M. Coutts, Ph.D. ..... 54 Executive Vice President, Research and Development
Peter G. Ulrich............... 43 Senior Vice President, Corporate Development and
Marketing
Mark T. Edgar, Ph.D. ......... 44 Vice President, Manufacturing
Wood C. Erwin................. 45 Vice President, Finance, Chief Financial Officer and
Secretary
Bonnie Hepburn, M.D. ......... 55 Vice President, Clinical Development
Andrew Wiseman, Ph.D. ........ 47 Director, Business Development
Joseph Stemler................ 65 Chairman of the Board
Thomas H. Adams, Ph.D.(1)..... 53 Director
William E. Engbers(1)......... 53 Director
Robert A. Fildes, Ph.D.(1).... 57 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee and the Compensation Committee
Steven B. Engle joined the Company as Executive Vice President and Chief
Operating Officer in 1993, and became President and a Director in 1994 and Chief
Executive Officer in 1995. From 1991 to 1993, Mr. Engle served as Vice President
of Marketing, Acting Vice President of Manufacturing and Acting Chief Executive
Officer for Cygnus Inc., a publicly held company that develops drug delivery
systems for therapeutic drugs. From 1987 to 1991, he was Chief Executive Officer
of Quantum Management Company, a management consulting firm serving the
pharmaceutical and biotechnology industry. From 1984 to 1987, he was Vice
President of Marketing and Divisional General Manager for Micro Power Systems,
Inc., a privately held company that manufactures high technology products
including medical devices. He holds an MSEE and a BSEE in Biomedical Engineering
from the University of Texas.
Stephen M. Coutts, Ph.D., has served as the Executive Vice President of
Research and Development of the Company since its formation in May 1989. From
1987 until 1989, Dr. Coutts was Vice President of Therapeutics Research and
Development for Quidel Corporation, a publicly held company that markets human
diagnostic kits. From 1986 to 1987 he served as Executive Director of Scientific
Research of the Purdue Frederick Company, a pharmaceutical company, and from
1976 to 1986 he held various positions with the Revlon Health Care Group,
including Director of Revlon's Department of Immunobiology. From 1968 to 1976,
Dr. Coutts held academic research and teaching positions at The Institute for
Molecular Biology (Braunschweig, Germany) and Princeton University. Dr. Coutts
holds an MBA from New York University and a Ph.D. in Biochemistry from Harvard
University.
Peter G. Ulrich joined the Company in December 1995 as Senior Vice
President of Corporate Development and Marketing. Mr. Ulrich has served as
President and Chief Executive Officer of three biotechnology companies:
MedClone, Inc., a biotechnology company developing therapeutics for autoimmune
diseases such as lupus, from 1991 to 1994, LipoGen, Inc. from 1988 to 1990, and
BIOTX from 1985 to 1988. From 1982 to 1985, he was the Vice President of
Marketing at Analytical Luminescence Laboratory, and from 1974 to 1982 he held
various positions with Baxter Travenol Laboratories, including International
Marketing Manager and National Sales Manager. Before joining the Company, Mr.
Ulrich served for one year as Assistant Vice President of Technology Development
for the University of Alabama at Birmingham. Mr. Ulrich holds a B.A. from the
University
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of Texas at Austin and a Masters Degree in International Business Administration
from the University of Dallas.
Mark T. Edgar, Ph.D., joined the Company in May 1995 as Vice President of
Manufacturing. Prior to joining the Company, Dr. Edgar was with Syntex Corp. for
15 years, during which time he served in a variety of capacities, including as
Vice President and Director of the CNTF Program Management Team at Syntex
Development Research from 1993 to 1995 Director of Operations at Syntex Bahamas
Chemical from 1990 to 1993; and Director of Manufacturing Engineering and
Materials at Syntex Laboratories, Inc. from 1987 to 1990. Dr. Edgar holds a
Ph.D. in organic chemistry from Arizona State University and an MBA from the
University of Colorado.
Wood C. Erwin joined the Company as Vice President of Finance and Chief
Financial Officer in January 1996. Before joining the Company, Mr. Erwin served
during 1995 as Vice President of Finance and Chief Financial Officer of Resource
Optimization, Inc., a software company. From 1992 to 1995 he served as Chief
Financial Officer of MedClone, Inc., a biotechnology company developing
therapeutics for autoimmune diseases. From 1991 to 1992, Mr. Erwin served as
Vice President of Finance and Chief Financial Officer of Med Images, Inc., a
provider of computerized services to hospitals; and from 1986 to 1991 as Chief
Financial Officer and Director of Operations of LipoGen, Inc., a biotechnology
company. Mr. Erwin was also the Controller of Plasti-Line, Inc., a publicly
traded manufacturer of illuminated signs; Vice President of Finance of Kusan,
Inc., a subsidiary of Bethlehem Steel Corp.; and Cost Analyst for Oscar Mayer
Company. Mr. Erwin holds BS and MBA degrees from the University of Tennessee and
is a Certified Public Accountant and Certified Management Accountant.
Bonnie Hepburn, M.D., a practicing rheumatologist, joined the Company in
April 1996 as Vice President of Clinical Development. Prior to joining the
Company, from 1994 to 1995, Dr. Hepburn served as Director of Immunology
Clinical Research for Centocor. From 1987 to 1994, Dr. Hepburn held several
positions with Ciba-Geigy Ltd., including Head of Inflammation/Bone/Allergy
Clinical Research, Executive Director of Anti-Inflammatory/Pulmonary Clinical
Research, and Director of Regulatory Affairs. She served as a member and
chairman on the FDA Arthritis Advisory Committee from 1980 to 1983 and also on
the Committee for Revision of FDA Antirheumatic Drug Guidelines. Since 1975, Dr.
Hepburn has held a faculty position at UMDNJ-Robert Wood Johnson Medical School
(formerly Rutgers Medical School). Dr. Hepburn received her B.A. from Wellesley
College and her M.D. from the University of Pennsylvania School of Medicine, and
completed her medical residency and fellowship in rheumatology at the Mayo
Clinic.
Andrew Wiseman, Ph.D., has served as the Director of Business Development
for the Company since its formation in May 1989. From 1983 to 1989, Dr. Wiseman
held several positions with Quidel Corporation including Senior Research
Scientist, Project Manager in Diagnostic Research and Development and Manager of
Business Development. Dr. Wiseman was an Associate Member (Professor) at the
Medical Biology Institute and an Assistant Member at the Scripps Clinic and
Research Foundation and holds a Ph.D. in Genetics from Duke University.
Joseph Stemler has served as Chairman of the Board of Directors of the
Company since its formation in May 1989, and also served as its Chief Executive
Officer until July 1995. From 1985 to 1989, Mr. Stemler served as Chief
Executive Officer and Chairman of Quidel Corporation, a publicly held company
that markets human diagnostic test kits. From 1978 to 1985, he served as
President of Bentley Laboratories and, after Bentley's acquisition by American
Hospital Supply Corporation (AHSC), as President of AHSC's Bentley subsidiary.
Mr. Stemler is currently a director of Sunrise Medical Inc., a publicly held
manufacturer and provider of medical products used in the rehabilitation and
recovery phases of patient care, Safeskin Corporation, a publicly held
manufacturer of surgical gloves, and Scholle Corporation, a privately held
company that develops, manufactures and markets aseptic flexible food
containers. He is an engineering graduate of Illinois Institute of Technology
and also holds advanced degrees in engineering and business administration.
Thomas H. Adams has been a director of the Company since 1991, and is the
founder, Chairman and Chief Executive Officer of Genta, Inc., a publicly held
biotechnology company in the field of
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antisense technology. Before founding Genta, Dr. Adams founded Gen-Probe, Inc.
in 1984 and served as its Chief Executive Officer and Chairman until its
acquisition by Chugai Pharmaceuticals, Inc. in 1989. Before founding Gen-Probe,
Dr. Adams was Senior Vice President of Research and Development at Hybritech
until 1984. Hybritech was later acquired by Eli Lilly and Co. in 1986. Dr. Adams
has also held management positions at Technicon Instruments and the Hyland
Division of Baxter Travenol. In addition to his chairmanship of Genta, Inc., Dr.
Adams currently serves as a director of Life Technologies, Inc., a publicly held
company that develops, manufactures and markets products to support biomedical
research. Dr. Adams holds a Ph.D. in Biochemistry from the University of
California at Riverside.
William E. Engbers has been a director of the Company since 1991, and has
been Venture Capital Manager for Allstate Insurance Company since 1989. Before
joining Allstate, he was a Vice President at Whitehead Associates, an investment
firm, from 1983 to 1987, and Chairman of the Board of Plant Genetics, Inc., a
publicly-traded biotechnology company, from 1982 to 1989. Mr. Engbers is also a
director of Applied Biometrics, a publicly held medical device company, DM
Management, a publicly held women's apparel company, and Diametrics Medical,
Inc., a publicly held manufacturer and marketer of blood chemistry testing
systems. Mr. Engbers received a BBA degree in accounting from Marshall
University and has attended graduate business school at Marshall and Seattle
University.
Robert A. Fildes has been a director of the Company since 1991, and has
been Chairman and Chief Executive Officer of Scotgen Biopharmaceuticals, Inc., a
privately held company in the field of human monoclonal antibody technology,
since 1993. From 1990 to 1993, Dr. Fildes was an independent consultant in the
biopharmaceutical industry. Dr. Fildes was the President and Chief Executive
Officer of Cetus Corporation from 1982 to 1990. Before his eight years at Cetus,
Dr. Fildes was the President of Biogen, Inc. from 1980 to 1982 and the Vice
President of Operations for the Industrial Division of Bristol-Myers from 1975
to 1980. Dr. Fildes is also a director of Carrington Laboratories, a publicly
held company that develops and manufactures products for wound and skin care.
Dr. Fildes holds a D.C.C. degree in Microbial Bio-chemistry and a Ph.D. in
Biochemical Genetics from the University of London.
All directors of the Company are elected annually and hold office until the
next annual meeting of stockholders or until their successors have been elected
and qualified. Officers serve at the pleasure of the Board of Directors, except
where the Company has entered into an employment agreement with such officer.
SCIENTIFIC ADVISORS TO THE COMPANY
The Company has established relationships with a group of scientific
advisors with recognized expertise in immunology, synthetic chemistry,
inflammation or one or more of the Company's targeted diseases. The Company's
scientific advisors consult with management and key scientific employees of the
Company to assist the Company in identifying scientific and product development
opportunities, review the progress of the Company's specific projects, and
recruit and evaluate the Company's scientific staff. The nature, scope and
frequency of consultations between the Company and each scientific advisor
varies depending upon the Company's current activities, the need for specific
assistance and the individual scientific advisor. While contact with certain
scientific advisors may be limited to telephonic consultations one or more times
a year, on-site consultations with other scientific advisors may occur on a
quarterly or monthly basis.
The Company pays certain of its scientific advisors consulting fees and
provides reimbursement for expenses incurred in connection with service to the
Company. The Company has also granted stock options to certain of its
consultants. During the year ended December 31, 1995, the Company paid an
aggregate of approximately $102,000 in consulting fees and granted options to
purchase an aggregate of 7,000 shares of Common Stock to its scientific advisors
for their services. These options have an exercise price of $3.13 per share and
become exercisable in five equal installments commencing one year from the date
of grant.
37
<PAGE> 39
Although the Company expects to receive guidance from its scientific
advisors, all of these advisors have substantial commitments to third parties
and are able to devote only a limited portion of their time to the Company. The
Company's scientific advisors have entered into confidentiality agreements with
the Company, and agreements with certain consultants also include an invention
assignment for the benefit of the Company.
The Company's scientific advisors and consultants include:
K. Frank Austen, M.D., Chairman, Dept. of Rheumatology & Immunology,
Harvard Medical School, Boston, Massachusetts. Dr. Austen has studied the role
of cells and inflammatory mediators in allergy and inflammation, as well as the
ability of biological mediators to influence cell function and phenotype and
various inflammatory diseases. Dr. Austen's numerous publications in medicine
and immunology are frequently cited, and he maintains active research and
clinical programs.
Bruce M. Coull, M.D., Director, Oregon Stroke Center and Professor, Dept.
of Neurology, Oregon Health Science University, Portland, Oregon. Dr. Coull
researches the role of antiphospholipid antibodies in stroke and treats stroke
patients. He is a member of a clinical research organization (APASS) examining
the role of antibodies in stroke.
Edward Dennis, Ph.D., Professor, Dept. of Chemistry, University of
California, San Diego, California. Dr. Dennis studies the role of PLA2 enzymes
in inflammation and is currently researching the regulation of secreted and
cellular PLA2. Dr. Dennis is the co-inventor of the PLA2 inhibitor technology
licensed to the Company.
James Donadio, M.D., Dept. of Nephrology, Mayo Clinic, Rochester,
Minnesota. Dr. Donadio actively treats a large number of lupus patients at the
Mayo Clinic and has studied and contributed to the development of current
treatments for lupus nephritis.
Richard Furie, M.D., Associate Professor of Clinical Medicine, Cornell
University Medical College, North Shore University Hospital, Manhasset, New
York. Dr. Furie treats a large number of lupus patients and participated in the
Phase II clinical studies of LJP 394. He also treats patients with
antiphospholipid antibody syndrome.
Richard Glassock, M.D., Chairman and Professor, Department of Internal
Medicine, University of Kentucky, Lexington, Kentucky. Dr. Glassock has a large
practice of lupus patients and has studied and researched lupus nephritis. Dr.
Glassock is the editor of several textbooks on the kidney and is a leading
expert in the general field of nephrology.
Steven A. Krilis, Ph.D., FRACP, Professor and Director of the Department of
Immunology, Allergy and Infectious Disease, the St. George Hospital, Kogarah,
Australia. Dr. Krilis investigates the biochemistry and immunology of
antiphospholipid antibodies.
Steven R. Levine, M.D., Clinical Associate Professor of Neurology,
University of Michigan Medical School, Henry Ford Hospital, Detroit, Michigan.
Dr. Levine researches the role of antiphospholipid antibodies in stroke and
treats stroke patients. He is a member of a clinical organization (APASS)
examining the role of antibodies in stroke.
Edmond T. Lewis, M.D., Chief of Nephrology, Rush Presbyterian St. Luke's
Medical Center, Chicago, Illinois. Dr. Lewis is a clinical researcher and
nephrologist responsible for a large number of lupus patients. He is a leader of
the lupus collaborative study group, a national organization of clinical
researchers in lupus, and has overseen the design and supervision of large
multi-center clinical studies in lupus nephritis.
S.P. Masouredis, M.D., Ph.D., Professor of Pathology Emeritus, University
of California, San Diego School of Medicine, San Diego, California. Dr.
Masouredis is an expert in blood transfusion medicine and is the former Director
of the UCSD Medical Center Blood Bank.
Jamie Scott, M.D., Ph.D., Assistant Research Professor, Frasier University,
Burnaby, British Columbia. Dr. Scott was a co-discoverer of phage epitope
library technology with George Smith while
38
<PAGE> 40
they collaborated at the University of Missouri. She is currently researching
the use of peptide libraries to evaluate various biological molecules.
Michael Swenson, M.D., Chief of Staff, University of California, San Diego
Medical Center, San Diego, California. Dr. Swenson treats a large number of
patients with neuromuscular disorders. Dr. Swenson is active in the clinical
research of myasthenia gravis and heads the Myasthenia Gravis Clinic at the UCSD
Medical Center.
Gregory L. Verdine, Ph.D., Professor of Chemistry, Harvard University,
Cambridge, Massachusetts. Dr. Verdine's research areas are the investigation of
protein-DNA interactions, using the tools of molecular biology and DNA synthetic
chemistry. He also conducts research in the biochemistry of key regulatory
proteins.
39
<PAGE> 41
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the ownership of the
Company's Common Stock as of March 31, 1996 by (i) those known by the Company to
be beneficial owners of 5% or more of the outstanding shares of the Company's
Common Stock, (ii) each director of the Company, (iii) each of the Company's
executive officers and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- ------------------------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Biotech Target S.A.(2)................................ 2,000,000 14.2% 11.7%
Swiss Bank Tower
Panama 1
Republic of Panama
Allstate Insurance Company(3)......................... 1,247,211 8.9% 7.3%
Allstate Plaza G5D
Northbrook, Illinois 60062
New York Life Insurance Company(4).................... 1,095,608 7.8% 6.4%
51 Madison Avenue
New York, New York 10010
State of Wisconsin Investment Board................... 1,022,500 7.3% 6.0%
121 East Wilson
Madison, Wisconsin 53707
Putnam Investments.................................... 762,500 5.4% 4.5%
99 High Street, 9th Floor
Boston, MA 02110
E.M. Warburg, Pincus & Co., Inc....................... 760,200 5.4% 4.5%
466 Lexington Ave., 10th Floor
New York, NY 10017
Thomas H. Adams, Ph.D.(5)............................. 15,400 * *
Stephen M. Coutts, Ph.D.(6)........................... 160,639 1.1% *
Mark T. Edgar(5)...................................... 6,500 * *
William E. Engbers(5)(7).............................. 10,000 * *
Steven B. Engle(8).................................... 130,881 * *
Wood C. Erwin......................................... -- * *
Robert A. Fildes, Ph.D.(9)............................ 47,802 * *
Bonnie Hepburn, M.D. ................................. -- * *
Joseph Stemler(10).................................... 382,375 2.7% 2.2%
Peter G. Ulrich....................................... -- * *
Andrew Wiseman, Ph.D.(11) ............................ 15,600 * *
All directors and executive officers as a group
(11 persons)(12).................................... 769,197 5.5% 4.5%
</TABLE>
- ---------------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3 (d) under the Securities Exchange Act of
1934, as amended. Applicable percentage ownership is based on 14,072,732
shares of Common Stock outstanding prior to the offering and 17,072,732
shares of Common Stock after the offering. In addition, shares not
outstanding that are subject to options or warrants exercisable by the
holder thereof within 60 days of the date of this Prospectus are deemed
outstanding for the purposes of calculating the number and percentage owned
by such stockholder, but not deemed outstanding for the purpose of
calculating the percentage owned by each other stockholder listed. Unless
otherwise noted, all shares listed as beneficially owned by a stockholder
are actually outstanding. The number of shares beneficially owned is deemed
to include shares of the Company's Common Stock as to
40
<PAGE> 42
which the beneficial owner has or shares either investment or voting power.
Unless otherwise stated, and except for voting power held jointly with a
person's spouse, the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. All information with respect to
beneficial ownership is based on filings made by the respective beneficial
owners with the Securities and Exchange Commission (the "Commission") or
information provided to the Company by such beneficial owners.
(2) Wholly owned subsidiary of BB Biotech AG, a Swiss corporation.
(3) Includes 140,429 shares issuable upon exercise of warrants.
(4) Includes 112,343 shares issuable upon exercise of warrants.
(5) All shares are issuable upon exercise of stock options.
(6) Includes 155,375 shares issuable upon exercise of stock options.
(7) Mr. Engbers is the Venture Capital Manager for Allstate Insurance Company,
and as such may be deemed to be a beneficial owner of the shares of the
Company's capital stock indicated as owned by Allstate Insurance Company.
Mr. Engbers disclaims such beneficial ownership.
(8) Includes 130,500 shares issuable upon exercise of stock options.
(9) Includes 17,400 shares issuable upon exercise of stock options.
(10) Includes 342,375 shares issuable upon exercise of stock options.
(11) Includes 14,500 shares issuable upon exercise of stock options.
(12) Includes 692,050 shares issuable upon exercise of stock options.
41
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital of the Company consists of 32,000,000 shares of
Common Stock, par value $0.01 per share and 8,000,000 shares of undesignated
Preferred Stock, par value $0.01 per share. The rights of holders of Common
Stock may be inferior in voting, dividend, liquidation distribution and other
respects to the rights of holders of any Preferred Stock that may be issued by
the Company from time to time.
COMMON STOCK
As of March 31, 1996, there were 14,072,732 shares of Common Stock
outstanding and held of record by 242 stockholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of stockholders. Subject to the rights of any Preferred Stock that may
be issued in the future, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. The outstanding shares of Common Stock are, and the
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable. No preemptive rights, conversion rights, redemption
rights or sinking fund provisions are applicable to the Common Stock.
WARRANTS AND IPO OPTION
All of the warrants and options described below contain anti-dilution and
adjustment provisions providing for adjustment of the underlying shares and/or
the exercise price upon the occurrence of certain events, including
recapitalizations, reclassifications, share dividends, share splits or
combinations, mergers or acquisitions or similar transactions. In the event of
liquidation, dissolution or winding up of the Company, holders will not be
entitled to receive any assets of the Company available for distribution to the
holders of Common Stock.
In the event of any reclassification, capital reorganization or other
similar change of outstanding Common Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization or other similar change
in the outstanding Common Stock), or a sale or conveyance to another corporation
of all or substantially all of the property of the Company, each of the warrants
and options described below will thereupon become exercisable for the kind and
number of shares of stock or other securities, assets or cash to which a holder
of the number of shares of Common Stock issuable (at the time of such
reclassification, reorganization, consolidation, merger or sale) upon exercise
of such warrant would have been entitled upon such reclassification,
reorganization, consolidation, merger or sale.
For the life of the various warrants and options described below, the
holders thereof have the opportunity to profit from a rise in the market price
of the Common Stock without assuming the risk of ownership of the shares of
Common Stock issuable upon the exercise of such warrants and options. The
holders of the warrants and options may be expected to exercise at times when
the exercise price is less than the market price for the Common Stock, with
resulting dilution in the interests of the Company's stockholders. Further, the
terms on which the Company could obtain additional capital during the life of
the warrants and options may be adversely affected.
$6.00 Public Warrants
In the Company's initial public offering in June 1994 (the "IPO") the
Company issued to the public 2,990,000 Units, each including one share of Common
Stock and a Redeemable Common Stock Purchase Warrant to purchase one-half of one
share of Common Stock for $3.00 (the "$6.00 Public Warrants"). The $6.00 Public
Warrants may be exercised only in multiples of two by the registered holder
thereof, with
42
<PAGE> 44
each two $6.00 Public Warrants entitling such holder to purchase one share of
Common Stock at a total exercise price per share of $6.00, subject to certain
anti-dilution and other adjustments. The $6.00 Public Warrants are exercisable
at any time until June 3, 1999, unless earlier redeemed.
The Company may redeem the outstanding $6.00 Public Warrants in whole but
not in part at any time upon at least 30 days' prior written notice to the
registered holders thereof, at a price of $.05 per Warrant, provided that the
closing price (as defined in the Warrant Agreement governing the $6.00 Public
Warrants) of the Common Stock has been at least 150% of the then-effective $6.00
Public Warrant exercise price for one whole share of Common Stock for a period
of at least 20 consecutive trading days ending within 15 calendar days prior to
the date of the notice of redemption.
For a holder to exercise the $6.00 Public Warrants there must be a current
registration statement in effect with the Commission and registration or
qualification with, or approval from, various state securities agencies with
respect to the shares or other securities underlying the $6.00 Public Warrants
or valid exemptions from such registration requirements. The Company is
obligated to use its best efforts to cause a registration statement with respect
to such securities under the Securities Act to continue to be effective during
the term of such warrants and to take such other actions under the laws of
various states as may be required to cause the sale of Common Stock upon
exercise of such warrants to be lawful. The Company currently has such a
registration statement in effect.
$6.00 Private Warrants
In a pre-IPO bridge financing (the "1994 Financing"), the Company issued
approximately $4.2 million in bridge notes to certain stockholders. In
connection with the subsequent IPO, this indebtedness and the accrued interest
thereon was converted at the IPO price into a total of 833,517 Units, each
including one share of Common Stock and a warrant (a "$6.00 Private Warrant") to
purchase one-half of one share of Common Stock for $3.00. These $6.00 Private
Warrants are identical to the $6.00 Public Warrants except that they have not
been registered under the Securities Act and are not publicly traded. The
Company intends to file a registration statement with the Commission shortly
after the offering to register the resale of the Common Stock issuable upon
exercise of the $6.00 Private Warrants.
$5.00 Warrants
The Company issued to participants in the 1994 Financing additional
warrants to purchase a total of 166,697 shares of Common Stock at $5.00 per
share (the "$5.00 Warrants"). The $5.00 Warrants are exercisable until June 3,
1999, but have not been registered under the Securities Act and are not publicly
traded. The Company intends to file a registration statement with the Commission
shortly after the offering to register the resale of the Common Stock issuable
upon exercise of the $5.00 Warrants.
IPO Option and $7.20 Warrants
In connection with the IPO, the Company issued to the IPO underwriter an
option (the "IPO Option") to purchase up to 260,000 Units at $8.00 per Unit,
each Unit consisting of one share of Common Stock and a warrant to purchase
one-half of one share of Common Stock for $3.60 (the "$7.20 Warrants"). This
option is exercisable until June 3, 1999, but has not been exercised (and
accordingly no $7.20 Warrants are outstanding) as of the date of this
Prospectus. The underlying $7.20 Warrants, if issued, will be subject to the
same general terms as the $6.00 Public Warrants except for their exercise price.
The holder of the IPO Option has certain registration rights with respect to
such option and its underlying securities. See "Registration Rights of Certain
Holders."
Lease Financing Warrants
As of March 31, 1996, the Company had outstanding warrants to purchase a
total of up to 40,690 shares of Common Stock issued to the provider of the
Company's lease financing facility (the "Lease Financing Warrants"). The
exercise price of these warrants is $8.43 per share with respect to 20,690
shares, and $5.00 per share with respect to the remaining 20,000 shares. The
Company intends to
43
<PAGE> 45
file a registration statement with the Commission shortly after the offering to
register the resale of the Common Stock issuable upon exercise of the Lease
Financing Warrants.
PREFERRED STOCK
The Company's Board of Directors has the authority, without further vote or
action by the stockholders, to issue up to 8,000,000 shares of Preferred Stock
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting or
conversion rights that could adversely affect the voting power of, or have
liquidation rights superior to those of, the holders of Common Stock. In
addition, the issuance of Preferred Stock could be used, under certain
circumstances, to render more difficult or discourage a hostile takeover of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
STOCK OPTIONS
As of March 31, 1996, there were outstanding options to purchase up to
1,420,738 shares of Common Stock under the Company's various stock option plans.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of the IPO Option have the right, subject to certain
restrictions, to demand prior to June 3, 1999, that the Company register the IPO
Option and its underlying Common Stock, the $7.20 Warrants and the Common Stock
underlying the $7.20 Warrants on no more than two occasions, once at the
Company's expense and once at the expense of the holder of such right. Such
holders also have the right to participate in registrations initiated by the
Company or another security holder on a pro-rata basis until June 3, 2001.
The Company is obligated to use its best efforts to cause a registration
statement under the Securities Act with respect to the 1,495,000 shares of
Common Stock issuable upon exercise of the $6.00 Public Warrants to continue to
be effective during the term of such warrants, and currently has in effect such
a registration statement.
Shortly after the offering, the Company expects to file a registration
statement covering the public resale of approximately 625,000 shares of Common
Stock issuable upon exercise of the $6.00 Private Warrants, the $5.00 Private
Warrants, and the Lease Financing Warrants.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"). In general, Section 203 prohibits certain publicly-held
Delaware corporations from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date of the
transaction in which the person or entity became an interested stockholder,
unless the business combination is approved in a prescribed manner. For purposes
of Section 203, "business combination" is defined broadly to include mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is any person or entity
that, together with affiliates and associates, owns (or within the three
immediately preceding years did own) 15% or more of the company's voting stock.
Section 203 could deter hostile takeovers of the Company, changes in the
Company's management, and certain transactions that stockholders might deem to
be in their best interests.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co. is the transfer agent and registrar for
the Company's Common Stock.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
approximately 17,072,732 shares of Common Stock without taking into account an
aggregate of 3,917,646 shares of Common Stock issuable upon exercise of warrants
and stock options outstanding as of March 31, 1996, as follows: (i) 1,495,000
shares issuable upon exercise of the $6.00 Warrants at an exercise price of
$6.00 per share; (ii) 1,001,908 shares issuable upon exercise of the $6.00
Private Warrants, the $5.00 Warrants, the IPO Option and the Lease Financing
Warrants at a weighted average exercise price of $6.55 per share; and (iii)
1,420,738 shares issuable upon exercise of stock options outstanding under the
Company's various stock option plans at a weighted average exercise price of
$2.55 per share. See "Dilution" and "Description of Capital Stock." Of these
outstanding shares, the 3,000,000 shares sold in this offering and the 6,390,000
shares previously sold by the Company in registered public offerings, as well as
the $6.00 Public Warrants and the 1,495,000 shares of Common Stock issuable upon
their exercise, will be freely transferable without restriction under the
Securities Act, unless held by an "affiliate" of the Company (as that term is
defined below). Any such affiliate will be subject to the resale limitations of
Rule 144 adopted under the Securities Act. The remaining approximately 7,600,000
outstanding shares of Common Stock, as well as the $6.00 Private Warrants, $5.00
Warrants, IPO Option and Lease Financing Warrants and the Common Stock issuable
upon their exercise, were or will be issued by the Company in private
transactions not involving a public offering, and are "restricted securities"
for purposes of Rule 144. Restricted securities may not be resold in a public
distribution except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom, including that provided by
Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an "affiliate," who has beneficially
owned shares that are "restricted securities" for at least two years is entitled
to sell, within any three-month period, that number of shares that does not
exceed the greater of 1% of the then outstanding shares or the average weekly
trading volume of the then outstanding shares during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain provisions
regarding the manner of sale, notice requirements and the availability of
current public information. Under Rule 144(k), a person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company for at least 90 days
prior to a proposed transaction, and who has beneficially owned "restricted
securities" for at least three years, is entitled to sell such shares under Rule
144 without regard to the volume limitations described above. As defined in Rule
144, an "affiliate" of an issuer is a person who directly or indirectly
controls, or is controlled by, or is under common control, with such issuer.
There is currently pending before the Commission a proposal to shorten the Rule
144 holding period to one year and the Rule 144(k) holding period to two years.
Of the approximately 7,600,000 restricted shares outstanding, up to
approximately 4,100,000 shares owned by non-affiliates will be eligible for sale
in the public market pursuant to Rule 144(k), approximately 1,500,000 additional
shares will be eligible for resale in the public market under Rule 144, subject
to the volume limitations described above, and 2,000,000 shares of Common Stock
issued to an overseas investor pursuant to Regulation S under the Securities Act
may also be resold. Approximately 77,000 outstanding shares are owned by the
officers and directors of the Company and will be subject to a 90-day lock-up
after the closing of the offering.
The holder of the IPO Option has registration rights with respect to the
IPO Option and its underlying securities. See "Description of Capital
Stock -- Registration Rights of Certain Holders." Further, the Company has in
effect or intends to file registration statements under the Securities Act
registering 1,250,000 shares of Common Stock reserved for issuance under its
1994 Stock Incentive Plan, 300,000 shares of Common Stock reserved for issuance
under the Company's 1995 Employee Stock Purchase Plan, and up to 1,495,000
shares of Common Stock reserved for issuance upon exercise of the $6.00 Public
Warrants. In addition, shortly after the offering the Company intends to file a
registration statement under the Securities Act to register the resale of
approximately 625,000 shares of Common Stock issuable upon exercise of the $6.00
Private Warrants, the $5.00 Private Warrants and
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<PAGE> 47
the Lease Financing Warrants. Registration of such shares will make them freely
tradable when issued or resold (except shares issued to affiliates, which are
tradable in compliance with the volume limitations of Rule 144). In addition,
approximately 806,000 shares of Common Stock issuable upon future exercise of
outstanding stock options will be available for public resale under Rule 144
pursuant to Rule 701 under the Securities Act.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Company's Securities prevailing from time to time. Sales of
substantial amounts of the Company's Securities, or the perception that such
sales could occur, could have a material adverse effect on the market price of
the Company's securities, as well as the Company's ability to raise new equity
capital.
46
<PAGE> 48
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Pacific Growth Equities, Inc., Vector
Securities International, Inc., and Van Kasper & Company (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Robertson, Stephens & Company LLC.................................
Pacific Growth Equities, Inc. ....................................
Vector Securities International, Inc. ............................
Van Kasper & Company..............................................
---------
Total................................................... 3,000,000
========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold.
The Company's officers and directors have agreed with the Representatives
for a period of 90 days from the date of this Prospectus (the "Lock-Up Period")
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any option to purchase any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock now owned or hereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power of disposition without the prior written consent of Robertson,
Stephens & Company LLC, which may, in its sole discretion and at any time or
from time to time, without notice, release all or any portion of the shares
subject to the lock-up agreements. In addition, the Company has agreed that
during the Lock-Up Period, the Company will not, without prior written consent
of Robertson, Stephens & Company LLC, issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the issuance of Common Stock
and warrants upon the exercise of outstanding warrants and options and the
Company's grant of options under existing employee stock option plans or
pursuant to the establishment of any collaborative arrangement approved by the
Company's Board of Directors.
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<PAGE> 49
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities including
liabilities under the Securities Act.
The offering price for the Common Stock has been determined by negotiations
among the Company and the Representatives of the Underwriters, based largely
upon the market price for the Common Stock as reported on the Nasdaq National
Market.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Company's Common Stock
during the period immediately preceding the commencement of sales in the
offering. The Commission has, however, adopted an exemption from these rules
that permits passive market making under certain conditions. These rules permit
an Underwriter or other member of the selling group to continue to make a market
in the Company's Common Stock subject to the conditions, among others, that its
bid not exceed the highest bid by a market maker not connected with the offering
and that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters and other members of the
selling group intend to engage in passive market making in the Company's Common
Stock during such period.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, Orange County, California. Certain legal
matters will be passed upon for the Underwriters by Cooley Godward Castro
Huddleson & Tatum, San Diego, California.
EXPERTS
The financial statements of the Company at December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 and for the
period from May 2, 1989 (inception) to December 31, 1995 appearing in this
Prospectus and Registration Statement and appearing in the Company's Annual
Report (Form 10-K) for the year ended December 31, 1995 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and incorporated herein by reference. Such financial
statements are included and incorporated herein by reference in reliance upon
such report given upon the authority of such firms as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission
located at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room
1204, Washington, D.C. 20549, the New York Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office located at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of all or any part of such material may
also be obtained from the Public Reference Section, Securities and Exchange
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon the payment of prescribed fees. The Company's Common Stock is listed on The
Nasdaq National Market, and material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
48
<PAGE> 50
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") on Form S-3 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the schedules and exhibits filed as a part
thereof. Statements contained in this Prospectus regarding the contents of any
contract or other document are not necessarily complete, and each such statement
is qualified in all respects by reference made hereby to the copy of such
contract or document filed, or incorporated by reference, as an exhibit to the
Registration Statement. A copy of the Registration Statement and the exhibits
and schedules thereto may be inspected without charge at the offices of the
Commission, or obtained at prescribed rates from the public reference facilities
maintained by the Commission at the addresses set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission, are
hereby incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
2. The Company's Current Report on Form 8-K dated January 1, 1996;
3. The Company's Current Report on Form 8-K dated February 15, 1996;
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1996; and
5. The description of Common Stock contained in the Company's registration
statement on Form 8-A filed pursuant to the Exchange Act, and any
amendment or report filed for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a subsequent statement
contained herein or in any other document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statements as modified or superseded shall be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any or all of the documents referred
to above which have been or may be incorporated by reference in this Prospectus
(other than certain exhibits to such documents). Requests for such documents may
be made by writing La Jolla Pharmaceutical Company, 6455 Nancy Ridge Drive, San
Diego, California 92121 (Attention: Chief Financial Officer) or by calling (619)
452-6600.
49
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... F-2
Balance Sheets......................................................................... F-3
Statements of Operations............................................................... F-4
Statements of Stockholders' Equity..................................................... F-5
Statements of Cash Flows............................................................... F-7
Notes to Financial Statements.......................................................... F-8
</TABLE>
F-1
<PAGE> 52
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
La Jolla Pharmaceutical Company
We have audited the accompanying balance sheets of La Jolla Pharmaceutical
Company (a development stage company) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995 and for the period May
2, 1989 (inception) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of La Jolla Pharmaceutical
Company (a development stage company) at December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 and for the period May 2, 1989 (inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 25, 1996
F-2
<PAGE> 53
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 11,417 $ 19,804 $ 7,262
Short-term investments -- available for sale............ 2,543 3,847 13,098
Other current assets.................................... 302 213 372
-------- -------- --------
Total current assets...................................... 14,262 23,864 20,732
Equipment, furniture and fixtures, net.................... 2,303 1,925 1,750
Patent costs and other assets, net........................ 529 586 600
-------- -------- --------
$ 17,094 $ 26,375 $23,082
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................... $ 735 $ 738 $ 670
Accrued payroll and related expenses.................... 253 398 206
Current portion of obligations under capital leases..... 668 779 826
-------- -------- --------
Total current liabilities................................. 1,656 1,915 1,702
Obligations under capital leases.......................... 1,628 892 641
Commitments
Stockholders' equity:
Common Stock, $0.01 par value; 32,000,000 shares
authorized, 8,616,171, 14,046,712 and 14,072,732
shares issued and outstanding at December 31, 1994
and 1995 and March 31, 1996, respectively............ 86 140 141
Additional paid-in capital.............................. 44,690 62,647 62,626
Note receivable from stockholder........................ (27) (14) (14)
Deferred compensation................................... (716) (428) (318)
Deficit accumulated during the development stage........ (30,223) (38,777) (41,696)
-------- -------- --------
Total stockholders' equity................................ 13,810 23,568 20,739
-------- -------- --------
$ 17,094 $ 26,375 $23,082
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 54
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 2, 1989
(INCEPTION) THREE MONTHS ENDED MAY 2, 1989
YEAR ENDED DECEMBER 31, TO MARCH 31, (INCEPTION) TO
--------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------- ---------- ----------- ------------- ---------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ 3,000 $ 3,000 $ -- $ -- $ 3,000
Operating expenses:
Research and
development......... 6,737 8,499 9,804 35,895 2,105 2,560 38,455
General and
administrative...... 1,386 2,049 2,390 8,989 429 588 9,577
---------- ---------- ----------- -------- ---------- ----------- --------
Total operating
expenses....... 8,123 10,548 12,194 44,884 2,534 3,148 48,032
---------- ---------- ----------- -------- ---------- ----------- --------
Loss from operations.... (8,123) (10,548) (9,194) (41,884) (2,534) (3,148) (45,032)
Interest expense........ (145) (364) (301) (810) (86) (57) (867)
Interest income......... 321 599 941 3,917 190 286 4,203
---------- ---------- ----------- -------- ---------- ----------- --------
Net loss................ $ (7,947) $ (10,313) $ (8,554) $ (38,777) $ (2,430) $ (2,919) $(41,696)
========== ========== =========== ======== ========== =========== ========
Net loss per share...... $ (1.58) $ (1.44) $ (0.79) $ (0.28) $ (0.21)
========== ========== =========== ========== ===========
Shares used in
computation of net
loss per share........ 5,015,953 7,137,412 10,883,009 8,617,531 14,060,127
</TABLE>
See accompanying notes.
F-4
<PAGE> 55
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD MAY 2, 1989 (INCEPTION) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DURING THE TOTAL
--------------- --------------- PAID-IN FROM DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER STAGE COMPENSATION EQUITY
------ ------ ------ ------ ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for net
assets acquired at
inception............ 5,360 $ 54 139 $ 1 $ 333 $ -- $ -- $ -- $ 388
Conversion of Series A
through F Preferred
Stock to Common
Stock............... (5,360) (54) 536 6 48 -- -- -- --
Issuance of Series G
Preferred Stock at
$.61 and $.66 per
share, net of
issuance costs...... 20,778 208 -- -- 12,279 -- -- -- 12,487
Issuance of Series H
Preferred Stock and
warrants to purchase
Series H Preferred
Stock at $.75 per
share, net of
issuance costs...... 15,999 160 -- -- 11,757 -- -- -- 11,917
Exercise of warrants
and stock options... -- -- 8 -- 19 -- -- -- 19
Issuance of Common
Stock under stock
purchase
agreement........... -- -- 3 -- 3 -- -- -- 3
Issuance of Common
Stock for cash and
an 8% note
receivable under
stock purchase
agreement........... -- -- 76 1 75 (61) -- -- 15
Net loss since
inception........... -- -- -- -- -- -- (7,191) -- (7,191)
--
------ ---- --- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1991............ 36,777 368 762 8 24,514 (61) (7,191) -- 17,638
Issuance of Series H
Preferred Stock and
warrants to purchase
Series H Preferred
Stock at $.75 per
share, net of
issuance costs...... 2,334 23 -- -- 1,720 -- -- -- 1,743
Issuance of Series H
Preferred Stock upon
exercise of
warrants............ 300 3 -- -- 223 -- -- -- 226
Exercise of stock
options............. -- -- 9 -- 9 -- -- -- 9
Payment on note
receivable.......... -- -- -- -- -- 11 -- -- 11
Net loss.............. -- -- -- -- -- -- (4,772) -- (4,772)
--
------ ---- --- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1992............ 39,411 394 771 8 26,466 (50) (11,963) -- 14,855
Exercise of stock
options............. -- -- 16 -- 16 -- -- -- 16
Payment on note
receivable.......... -- -- -- -- -- 11 -- -- 11
Deferred compensation
related to grant of
stock options....... -- -- -- -- 302 -- -- (302) --
Amortization of
deferred
compensation........ -- -- -- -- -- -- -- 3 3
Net loss.............. -- -- -- -- -- -- (7,947) -- (7,947)
--
------ ---- --- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1993............ 39,411 394 787 8 26,784 (39) (19,910) (299) 6,938
</TABLE>
(continued on F-6)
F-5
<PAGE> 56
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD MAY 2, 1989 (INCEPTION) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DURING THE TOTAL
---------------- --------------- PAID-IN FROM DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER STAGE COMPENSATION EQUITY
------- ------ ------ ------ ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1993............ 39,411 $394 787 $ 8 $ 26,784 $ (39) $ (19,910) $ (299) $ 6,938
Issuance of Common
Stock upon
initial public
offering at $5.00
per Unit, net of
issuance costs... -- -- 2,990 30 12,672 -- -- -- 12,702
Conversion of
Preferred Stock
to Common
Stock............ (39,411) (394) 3,941 39 355 -- -- -- --
Conversion of
bridge notes and
accrued interest
to Common
Stock............ -- -- 833 8 4,159 -- -- -- 4,167
Exercise of stock
options.......... -- -- 65 1 64 -- -- -- 65
Payment on note
receivable....... -- -- -- -- -- 12 -- -- 12
Deferred
compensation
related to grant
of stock
options.......... -- -- -- -- 656 -- -- (656) --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 239 239
Net loss........... -- -- -- -- -- -- (10,313) -- (10,313)
------- ----- ------ ---- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1994........... -- -- 8,616 86 44,690 (27) (30,223) (716) 13,810
Issuance of Common
Stock upon
secondary public
offering at $3.25
per share, net of
issuance costs... -- -- 3,400 34 9,852 -- -- -- 9,886
Issuance of Common
Stock at $4.07
per share........ -- -- 2,000 20 8,120 -- -- -- 8,140
Exercise of stock
options.......... -- -- 31 -- 30 -- -- -- 30
Payment on note
receivable....... -- -- -- -- -- 13 -- -- 13
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 243 243
Adjustment to
deferred
compensation for
terminations..... -- -- -- -- (45) -- -- 45 --
Net loss........... -- -- -- -- -- -- (8,554) -- (8,554)
------- ----- ------ ---- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1995........... -- -- 14,047 140 62,647 (14) (38,777) (428) 23,568
Issuance of Common
Stock
(unaudited)...... -- -- 26 1 40 -- -- -- 41
Amortization of
deferred
compensation
(unaudited)...... -- -- -- -- -- -- -- 49 49
Adjustment to
deferred
compensation for
terminations
(unaudited)...... -- -- -- -- (61) -- -- 61 --
Net loss
(unaudited)...... -- -- -- -- -- -- (2,919) -- (2,919)
------- ----- ------ ---- ------- ---- -------- ----- -------
BALANCE AT MARCH 31,
1996(unaudited).... -- $ -- 14,073 $141 $ 62,626 $ (14) $ (41,696) $ (318) $ 20,739
======= ===== ====== ==== ======= ==== ======== ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 57
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 2, 1989 THREE MONTHS ENDED MAY 2, 1989
YEAR ENDED DECEMBER 31, (INCEPTION) TO MARCH 31, (INCEPTION) TO
---------------------------- DECEMBER 31, -------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
------- -------- ------- -------------- ------- -------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................... $(7,947) $(10,313) $(8,554) $(38,777) $(2,430) $ (2,919) $(41,696)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Write-off of patent costs.......... -- -- -- 209 -- -- 209
Depreciation and amortization...... 456 683 784 2,536 191 193 2,729
Deferred compensation
amortization..................... 3 239 243 485 65 49 534
Common Stock issued for interest... -- 11 -- 11 -- -- 11
Changes in operating assets and
liabilities:
Other current assets............... 34 (148) 89 (213) 55 (159) (372)
Accounts payable and accrued
expenses......................... 573 (147) 3 604 (201) (68) 536
Accrued payroll and related
expenses......................... 120 28 145 378 (108) (192) 186
------- -------- ------- -------- ------- -------- --------
Net cash used for operating
activities........................... (6,761) (9,647) (7,290) (34,767) (2,428) (3,096) (37,863)
INVESTING ACTIVITIES
(Increase) decrease in short-term
investments.......................... 1,100 (2,543) (1,304) (3,847) (527) (9,251) (13,098)
Additions to equipment, furniture and
fixtures............................. (469) (288) (248) (2,661) (2) (12) (2,673)
Proceeds from sale-leaseback of
equipment............................ 1,747 -- -- 1,747 -- -- 1,747
Increase in patent costs and other
assets............................... (119) (120) (83) (578) (15) (20) (598)
------- -------- ------- -------- ------- -------- --------
Net cash provided by (used for)
investing activities................. 2,259 (2,951) (1,635) (5,339) (544) (9,283) (14,622)
FINANCING ACTIVITIES
Payment on note receivable from
stockholder.......................... 11 12 13 47 -- -- 47
Proceeds from issuance of Preferred
Stock, net........................... -- -- -- 26,373 -- -- 26,373
Proceeds from issuance of common
stock, net........................... 16 12,767 18,056 30,885 -- 41 30,926
Proceeds from bridge notes............. -- 4,156 -- 4,156 -- -- 4,156
Payments on obligations under capital
leases............................... (175) (619) (757) (1,551) (177) (204) (1,755)
------- -------- ------- -------- ------- -------- --------
Net cash provided by (used for)
financing activities................. (148) 16,316 17,312 59,910 (177) (163) 59,747
Increase (decrease) in cash and cash
equivalents.......................... (4,650) 3,718 8,387 19,804 (3,149) (12,542) 7,262
Cash and cash equivalents at beginning
of period............................ 12,349 7,699 11,417 -- 11,417 19,804 --
------- -------- ------- -------- ------- -------- --------
Cash and cash equivalents at end of
period............................... $ 7,699 $ 11,417 $19,804 $ 19,804 $ 8,268 $ 7,262 $ 7,262
======= ======== ======= ======== ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid.......................... $ 145 $ 353 $ 301 $ 799 $ 86 $ 57 $ 856
======= ======== ======= ======== ======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
equipment, furniture and fixtures.... $ 2,232 $ 858 $ 132 $ 3,222 $ 132 $ -- $ 3,222
======= ======== ======= ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 58
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(INFORMATION AS OF AND SUBSEQUENT TO MARCH 31, 1996 AND FOR THE THREE MONTH
PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
La Jolla Pharmaceutical Company ("LJP" or the "Company") is engaged in the
research and development of highly specific therapeutics for the treatment of
certain antibody-mediated diseases in which some of the body's B cells produce
disease-causing antibodies that attack the body's own tissue. The Company's lead
compound, LJP 394, is a drug candidate for the treatment of Systemic Lupus
Erythematosus ("lupus") and is currently in Phase II clinical trials.
The Company has not commenced commercial operations and is considered to be
in the development stage. All of the Company's revenues to date have been
derived from its former collaborative agreement with Leo Pharmaceutical Products
Ltd., a Danish company ("Leo Pharmaceutical"). (See Note 5.) Prior to generating
product revenues, the Company must complete the development of its products,
including several years of clinical testing, and receive regulatory approvals
prior to selling these products commercially. No assurance can be given that the
Company's products will be successfully developed, regulatory approvals will be
granted or patient and physician acceptance of these products will be achieved.
In addition, there can be no assurance that the Company can successfully
manufacture and market any such products at prices that would permit the Company
to operate profitably.
The Company actively seeks additional financing to fund its research and
development efforts and commercialize its technologies. There is no assurance
such financing will be available to the Company when required or that such
financing would be available under favorable terms.
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to the development of its business. The patent positions of
biotechnology firms, including the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The financial statements at March 31, 1996 and for the three-month periods
ended March 31, 1995 and 1996 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for those periods. Results for interim periods
are not necessarily indicative of results for the entire year.
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 amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
F-8
<PAGE> 59
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less and are stated at market. Short-term investments consist of debt
securities with maturities greater than three months.
Available-for-sale securities are carried at fair value, with unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method.
The Company has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any losses on its cash
equivalents and short-term investments.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the periods as adjusted for the effects of certain
rules of the Securities and Exchange Commission for the periods prior to the
Company's initial public offering. In addition, the calculation of the shares
used in computing net loss per share includes convertible Preferred Stock that
converted into Common Stock in conjunction with the Company's initial public
offering as if they had converted into Common Stock as of the original dates of
issuance.
INCOME TAXES
The Company accounts for income taxes using the liability method under
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Laboratory equipment..................................... $ 3,243 $ 3,450
Office equipment......................................... 247 389
Furniture and fixtures................................... 516 547
------- -------
4,006 4,386
Less depreciation........................................ (1,703) (2,461)
------- -------
$ 2,303 $ 1,925
======= =======
</TABLE>
Equipment, furniture and fixtures are stated at cost and depreciated using
the straight-line method over estimated useful lives (primarily five years).
F-9
<PAGE> 60
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The adoption of
the new standard had no material effect on the financial statements.
STOCK OPTIONS
Effective January 1, 1996, the Company adopted SFAS No. 123 Accounting and
Disclosure of Stock Based Compensation ("SFAS 123"). As allowed under SFAS 123,
the Company has elected to continue to account for stock option grants in
accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees ("APB 25") and related interpretations. The Company
generally grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant and,
under APB 25, recognizes no compensation expense for such stock option grants.
The adoption of SFAS 123 had no material effect on the financial statements.
PATENTS
The Company has filed several patent applications in the United States
Patent Office and in foreign countries. Legal costs and expenses incurred in
connection with pending patent applications have been deferred. Costs related to
successful patent applications are amortized using the straight-line method over
the lesser of the remaining useful life of the related technology or the
remaining patent life, commencing on the date the patent is issued. Accumulated
amortization at December 31, 1994 and 1995 was $49,000 and $75,000,
respectively. Deferred costs related to patent applications are charged to
operations at the time a determination is made not to pursue such applications.
2. SHORT-TERM INVESTMENTS
The following is a summary of the estimated fair value of
available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Money market accounts.................................... $ -- $13,400
U.S. Corporate debt securities........................... 5,018 9,805
Obligations of states and municipalities................. 6,246 --
Other debt securities.................................... 2,579 --
------- -------
$13,843 $23,205
======= =======
</TABLE>
As of December 31, 1994 and 1995, the difference between cost and estimated
fair value of available-for-sale securities was not significant. Included in
cash and cash equivalents at December 31, 1994 and 1995 were $11,300,000 and
$19,358,000, respectively, of securities classified as available-for-sale. All
available for sale securities are due in one year or less.
3. COMMITMENTS
LEASES
The Company has a non-cancellable operating lease for its office and
research facilities which expires in July 2004. Under the terms of the lease,
monthly rental payments are increased annually by
F-10
<PAGE> 61
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
not less than 4% or more than 8%, based upon changes in the CPI index. The lease
provides the Company with an option to extend the lease term for an additional
five years at 95% of the then market rental rate. In addition, the Company may
exercise a one-time cancellation option effective any time after August 1, 1998
with the payment of certain penalties.
The Company has a $4,000,000 equipment lease financing facility. In 1993,
the Company sold and leased back equipment (under a capital lease) for
$1,747,000, consisting of $1,278,000 of equipment acquired prior to 1993 and
$469,000 of equipment acquired in 1993. No gain or loss was recognized in
connection with this transaction.
Annual future minimum lease payments as of December 31, 1995, which include
$721,000 for the effect of exercising the cancellation option, are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996..................................................... $ 669 $ 952
1997..................................................... 635 788
1998..................................................... 1,099 168
1999..................................................... -- 9
------ ------
Total............................................... $ 2,403 1,917
======
Less amount representing interest........................ (246)
------
Present value of net minimum lease payments.............. 1,671
Less current portion..................................... (779)
------
Long-term portion of capital lease obligations........... $ 892
======
</TABLE>
Rent expense under all operating leases totaled $308,000, $485,000,
$545,000 and $2,556,000 for the years ended December 31, 1993, 1994 and 1995 and
the period May 2, 1989 (inception) to December 31, 1995, respectively. Equipment
acquired under capital leases totaled $2,386,000 and $1,859,000 (net of
accumulated amortization of $704,000 and $1,363,000) at December 31, 1994 and
1995, respectively.
LICENSE AGREEMENT
The Company's primary core technology is its Tolerance Technology which is
protected by patents that are owned solely by the Company. The Company's
secondary core technology is targeted at enzymes ("PLA(2)") critical to the
inflammatory process in diseases such as rheumatoid arthritis and asthma. In
September 1991, the Company entered into an exclusive license agreement for the
PLA(2) inhibitor technology with The Regents of the University of California.
Under the agreement, the Company is required to pay royalties on approved drugs
employing the technology of 2% to 6% based upon sales of products with a minimum
annual royalty of $50,000. To retain its exclusive license rights, the Company
must meet and satisfy certain development milestones in addition to its royalty
and other obligations under this agreement. These milestones include submission
of an IND for a potential product utilizing the licensed technology by 1999, and
other standards designed to promote diligent development and marketing of
potential products. The Company has the right to terminate the agreement at any
time and failure to meet the above conditions could result in termination of the
license.
F-11
<PAGE> 62
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE AGREEMENT
In June 1994, the Company purchased certain scientific equipment. In
connection with the purchase agreement, the Company may be required to make
annual payments of $200,000 for a period of up to 10 years, in the event that
the equipment is used to produce materials for sale.
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of December 31, 1995, the Company is authorized to issue 8,000,000
shares of Preferred Stock, in one or more series.
STOCK OFFERINGS
In June 1994, the Company completed an initial public offering of 2,990,000
Units (the "IPO") at a price of $5.00 per Unit. Each Unit consisted of one share
of Common Stock and one redeemable warrant to purchase one-half of one share of
Common Stock. The Company received net proceeds from the IPO of $12,700,000.
Upon closing of the IPO, all outstanding Preferred Stock automatically converted
into an aggregate of 3,941,063 shares of Common Stock and shareholder bridge
notes and accrued interest totaling $4,167,000 were converted into 833,517
Units. In connection with the IPO, the IPO underwriter was granted the option to
purchase up to 260,000 additional Units at $8.00 per Unit. The purchase option
expires on June 3, 1999.
In June 1995, the Company completed a secondary public offering of
3,400,000 shares of Common Stock for net cash proceeds of $9,886,000. In October
1995, the Company issued 2,000,000 shares of Common Stock to an institutional
investor for cash proceeds of $8,140,000.
SHAREHOLDER BRIDGE NOTES
In May 1994, the Company issued $4,156,000 of 8% bridge notes to existing
shareholders. The terms of the bridge notes required the automatic conversion of
the principal and accrued interest to Units at the price paid in the IPO. In
addition, the notes provided for the granting of additional warrants to the
holders equal to 20% of the Units into which the debt was converted. Those
additional warrants permit the holders to purchase 166,697 shares of Common
Stock at $5.00 per share through June 1999.
WARRANTS
In connection with the IPO and the conversion of bridge notes, the Company
issued 3,823,517 redeemable warrants. The redeemable warrant holders are
entitled to purchase one half of one share of Common Stock for each warrant at
an exercise price of $3.00 per one-half share, subject to adjustment. The
warrants are exercisable beginning June 3, 1995 until June 3, 1999. The Company
is entitled to redeem the warrants on not less than 30 days written notice at
$0.05 per warrant if the average closing bid price of the Common Stock exceeds
150% of the then-effective warrant exercise price for one share of Common Stock,
over a period of 20 consecutive trading days, ending within 15 days of the date
of notice of redemption.
In connection with capital lease agreements entered into during 1993 and
1994, the Company issued warrants to purchase 20,690 shares of the Company's
Common Stock at $8.43 per share and
F-12
<PAGE> 63
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20,000 shares of the Company's Common Stock at $5.00 per share, respectively.
These warrants expire on June 10 and June 3, 1996, respectively.
All warrants were outstanding as of December 31, 1995 and 2,119,145 shares
of Common Stock are reserved for issuance upon exercise of warrants.
STOCK OPTION PLANS
In May 1989, the Company adopted the 1989 Stock Option Plan and 1989
Nonstatatury Stock Option Plan (the "1989 Plan"), under which 885,130 shares of
Common Stock are reserved for issuance upon exercise of options granted by the
Company.
In June 1994, the Company adopted the 1994 Stock Incentive Plan (the "1994
Plan"), under which 1,250,000 shares of Common Stock are reserved for issuance
upon exercise of options granted by the Company. The 1994 Plan provides for the
grant of incentive and non-qualified stock options, as well as other stock based
awards, to employees, consultants and advisors of the Company with various
vesting periods as determined by the compensation committee, as well as
automatic fixed grants to non-employee directors of the Company.
As of December 31, 1995, options to purchase 720,588 common shares were
exercisable.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
MAY 2, 1989
(INCEPTION) MAY 2, 1989
YEAR ENDED DECEMBER 31, TO THREE MONTHS (INCEPTION)
----------------------------------- DECEMBER 31, ENDED TO
1993 1994 1995 1995 MARCH 31, MARCH 31,
------- ----------- ----------- ------------ 1996 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 632,750 753,011 1,200,874 -- 1,462,038 --
Granted................ 137,000 566,280 336,195 1,697,511 74,400 1,771,911
Exercised.............. (16,043) (65,055) (30,541) (130,509) (17,528) (148,037)
Cancelled.............. (696) (53,362) (44,490) (104,964) (98,172) (203,136)
-------- ----------- ----------- ----------- ----------- -----------
Outstanding at end
of period.............. 753,011 1,200,874 1,462,038 1,462,038 1,420,738 1,420,738
======== =========== =========== =========== =========== ===========
Price of options granted,
exercised and
outstanding............ $1.00 $1.00-$5.25 $1.00-$5.25 $1.00-$5.25 $1.00-$7.88 $1.00-$7.88
======== =========== =========== =========== =========== ===========
</TABLE>
For certain options granted, the Company recognizes as compensation expense
the excess of the deemed value for accounting purposes of the Common Stock
issuable upon exercise over the aggregate exercise price of such options.
Compensation expense is amortized ratably over the vesting period of each
option.
EMPLOYEE STOCK PURCHASE PLAN
Effective August 1, 1995, the Company adopted the 1995 Employee Stock
Purchase Plan (the "Purchase Plan") under which 300,000 shares of Common Stock
are reserved for sale to full-time employees with one year of service. On August
1 and February 1, eligible employees may enroll in the Purchase Plan for an
offering period of 24 months. Employees may purchase stock every six months (up
to but not exceeding 10% of each employee's earnings) over the offering period
at the lesser of 85% of the fair market value of the stock on the enrollment
date for the offering period or 85% of the fair market value on the purchase
date.
F-13
<PAGE> 64
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COLLABORATIVE ARRANGEMENT
In September 1995, the Company granted to Leo Pharmaceutical Products Ltd.,
a Danish company ("Leo") the exclusive rights to distribute LJP 394 in Europe
and the Middle East. Leo made an initial payment of $3.0 million in connection
with this arrangement and was obligated to make further milestone payments to
the Company and fund approximately 50% of the clinical development costs of LJP
394, subject to progress in the clinical trials and regulatory approval process
for the compound. Leo was obligated to collaborate with the Company in
attempting to complete clinical trials and secure necessary regulatory approvals
for LJP 394. Subject to appropriate marketing approvals, the Company was
obligated to sell LJP 394 in bulk form to Leo and Leo would formulate and
package the compound for commercial distribution in Europe and the Middle East
and pay the Company royalties on its sales.
In May 1996, the Company terminated its relationship with Leo
Pharmaceutical because the Company and Leo Pharmaceutical could not reach
agreement regarding the timing and allocation of resources with respect to
further clinical trials of LJP 394. Under the termination provisions of the
agreement, the Company retained a $3.0 million payment previously received from
Leo Pharmaceutical, and neither the Company nor Leo Pharmaceutical has any
further obligations.
6. 401(K) PLAN
The Company has established a 401(k) defined contribution retirement plan
(the "Plan") covering all employees. The Plan provides for voluntary employee
contributions up to 20% of annual compensation (as defined). The Company does
not match employee contributions or otherwise contribute to the Plan.
7. INCOME TAXES
At December 31, 1995, the Company had federal and California income tax net
operating loss carryforwards of approximately $36,291,000 and $1,862,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the 50% limitation
on California loss carryforwards. The Company also had federal and California
research tax credit carryforwards of $1,996,000 and $785,000, respectively. The
federal net operating loss and tax credit carryforwards will begin to expire in
2004 unless previously utilized, while the California net operating loss
carryforwards will begin to expire in 1997.
In accordance with certain provisions of the Internal Revenue Code, a
change in ownership of greater than 50% within a three-year period will place an
annual limitation on the Company's ability to utilize its existing net operating
loss and tax credit carryforwards. Due to the completion of the initial public
offering in June 1994, the Company is subject to these annual limitations.
However, the annual limitations are not expected to have a material adverse
effect on the Company's ability to utilize its net operating loss and tax credit
carryforwards.
F-14
<PAGE> 65
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets are shown below
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 9,694 $ 12,814
Research and development credits..................... 2,416 2,781
Capitalized research and development................. 1,048 2,041
Other................................................ 27 340
-------- --------
Total deferred tax assets.............................. 13,185 17,976
Valuation allowance for deferred tax assets............ (13,185) (17,976)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
A valuation allowance of $17,976,000 has been recognized to offset the
deferred tax assets as realization of such assets is uncertain.
F-15
<PAGE> 66
LOGO
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with this offering to be borne by the
Company are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 8,254
National Association of Securities Dealers, Inc. filing fee............... 2,893
Nasdaq National Market Listing Fee........................................ 17,500
Accountants' fees and expenses............................................ 40,000
Registrant's legal fees and expenses...................................... 100,000
Blue Sky fees and expenses................................................ 15,000
Printing and engraving expenses........................................... 110,000
Miscellaneous............................................................. 6,353
--------
Total........................................................... $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsection (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
such officer or director and incurred by him or her in any such capacity or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
II-1
<PAGE> 68
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation provides that a director shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
However, such provision does not eliminate or limit the liability of a director
for acts or omissions not in good faith or for breaching his or her duty of
loyalty, engaging in intentional misconduct or knowingly violating a law, paying
a dividend or approving a stock repurchase which was illegal, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty.
The Company's Bylaws require that directors and officers be indemnified to
the maximum extent permitted by Delaware law.
The Company has entered into indemnity agreements with each of its
directors and executive officers. These indemnity agreements require that the
Company pay on behalf of each director and officer party thereto any amount that
he or she is or becomes legally obligated to pay because of any claim or claims
made against him or her because of any act or omission or neglect or breach of
duty, including any actual or alleged error or misstatement or misleading
statement, which he or she commits or suffers while acting in his or her
capacity as a director and/or officer of the Company and solely because of his
or her being a director and/or officer. Under the General Corporation Law,
absent such an indemnity agreement, indemnification of a director or officer is
discretionary rather than mandatory (except in the case of a proceeding in which
a director or officer is successful on the merits). Consistent with the
Company's Bylaw provision on the subject, the indemnity agreements require the
Company to make prompt payment of defense and investigation costs and expenses
at the request of the director or officer in advance of indemnification,
provided that the recipient undertakes to repay the amounts if it is ultimately
determined that he or she is not entitled to indemnification for such expenses
and provided further that such advance shall not be made if it is determined
that the director or officer acted in bad faith or deliberately breached his or
her duty to the Company or its stockholders and, as a result, it is more likely
than not that it will ultimately be determined that he or she is not entitled to
indemnification under the terms of the indemnity agreement. The indemnity
agreements make the advance of litigation expenses mandatory absent a special
determination to the contrary, whereas under the General Corporation Law absent
such an indemnity agreement, such advance would be discretionary. Under the
indemnity agreement, the director or officer is permitted to petition the court
to seek recovery of amounts due under the indemnity agreement and to recover the
expenses of seeking such recovery if he or she is successful. Without the
indemnity agreement, the Company would not be required to pay or reimburse the
director or officer for his or her expenses in seeking indemnification recovery
against the Company. By the terms of the indemnity agreement, its benefits are
not available if the director or officer has other indemnification or insurance
coverage for the subject claim or, with respect to the matters giving rise to
the claim, (i) received a personal benefit, (ii) violated Section 16(b) of the
Securities Exchange Act of 1934 or analogous provisions of law, or (iii)
committed certain acts of dishonesty. Absent the indemnity agreement,
indemnification that might be made available to directors and officers could be
changed by amendments to the Company's Certificate of Incorporation or Bylaws.
The Company has a policy of directors and officers liability insurance that
insures the Company and its directors and officers against damages, settlements,
and defense costs under certain circumstances.
II-2
<PAGE> 69
ITEM 16. EXHIBITS
Set forth below is a list of the exhibits included as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Gibson, Dunn & Crutcher(*)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Gibson, Dunn & Crutcher (included in Exhibit 5.1)(*)
24.1 Power of Attorney (contained on page II-4)
</TABLE>
- ---------------
(*) To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 70
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SAN DIEGO, STATE OF CALIFORNIA, ON MAY 30, 1996.
LA JOLLA PHARMACEUTICAL COMPANY
(REGISTRANT)
By: /s/ STEVEN B. ENGLE
------------------------------------
Steven B. Engle
Chief Executive Officer
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS STEVEN
B. ENGLE AND WOOD C. ERWIN HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS,
EACH ACTING ALONE, WITH FULL POWERS OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL
AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT,
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN
CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO
SAID ATTORNEYS-IN-FACT AND AGENTS, EACH ACTING ALONE, WITH FULL POWERS AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY
TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING THAT ALL SAID
ATTORNEYS-IN-FACT AND AGENTS, EACH ACTING ALONE, OR HIS SUBSTITUTE OR
SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ----------------------------- -------------
<C> <S> <C>
/s/ STEVEN B.ENGLE Director, Chief Executive May 30, 1996
- ------------------------------------------ Officer and President
Steven B. Engle (Principal Executive Officer)
/s/ WOOD C. ERWIN Vice President of Finance May 30, 1996
- ------------------------------------------ and Chief Financial Officer
Wood C. Erwin (Principal Financial Officer
and Principal Accounting
Officer)
/s/ THOMAS H. ADAMS Director May 30, 1996
- ------------------------------------------
Thomas H. Adams
/s/ WILLIAM E. ENGBERS Director May 30, 1996
- ------------------------------------------
William E. Engbers
/s/ ROBERT A. FILDES Director May 30, 1996
- ------------------------------------------
Robert A. Fildes
/s/ JOSEPH STEMLER Director and Chairman May 30, 1996
- ------------------------------------------
Joseph Stemler
</TABLE>
II-4
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.........................................
5.1 Opinion of Gibson, Dunn & Crutcher(*)..................................
23.1 Consent of Ernst & Young LLP...........................................
23.2 Consent of Gibson, Dunn & Crutcher (included in Exhibit 5.1)(*)........
24.1 Power of Attorney (contained on page II-4).............................
</TABLE>
- ---------------
(*) To be filed by amendment.
<PAGE> 1
3,000,000 SHARES(1)
LA JOLLA PHARMACEUTICAL COMPANY
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1996
ROBERTSON, STEPHENS & COMPANY LLC
PACIFIC GROWTH EQUITIES, INC.
VECTOR SECURITIES INTERNATIONAL, INC.
VAN KASPER & COMPANY
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
LA JOLLA PHARMACEUTICAL COMPANY, a Delaware corporation (the
"Company"), addresses you as the Representatives of each of the persons, firms
and corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
3,000,000 shares of its authorized and unissued Common Stock, $.01 par value per
share (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 450,000
additional shares of the Company's Common Stock, $.01 par value per share (the
"Option Shares"), as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of Common Stock, $.01 par value per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "Common Stock."
- -----------------------------
1 Plus an option to purchase up to 450,000 additional shares from the
Company to cover over-allotments.
<PAGE> 2
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents and warrants to and agrees with each Underwriter that:
2.1 A registration statement on Form S-3 (File No.
333-_____) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the applicable rules
and regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
The Company and the transactions contemplated by this Agreement meet the
requirements for using Form S-3 under the Act.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant
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to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event
of any amendment thereto or the filing of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the
effective date of such registration statement, shall also mean (from and after
the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together with
any such abbreviated registration statement. The term "Prospectus" as used in
this Agreement shall mean the prospectus relating to the Shares as included in
such Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
Registration Statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations); provided, however, that if in reliance on Rule
434 of the Rules and Regulations and with the consent of Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus
subject to completion" (as defined in Rule 434(g) of the Rules and Regulations)
last provided to the Underwriters by the Company and circulated by the
Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. If in reliance on Rule 434
of the Rules and Regulations and with the consent of Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together,
will not be materially different from the prospectus in the Registration
Statement. Any reference to the Registration Statement or the Prospectus shall
be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the
Registration Statement or the Prospectus, as the case may be, and any reference
to any amendment or supplement to the Registration Statement or the Prospectus
shall be deemed to refer to and include any documents filed after such date
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used in this Agreement, the term
"Incorporated Documents" means
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the documents which at the time are incorporated by reference in the
Registration Statement, the Prospectus or any amendment or supplement thereto.
2.2 The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
The Incorporated Documents heretofore filed, when they were filed (or,
if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission thereunder;
any further Incorporated Documents so filed will, when they are filed, conform
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder; no such document when it was filed
(or, if an amendment with respect to any such document was filed, when such
amendment was filed), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and no such further amendment will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
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2.3 Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation with full power and
authority (corporate and other) to own, lease and operate its properties and
conduct its business as described in the Prospectus; the Company owns all of the
outstanding capital stock of its subsidiaries free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; each of the
Company and its subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise; no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification;
each of the Company and its subsidiaries is in possession of and operating in
compliance with all authorizations, licenses, certificates, consents, orders and
permits from state, federal and other regulatory authorities that are material
to the conduct of its business, all of which are valid and in full force and
effect; neither the Company nor any of its subsidiaries is in violation of its
respective charter or bylaws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound; and neither the Company nor any of its
subsidiaries is in material violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties of which it has knowledge. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than [list subsidiaries].
2.4 The Company has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in (A) any violation of the
charter or bylaws of the Company or any of its subsidiaries or (B) a material
breach or violation of any of the
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<PAGE> 6
terms and provisions of, or constitute a default under, (i) any bond, debenture,
note or other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its subsidiaries or their respective properties may be bound,
or (ii) any law, order, rule, regulation, writ, injunction, judgment or decree
of any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its subsidiaries or over their
respective properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties is required for the execution
and delivery of this Agreement and the consummation by the Company or any of its
subsidiaries of the transactions herein contemplated, except such as may be
required under the Act, the Exchange Act (if applicable), or under state or
other securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
2.5 There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company, any of its subsidiaries or any of their respective officers or any of
their respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or any
Incorporated Document or to be filed as an exhibit to the Registration Statement
or any Incorporated Document by the Act or the Rules and Regulations or by the
Exchange Act or the rules and regulations of the Commission thereunder which
have not been accurately described in all material respects in the Registration
Statement or Prospectus or any Incorporated Document or filed as exhibits to the
Registration Statement or any Incorporated Document.
2.6 All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company
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<PAGE> 7
is as set forth in the Prospectus under the caption "Capitalization" and
conforms in all material respects to the statements relating thereto contained
in the Registration Statement and the Prospectus and any Incorporated Document
(and such statements correctly state the substance of the instruments defining
the capitalization of the Company); the Firm Shares and the Option Shares have
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of shareholders exists with respect to any of the Firm
Shares or Option Shares or the issuance and sale thereof other than those that
have been expressly waived prior to the date hereof and those that will
automatically expire upon and will not apply to the consummation of the
transactions contemplated on the Closing Date. No further approval or
authorization of any shareholder, the Board of Directors of the Company or
others is required for the issuance and sale or transfer of the Shares except as
may be required under the Act, the Exchange Act or under state or other
securities or Blue Sky laws. All issued and outstanding shares of capital stock
of each subsidiary of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and were not issued in violation of or
subject to any preemptive right, or other rights to subscribe for or purchase
shares, and are owned by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest. Except as disclosed
in the Prospectus and the financial statements of the Company, and the related
notes thereto, included or incorporated by reference in the Prospectus, neither
the Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth or incorporated by
reference in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
2.7 Ernst & Young LLP, which has examined the
consolidated financial statements of the Company, together with the related
schedules and notes, as of December 31, 1995 and 1994 and for each of the years
in the three (3) years ended December 31, 1995 and for the period May 2, 1989
(inception) to December 31, 1995 filed with the Commission as a part of or
incorporated by reference into the Registration Statement, which are included or
incorporated by reference in the Prospectus, are independent accountants within
the meaning of the Act and the Rules and Regulations; the audited consolidated
financial statements of the Company, together with the related schedules and
notes, and the unaudited consolidated financial
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<PAGE> 8
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company and
its subsidiaries at the respective dates and for the respective periods to which
they apply; and all audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, filed with the Commission as part of or incorporated by
reference into the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included or incorporated by reference in
the Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included or incorporated by reference in the Registration Statement.
2.8 Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) any transaction that is material
to the Company and its subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
2.9 Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document, (i) each of the Company and its
subsidiaries has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus and any Incorporated
Document as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) the agreements to which the Company or any of
its subsidiaries is a party described in the Registration Statement and
Prospectus and any Incorporated Document are valid agreements, enforceable by
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<PAGE> 9
the Company and its subsidiaries (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles and, to the best of the Company's
knowledge, the other contracting party or parties thereto are not in material
breach or material default under any of such agreements, and (iii) each of the
Company and its subsidiaries has valid and enforceable leases for all properties
described in the Registration Statement and Prospectus and any Incorporated
Document as leased by it, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles. Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as proposed to
be conducted.
2.10 The Company and its subsidiaries have timely filed
all necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown thereon as due, and there is no tax deficiency that
has been or, to the best of the Company's knowledge, might be asserted against
the Company or any of its subsidiaries that might have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; and all tax liabilities are adequately provided for on the books of
the Company and its subsidiaries.
2.11 The Company and its subsidiaries maintain insurance
with insurers of recognized financial responsibility of the types and in the
amounts generally deemed adequate for their respective businesses and consistent
with insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor any
such subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
2.12 To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the
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employees of any of its principal suppliers, contractors or subcontractors that
might be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise. No collective
bargaining agreement exists with any of the Company's employees and, to the best
of the Company's knowledge, no such agreement is imminent.
2.13 Each of the Company and its subsidiaries owns or
possesses adequate rights to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names, copyrights and other
information (collectively, "Intellectual Property") that are necessary to
conduct its businesses as described in the Registration Statement and Prospectus
and any Incorporated Document; the expiration of any patents, patent rights,
trade secrets, trademarks, service marks, trade names or copyrights would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise; the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any Intellectual
Property; and the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of others with respect
to any Intellectual Property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, might have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise. To the Company's knowledge, none of the patent rights owned or
licensed by the Company are unenforceable or invalid. The Company has duly and
properly filed or caused to be filed with the U.S. Patent and Trademark Office
(the "PTO") and appropriate foreign and international patent authorities all
patent applications described or referred to in the Prospectus and as set forth
on Schedule B, and has complied with the PTO's duty of candor and disclosure for
each of the U.S. patent applications set forth on Schedule B; the Company is
unaware of any facts which would preclude their grant of a patent from each of
the patent applications set forth on Schedule B; the Company has no knowledge of
any facts which would preclude it from having clear title to its patent
applications referenced in the Prospectus. The Company is not aware of the
granting of any patent rights to third parties or the filing of patent
applications by third parties or any other rights to any of the Company's
Intellectual Property.
2.14 The Common Stock is registered pursuant to Section
12(g) of the Exchange Act and is listed on the Nasdaq National Market, and the
Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from the Nasdaq National Market, nor has the Company
received any notification that the
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Commission or the National Association of Securities Dealers, Inc. ("NASD") is
contemplating terminating such registration or listing.
2.15 The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the future
to conduct, its affairs in such a manner as to ensure that it will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
2.16 The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted by
the Act.
2.17 Neither the Company nor any of its subsidiaries has
at any time during the last five (5) years (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
2.18 The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
2.19 Each officer and director of the Company and each
beneficial owner of Common Stock listed on Annex I hereto has agreed in writing
that such person will not, for a period of 90 days from the date that the
Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Disposition") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to partners or shareholders of such person, provided that
the distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Robertson, Stephens &
Company LLC. The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other
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transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a complete
and accurate list of all securityholders of the Company and the number and type
of securities held by each securityholder. The Company has provided to counsel
for the Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and shareholders have agreed to such
or similar restrictions (the "Lock-up Agreements") presently in effect or
effected hereby. The Company hereby represents and warrants that it will not
release any of its officers, directors or other shareholders from any Lock-up
Agreements currently existing or hereafter effected without the prior written
consent of Robertson, Stephens & Company LLC
2.20 Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document, (i) the Company is in compliance with
all rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, (ii) the Company
has received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be disclosed
in the Registration Statement and the Prospectus and any Incorporated Document,
(iii) the Company will not be required to make future material capital
expenditures to comply with Environmental Laws and (iv) no property that is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
2.21 The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
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2.22 There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the families of
any of them, except as disclosed in the Registration Statement and the
Prospectus and any Incorporated Document.
2.23 The Company has complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be purchased
by the Underwriters pursuant to this Section 3 shall be made against payment of
the purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in next-day funds, payable to the order of the
Company (and the Company agrees not to deposit any such check in the bank on
which it is drawn, and not to take any other action with the purpose or effect
of receiving immediately available funds, until the business day following the
date of its delivery to the Company, and, in the event of any breach of the
foregoing, the Company shall reimburse the Underwriters for the interest lost
and any other expenses borne by them by reason of such breach), at the offices
of Cooley Godward Castro Huddleson & Tatum, 4365 Executive Drive, Suite 1100,
San Diego, California 92121 (or at such other place as may be agreed upon among
the Representatives and the Company), at 7:00 A.M., San Francisco time (a) on
the third (3rd) full business day following the first day that Shares are
traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San
Francisco time, the fourth (4th) full business day following the day that this
Agreement is executed and delivered or (c) at such other time and date not later
than seven (7) full business days following the first day that Shares are traded
as the Representatives and the Company may determine (or at such time and date
to which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date"; provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies
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of the Prospectus to the Representatives. The certificates for the Firm Shares
to be so delivered will be made available to you at such office or such other
location including, without limitation, in New York City, as you may reasonably
request for checking at least one (1) full business day prior to the Closing
Date and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside front
cover concerning stabilization and over-allotment by the Underwriters, and under
the first and second paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement or any Incorporated
Document, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
4.1 The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly
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after it shall receive notice thereof, of the time when the Registration
Statement, any subsequent amendment to the Registration Statement or any
abbreviated registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the Company will provide evidence satisfactory to you that the
Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as
applicable, of the Rules and Regulations, have been filed, within the time
period prescribed, with the Commission pursuant to subparagraph (7) of Rule
424(b) of the Rules and Regulations; if for any reason the filing of the final
form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus that may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus or the Incorporated Documents, or, prior to
the end of the period of time in which a prospectus relating to the Shares is
required to be delivered under the Act, file any document which upon filing
becomes an Incorporated Document, which shall not
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<PAGE> 16
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations , the Exchange
Act and the rules and regulations of the Commission thereunder and the
provisions of this Agreement.
4.2 The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
4.3 The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
4.4 The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or abbreviated
term sheet under Rule 434, in no event later than the first (1st) full business
day following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, and the Incorporated Documents (three of which will
include all exhibits,) all in such quantities as you may from time to time
reasonably request. Notwithstanding the foregoing, if Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time reasonably
request.
4.5 The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the
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provisions of Section 11(a) of the Act and covering a twelve (12) month period
beginning after the effective date of the Registration Statement.
4.6 During a period of five (5) years after the date
hereof, the Company will furnish to its shareholders as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request, (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's shareholders, (ii)
concurrently with furnishing to its shareholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD, (v) every material
press release and every material news item or article in respect of the Company
or its affairs which was generally released to shareholders or prepared by the
Company or any of its subsidiaries, and (vi) any additional information of a
public nature concerning the Company or its subsidiaries, or its business, which
you may reasonably request. During such five (5) year period, if the Company
shall have active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary that is not so consolidated.
4.7 The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
4.8 The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
4.9 If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11.1 hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 11.2(i), the
Company will reimburse the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of
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Underwriters' Counsel) incurred by the Underwriters in investigating or
preparing to market or marketing the Shares.
4.10 If at any time during the ninety (90) day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which in
your opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
4.11 During the Lock-up Period, the Company will not,
without the prior written consent of Robertson Stephens & Company LLC, effect
the Disposition of, directly or indirectly, any Securities other than the sale
of the Firm Shares and the Option Shares hereunder and the Company's issuance of
options or Common Stock under the Company's presently authorized stock option
plans (the "Option Plans").
4.12 During a period of ninety (90) days from the
effective date of the Registration Statement, the Company will not file a
registration statement registering shares under the Option Plans or other
employee benefit plan.
4.13 The Company will use its best efforts to maintain the
inclusion of the Common Stock on the Nasdaq National Market (or on a national
securities exchange) for a period of five years after the effective date of the
Registration Statement.
5. EXPENSES.
5.1 The Company agrees with each Underwriter that:
(a) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and the Incorporated Documents and
any amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any, the cost of all certificates
representing the Shares and transfer agents' and registrars' fees; the fees and
disbursements of counsel for the Company; all fees and other charges of the
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Company's independent certified public accountants; the cost of furnishing to
the several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus and the
Incorporated Documents, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of their obligations hereunder.
(b) In addition to its other obligations under
Section 8.1 hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8.1 hereof, it will reimburse the Underwriters on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of the
nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
5.2 In addition to their other obligations under Section
8.2 hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.2 hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement
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payments which are not made to the Company within thirty (30) days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request.
5.3 It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 5.1(b)
and 5.2 hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5.1(b) and 5.2 hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses which is created by the provisions of Sections 8.1 and
8.2 hereof or the obligation to contribute to expenses which is created by the
provisions of Section 8.4 hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Shares as provided herein
shall be subject to the accuracy, as of the date hereof and the Closing Date and
any later date on which Option Shares are to be purchased, as the case may be,
of the representations and warranties of the Company herein, to the performance
by the Company of its obligations hereunder and to the following additional
conditions:
6.1 The Registration Statement shall have become
effective not later than 2:00 P.M., San Francisco time, on the date following
the date of this Agreement, or such later date as shall be consented to in
writing by you; and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or any Incorporated
Document or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel.
6.2 All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been
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furnished with such papers and information as they may reasonably have requested
to enable them to pass upon the matters referred to in this Section.
6.3 Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
6.4 You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
the following opinion of counsel for the Company, dated the Closing Date or such
later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(a) The Company and each subsidiary has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation;
(b) The Company and each subsidiary has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(c) The Company and each subsidiary is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise. To
such counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than [list
subsidiaries];
(d) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, will not have
been issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
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(e) All issued and outstanding shares of capital
stock of each subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to such counsel's knowledge,
have not been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right and are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(f) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against payment
therefor in accordance with the terms hereof, will be duly and validly issued
and fully paid and nonassessable, and will not have been issued in violation of
or subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right.
(g) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(h) This Agreement has been duly authorized by
all necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as indemnification
provisions may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(i) The Registration Statement has become
effective under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(j) The Registration Statement and the
Prospectus, and each amendment or supplement thereto (other than the financial
statements (including supporting schedules) and financial data derived therefrom
as to which such counsel need express no opinion), as of the effective date of
the Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations; and each
of the Incorporated Documents (other than the financial statements (including
supporting schedules) and the financial data derived therefrom as to which such
counsel need express no opinion) complied when filed pursuant to the Exchange
Act as to form in all material respects with the requirements of the Act and the
Rules and Regulations and the Exchange Act and the applicable rules and
regulations of the Commission thereunder;
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(k) The information in the Prospectus under the
caption "Description of the Company's Securities," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by such
counsel and is a fair summary of such matters and conclusions; and the forms of
certificates evidencing the Common Stock and filed as exhibits to the
Registration Statement comply with Delaware law;
(l) The descriptions in the Registration
Statement and the Prospectus of the charter and bylaws of the Company and of
statutes are accurate and fairly present the information required to be
presented by the Act and the applicable Rules and Regulations;
(m) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration Statement
or Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which are not described or
referred to therein or filed as required;
(n) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification obligations hereunder, concerning which no opinion
need be expressed) will not (i) result in any violation of the Company's charter
or bylaws or (ii) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations;
(o) No consent, approval, authorization or order
of or qualification with any court, government or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the consummation
by the Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(p) To such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against the Company or
any of its subsidiaries of a character required to be disclosed in the
Registration Statement or the Prospectus or any Incorporated Document by the Act
or the Rules and Regulations or
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by the Exchange Act or the applicable rules and regulations of the Commission
thereunder, other than those described therein;
(q) To such counsel's knowledge, neither the
Company nor any of its subsidiaries is presently (i) in violation of its
respective charter or bylaws, or (ii) in material breach of any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations; and
(r) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus and any Incorporated
Document, no holders of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company and, except as set
forth in the Registration Statement and Prospectus, all holders of securities of
the Company having rights known to such counsel to registration of such shares
of Common Stock or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such rights or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the Registration
Statement or have included securities in the Registration Statement pursuant to
the exercise of and in full satisfaction of such rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto and any Incorporated Document, when such documents became
effective or were filed with the Commission (other than the financial statements
including supporting schedules and other financial and statistical information
derived therefrom, as to which such counsel need express no comment) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Registration Statement, the
Prospectus and any amendment or supplement thereto and any Incorporated Document
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
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misleading. Such counsel shall also state that the conditions for the use of
Form S-3 set forth in the General Instructions thereto have been satisfied.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States, the State of California or the
State of Delaware upon opinions of local counsel, and as to questions of fact
upon representations or certificates of officers of the Company, and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
6.5 You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
the following opinion of Morrison & Foerster, patent counsel for the Company,
dated the Closing Date or such later date on which Option Shares are purchased,
addressed to the Underwriters and in form and substance satisfactory to counsel
for the Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters, to the effect that:
(a) The Company is either the assignee of record
at the PTO or the exclusive licensee of each of the patents listed under the
heading "U.S. Patents of the Company" on Schedule B hereof (the U.S. Patents")
and each of the patent applications listed under the heading "U.S. Patent
Applications of the Company" on Schedule B hereof (the "U.S. Applications"). The
best knowledge of such counsel, the Company owns ____ issued U.S. Patents, ___
allowed U.S. Applications and ___ pending U.S. Applications. Such counsel knows
of no claims by others to any ownership interest or lien with respect to any of
the U.S. Patents or U.S. Applications. To such counsel's knowledge, none of the
U.S. Patents are subject to an interference, reexamination, reissue examination
or declaratory action. To such counsel's knowledge, none of the U.S.
Applications has been appealed, finally rejected or subject to an interference;
(b) The Company is the assignee of record at the
appropriate foreign office or the exclusive licensee of each of the foreign
patents listed under the heading "Non-U.S. Patents of the Company" on Schedule C
hereof (the "Non-U.S. Patents") (collectively, the U.S. Patents and Non-U.S.
Patents are referred to herein as the "Patents") and each of the foreign patent
applications listed under the heading "Non-U.S. Patent Applications of the
Company" on Schedule C hereof (the "Non-U.S. Applications") (collectively, the
U.S. Applications and the Non-U.S. Applications are referred to herein as the
"Applications"). Such counsel knows of no claims by others to any of such
Non-U.S. Patents or Non-U.S. Applications. To such counsel's knowledge, none of
the Non-U.S. Patents are subject to an opposition,
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<PAGE> 26
national invalidation proceeding or national court proceeding. To such counsel's
knowledge, none of the Non-U.S. Applications has been appealed or finally
rejected.
(c) Such counsel has no knowledge of any facts
that the Company lacks or will be unable to obtain rights to all Intellectual
Property necessary to the conduct of its business as now or proposed to be
conducted by the Company as described in the Prospectus. Such counsel is not
aware of any facts that (i) would preclude the Company from having clear title
to the Patents and Applications, or (ii) would lead such counsel to conclude
that any of the Patents are invalid or unenforceable or that any patent issued
from an Application would be invalid or unenforceable;
(d) Such counsel is not aware of any material
defects of form in the preparation, filing or prosecution of the Applications on
behalf of the Company or licensors of the Applications. To the best of such
counsel's knowledge, the Company, the Company's patent counsel and patent
counsel of licenses have complied with the PTO duty of candor and disclosure
before the PTO for each of the U.S. Patents and U.S. Patent Applications. The
Applications are being diligently pursued by the Company;
(e) Such counsel knows of no pending or
threatened notification, action, suit, proceeding or claim by governmental
authorities or others that the Company is infringing or otherwise violating any
patents, trademarks, trade secrets or other intellectual property that is not
owned or licensed by the Company;
(f) Such counsel is not aware of any pending or
threatened actions, suits, proceedings or claims by governmental authorities or
others challenging the validity, enforceability or scope of the Applications or
the Patents, other than the patent application proceedings themselves;
(g) Such counsel is not aware of any
infringement on the part of others of the Patents, Applications or trademarks of
the Company or the misappropriation on the part of others of any trade secrets,
know-how or other proprietary rights of the Company;
(h) Such counsel has no knowledge of any patent
rights of others which are or would be infringed by the Company's products or
applications of the Company's products referred to in the Prospectus; and
(i) Nothing has come to the attention of such
counsel which causes such counsel to believe that the information with respect
to the Company's Intellectual Property, or with respect to any infringement by
the Company of the Intellectual Property of others, contained in (a) the
Registration Statement, or any amendments thereof, contained or contains an
untrue statement of a material fact or
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<PAGE> 27
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (b) the Prospectus,
or any amendments thereof, contained or contains an untrue statement of a
material fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
6.6 You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
an opinion of Cooley Godward Castro Huddleson & Tatum, in form and substance
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
6.7 You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be, a
letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in the
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
five (5) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts described
in the Original Letter since the date of such letter, or to reflect the
availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to
or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the consolidated
balance sheet of the Company as of
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<PAGE> 28
December 31, 1995 and related consolidated statements of operations,
shareholders' equity, and cash flows for the twelve (12) months ended December
31, 1995, (iii) state that Ernst & Young LLP has performed the procedures set
out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Ernst & Young LLP as described
in SAS 71 on the financial statements for the quarter ended March 31, 1996 (the
"Quarterly Financial Statements"), (iv) state that in the course of such review,
nothing came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and (v) address other matters
agreed upon by Ernst & Young LLP and you. In addition, you shall have received
from Ernst & Young LLP a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's consolidated
financial statements as of December 31, 1995, did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
6.8 You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(a) The representations and warranties of the
Company in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be purchased, as
the case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to the Closing Date or any later date on which Option Shares are to be
purchased, as the case may be;
(b) No stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act;
(c) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any amendments
or supplements thereto, and the Incorporated Documents, when such Incorporated
Documents became effective or were filed with the Commission, contained all
material information required to be included therein by the Act and the Rules
and Regulations or the Exchange Act and the applicable rules and regulations of
the Commission thereunder, as the case may be, and in all material respects
conformed to the requirements of the Act and the Rules
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<PAGE> 29
and Regulations or the Exchange Act and the applicable rules and regulations of
the Commission thereunder, as the case may be, the Registration Statement, and
any amendment or supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been so set forth; and
(d) Subsequent to the respective dates as of
which information is given in the Registration Statement and Prospectus, there
has not been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (b) any transaction that is
material to the Company and its subsidiaries considered as one enterprise, (c)
any obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, (d) any change in the capital stock or outstanding indebtedness of
the Company or any of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise, (e) any dividend or distribution of
any kind declared, paid or made on the capital stock of the Company or any of
its subsidiaries, or (f) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
6.9 The Company shall have obtained and delivered to you
an agreement from each officer and director of the Company and each beneficial
owner of Common Stock listed on Annex I hereto in writing prior to the date
hereof that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Robertson, Stephens &
Company LLC. The foregoing restriction shall have been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be
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<PAGE> 30
disposed of by someone other than the such holder. Such prohibited hedging or
other transactions would including, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
6.10 The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company herein as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. OPTION SHARES.
7.1 On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
450,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several
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<PAGE> 31
Underwriters by certified or official bank check or checks drawn in next-day
funds, payable to the order of the Company (and the Company agrees not to
deposit any such check in the bank on which it is drawn, and not to take any
other action with the purpose or effect of receiving immediately available
funds, until the business day following the date of its delivery to the
Company). In the event of any breach of the foregoing, the Company shall
reimburse the Underwriters for the interest lost and any other expenses borne by
them by reason of such breach. Such delivery and payment shall take place at the
offices of Cooley Godward Castro Huddleson & Tatum, 4365 Executive Drive, Suite
1100, San Diego, California 92121, or at such other place as may be agreed upon
among the Representatives and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company at least two
(2) full business days prior to the Closing Date, or (ii) on a date which shall
not be later than the third (3rd) full business day following the date the
Company receives written notice of the exercise of such option, if such notice
is received by the Company less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
7.2 Upon exercise of any option provided for in Section
7.1 hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall
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<PAGE> 32
have been furnished with all such documents, certificates and opinions as you
may request in order to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of the
covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
8.1 The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, including any Incorporated
Document, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8.1 with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the
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<PAGE> 33
Act and the Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 4.4 hereof.
The indemnity agreement in this Section 8.1 shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter within the meaning of the Act or the Exchange Act.
This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
8.2 Each Underwriter, severally and not jointly, agrees
to indemnify and hold harmless the Company against any losses, claims, damages
or liabilities, joint or several, to which the Company may become subject under
the Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of such Underwriter herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement or
any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8.2 to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8.2 shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
and each person, if any, who controls the Company within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which each Underwriter may otherwise have.
8.3 Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but
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the omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notified the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it shall
elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying party
to such indemnified party of the indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8.1 or
8.2 hereof who are parties to such action), (ii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved the
terms of such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.
8.4 In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made pursuant
to this Section 8 but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last
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<PAGE> 35
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 8 provides for indemnification in
such case, all the parties hereto shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Underwriters severally and not
jointly are responsible pro rata for the portion represented by the percentage
that the underwriting discount bears to the initial public offering price, and
the Company is responsible for the remaining portion, provided, however, that
(i) no Underwriter shall be required to contribute any amount in excess of the
amount by which the underwriting discount applicable to the Shares purchased by
such Underwriter exceeds the amount of damages which such Underwriter has
otherwise required to pay and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8.4 shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter, the Company within the meaning of
the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
8.5 The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO
SURVIVE DELIVERY. All representations, warranties, covenants and agreements of
the Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such Underwriter or Underwriters to be purchased hereunder upon tender of
such Firm Shares in accordance with the terms hereof, and if the aggregate
number of Firm
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<PAGE> 36
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, the Company shall not be liable to any
Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be
36
<PAGE> 37
purchased hereunder, which Underwriter shall remain liable to the Company, and
the other Underwriters for damages, if any, resulting from such default) be
liable to the Company (except to the extent provided in Sections 5 and 8
hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
11.1 This Agreement shall become effective at the earlier
of (i) 6:30 A.M., San Francisco time, on the first full business day following
the effective date of the Registration Statement, or (ii) the time of the
initial public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by letter,
telephone, telegram or telecopy, whichever shall first occur. By giving notice
as set forth in Section 12 before the time this Agreement becomes effective,
you, as Representatives of the several Underwriters, or the Company, may prevent
this Agreement from becoming effective without liability of any party to any
other party, except as provided in Sections 4.9, 5 and 8 hereof.
11.2 You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company shall have failed, refused or been unable to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in
37
<PAGE> 38
the general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4.9, 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to 6455 Nancy Ridge Drive, San Diego,
California 92121, telecopier number (619) 452-6893, Attention: Steven B. Engle,
President and Chief Executive Officer.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or entity, other than the parties hereto and their respective executors,
administrators, successors and assigns, and the controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in respect of
this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
38
<PAGE> 39
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by Robertson, Stephens & Company LLC on behalf of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several
counterparts, each of which will constitute an original.
39
<PAGE> 40
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
LA JOLLA PHARMACEUTICAL
COMPANY
By____________________________________
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
PACIFIC GROWTH EQUITIES, INC.
VECTOR SECURITIES INTERNATIONAL, INC.
VAN KASPER & COMPANY
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By________________________________________________
Authorized Signatory
40
<PAGE> 41
SCHEDULE A
<TABLE>
<CAPTION>
Number
of Firm
Shares to
be
Underwriters Purchased
----------------------------------------------------------------------------------------------------------
<S> <C>
Robertson, Stephens & Company LLC
Pacific Growth Equities, Inc.
Vector Securities International, Inc.
Van Kasper & Company
---------
Total........................................................................... 3,000,000
=========
</TABLE>
<PAGE> 42
SCHEDULE B
U.S. PATENTS
U.S. PATENT APPLICATIONS
<PAGE> 43
SCHEDULE C
NON-U.S. PATENTS
NON-U.S. PATENT APPLICATIONS
43.
<PAGE> 1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" in the Registration Statement (Form S-3) and related
Prospectus of La Jolla Pharmaceutical Company for the registration of shares of
its common stock and to the use and incorporation by reference therein of our
report dated January 25, 1996, with respect to the financial statements of La
Jolla Pharmaceutical Company included in its Annual Report (Form 10-K) for the
year ended December 31, 1995, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
May 30, 1996
