La Jolla Pharmaceutical Company Annual Report 2001

Plain-text annual report

Table of ContentsSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended DECEMBER 31, 2001OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________________ to _______________Commission file number 0-24274LA JOLLA PHARMACEUTICAL COMPANY(Exact Name of Registrant as Specified in Its Charter) Delaware 33-0361285(State or Other Jurisdiction ofIncorporation of Organization) (I.R.S. EmployerIdentification No.)6455 Nancy Ridge Drive, San Diego, CA 92121(Address of principal executive offices, including zip code)Registrant’s telephone number, including area code: (858) 452-6600Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-Kor any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of suchstock on the Nasdaq Stock Market on February 28, 2002, was $235,430,314. The number of shares of the Registrant’s common stock, $.01 parvalue, outstanding at February 28, 2002 was 42,311,674.DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for its annual meeting of stockholders tobe held on May 22, 2002, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the closeof the fiscal year ended December 31, 2001. TABLE OF CONTENTSPART IItem 1. Business.Item 2. Properties.Item 3. Legal Proceedings.Item 4. Submission of Matters to a Vote of Security Holders.PART IIItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters.Item 6. Selected Financial Data.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Item 7 A. Quantitative and Qualitative Disclosures about Market Risk.Item 8. Financial Statements and Supplementary Data.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.PART IIIItem 10. Directors and Executive Officers of the Registrant.Item 11. Executive Compensation.Item 12. Security Ownership of Certain Beneficial Owners and Management.Item 13. Certain Relationships and Related Transactions.PART IVItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Balance Sheets Statements of Operations Statements of Stockholders’ Equity Statements of Cash Flows Notes to Financial StatementsSIGNATURESExhibit IndexEXHIBIT 10.19EXHIBIT 10.20EXHIBIT 23.1Table of ContentsFORWARD-LOOKING STATEMENTS This report includes forward-looking statements, including without limitation those dealing with La Jolla Pharmaceutical Company’s drugdevelopment plans and clinical trials, and other matters described in terms of our plans and expectations. The forward-looking statements in thisreport involve significant risks and uncertainties, and a number of factors, both foreseen and unforeseen, could cause actual results to differmaterially from our current expectations. Our analyses of clinical results of LJP 394, our drug candidate for the treatment of systemic lupuserythematosus (“lupus”), and LJP 1082, our drug candidate for the treatment of antibody-mediated thrombosis (“thrombosis”), are ongoing andfuture analyses could result in a finding that these drug candidates are not effective in large patient populations or do not provide a meaningfulclinical benefit. Our blood test to measure the binding affinity for LJP 394 is experimental, has not been validated by independent laboratories, mayrequire regulatory approval and may be necessary for the approval and the commercialization of LJP 394. Our other potential drug candidates areat earlier stages of development and involve comparable risks. Analysis of our clinical trials could have negative or inconclusive results. Even ifresults are promising, the U.S. Food and Drug Administration (“FDA”) may require additional clinical trials. Additional risk factors include theuncertainty of: obtaining required regulatory approvals; successfully marketing products; receiving future revenue from product sales or othersources such as collaborative relationships; future profitability; the need for additional financing; our dependence on patents and other proprietaryrights; FDA approval of our manufacturing facilities; the increase in capacity of our manufacturing capabilities for possible commercialization; andour lack of marketing experience. Readers are cautioned to not place undue reliance upon forward-looking statements, which speak only as of thedate hereof, and we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the datehereof. Interested parties are urged to review the risks described below under the heading “Risk Factors” and elsewhere in this report and in ourother reports and registration statements filed with the Securities and Exchange Commission from time to time.PART IItem 1. Business.Overview La Jolla Pharmaceutical Company was incorporated in Delaware in 1989. We are a biopharmaceutical company focused on the research anddevelopment of highly specific therapeutic products 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 attackhealthy tissues. Current treatments for these autoimmune disorders address only symptoms of the disease, or nonspecifically suppress thenormal operation of the immune system, which often results in severe, negative side effects and hospitalization. We believe that our drugcandidates, called Toleragens®, will treat the underlying cause of many antibody-mediated diseases without these severe, negative side effects.Our clinical drug candidate for the treatment of lupus is known as LJP 394, and is currently being evaluated in a Phase III clinical trial. Our clinicaldrug candidate for the treatment of antibody-mediated thrombosis, known as LJP 1082, is currently being evaluated in a Phase I/II clinical trial.1Table of ContentsAntibody-Mediated Diseases The immune system is the major biological defense mechanism responsible for recognizing and fighting disease. The immune systemidentifies antigens, such as bacteria, viruses and other disease-causing substances, and seeks to rid the body of these antigens. There are twofundamental types of immune responses: cell-mediated and antibody-mediated. Cell-mediated immunity is primarily responsible for ridding thebody of cells that have become infected. Antibody-mediated immunity is primarily responsible for eliminating circulating antigens. These immuneresponses are controlled by the activities of white blood cells called T cells and B cells. T cells provide cell-mediated immunity and regulate Bcells. B cells provide antibody-mediated immunity by producing 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 produceantibodies 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 cellreceives 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 foreign antigens and the body’s healthy tissues. In a malfunctioning immunesystem, healthy tissue may trigger an immune response that causes B cells to produce disease-causing antibodies, resulting in antibody-mediatedautoimmune disease. For example, B cells can produce disease-causing antibodies that are associated with the destruction of the kidneys inlupus and the wasting of muscles in myasthenia gravis. Other antibody-mediated disorders include antibody-mediated stroke, heart attack, deepvein thrombosis, recurrent fetal loss, organ rejection in xenotransplantation, and Rh hemolytic disease of the newborn. Current therapies for antibody-mediated diseases have significant shortcomings, including severe side effects and a lack of specificity. Mildforms of antibody-mediated diseases are generally treated with drugs that address only the disease symptoms and fail to suppress diseaseprogression, because such drugs do not control the production of disease-causing antibodies. Severe antibody-mediated diseases like lupus aregenerally treated with high levels of corticosteroids and immunosuppressive therapy (primarily anti-cancer or chemotherapy drugs), which broadlysuppress the normal function of the entire immune system. These therapies can leave patients susceptible to potentially life-threatening infectionsthat may require hospitalization. Repeated dosing with corticosteroids may cause other serious conditions, including diabetes, hypertension,cataracts, osteonecrosis and psychosis, and an increased risk of severe infections that may limit the use of this therapy. The use ofchemotherapy may lead to acute problems, including weight loss, nausea, an increased risk of severe infections and long-term adverse effects,including sterility and an increased risk of malignancies.Tolerance Technology® Our Tolerance Technology program focuses on the discovery and development of proprietary therapeutics, called Toleragens, which target andsuppress the production of specific disease-causing antibodies without affecting the protective functions of the immune system. We believe thatToleragens will be able to treat the underlying causes of antibody-mediated diseases, and that our Tolerance Technology may be applied broadlywherever specific antibodies are involved in causing diseases. Since the 1970s, hundreds of papers have been published by the scientific community describing laboratory studies and a Nobel Prize wasawarded for research in tolerance. The2Table of Contentsunderlying science supporting our Tolerance Technology is based on these discoveries as well as on our own patented research. Toleragens are composed of disease-specific epitopes and a carrier platform, which are proprietary chemical structures that we have developedand synthesized. To mimic the unique epitopes on an antigen’s surface, we identify and synthesize epitopes specific to particular antibody-mediated diseases and attach or conjugate these epitopes to the carrier platform, which serves as a vehicle for presenting the epitopes to theantibody 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 Bcell may become tolerized and cease to produce disease-causing antibodies. We design our Toleragens to bind selectively to disease-causing B cells without affecting the function of disease-fighting B cells. This processinvolves: (1) collecting and purifying the disease-causing antibodies from patients with the targeted disease; (2) generating and selecting anepitope that strongly binds to the purified antibodies; (3) modifying the epitope’s structure to maximize its binding properties while eliminating, ifnecessary, structures that can activate a patient’s T cells (this process is called “optimization”); and (4) linking the optimized epitope to the carrierplatform. We believe this process enables us to create Toleragens that will preferentially tolerize and shut down B cells that generate antibodieswith the highest binding affinity, and which are believed to be the most harmful.Business Strategy Our objective is to become the leading developer of highly specific therapeutics for the treatment of life-threatening, antibody-mediateddiseases such as lupus; antibody-mediated stroke, heart attack, deep vein thrombosis and recurrent fetal loss; organ rejection inxenotransplantation; myasthenia gravis and Rh hemolytic disease of the newborn. Our strategy includes the following key elements: Complete the Clinical Development of LJP 394 for Lupus Patients. Our primary near-term goal is to complete development of LJP 394 to treatlupus. Following our analysis of a Phase II/III clinical trial of LJP 394 and a positive meeting with the FDA in April 2000, we initiated a Phase IIIclinical trial of LJP 394 in September 2000. Our Phase III trial is ongoing. Apply Tolerance Technology to Other Life-Threatening Antibody-Mediated Diseases. We are focusing on chronic, life-threatening diseases andconditions caused by antibodies, such as lupus and antibody-mediated thrombosis, for which there are no existing treatments or for which currenttherapeutics have significant limitations. We intend to use our Tolerance Technology to design therapeutics that specifically address other targetedantibody-mediated diseases without adversely affecting normal immune system function. Utilize Strategic Collaborations to Develop and Commercialize Product Candidates. We intend to seek collaborative relationships withpharmaceutical companies to provide support for our research programs, and for the clinical development and commercialization of other drugcandidates. Expand Intellectual Property Leadership Position. Currently, we own 96 issued patents and have 82 pending patent applications covering ourvarious technologies and drug candidates, including our Tolerance Technology, our lupus and antibody-mediated thrombosis drug candidates, andour platform and linkage technologies for our Toleragens. We hope to broaden our position with future discoveries and additional patent filings.3Table of ContentsProducts Under DevelopmentThe Lupus Program Lupus is a life-threatening, antibody-mediated disease in which disease-causing antibodies damage various tissues. According to recentstatistics compiled by the Lupus Foundation of America, epidemiological studies and other sources, the number of lupus patients in the UnitedStates is estimated to be between 250,000 and 1,000,000, and approximately 16,000 new cases are diagnosed each year. Approximately nine outof 10 lupus patients are women, who usually develop the disease during their childbearing years. Lupus is characterized by a multitude ofsymptoms, including chronic kidney inflammation, which can lead to kidney failure, serious episodes of cardiac and central-nervous-systeminflammation, as well as extreme fatigue, arthritis and rashes. Approximately 80% of all lupus patients progress to serious symptoms.Approximately 50% of lupus patients have kidney disease. Antibodies to double-stranded DNA (“dsDNA”) can be detected in approximately 90% of lupus patients who are not receivingimmunosuppressive therapy. These antibodies are widely believed to cause kidney disease (nephritis), often resulting in morbidity and mortality inlupus patients. These antibodies are also associated with episodes of potentially life-threatening kidney inflammation — called “renal flares” — thatmay occur more than once per year and usually require intensive-care hospitalization. Significant kidney destruction occurs during a renal flare.Lupus nephritis can lead to deterioration of kidney function and to end-stage kidney disease, requiring long-term renal dialysis or kidneytransplantation to sustain the patient’s life. Current treatments for lupus patients with kidney disease and other serious symptoms usually include repeated administration ofcorticosteroids, often at high levels that can have toxic effects when used as a chronic treatment regimen. Many patients with advanced diseaseare also treated with immunosuppressive therapy, including anti-cancer drugs that have a general suppressive effect on the immune system andmay be carcinogenic. This immunosuppressive treatment leaves the patient vulnerable to serious infection and is a significant cause of sicknessand death. We have designed LJP 394 to suppress the production of antibodies to dsDNA in lupus patients without suppressing the normal function of theimmune system. The design of LJP 394 is based upon scientific evidence of the role of antibodies to dsDNA in lupus. Published studies of lupuspatients indicate that a rise in the level of antibodies to dsDNA may be predictive of renal flares in lupus patients with renal involvement, and thatsuppressing antibodies to dsDNA by treating with corticosteroids prevents relapses in a majority of patients. In a mouse model of lupus nephritisthat generates elevated levels of antibodies to dsDNA, administration of LJP 394 reduced the production of antibodies to dsDNA, reduced thenumber of antibody-forming cells, reduced kidney disease and extended the life of the animals. We believe that our own and other studies provideevidence 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 thekidneys. We believe that LJP 394 preferentially targets these antibodies.LJP 394 Clinical Trial History Based on our preclinical findings, we filed an Investigational New Drug application for LJP 394 with the FDA in August 1994. In a double blind,placebo-controlled Phase I clinical trial conducted in December 1994, healthy volunteers received LJP 394 and displayed no significant4Table of Contentsdrug-related adverse effects and no immune reaction to the drug. Upon completion of our Phase I trial, we began four Phase II clinical trials. OurPhase II clinical trials included a single-dose trial, a repeat dose-escalating trial and two dose-ranging trials. In 1994, the single-dose clinical trial was initiated to evaluate the safety of a single, 100 mg intravenous dose of LJP 394 in four female lupuspatients. We monitored antibody levels, blood chemistry, vital signs and complement (inflammation-promoting proteins) levels for 28 days afterdosing. LJP 394 was well tolerated by all four patients, with no drug-related adverse clinical symptoms and no clinically significant complementlevel 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 antibodies to dsDNA levels was alsoobserved. These results were presented at the Annual Scientific Meeting of the American College of Rheumatology in October 1995. In 1995, a repeat dose-escalating clinical trial was initiated in which two female patients each received doses of 10, 10, 50, 50, 100 and 100 mgof LJP 394 at two-week intervals. After the 10-week dosing regimen was completed, the patients were followed for six weeks. LJP 394 was welltolerated by both patients with no drug-related adverse clinical symptoms, no clinically significant complement changes and no significant immunecomplex formation. Six weeks after the last dose, the antibodies to dsDNA levels in both patients remained suppressed below baseline levels. In 1995, we conducted a first double-blind, placebo-controlled dose-ranging trial, in which 58 lupus patients (53 females and five males) withmild lupus symptoms were treated for a four-month period with LJP 394 or placebo, and then were monitored for two months. Patients wereenrolled who were clinically stable and had antibodies to dsDNA levels exceeding those generally found in healthy individuals. The patients wereorganized into nine treatment groups at three dose levels (1 mg, 10 mg and 50 mg), and three frequencies (once per week, once every two weeksand once every four weeks). Patients were randomized to one of the nine treatment groups so that at each dose and frequency, four to sevenpatients received LJP 394 and one patient received a placebo. Patients in the weekly treatment groups showed a dose-response correlation between increasing doses of LJP 394 and reductions of levels ofantibodies to dsDNA. In patients treated weekly with 10 mg or 50 mg doses of LJP 394, antibodies to dsDNA were reduced by statisticallysignificant levels and remained suppressed in certain patients for up to two months after the last dose. In the patient group treated weekly with 50mg, the reductions in median levels of antibodies to dsDNA were accompanied by increases in median levels of two important inflammation-relatedcomplement proteins, C3 and C4, which normally increase with clinical improvement and decrease during active lupus renal disease. These studydata suggested that complement levels and antibodies to dsDNA levels were normalizing in parallel in the LJP 394-treated. Throughout this first dose-ranging trial, the drug was well tolerated with no clinically significant dose-related adverse reactions observed. Threepatients experienced lupus renal flares, and three other patients were hospitalized as a result of transient adverse events that the treatingclinicians believed were unrelated to the underlying disease or to LJP 394. Two of the patients with renal flares withdrew from the study, as did fourpatients who experienced exacerbations of lupus and one patient who experienced a herpes rash. However, no relationship was observed betweenthe development of an adverse event and the dose or frequency of administration of LJP 394. In 1999, we completed a second double-blind, placebo-controlled dose-ranging trial, in which 74 lupus patients received weekly injections of 10,50, or 100 mg of LJP 394 or placebo5Table of Contentsfor a 12-week period. In patients treated weekly with placebo, 10 mg or 50 mg of LJP 394, antibodies to dsDNA increased by 100%, 53% and10%, respectively, while in patients treated weekly with 100 mg of LJP 394, antibodies to dsDNA decreased by 43%, a statistically significantdifference from placebo. Seven LJP 394-treated patients had serious adverse events, but none were considered related to LJP 394 treatment. In December 1996, we initiated a double-blind, placebo-controlled multi-center Phase II/III clinical trial of LJP 394 in which patients receivedLJP 394 or placebo and were in the trial for up to 18 months. The purpose of this trial was to evaluate the safety of the drug and its potential todelay or reduce renal flares, to delay or reduce the need for immunosuppressive or corticosteroids and/or chemotherapy drugs and to improvepatients’ health-related quality of life. The trial enrolled more than 200 patients and was conducted by us and Abbott Laboratories (“Abbott”) in morethan 50 sites in North America and Europe as part of our joint development agreement with Abbott. In May 1999, an interim analysis of the Phase II/III clinical trial of LJP 394 indicated that the trial was unlikely to reach statistical significancefor the primary endpoint, time to renal flare, and it was decided to stop the study and evaluate the data. Although both the drug- and placebo-treated groups exhibited serious adverse events, there were no statistically significant differences in the number of events in the two groups,indicating the drug was well tolerated. In September 1999, the joint development agreement for LJP 394 between us and Abbott was terminated. In November 1999, we announced encouraging initial results from the analysis of the data from the Phase II/III clinical trial showing a certaingroup of patients treated with LJP 394 had fewer renal flares and treatment with high-dose corticosteroids and/or cyclophosphamide. These resultswere based on an analysis of the trial using a new blood test that we developed and that appears to predict which patients will respond to drugtreatment. Developed in 1998, the blood test measures the strength of the binding between LJP 394 and a patient’s antibodies. Prior to using theblood test in the Phase II/III trial, we used it retrospectively to evaluate patients samples from the 1995 Phase II dose-ranging trial and found thatthe blood test predicted which patients would respond to drug treatment as measured by changes in antibody affinity following drug treatment. In May 2000, we completed the analysis following the testing of more than 99% of the North American patients’ samples from the Phase II/IIIclinical trial. The blood test showed that 89% of the patients had high-affinity antibodies to LJP 394 (high-affinity patients). The high-affinitypatients treated with LJP 394 experienced significantly longer time to renal flare (p = 0.008), the primary endpoint of the trial, fewer renal flares(p = 0.008), longer time to treatments with high-dose corticosteroids and/or cyclophosphamide (p = 0.002) and fewer exposures to high-dosecorticosteroids and/or cyclophosphamide (p = 0.001) when compared to the placebo-treated group. Also in the Phase II/III study, mean levels of circulating antibodies to dsDNA in patients treated with LJP 394 were reduced by a statisticallysignificant amount relative to placebo during drug treatment. Levels of an important complement protein, C3, improved when antibodies werereduced. In lupus patients, this inflammation-related protein, C3, decreases during active renal disease and increases with clinical improvement.The concurrent reduction of antibodies to dsDNA and increase in C3 complement levels is biologically consistent. As noted earlier, this effect hadbeen observed in the 1995 Phase II dose-ranging study of LJP 394 in 58 lupus patients. The Phase II/III trial design included periods during which patients received no drug for approximately two months (the “off” periods) and weeklydoses of 50 mg over three months (the “on” periods). When patients were on drug, mean levels of antibodies to dsDNA decreased. When patientswere off drug, mean levels of antibodies to dsDNA increased. During the first6Table of Contentsfour months of the trial, when patients were treated with 100 mg per week, there were nine renal flares in the placebo-treated group and four in thedrug-treated group — a 2:1 ratio in favor of drug treatment. Furthermore, in patients with high-affinity antibodies, during the first four months of thetrial, there were eight renal flares in the placebo-treated group and only one renal flare in the drug-treated group (p = 0.035) — an 8:1 ratio in favorof drug treatment. Results from the Phase II/III lupus study suggested three ways to improve the clinical trial design of a Phase III trial: eliminate “off” periods,use doses of 100 mg of LJP 394 per week and evaluate the drug in the patients with high-affinity antibodies. Based on these observations and following discussions with the FDA, we initiated a Phase III clinical trial in September 2000 to demonstratethe safety and efficacy of LJP 394 for lupus. In this trial, the primary endpoint, time to renal flare, will be measured in patients with high-affinityantibodies who are treated with 100 mg per week of LJP 394 or placebo. There are no “off” periods. The Phase III clinical trial is a double-blind, placebo-controlled study, which is being conducted at more than 60 major medical centers in NorthAmerica and Europe. We plan to enroll approximately 300 high-affinity lupus patients to evaluate the potential of LJP 394 to delay and reduce thenumber of renal flares, and delay and reduce the need for treatment with high-dose corticosteroids and/or chemotherapy drugs. At year-endapproximately 200 patients had been enrolled in the study. The trial is expected to be completed in late 2002. We believe that the blood test we developed can identify lupus patients who are most likely to respond to LJP 394 and we will use this affinityassay to identify the patients to be included in the efficacy analysis of the Phase III trial. We have filed a patent application on this new bloodassay. In September 2000, the FDA granted us orphan drug designation for LJP 394 for the treatment of lupus kidney disease. The Orphan Drug Actprovides for seven years of marketing exclusivity in the U.S. and enables us to obtain research funding, tax credits for certain research expenses,and a waiver of the application user fees. In November 2001, European Commission granted orphan medicinal product designation in the European Union for LJP 394 on therecommendation of the Committee on Orphan Medical Products. Orphan designation in Europe enables us to receive significant fee reductions forscientific advice, marketing authorization and inspections, and provides 10 years of market exclusivity in the European Union.Additional LJP 394 Clinical Trial Data In October 2000, we presented additional data from the Phase II/III trial at the American College of Rheumatology Annual Scientific Meetingconcerning the effect of LJP 394 treatment on patients with impaired renal function. In a predefined group of patients with poor renal function, therewere more renal flares in the patients treated with placebo than in the patients treated with LJP 394 (p = 0.046). In a group of patients with poorrenal function and with high-affinity antibodies to LJP 394, there were six renal flares in 10 patients treated with placebo and zero renal flares in 11patients treated with drug (p = 0.004). In January 2001, we announced that approximately 90% of patients in each of three previous clinical trials from whom sera specimens wereavailable had high-affinity antibodies to LJP 394, prior to drug treatment. The ratios for the trials were: 89% of the 213 patients in the Phase II/IIItrial, 94% of the 31 patients in the Phase II trial completed in 1996 and 90% of the 60 patients in the Phase II trial completed in 1999. Patients inthe Phase II/III trial had moderate to severe disease and a history of renal flares. Patients in the two Phase II trials had mild to moderate disease.Placebo- and drug-treated groups7Table of Contentshad similar percentages at baseline in each clinical trial. These data suggest that the percentage of high-affinity patients in a larger population oflupus patients may be 90%, but a larger population of patients would need to be evaluated to confirm this result. In October 2001, we presented additional data from the Phase II/III trial at the World Congress of Nephrology. Our study revealed that 70% ofthe patients in our study with biopsies had World Health Organization Classifications III (focal) or IV (diffuse) proliferative glomerulonephritis. Wealso reported that 83% of patients in our trial who had a renal flare required treatment with high-dose corticosteroids and/or cyclophosphamide and48% required hospitalization. In patients who entered the trial with impaired renal function and who flared, serum creatinine levels worsenedsignificantly and increased from an average of 1.9 mg/dL at baseline to 5.0 mg/dL at final visit. In November 2001, we presented additional data from the Phase II/III trial at the American College of Rheumatology Annual Scientific Meetingindicating that treatment with LJP 394 appeared to be as effective as current immunosuppressive therapy in reducing antibodies to dsDNA.Patients on placebo who were treated with high-dose steroids and/or cyclophosphamide (HDCC) were compared to patients who received LJP 394.Following treatment with HDCC, levels of antibodies to dsDNA in 38 patients receiving placebo were reduced within four weeks by a mean of 25%.In 100 patients treated weekly with 100 mg of LJP 394, but not HDCC, antibodies to dsDNA were reduced within four weeks by a mean of 36%. Inpatients requiring HDCC, mean levels of antibodies to dsDNA decreased 37% in 22 patients receiving LJP 394 treatment compared with 25% in 38patients receiving placebo. In patients receiving HDCC, the median dose of corticosteroids was 50 mg per day. In January 2002, we presented additional data from the Phase II/III clinical trial at the National Institutes of Health Medical Conference on SLE:Targets for New Therapeutics, indicating that treatment with LJP 394 improved or sustained health-related quality of life in patients with lupus renaldisease following 16 weeks of treatment with LJP 394 and following renal flares, when compared to placebo. Health-related quality of life is ameasure of a patient’s sense of mental and physical well-being or how he/she feels and was measured by a standard scoring instrument called theSF-36® Health Survey that categorizes results in eight domains. At the beginning of the study, the mean SF-36 scores for all lupus patients weresignificantly lower in all domains compared with normal individuals in the U.S. of similar age and sex. In 190 patients with SF-36 measurements, LJP 394-treated patients reported a positive trend in their composite mental component score of1.3, compared with a worsening of -0.8 for patients treated with placebo, a difference of 2.1. The largest mean change occurred in the role-emotional score where the drug-treated patient score improved by +7.7 points while the placebo-treated patient score decreased by -8.1. This wasa relative difference of 15.8 and is of a magnitude that is generally believed to be clinically meaningful. The role-emotional assessment representsthe patients’ perception of limitations they experience in their daily routine attributed to emotional problems. In 37 patients with SF-36 measurements before and after a renal flare, LJP 394-treated patients experienced an improved or stable health-related quality of life in all domains except one, while placebo-treated patients reported worsening in all domains. For example, the mean change inrole-emotional score for LJP 394-treated patients improved by +2.1 points, compared with placebo-treated patients where it decreased by -20.6points, a relative difference of 22.7 points. The changes in role-emotional and the mental component summary scores are of a magnitude that isgenerally believed to be clinically meaningful. The Phase III clinical trial, and the development of LJP 394 in general, involve many risks and uncertainties, and there can be no assurancethat any previous clinical results can be8Table of Contentsreplicated in further clinical testing or that LJP 394 will be effective in inducing and sustaining antibody suppression; will prove to be clinically safeor effective; will receive required regulatory approvals; or will require further FDA-mandated clinical testing in addition to a Phase III clinical trial. Ifthe continued development of LJP 394 produces negative or inconclusive results, our business and financial condition will be adversely affectedand it may be difficult or impossible for us to survive. Our blood test to measure the binding affinity for LJP 394 is experimental, has not beenvalidated by independent laboratories, may require regulatory approval and may be necessary for the approval and the commercialization of LJP394.Antibody-Mediated Thrombosis, Including Stroke, Heart Attack, Deep Vein Thrombosis and Recurrent Fetal Loss Researchers believe that antibodies called “antiphospholipid” antibodies promote arterial and venous blood clots, which can cause a variety ofrecurring and potentially life-threatening medical problems. For example, blood clots that lodge in the brain may cause stroke and those that lodgein the legs may cause deep vein thrombosis. There are multiple conditions associated with these antibodies that we collectively refer to asantibody-mediated thrombosis: antibody-mediated stroke, heart attack, deep vein thrombosis, recurrent fetal loss, and complications followingcardiovascular surgery. Our program to develop a Toleragen to treat antibody-mediated thrombosis could be helpful in preventing these problems.We estimate that there are up to 2,000,000 patients in the United States and Europe with antibody-mediated thrombosis. Stroke is a leading cause of death in the United States. In 2002, there are approximately 4,000,000 stroke patients in the United States andapproximately 750,000 new episodes will occur. In 2002, approximately 160,000 people will die from stroke. This debilitating condition results fromacute neurological injury caused by the blockage or rupture of blood vessels in the brain. Many of the blockages are caused by thromboses, orblood clots, which many clinicians believe may be caused by a number of factors, including antiphospholipid antibodies. It is estimated that theseantibodies cause about 10% of the strokes in the United States (affecting about 200,000 to 400,000 patients). Antibody-mediated stroke is thoughtto occur in younger individuals and with greater frequency than non-antibody-mediated stroke. The cost of treatment to provide hospitalization andhome nursing care for a survivor of a serious stroke is approximately $30,000 per year for life. Antibody-mediated thrombosis is also associated with recurrent fetal loss, a syndrome of repeated miscarriage. Published clinical reportsestimate that many women with elevated antiphospholipid antibody levels experience multiple miscarriages, delayed fetal development orpremature childbirth. Recent academic research suggests that elevated levels of these antibodies are also found in approximately 10 to 30% ofpatients with other clotting disorders, including myocardial infarction (heart attack), deep vein thrombosis and cardiac valve lesion, as well as inapproximately 30% of lupus patients. In myocardial infarction, recent research suggests the relative risk of a thrombotic event or death is twice ashigh in people with high antiphospholipid antibodies, and this risk is independent of other risk factors. In deep vein thrombosis, research indicatesantiphospholipid antibody-positive patients have recurring deep vein thromboses twice as often as antiphospholipid antibody-negative patients. Current treatments for antibody-mediated thrombosis involve the use of chronic, potentially life-long anticoagulant therapy with drugs such asheparin or warfarin to prevent the formation of blood clots. Patients must be carefully monitored to minimize serious bleeding episodes that canoccur because of the therapy. If patients are removed from anticoagulant therapy, they are at an increased risk of stroke or another thromboticepisode. Warfarin is not recommended in the treatment of recurrent fetal loss because it is toxic to the developing fetus.9Table of Contents We believe that a Toleragen to treat antibody-mediated thrombosis would be a major step forward in specifically targeting the cause of thisclotting disorder, thereby avoiding the side effects of current therapies. Our research supports the finding that specific antibodies in antibody-mediated thrombosis enhance blood-clot formation by interfering with thenatural breakdown of a blood component — Factor Va — that accelerates clotting. The true target of these clot-promoting antibodies is notcardiolipin, but a region on a blood protein called beta 2-glycoprotein I. To date, our scientists have shown that approximately 90% of patientsstudied with antibody-mediated thrombosis have antibodies that bind to this region. The identification of a disease target for antibody-mediatedthrombosis has allowed us to begin building new drug candidates that bind to these antibodies with high affinity and are designed to tolerize, orshut down, the B cells that produce them. We have synthesized a family of candidate antibody-mediated thrombosis Toleragens for testing. We have also developed a mouse model ofthe disease, where the animals produce antibodies to beta 2-glycoprotein I and develop a clotting defect similar to that seen in patients withantibody-mediated thrombosis. In this animal model, several candidate molecules have been shown to reduce the production of pathogenicantibodies, a key step in the development of a drug to treat this disorder.LJP 1082 Clinical Trial History In July 2000, we nominated LJP 1082 as our clinical drug candidate for the treatment of antibody-mediated thrombosis. Based on positivepreclinical results in mice, rats and primates, we chose this candidate for planned toxicology studies required for the filing of an InvestigationalNew Drug application. In September 2000, we presented positive preclinical results at the 9th International Symposium on AntiphospholipidAntibodies in Tours, France that showed LJP 1082 reduced disease-causing antibodies and the B cells involved in antibody-mediated thrombosisin an animal model of the disease. In September 2001, we announced that we had filed an Investigational New Drug application with the FDA to begin a Phase I/II clinical trial ofLJP 1082. In November 2001, we announced the initiation of the Phase I/II clinical trial. The objective of the study is to evaluate the safety of LJP1082 and its ability to reduce disease-causing antibody levels in patients with antibody-mediated thrombosis. The trial is a double-blind, placebo-controlled study evaluating multiple doses in a small group of patients.Other Antibody-Mediated Diseases We believe our Tolerance Technology may be applicable to additional diseases and conditions caused by the production of disease-causingantibodies, including xenotransplantation, myasthenia gravis and Rh hemolytic disease of the newborn. Xenotransplantation, the use of animals as a source of donor organs for human transplantation, has become an area of great interest due to theworldwide shortage of human organs available for transplantation. According to the American Society of Transplant Physicians, approximately100,000 patients in the United States are on waiting lists for organ transplants. More than 5,000 patients die annually, many of whom are too sickto qualify for waiting lists. A typical organ transplant can cost more than $100,000.10Table of Contents Hyper acute rejection, or the immediate destruction of the transplanted animal organ by the recipient’s antibodies, is a major barrier toxenotransplantation. Human antibodies recognize and bind to an epitope called alpha galactose found on the tissues of transplanted animalorgans. This binding causes massive blood clots that block the blood supply to the transplanted organ, destroying it within minutes. Myasthenia gravis is a form of muscular paralysis in which neuromuscular receptors are attacked by antibodies, which can lead to a wasting ofmuscles, progressive loss of strength and life-threatening respiratory arrest. This disease affects an estimated 20,000 people in the United States. Rh hemolytic disease of the newborn is a life-threatening fetal condition characterized by the hemolysis, or 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 andcause their destruction. Each year approximately 500,000 women in the United States have Rh-incompatible pregnancies. We believe that aToleragen that binds to the appropriate maternal B cells will suppress Rh antibody production, and that once the level of antibodies to Rh(+) redblood cells is reduced, the risk of life-threatening hemolysis will be reduced.Collaborative Arrangements As part of our business strategy, we attempt to pursue collaborations with pharmaceutical companies in an effort to access their research, drugdevelopment, manufacturing, marketing and financial resources. In December 1996, we entered into a collaborative relationship with Abbott for theworldwide development and commercialization of LJP 394. This agreement was terminated in September 1999 following the initial analysis of thePhase II/III lupus trial, and all rights to LJP 394 were returned to us. Concurrent with the formation of the collaborative relationship, Abbott made an initial $4.0 million license payment to us and purchased a totalof 3,369,604 shares of our common stock in December 1996, September 1997 and October 1998, for gross proceeds of $4.0 million on eachpurchase date. Under the collaborative agreement, Abbott paid us a total of approximately $23.2 million for the research and development costswe incurred for the development of LJP 394 from 1997 through 1999. We intend to pursue collaborative arrangements with other pharmaceutical companies to assist in our research programs and the clinicaldevelopment and commercialization of our drug candidates. There can be no assurance that we will be able to negotiate arrangements with anycollaborative partner on acceptable terms, if at all. Once a collaborative relationship is established, there can be no assurance that thecollaborative 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 our competitors, as a means for developing treatments for the diseases we havetargeted. Furthermore, competing products, either developed by a collaborative partner or to which a collaborative partner has rights, may result inthe withdrawal of support by the collaborative partner with respect to all or a portion of our technology. Failure to establish or maintain collaborative arrangements will require us to fund our own research and development activities, resulting inaccelerated expenditure of capital, and will require us to develop our own marketing capabilities for any drug candidate that may receive regulatoryapproval. The failure of any collaborative partner to continue funding any particular program of ours, or to commercialize successfully any product,could delay or halt the development or commercialization of any products involved in such program. As a result, failure11Table of Contentsto establish or maintain collaborative arrangements could hurt our business, financial condition and results of operations.Manufacturing We have constructed and are currently operating a pilot production facility for the manufacture of LJP 394 that is large enough to exceedanticipated research and clinical trial needs for LJP 394. Through internal development programs and external collaborations, we have madeseveral improvements to the manufacturing process for LJP 394 that have reduced our costs and increased our manufacturing capacity. We havedeveloped proprietary synthesis and conjugation technologies that are being used in the development of our other Toleragen candidates. We intendto further develop these technologies in order to increase our manufacturing efficiencies and apply our expertise to the development andmanufacture of other potential products. There are currently a limited number of suppliers who produce raw materials or the DNA components forLJP 394. While we believe that our current production facility will provide sufficient capacity for launch, as planned, additional capacity will be required tomeet additional potential demand in the marketplace at sometime in the future. Following launch, we plan to increase capacity through contractmanufacturing and additional capital investments in the expansion of our facilities. The manufacture of our potential products for clinical trials andthe manufacture of any resulting products for commercial purposes are subject to current Good Manufacturing Practices, as defined by the FDA.We have never operated an FDA-approved manufacturing facility, and there can be no assurance that we will obtain the necessary approvals. Wehave limited manufacturing experience, and no assurance can be given that we will be able to make the transition to commercial productionsuccessfully. We may enter into arrangements with contract manufacturers to expand our own production capacity in order to meet requirementsfor our products or to attempt to improve our manufacturing efficiency. If we choose to contract for manufacturing services and encounter delaysor difficulties in establishing relationships with manufacturers to produce, package and distribute finished products, clinical trials, marketintroduction and subsequent sales of such products would be adversely affected. Contract manufacturers must also operate in compliance with theFDA’s manufacturing requirements. Our potential dependence upon others for the manufacture of our products may adversely affect our profitmargins and our 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, we must either develop our own marketing and sales force or enter intomarketing arrangements with others. These arrangements may be exclusive or nonexclusive and may provide for marketing rights worldwide or ina specific market. We currently have no arrangements with others for the marketing of any of our drug candidates. There can be no assurance thatwe will be able to enter into any marketing agreements on favorable terms, if at all, or that any such agreements that we may enter into will resultin payments to us. Under any co-promotion or other marketing and sales arrangements that we may enter into with other companies, any revenuesthat we may receive will be dependent on the efforts of others and there can be no assurance that such efforts will be successful. To the extentthat we choose to attempt to develop our own marketing and sales capability, we will compete with other companies that currently haveexperienced and well-funded marketing and sales operations. Furthermore, there can be no assurance that we or any collaborative partner will beable to establish sales and distribution capabilities without undue delays or expenditures, or gain market acceptance for any of our drugcandidates.12Table of ContentsPatents and Proprietary Technologies We file patent applications in the United States and in foreign countries for the protection of our proprietary technologies and drug candidatesas we deem appropriate. We currently own 96 issued patents and have 82 pending patent applications covering various technologies and drugcandidates, including our Tolerance Technology, our lupus and antibody-mediated stroke drug candidates, and our linkage technologies for ourToleragens. Our issued patents include: (1) four issued United States patents, one issued Australian patent, one granted Portuguese patent, one granted Norwegian patent, onegranted European patent, which has been unbundled as 13 European national patents, two granted Canadian patents, one granted Finnishpatent and one granted Irish patent concerning our lupus Toleragens (expiring in 2010, 2011, 2013, 2014, 2007, 2013, 2011, 2011, 2011,2011, 2011 and 2011, respectively); (2) three issued United States patents, two issued Australian patents, one granted European patent, which has been unbundled as 15European national patents, one granted Japanese patent, one granted Canadian patent, one granted South Korean patent and one grantedIrish patent concerning our Tolerance Technology (expiring in 2011, 2011, 2014, 2008, 2014, 2012, 2012, 2012, 2012 and 2012,respectively); (3) four issued United States patents, four issued Australian patents, one granted European patent, which has been unbundled as 15European national patents, two issued Japanese patents, one granted Hong Kong patent, and one granted Portuguese patent concerninglinkage technologies for our Toleragens (expiring in 2012, 2015, 2015, 2016, 2014, 2012, 2012, 2017, 2012, 2012, 2012, 2012 and 2014,respectively); and (4) two issued United States patents and one issued Australian patent concerning our antibody-mediated stroke drug candidates (expiring in2016, 2015 and 2016, respectively). We have received a Notice of Allowance from the United States Patent and Trademark Office for a patent application for our linkagetechnology.Competition The biotechnology and pharmaceutical industries are subject to rapid technological change. Competition from domestic and foreignbiotechnology companies, large pharmaceutical companies and other institutions is intense and expected to increase. A number of companies arepursuing the development of pharmaceuticals in our targeted areas. These include companies that are conducting clinical trials and preclinicalstudies for the treatment of lupus, thrombosis and other antibody-mediated diseases. In addition, there are many academic institutions, both public and private, engaged in activities relating to the research and development oftherapeutics 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 we do. Inaddition, other technologies may in the future be the basis of competitive products. There can be no assurance that our competitors will notdevelop or obtain regulatory approval for products more rapidly than we can, or develop and13Table of Contentsmarket technologies and products that are more effective than those being developed by us or that would render our technology and proposedproducts obsolete or noncompetitive. We believe that our ability to compete successfully will depend upon our ability to attract and retain experienced scientists, develop patented orproprietary technologies and products, obtain regulatory approvals, manufacture and market products either alone or through third parties, andsecure additional capital resources to fund anticipated net losses for at least the next several years. We expect that competition among productsapproved for marketing will be based in large part upon product safety, efficacy, reliability, availability, price and patent position.Government Regulation Our research and development activities and the future manufacturing and marketing of any products we develop are subject to significantregulation by numerous government authorities in the United States and other countries. In the United States, the Federal Food, Drug andCosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval,advertising and promotion of any products we may develop. In addition to FDA regulations, we are subject to other federal, state and localregulations, 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 in our research activities. Product development and approval within thisregulatory framework takes a number of years and involves the expenditure of substantial resources. In addition, this regulatory framework issubject to changes that may affect approval, delay an application or require additional expenditures. The steps required before a pharmaceutical compound may be marketed in the United States include (1) preclinical laboratory and animaltesting; (2) submission to the FDA of an Investigational New Drug application, which must become effective before clinical trials may commence;(3) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug; (4) submission to the FDA of a New Drug application;and (5) FDA approval of the New Drug application prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval foreach product, each domestic drug-manufacturing establishment must be registered with, and approved by, the FDA. Drug product manufacturingestablishments 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 andits formulation. The results of preclinical testing are submitted to the FDA as part of an Investigational New Drug application and, unless the FDAobjects, the Investigational New Drug application becomes 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 beingtested under the supervision of a qualified clinical investigator. Clinical trials are conducted in accordance with protocols that detail the objectivesof 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 partof the Investigational New Drug application. Each clinical trial is conducted under the auspices of an independent Institutional Review Board. Theboard considers, 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 phase in which the drug is initiallyintroduced into healthy human subjects, the drug is tested for adverse effects, dosage tolerance, metabolism, distribution,14Table of Contentsexcretion and clinical pharmacology. Phase II trials involve the testing of a limited patient population in order (1) to characterize the actions of thedrug in targeted indications, (2) to determine drug tolerance and optimal dosage and (3) to 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 areundertaken to further evaluate and confirm clinical efficacy and safety within an expanded patient population at multiple clinical trial sites. The FDAreviews the clinical plans and monitors 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 a New Drug application or Product Licenseapplication for marketing approval. The testing and approval process is likely to require substantial time and effort and there can be no assurancethat any approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, including the severity of thedisease, 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 FDAapproval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications. TheFDA mandates that adverse effects be reported to the FDA and may also require post-marketing testing to monitor for adverse effects, which caninvolve significant expense. Among the conditions for FDA approval is the requirement that the prospective manufacturer’s quality control and manufacturing proceduresconform to the FDA’s current Good Manufacturing Practices requirements. Domestic manufacturing facilities are subject to biannual FDAinspections and foreign manufacturing facilities are subject to periodic inspections by the FDA or foreign regulatory authorities. We are also subject to numerous and varying foreign regulatory requirements governing the design and conduct of clinical trials and marketingapproval for pharmaceutical products to be marketed outside of the United States. The approval process varies among countries and can involveadditional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approvalprocess includes all of the risks associated with obtaining FDA approval, and approval by the FDA does not ensure approval by the healthauthorities of any other country.Employees We currently have 118 full-time employees (including 17 people who have earned Ph.D.s and one person who is an M.D.), 51 of whom areinvolved full-time in research, development and manufacturing activities. All of our management has had prior experience with pharmaceutical,biotechnology or medical product companies. We believe that we have been successful in attracting skilled and experienced personnel, butcompetition for such personnel is intense and there can be no assurance that we will be able to attract and retain the individuals needed. None ofour employees is covered by collective bargaining agreements and management considers relations with our employees to be good.15Table of ContentsExecutive Officers of the Registrant Our executive officers and key employees and their ages are set forth below. Name Age Title Steven B. Engle 47 Chairman of the Board and Chief Executive OfficerMatthew D. Linnik, Ph.D. 42 Executive Vice President of Research and AssistantSecretaryWilliam J. Welch 40 Vice President of MarketingPaul Jenn, Ph.D. 51 Vice President of Product DevelopmentBruce Bennett 50 Vice President of ManufacturingTheodora Reilly 52 Vice President of Human ResourcesAndrew Wiseman, Ph.D. 53 Senior Director of Business Development and InvestorRelationsGail A. Sloan, CPA 39 Controller and Secretary Steven B. Engle, Chairman of the Board and Chief Executive Officer, joined the Company in 1993 as Executive Vice President and ChiefOperating Officer. He assumed the offices of President, Director and Secretary in 1994, became Chief Executive Officer in 1995, and Chairman ofthe Board in 1997. From 1991 to 1993, Mr. Engle served as Vice President of Marketing and in other senior management positions while atCygnus Inc., a publicly held company that develops drug-delivery systems for therapeutic drugs. From 1987 to 1991, he was Chief ExecutiveOfficer of Quantum Management Company, a privately held management consulting firm serving the pharmaceutical 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 manufactureshigh technology products, including medical devices, which was acquired by Exar Corporation. From 1979 to 1984, he was a managementconsultant at Strategic Decisions Group and SRI International where he advised pharmaceutical, high technology and other companies. Mr. Englewas the former Chairman of BIOCOM, a regional trade association for the biotechnology and medical devices industries, is a member of the Boardof the Lupus Foundation of America, and is a Director of eGetgoing, a privately held company. Mr. Engle holds an M.S.E.E. and a B.S.E.E. with afocus in biomedical engineering from the University of Texas. Matthew D. Linnik, Ph.D., Executive Vice President of Research, joined the Company in 1998 as Director of Research and Development, waspromoted to Vice President of Research in 1999 and then to Executive Vice President of Research in 2000. Prior to joining the Company, from1989 to 1998, Dr. Linnik served as Senior Pharmacologist, Scientist, Research Scientist and Project Leader for Hoechst Marion Roussel, formerlyMarion Merrell Dow and Marion Laboratories, a pharmaceutical company. From 1996 to 1998, he also served as Adjunct Associate Professor ofNeurosurgery at the University of Cincinnati School of Medicine. From 1986 to 1988, he served as Postdoctoral Fellow, then Instructor, in theDepartments of Neurology and Neurosurgery at Massachusetts General Hospital and Harvard Medical School. Dr. Linnik16Table of Contentsholds a B.A. in Physiology from Southern Illinois University and a Ph.D. in Physiology and Pharmacology from Southern Illinois University Schoolof Medicine. William J. Welch, Vice President of Marketing, rejoined the Company in May 2001. Prior to rejoining the Company, Mr. Welch was VicePresident of Global Marketing for Dade Behring, a global diagnostic company. Mr. Welch previously worked for La Jolla Pharmaceutical from 1998until 1999 as Vice President of Business Development. From 1993 until 1998, Mr. Welch worked for Abbott Laboratories, a pharmaceuticalcompany, as General Manager of Abbott Ambulatory Infusion Systems, Senior Marketing Manager of Abbott Renal Care and as Manager ofStrategic Planning, Corporate Planning and Development. From 1991 to 1993, Mr. Welch was Director of Business Development for In-ProcessTechnology, a privately held company that manufactured processing systems for the pharmaceutical industry. Mr. Welch holds a B.S. in ChemicalEngineering from the University of California, Berkeley and an M.B.A. from Harvard University. Paul Jenn, Ph.D., Vice President of Product Development, joined the Company in 1994 as Associate Director of Production & ProcessDevelopment. Dr. Jenn was promoted to Director of Operations in 1999, Senior Director of Operations in 2000, Vice President of Operations in2001 and Vice President of Product Development in 2002. Prior to joining the Company, from 1992 to 1994, Dr. Jenn was Director of PeptideManufacturing at Telios Pharmaceuticals, Inc., a pharmaceutical company, and held several other positions. From 1988 to 1992, he served asSenior Research Associate at Mallinckrodt Specialty Chemicals, a specialty chemical company. From 1984 to 1988, Dr. Jenn served as aResearch Scientist at International Minerals and Chemical Corp., a chemical company. From 1982 to 1984, he performed his Post-doctoralresearch at the Lawrence Berkeley Laboratory at the University of California at Berkley. Dr. Jenn holds a B.S. in Chemistry from Fu-Jen CatholicUniversity, Taipei, Taiwan and a Ph.D. in Chemistry from New York State University at Buffalo. Bruce K. Bennett, Jr., Vice President of Manufacturing, joined the Company in January 2002. Prior to joining the Company, from 2000 to 2001,Mr. Bennett was Vice President of Operations at Provasis Therapeutics, Inc., a medical device company. From 1997 to 2000, he served as VicePresident of Operations, Regulatory Affairs/Quality Assurance and Commercial Development at VIA Medical Corporation, a medical devicecompany. From 1995 to 1996, he was Vice President of Manufacturing at Mulay Plastic, Inc., an injection molding company. From 1992 to 1995,Mr. Bennett served as Vice President of Operations at Cygnus Therapeutic Systems, Inc., a publicly held company that develops drug-deliverysystems for therapeutic drugs. From 1989 to 1992, he was Vice President of Manufacturing at Progress Lighting, a manufacturer of decorativelighting fixtures. From 1987 to 1989, he was Vice President of Manufacturing at Sulzer Intermedics, Inc., a medical device company. From 1986 to1987, Mr. Bennett served as Director of Manufacturing at Kendall Respiratory Care, a medical device company. From 1979 to 1986, he wasOperations Director at Kendall McGaw Laboratories, and held several other positions. Mr. Bennett holds a B.S. in Industrial Technology from theCalifornia State University, Long Beach and an M.B.A. from Pepperdine University. Theodora Reilly, Vice President of Human Resources, joined the Company in 1998 as Director of Human Resources and was promoted toVice President of Human Resources in 2001. Prior to joining the Company, from 1997 to 1998, Ms. Reilly was Director of Human Resources atThermoLase Corporation, a public subsidiary of Thermo Electron Corporation, which developed laser-based systems for laser-based skinresurfacing. From 1994 to 1997, Ms. Reilly served as Director of Human Resources at Solectek Corporation, a privately held high techmanufacturer of wireless interconnectivity products. Ms. Reilly received a B.S. in Psychology from the Christian Bible College and Seminary,Independence, Missouri.17Table of Contents Andrew Wiseman, Ph.D., Senior Director of Business Development, joined the Company in May 1989 as Director of Business Developmentand was one of the Company’s original founders. Dr. Wiseman has also served as head of investor relations since 1994. From 1983 to 1989,Dr. Wiseman held several positions with Quidel Corporation, a manufacturer of diagnostic tests, including Manager of Business Development,Project Manager in Diagnostic Research and Development, and Senior Research Scientist. Dr. Wiseman was an Assistant Professor at theMedical Biology Institute and an Assistant Member at the Scripps Clinic and Research Foundation. He received a B.S. in Zoology and a Ph.D. inGenetics from Duke University. Gail A. Sloan, Controller and Secretary, joined the Company in 1996 as Assistant Controller and was promoted to Controller in 1997. Prior tojoining the Company, from 1993 to 1996, Ms. Sloan served as Assistant Controller at Affymax Research Institute, a drug-discovery researchcompany and a part of the Glaxo Wellcome Group. From 1985 to 1993, she progressed to the position of Audit Manager with Ernst & Young, LLP.Ms. Sloan holds a B.S. in Business Administration from California Polytechnic State University at San Luis Obispo and is a Certified PublicAccountant.RISK FACTORS In this section, all references to “we,” “our,” and “us” refer to La Jolla Pharmaceutical Company, a Delaware corporation.I. Risk Factors Relating To La Jolla Pharmaceutical and The Industry in Which We Operate.Our drug candidates may not perform well in clinical trials and we may not be permitted to conduct further clinical trials. Withoutsuccessful clinical trials, we will not be able to market or sell any products. If LJP 394 or LJP 1082 are ultimately not found to be safe and effective, we would be unable to obtain regulatory approval for theircommercialization. Because LJP 394 is our only drug candidate that has advanced to Phase III clinical trials, and because there is no guaranteethat we would be able to develop an alternate drug candidate, our inability to commercialize LJP 394 would have a severe negative effect on ourbusiness. In order to sell our products that are under development, we must first receive regulatory approval. To obtain regulatory approval, we mustconduct clinical studies demonstrating that our products are safe and effective. Although LJP 394 and LJP 1082 appear promising, they may notbe successful in future clinical trials and results from previous trials and studies may not be observed in current or future trials and studies. OurPhase II/III clinical study of LJP 394, in collaboration with Abbott, terminated before it was completed. The ongoing Phase III clinical study of LJP394 and the ongoing Phase I/II clinical study of LJP 1082 may also be delayed or halted for various reasons, including: • the products are not effective, • patients experience severe side effects during treatment, • patients do not enroll in the study at the rate we expect, or • supplies of either product are not sufficient to treat the patients in the studies.18Table of Contents In addition, the FDA and foreign regulatory authorities have substantial discretion in the approval process. The FDA and foreign regulatoryauthorities may not agree that we have demonstrated that LJP 394 or LJP 1082 is safe and effective after we complete clinical trials. Even if theresults of either prior clinical trials are positive, the FDA and foreign regulatory authorities may require us to design and conduct additional studies,which may result in significant expense and delay. The FDA and foreign regulatory authorities may require new clinical trials because ofinconclusive results from earlier clinical trials, a possible failure to conduct prior clinical trials in complete adherence to FDA good clinical practicestandards and similar standards of foreign regulatory authorities, and identification of new clinical trial endpoints.Our blood test to measure the binding affinity for LJP 394 is experimental and has not been validated by independent laboratories. Itmay require regulatory approval and may be necessary for the approval and commercialization of LJP 394. In 1998, we developed a blood test that we believe can identify the lupus patients who are most likely to respond to LJP 394. The blood testmeasures the strength of the binding between LJP 394 and a patient’s antibodies. We are developing an improved version of the assay for generaluse and will use this affinity assay to identify the patients to be included in the efficacy analysis of the Phase III trial. The following factors can have a significant effect on the commercialization of LJP 394: • we do not know if affinity results from previous trials will be observed in the current Phase III trial or in the broader lupus patient population, • the affinity assay has not been reviewed by any regulatory authorities, • we do not know if regulatory approval of the assay will be required, • the assay has not been tested at full scale, and • the testing laboratory conducting the assay may require additional regulatory approval. The realization of any of the risk factors described in these “Risk Factors” could have a negative effect on the commercialization of LJP 394.Results from our clinical trials may not be sufficient to obtain clearance to market LJP 394 in the United States or Europe on a timelybasis, or at all. Our drug candidates are subject to extensive government regulations related to development, clinical trials, manufacturing andcommercialization. The process of obtaining FDA and other regulatory approvals is costly, time consuming, uncertain and subject to unanticipateddelays. The FDA may refuse to approve an application for approval of a drug candidate if it believes that applicable regulatory criteria are notsatisfied. The FDA may also require additional testing for safety and efficacy. Moreover, if the FDA grants regulatory approval of a product, theapproval may be limited to specific indications or limited with respect to its distribution. Foreign regulatory authorities may apply similar limitationsor may refuse to grant any approval. Although LJP 394 appears promising, it may not be successful in future clinical trials. It is possible that the FDA or foreign regulatoryauthorities may not ultimately approve LJP 394 for commercial sale in any jurisdiction even if clinical results are positive. If LJP 394 does notmeet applicable regulatory requirements for approval, we may not have the financial resources to19Table of Contentscontinue research and development of LJP 394, LJP 1082 or any other potential drug candidates and we may not be able to generate revenuesfrom the commercial sale of any of our developed candidates.Our products are in various stages of development and the technology underlying our products is uncertain and unproven. If ourproducts cannot be successfully developed, we will never be able to generate meaningful sales. All of our product development efforts are based on unproven technologies and therapeutic approaches that have not been widely tested orused. LJP 394 and LJP 1082 have not been proven to be effective in humans, and the technology on which they are based has been used only inour preclinical tests and clinical trials. If our products or technology are not effective, we will not generate meaningful sales. Application of ourtechnology to antibody-mediated diseases other than lupus and antibody-mediated stroke is in earlier research stages. LJP 394, LJP 1082 and our other potential drug candidates require significant additional research and development and are subject tosignificant risks. Potential products that appear to be promising at early stages of development may nevertheless fail to reach market or becomeprofitable for any of the following reasons: • products may be ineffective or cause harmful side effects during preclinical testing or clinical trials, • products may fail to receive necessary regulatory approvals, • products may be difficult to manufacture, • products may be uneconomical to produce, particularly if high dosages are required, • products may fail to achieve market acceptance, • physicians may think that the products are not effective, • products may be precluded from commercialization because of proprietary rights of third parties, and • competitors may develop superior products. The technology underlying LJP 394 appears effective in humans. However, no products have been commercialized to date that use ourtechnology. There is no guarantee that LJP 394 or LJP 1082 will work as intended. Furthermore, clinical trials of LJP 394 and LJP 1082 may beviewed as a test of our entire approach to developing therapies for antibody-mediated diseases. If the data from our clinical trials indicate that LJP394 or LJP 1082 is ineffective, the applicability of our technology to other antibody-mediated diseases will be highly uncertain. Therefore, there issignificant risk that our therapeutic approaches will not prove to be successful, and there can be no guarantee that our drug discovery technologieswill result in any commercially successful products.20Table of ContentsOur success in developing our products and marketing them successfully depends significantly upon our ability to obtain patentprotection for LJP 394, LJP 1082 and any other developed products. In addition, we will need to successfully preserve our trade secretsand operate without infringing on the rights of others. We will depend upon patents and other unpatented intellectual property to prevent others from profiting from products or technologies that wemay have developed. We currently own 96 issued patents and have 82 pending patent applications covering various technologies and drugcandidates including LJP 394 and LJP 1082. However, there can be no assurance that any additional patents will be issued, that the scope of anypatent protection will be sufficient, or that any current or future issued patent will be held valid if subsequently challenged. There is a substantialbacklog of biotechnology patent applications at the United States Patent and Trademark Office that may delay the review and issuance of anypatents. The patent position of biotechnology firms like ours generally is highly uncertain and involves complex legal and factual questions, and noconsistent policy has emerged regarding the breadth of claims covered in biotechnology patents or protection afforded by these patents. Currently,we have a number of patent applications pending in the United States relating to our technology, as well as foreign counterparts to some of ourUnited States patent applications. We intend to continue to file applications as believed appropriate for patents covering both our products andprocesses. There can be no assurance that patents will be issued from any of these applications, or that the scope of any issued patents willprotect our technology. We are aware of one United States patent grant that contains claims covering subject matter that may conflict with some of our key patentsand patent applications, and that may affect our ability to develop and sell our products. Any conflict between our patents and patent applications,and patents or patent applications of third parties, could result in a significant reduction of the coverage of our existing patents or any futurepatents that may be issued. This could have a negative effect on our ability to prevent competitors from profiting from our products andtechnologies, and this could affect our future sales. In addition, we may have to incur significant expenses in defending or enforcing our patents. If the United States Patent and Trademark Office or any foreign counterpart issues or has issued to a competitor patents containingcompetitive or conflicting claims, and if these claims are valid, there can be no guarantee that we would be able to obtain licenses to thesepatents, that any licensing fees would be reasonable, or that we would be able to develop or obtain alternative technology. We do not necessarilyknow if others, including competitors, have filed patent applications for technology covered by our pending applications, nor can we be certain thatwe were the first to invent or to file patent applications for our technologies. Competitors may have patents or patent applications pending thatrelate to compounds or processes that overlap or compete with our intellectual property. We also rely on unpatented intellectual property such as trade secrets and improvements, know-how, and continuing technological innovation.While we seek to protect these rights, it is possible that: • inventions relevant to our business will be developed by a person not bound by a La Jolla Pharmaceutical invention assignment agreement, • binding confidentiality agreements will be breached and we will not have adequate remedies for such a breach, or • our trade secrets will otherwise become known or be independently discovered by competitors.21Table of Contents We could incur substantial costs in defending suits brought against us by others for infringement of intellectual property rights or in prosecutingsuits that we might bring against others to protect our intellectual property rights.We have a history of losses and may not become profitable. We have incurred operating losses each year since our inception in 1989 and had an accumulated deficit of approximately $110.2 million as ofDecember 31, 2001. Our losses are likely to exceed those experienced in prior years due to costs for clinical trials and the termination of ourcollaborative relationship with Abbott in 1999, unless we are successful in establishing additional collaborative relationships to help finance ourresearch and development costs. To achieve profitability we must, among other matters, complete the development of our products, obtain allnecessary regulatory approvals and establish commercial manufacturing and marketing capabilities. We expect to incur significant losses eachyear for at least the next several years as our clinical trial, research, development and manufacturing activities increase. The amount of lossesand the time required by us to reach sustained profitability are highly uncertain, and we do not expect to generate revenues from the sale ofproducts, if any, for at least several years. We may never achieve product revenues or profitability.We will need additional funds to support operations and may need to reduce operations, sell stock or assets, or merge with anotherentity to continue operations. Our operations to date have consumed substantial capital resources, and we will continue to expend substantial and increasing amounts ofcapital for research, product development, preclinical testing and clinical trials of drug candidates, to establish commercial-scale manufacturingcapabilities, and to market potential products. We will need to raise additional funds. If we are not able to do so, we will not be able to fund ouroperations. Our future capital requirements will depend on many factors, including: • continued scientific progress in our research and development programs, • the size and complexity of our research and development 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, • our ability to establish and maintain collaborative research and development arrangements, and • the cost of manufacturing scale-up and product commercialization. We expect to incur substantial and increasing losses each year for at least the next several years as our clinical trial, research, developmentand manufacturing activities increase. We expect our existing capital resources, including the capital raised through the sale of 7,000,000 sharesof our common stock in January 2002, will be sufficient to fund our activities, as currently planned and assuming that we do not engage acollaborative partner, into the fourth quarter of 2003. However, the amounts expended by us for various purposes such as building productinventory22Table of Contentsmay vary significantly, and it is possible that our cash requirements will exceed current projections and that we will therefore need additionalfinancing sooner than currently expected. In the future, it is possible that we will not have adequate resources to support our business activities. We actively seek additional funding, including through collaborative arrangements and public and private financings. Our choice of financingalternatives may vary from time to time depending upon various factors, including the market price of our securities, conditions in the financialmarkets and the interest of other entities in strategic transactions with us. There can be no guarantee that additional financing will be available onacceptable terms, if at all, whether through collaborative arrangement, issuance of securities, or otherwise. If adequate funds are not available, wemay be required to delay, scale back or eliminate one or more of our research and development programs or obtain funds through arrangementswith collaborative partners or others that require us to relinquish rights to certain technologies or potential products. This could have a negativeimpact on our ability to develop products, or to achieve profitability if our products are brought to market. If we obtain additional funding throughsales of securities, your investment in us will be diluted.We may not earn as much income as we hope due to possible changes in health care reimbursement policies. The continuing efforts of government and health care insurance companies to reduce the costs of health care may reduce the amount ofincome we can generate from our products. For example, in certain foreign markets, pricing and profitability of prescription drugs are subject togovernment control. In the United States, we expect that there will continue to be a number of federal and state proposals to implement similargovernment controls. In addition, increasing emphasis on managed care in the United States will continue to put pressure on drug manufacturersto keep prices down. Cost control initiatives could reduce the revenue that we receive for any products we may develop and sell in the future.These cost control measures may also affect the profitability of companies with which we may transact business, such as manufacturers of ourproducts, and thus may have a negative effect on our ability to continue to work with these companies.Because a number of companies compete with us, many of which have greater resources than we do, and because we face rapidchanges in technology in our industry, we cannot be certain that our products will be accepted in the marketplace or capture marketshare. Competition from domestic and foreign biotechnology companies, large pharmaceutical companies and other institutions is intense and isexpected to increase. A number of companies and institutions are pursuing the development of pharmaceuticals in our targeted areas, many ofwhich are very large, and have financial, technical, sales and distribution and other resources substantially greater than ours. The greaterresources of these competitors could enable them to develop competing products more quickly than we are able to, and to market any competingproduct more quickly or effectively so as to make it extremely difficult for us to develop a share of the market for these products. Thesecompetitors also include companies that are conducting clinical trials and preclinical studies for the treatment of lupus and thrombosis. Ourcompetitors may develop or obtain regulatory approval for products more rapidly than we do. Also, the biotechnology and pharmaceutical industriesare subject to rapid changes in technology. Our competitors may also develop and market technologies and products that are more effective thanthose being developed by us, or that would render our technology and proposed products obsolete or noncompetitive.23Table of ContentsWe may need to establish collaborative agreements, and this could have a negative effect on our freedom to operate our business, orprofit fully from sales of our products. We may seek to collaborate with pharmaceutical companies to gain access to their research, drug development, manufacturing, marketing andfinancial resources. However, we may not be able to negotiate arrangements with any collaborative partners on acceptable terms, if at all. Anycollaborative relationships that we enter into may include restrictions on our freedom to operate our business or to profit fully from the sales of ourproducts. Once a collaborative arrangement is established, the collaborative partner may discontinue funding any particular program or may, either aloneor with others, pursue alternative technologies or develop alternative drug candidates for the diseases we are targeting. Competing products,developed by a collaborative partner or to which a collaborative partner has rights, may result in the collaborative partner withdrawing support as toall or a portion of our technology. Without collaborative arrangements, we must fund our own research and development activities, accelerating the expenditure of our capital andrequiring us to develop our own marketing capabilities. Therefore, if we are unable to establish and maintain collaborative arrangements, we couldexperience a material adverse effect on our ability to develop products and, once developed, to market them successfully.Our limited manufacturing capabilities could result in shortages of products for testing and future sale, and our revenues and profitmargin could be negatively affected. While we are producing limited quantities of LJP 394 and LJP 1082 for clinical trials, our current facilities must be approved by the FDA forcommercial production of our potential products. Although we believe our current production facility will provide sufficient capacity for launch asplanned, additional capacity for further growth will require additional funds. The manufacture of our potential products for clinical trials and themanufacture of any resulting products for commercial purposes are subject to FDA standards. Substantial capital investment in the expansion andbuild-out of our manufacturing facilities will be required to enable us to manufacture our products in commercial quantities. While we have initiatedthe process of obtaining FDA approval for our facilities, we have never operated an FDA-approved manufacturing facility and we may not obtainnecessary approvals. We have limited manufacturing experience, and we may be unable to successfully transition to commercial production. Wemay enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet requirements for ourproducts, or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services and encounter delays ordifficulties in establishing relationships with manufacturers to produce, package and distribute our finished products, the clinical trials, theintroduction of our products into the market and the subsequent sales of these products would be negatively affected by the lack of availableproducts, and our profit margins and our ability to develop and deliver products on a timely and competitive basis may be negatively affected.We lack experience in marketing products for commercial sale and thus may have difficulty gaining acceptance for our products. In order to commercialize any drug candidate approved by the FDA, we must either develop our own marketing and sales force or enter intomarketing arrangements with others. If we cannot do either of these successfully, we will have difficulty generating sales for our products. Wecurrently have no marketing arrangements with others, and there can be no guarantee that we will be able to enter into any marketing agreementson favorable terms, or that any such agreements will result in payments to us. To the extent that we enter into co-promotion or other marketing andsales arrangements with other companies, any revenues that we may24Table of Contentsreceive will be dependent on the efforts of others. There can be no guarantee that these efforts will be successful. If we attempt to develop ourown marketing and sales capabilities, we will compete with other companies that have experienced and well-funded marketing and salesoperations. Furthermore, if we attempt to establish sales and distribution capabilities, we may experience delays and expenditures and experiencedifficulty in gaining market acceptance for our drug candidates.The use of LJP 394, LJP 1082 and other potential products in clinical trials, as well as the sale of any approved products, may expose usto lawsuits resulting from the use of these products. The use and possible sale of LJP 394, LJP 1082 and other potential products may expose us to legal liability and generate negative publicity ifwe are subject to claims that people were harmed by our products. These claims might be made directly by consumers, pharmaceuticalcompanies, or others. We currently maintain $10.0 million of product liability insurance for claims arising from the use of our products in clinicaltrials. However, coverage is becoming increasingly expensive, and there can be no guarantee that we will be able to maintain insurance or thatinsurance can be acquired at a reasonable cost or in sufficient amounts to protect us against possible losses. Furthermore, it is possible that ourfinancial resources would be insufficient to satisfy potential product liability claims. A successful product liability claim or series of claims broughtagainst us could negatively impact our business and financial condition.Our research and development and operations depend in part upon certain key employees and consultants. Losing these employees orconsultants would have a negative effect on our product development and operations. We are highly dependent upon the principal members of our scientific and management staff, the loss of whose services would delay theachievement of our research and development objectives. This is because our key personnel, including Mr. Steven Engle, Dr. Matthew Linnik,Dr. Paul Jenn and Dr. Andrew Wiseman, have been involved in the development of LJP 394, LJP 1082 and other drug candidates for several yearsand have unique knowledge of our drug candidates and of the technology on which they are based. Our anticipated growth and expansion intoareas requiring additional expertise, such as clinical trials, government approvals, manufacturing and marketing, are expected to place increaseddemands on our resources and require the addition of new management personnel as well as the development of additional expertise by existingmanagement personnel.Recruiting additional personnel in the future will be critical to our success. Recruiting additional qualified personnel to perform research and development, clinical development and manufacturing work in the future will becritical to our success. Because competition for experienced scientific, clinical and manufacturing personnel among numerous pharmaceutical andbiotechnology companies and research and academic institutions is intense, we may not be able to attract and retain these people. If we cannotattract and retain qualified people, our ability to conduct necessary clinical trials and to develop our products may be negatively affected because,for instance, the trials may not be conducted properly, or the trials or our manufacturing of products may be delayed. In addition, we rely uponconsultants and advisors to assist us in formulating our research and development, clinical, regulatory and manufacturing strategies. All of ourconsultants and advisors have outside employment and may have commitments or consulting or advisory contracts with other entities that mayaffect their ability to contribute to our business.25Table of ContentsWe may face environmental liabilities related to certain hazardous materials used in our operations. Due to the nature of our manufacturing processes, we are subject to stringent federal, state and local laws governing the use, handling anddisposal of certain materials and wastes. We may have to incur significant costs to comply with environmental regulations if and when ourmanufacturing increases to commercial volumes. Our operations may be significantly affected by current or future environmental laws because, forinstance, our ability to produce products may be slowed, thereby increasing our production costs. In our research activities, we use radioactiveand other materials that could be hazardous to human health, safety or the environment. These materials and various wastes resulting from theiruse are stored at our facility pending ultimate use and disposal. The risk of accidental injury or contamination from these materials cannot beeliminated. In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed our resources.While we maintain general liability insurance, we do not specifically insure against environmental liabilities.II. Risk Factors Related Specifically To Our Stock.Our common stock price is volatile and may decline even if our business is doing well. The market price of our common stock has been and is likely to continue to be highly volatile. Market prices for securities of biotechnology andpharmaceutical companies, including ours, have historically been highly volatile, and the market has from time to time experienced significantprice and volume fluctuations that are unrelated to the operating performance of particular companies. The following factors can have a significanteffect on the market price of our securities: • announcements of technological innovations or new therapeutic products by us 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 us or others, • future sales of substantial amounts of our common stock by existing stockholders, and • comments by securities analysts and general market conditions. The realization of any of the other risks described in these “Risk Factors” could also have a negative effect on the market price of our commonstock.In the future, our stock may be removed from listing on the Nasdaq quotation system and may not qualify for listing on any stockexchange, in which case it may be difficult to find a market in our stock. If our stock is no longer traded on a national trading market, it may be more difficult for you to sell shares that you own, and the price of thestock may be negatively affected. Currently our securities are traded on the Nasdaq National Market. Nasdaq has certain continued listing26Table of Contentsrequirements, including a minimum trading price. Previously, we have received notice from Nasdaq that our stock price fell below this minimumtrading price. While we have since come back into compliance with this Nasdaq requirement, it is possible that we will fall out of compliance withthis and/or other Nasdaq continued listing criteria at some point in the future. Failure to comply with any one of several Nasdaq requirements maycause our stock to be removed from listing on Nasdaq. Should this happen, we may not be able to secure listing on other exchanges or quotationsystems. This would have a negative effect on the price and liquidity of our stock.Future sales of our stock by existing stockholders could negatively affect the market price of our stock and make it more difficult for usto sell stock in the future. Sales of our common stock in the public market, or the perception that such sales could occur, could result in a drop in the market price of oursecurities and make it more difficult for us to complete future equity financings on acceptable terms, if at all. We have outstanding the followingshares of common stock: •30,070,000 shares of common stock that have been issued in registered offerings and are freely tradable in the public markets. •Approximately 1,722,000 shares of common stock currently eligible for resale in the public market pursuant to SEC Rule 144. •In addition, as of March 28, 2002, there are an aggregate of 4,579,928 shares of common stock that may be issued on the exercise ofoutstanding stock options granted under our various stock option plans at a weighted average exercise price of $4.6402 per share. •We have in effect registration statements under the Securities Act registering approximately 6,000,000 shares of common stock reservedunder our incentive stock option and employee stock purchase plans. Approximately 162,700 shares of common stock that may beissued on the exercise of outstanding stock options will be available for public resale under SEC Rule 144 pursuant to Rule 701 under theSecurities Act. We cannot estimate the number of shares of common stock that may actually be resold in the public market since this will depend upon themarket price for the common stock, the individual circumstances of the sellers and other factors. We also have a number of institutionalstockholders that own significant blocks of our common stock. If these stockholders sell large portions of their holdings in a relatively short time,for liquidity or other reasons, the market price of our common stock could drop significantly.Anti-takeover devices may prevent changes in our management. We have in place certain anti-takeover devices, including a stockholder rights plan, that may have the effect of delaying or preventing changesin our management. For example, one anti-takeover device provides for a board of directors that is separated into three classes, with their terms inoffice staggered over three year periods. This has the effect of delaying a change in control of our board of directors without the cooperation of theincumbent board. In addition, our bylaws require stockholders to give us written notice of any proposal or director nomination within a certain periodof time prior to the stockholder annual meeting, establish certain qualifications for a person to be elected or appointed to the board of directorsduring the pendency of certain business combination transactions, and do not allow stockholders to call a special meeting of stockholders. We may also issue shares of preferred stock without stockholder approval and upon terms that our board of directors may determine in thefuture. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstandingstock, and the holders of such preferred stock could have voting, dividend, liquidation and other rights superior to those of holders of our commonstock.We do not pay dividends and this may negatively affect the price of our stock. We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends in the foreseeable future. The futureprice of our common stock may be depressed by the fact that we have not paid dividends.Item 2. Properties. We lease two adjacent buildings in San Diego, California covering a total of approximately 54,000 square feet. One building contains ourresearch and development labs and clinical manufacturing facilities and the other contains our general offices and warehouse. Both building leasesexpire in July 2004. Each includes an option to extend the term of the lease for an additional five years and each is subject to escalation clausesthat provide for annual rent increases, one of which is based on the U.S. Consumer Price Index. We believe that these facilities will be adequate tomeet our needs for the near term. Over the longer term, management believes additional space can be secured at commercially reasonable rates.27Table of ContentsItem 3. Legal Proceedings. We are currently not a party to any legal proceedings.Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the three-month period ended December 31, 2001.PART IIItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters. Our common stock trades on the Nasdaq National Market under the symbol “LJPC.” Set forth below are the high and low sales prices for ourcommon stock for each full quarterly period within the two most recent fiscal years. Prices High Low Year Ended December 31, 2001 First Quarter 8.25 4.44 Second Quarter 10.75 4.94 Third Quarter 9.50 3.40 Fourth Quarter 9.18 3.88 Year Ended December 31, 2000 First Quarter 12.25 2.44 Second Quarter 6.63 2.63 Third Quarter 9.88 4.06 Fourth Quarter 10.00 4.00 We have not paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future. The number of record holders of our common stock as of March 20, 2002 was 357. On January 17, 2002, we sold 7,000,000 shares of our common stock to private investors for an aggregate price of $51.6 million. The sale wasa privately negotiated sale to selected institutional investors and other accredited investors as defined in Rule 501(1) of Regulation D promulgatedunder the Securities Act of 1933. The shares were sold without registration under the Securities Act of 1933 in reliance on Rule 506. The sale wasmade for the purpose of financing working capital. We filed a registration statement covering the resale of these shares on Form S-3 that becameeffective on February 4, 2002.Item 6. Selected Financial Data. The following Selected Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in Item 7 below and the financial statements of the Company and related notes thereto beginning at page F-1 ofthis report.28Table of Contents Years Ended December 31, 1997 1998 1999 2000 2001 (In thousands, except per share data)Statement of Operations Data: Revenue from collaborativeagreements —related party $9,860 $8,600 $4,690 $— $— Expenses: Research and development 14,676 14,627 11,686 12,933 23,228 General and administrative 2,937 3,076 2,944 2,706 4,268 Loss from operations (7,753) (9,103) (9,940) (15,639) (27,496)Interest expense (56) (6) (20) (6) (30)Interest income 1,441 1,232 811 1,846 2,843 Net loss $(6,368) $(7,877) $(9,149) $(13,799) $(24,683) Basic and diluted net loss per share $(0.36) $(0.42) $(0.45) $(0.53) $(0.71) Shares used in computing basic anddiluted net loss per share 17,547 18,649 20,135 26,138 34,604 Balance Sheet Data: Working capital $23,705 $19,911 $10,661 $37,215 $44,387 Total assets $29,646 $25,815 $14,043 $43,016 $51,686 Noncurrent portion of obligations undercapital leases $— $— $44 $— $— Stockholders’ equity $25,715 $21,859 $12,793 $39,742 $48,545 29Table of ContentsQuarterly Results of Operations The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000: Quarters Ended Mar. 31, Jun. 30, Sept. 30, Dec. 31, 2001 Expenses: Research and development $6,465 $5,949 $4,939 $5,875 General and administrative 884 1,024 1,042 1,318 Loss from operations (7,349) (6,973) (5,981) (7,193)Interest expense — (13) (10) (7)Interest income 800 880 645 518 Net loss $(6,549) $(6,106) $(5,346) $(6,682) Basic and diluted net loss per share $(0.20) $(0.17) $(0.15) $(0.19) Shares used in computing basic and diluted netloss per share 32,689 35,150 35,224 35,255 2000 Expenses: Research and development $2,435 $2,708 $4,184 $3,606 General and administrative 719 585 617 785 Loss from operations (3,154) (3,293) (4,801) (4,391)Interest expense (3) (2) (1) — Interest income 280 301 580 685 Net loss $(2,877) $(2,994) $(4,222) $(3,706) Basic and diluted net loss per share $(0.13) $(0.12) $(0.15) $(0.13) Shares used in computing basic and diluted netloss per share 22,249 24,401 28,037 29,293 30Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Since our inception in May 1989, we have devoted substantially all of our resources to the research and development of technology andpotential drugs to treat antibody-mediated diseases. We have never generated any revenue from product sales and have relied upon private andpublic investors, revenue from collaborative agreements, equipment lease financings and interest income on invested cash balances for ourworking capital. We have been unprofitable since inception and we expect to incur substantial additional expenses and net operating losses for atleast the next several years as we increase our clinical trial and manufacturing activities including the production of LJP 394 and LJP 1082 forclinical trials, and increase our research and development expenditures on additional drug candidates, as well as general and administrativeexpenditures to support increased clinical trial, manufacturing and research and development activities. Our activities to date are not as broad indepth or scope as the activities we must undertake in the future, and our historical operations and the financial information included in this reportare not necessarily indicative of our future operating results or financial condition. We expect losses to fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and potential revenues fromcollaborative arrangements. Some of these fluctuations may be significant. As of December 31, 2001, our accumulated deficit was approximately$110.2 million. Our business is subject to significant risks including, but not limited to, the risks inherent in research and development efforts, including clinicaltrials, uncertainties associated with both obtaining and enforcing patents and with the potential enforcement of the patent rights of others, thelengthy, expensive and uncertain process of seeking regulatory approvals, uncertainties regarding government reforms and of product pricing andreimbursement levels, technological change and competition, manufacturing uncertainties, our lack of marketing experience and the uncertainty ofreceiving future revenue from product sales or other sources such as collaborative relationships, the uncertainty of future profitability and the needfor additional financing. Even if our product candidates appear promising at an early stage of development, they may not reach the market fornumerous reasons, including the possibilities that the products will be ineffective or unsafe during clinical trials, will fail to receive necessaryregulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercializationby the proprietary rights of third parties or competing products.Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon the Company’s consolidated financialstatements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to revenuerecognition, patent costs and income taxes. We base our estimates on historical experience and on other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions orconditions. We believe the following critical accounting policy affects the significant judgments and estimates used in the preparation of our consolidatedfinancial statements (see note 1 to our financial statements).31Table of Contents Patent Costs. We capitalize the costs incurred to file our patent applications. These costs are amortized using the straight-line method over thelesser of the remaining useful life of the related technology or the remaining patent life, commencing on the date the patent is issued. AtDecember 31, 2001, capitalized costs related to issued patents totaled $0.6 million (net of accumulated amortization) and $1.4 million related tounissued patents. Our results of operations could be materially impacted when we begin amortizing the costs related to unissued patents. Inaddition, we expense all costs related to abandoned patent applications. If we elect to abandon any of our currently issued or unissued patents,the related expense could be material to our results of operations for the period of the abandonment.Results of OperationsYears Ended December 31, 2001, 2000 and 1999 Revenue. We earned no revenue for the years ended December 31, 2001 and 2000 compared to $4.7 million for the year ended December 31,1999. In December 1996, we entered into a collaborative agreement with Abbott for the worldwide development and commercialization of LJP 394,our lupus drug candidate. All revenue in 1999 was attributable to the funding from Abbott under this collaborative agreement for the development ofLJP 394. Our collaborative agreement with Abbott granted Abbott the exclusive right to market and sell LJP 394 throughout the world in exchangefor development funding, royalties on sales and milestone payments. Abbott’s obligations to make payments to us and to conduct developmentactivities were conditioned on the progress of clinical trials and the attainment of milestones related to regulatory approvals and sales levels. InMay 1999, with the concurrence of Abbott, we elected to stop the enrollment and treatment of the more than 200 patients enrolled in the jointlyconducted Phase II/III clinical trial of LJP 394. In September 1999, the collaborative agreement between us and Abbott was terminated and allrights to LJP 394 were returned to us. There can be no assurance that we will realize any further revenue from any other collaborativearrangement. Research and Development Expense. Our research and development expense increased to $23.2 million for the year ended December 31,2001 from $12.9 million in 2000 and $11.7 million in 1999. The increase in research and development expense in 2001 from 2000 and 1999 wasprimarily due to the initiation of the Phase III clinical trial for LJP 394 in September 2000 and the initiation of the Phase I/II clinical trial for LJP1082 in November 2001. Research and development expense of $23.2 million for the year ended December 31, 2001, consisted of $14.7 million for lupus research anddevelopment related expense, $5.9 million for thrombosis research and development related expense and $2.6 million for other research anddevelopment related expense. Total lupus related research and development expense consisted primarily of investigator fees, clinical researchorganization fees, salaries and other costs related to research, manufacturing and clinical personnel, clinical lab fees, facilities expense and rawmaterials for the production of LJP 394 for clinical trials. Total thrombosis related research and development expense consisted primarily ofsalaries for research and development personnel, raw materials for the production of LJP 1082 for clinical trials and facilities expense. Total otherresearch and development expense consisted primarily of salaries for research and development personnel, facilities expense and researchsupplies. Our research and development expense is expected to increase significantly in the future as our clinical trial and manufacturing activities,including the production of LJP 394 and LJP 1082 for clinical trials, are increased, efforts to develop additional drug candidates are intensified andother potential products progress into and through clinical trials.32Table of Contents General and Administrative Expense. Our general and administrative expense of $4.3 million for the year ended December 31, 2001 increasedfrom $2.7 million in 2000 and from $2.9 million in 1999. The increase in general and administrative expense in 2001 as compared to 2000 was dueto an increase in expenses to support increased clinical trial, manufacturing and research and development activities. The slight decrease ingeneral and administrative expense in 2000 compared to 1999 was due to the reduction in expenses related to a restructuring completed in 1999.We expect general and administrative expense to increase in the future to support increased clinical trial, manufacturing and research anddevelopment activities. Interest Income and Expense. Our interest income increased to $2.8 million for the year ended December 31, 2001 from $1.8 million in 2000and from $0.8 million in 1999. The increase in interest income in 2001 was due to our maintenance of higher investment balances as a result of thenet proceeds of $33.1 million received by us from the sale of our common stock in February 2001. The increase in interest income in 2000 wasdue to our maintenance of higher investment balances as a result of the net proceeds of $12.7 million and $27.5 million received by us from thesale of our common stock in February and July 2000, respectively. Interest expense increased to $30,000 for the year ended December 31, 2001from $6,000 in 2000 and $20,000 in 1999. The increase in interest expense in 2001 was due to new capital lease obligations entered into in 2001.The decrease in interest expense in 2000 compared to 1999 was due to the termination of some capital leases in 2000. Net Operating Loss Carryforwards. At December 31, 2001, we had available net operating loss carryforwards and research tax creditcarryforwards of approximately $104.8 million and $5.8 million, respectively, for federal income tax purposes, which will begin to expire in 2004unless previously utilized.Liquidity and Capital Resources From inception through December 31, 2001, we have incurred a cumulative net loss of approximately $110.2 million and have financed ouroperations through private and public offerings of securities, revenues from collaborative agreements, equipment lease financings and interestincome on invested cash balances. As of December 31, 2001, we had raised $157.8 million in net proceeds since inception from sales of equitysecurities. At December 31, 2001, we had $47.0 million in cash, cash equivalents and short-term investments, as compared to $39.9 million atDecember 31, 2000. Our working capital at December 31, 2001 was $44.4 million, as compared to $37.2 million at December 31, 2000. Theincrease in cash, cash equivalents and short-term investments resulted from net proceeds of $33.1 million received by us from the sale of5,700,000 shares of our common stock to private investors in February 2001. We invest our cash in corporate and United States government-backed debt instruments. As of December 31, 2001, available-for-sale securities of $38.9 million mature in one year or less and $6.8 million aredue after one year through two years. As of December 31, 2001, we had acquired an aggregate of $6.2 million in property and equipment, of which $0.5 million of equipment isfinanced under capital lease obligations. In addition, we lease our office and laboratory facilities and certain equipment under operating leases. Wecurrently have no material commitments for the acquisition of property and equipment. However, we anticipate increasing our investment inproperty and equipment in connection with the enhancement of our research and development and manufacturing facilities and capabilities. We intend to use our financial resources to fund clinical trials and to increase our manufacturing activities, including the production of LJP 394and LJP 1082 for clinical trials, research and development efforts, and for working capital and other general corporate purposes.33Table of ContentsThe amounts actually expended for each purpose may vary significantly depending upon numerous factors, including the results of clinical trials,the timing of regulatory applications and approvals, and technological developments. Expenditures also will depend upon the establishment andprogression of collaborative arrangements and contract research as well as the availability of other financings. There can be no assurance thatthese funds will be available on acceptable terms, if at all. We anticipate that our existing capital including the net proceeds of approximately $48.4 million received by us from the sale of 7,000,000shares of our common stock to private investors in January 2002, and interest earned thereon, will be sufficient to fund our operations as currentlyplanned, and assuming that we do not engage a collaborative partner, into the fourth quarter of 2003. Our future capital requirements will depend onmany factors, including continued scientific progress in our research and development programs, the size and complexity of these programs, thescope and results of clinical trials, the analysis of data from the Phase III clinical trial for lupus and Phase I/II clinical trial for thrombosis, the timeand costs involved in applying for regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patentclaims, competing technological and market developments, our ability to establish and maintain collaborative relationships, and the cost ofmanufacturing and effective commercialization activities and arrangements. We expect to incur significant net operating losses each year for atleast the next several years as we expand our current research and development programs, including clinical trials and manufacturing activities,and increase our general and administrative expenses to support a larger, more complex organization. It is possible that our cash requirements willexceed current projections and that we will therefore need additional financing sooner than currently expected. We have no current means of generating cash flow from operations. Our lead drug candidate, LJP 394, will not generate revenues, if at all, untilit has been proven safe and effective, has received regulatory approval and has been successfully commercialized. This process is expected totake at least the next several years. Our other drug candidates are much less developed than LJP 394. There can be no assurance that ourproduct development efforts with respect to LJP 394 or any other drug candidate will be successfully completed, that required regulatory approvalswill be obtained or that any product, if introduced, will be successfully marketed or achieve commercial acceptance. Accordingly, we mustcontinue to rely upon outside sources of financing to meet our capital needs for the foreseeable future. We will continue to seek capital through any appropriate means, including issuance of our securities and establishment of additionalcollaborative arrangements. However, there can be no assurance that additional financing will be available on acceptable terms and our negotiatingposition in capital-raising efforts may worsen as we continue to use existing resources. There is no assurance that we will be able to enter intofurther collaborative relationships.Item 7 A. Quantitative and Qualitative Disclosures about Market Risk. We invest our excess cash in interest-bearing investment-grade securities that we hold for the duration of the term of the respectiveinstrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market-risk-sensitive instruments,positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject tochanges in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates,foreign currency exchange rates, commodity prices or other market changes that affect market-risk-sensitive instruments.34Table of ContentsItem 8. Financial Statements and Supplementary Data. The financial statements and supplementary data required by this item are at the end of this report beginning on page F-1.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.PART IIIItem 10. Directors and Executive Officers of the Registrant. Information for Item 10 is incorporated by reference from portions of our definitive proxy statement for the annual meeting of stockholders to beheld on May 22, 2002, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal yearended December 31, 2001.Item 11. Executive Compensation. Information for Item 11 is incorporated by reference from portions of our definitive proxy statement for the annual meeting of stockholders to beheld on May 22, 2002 under the captions “Executive Compensation and Other Information,” “Report of the Compensation Committee on ExecutiveCompensation,” “Compensation Committee Interlocks and Insider Participation,” and “Stock Performance Graph,” which will be filed with theSecurities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2001.Item 12. Security Ownership of Certain Beneficial Owners and Management. Information for Item 12 is incorporated by reference from the portion of our definitive proxy statement for the annual meeting of stockholders tobe held on May 22, 2002 entitled “Security Ownership of Certain Beneficial Owners and Management,” which will be filed with the Securities andExchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2001.Item 13. Certain Relationships and Related Transactions. None.35Table of ContentsPART IVItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as part of this report. 1. Financial Statements. The following financial statements of La Jolla Pharmaceutical Company are included in Item 8: Report of Independent AuditorsF-1 Balance Sheets at December 31, 2001 and 2000F-2 Statements of Operations for the years ended December 31, 2001, 2000 and 1999F-3 Statements of Stockholders’ Equity for the years ended December 31, 2001, 2000 and 1999F-4 Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999F-5 Notes to Financial StatementsF-6 2. Financial Statement Schedules. No financial statement schedules are required. 3. Exhibits. 36Table of Contents Exhibit Number Description 3.1 Intentionally omitted 3.2 Amended and Restated Bylaws of the Company(15) 3.3 Amended and Restated Certificate of Incorporation of the Company(13) 4.0 Rights Agreement dated as of December 3, 1998 between the Company and American Stock Transfer & TrustCompany(11) 4.1 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of theCompany(12) 4.2 Amendment to Rights Agreement, effective as of July 21, 2001, between the Company and American StockTransfer & Trust Company(17) 10.1 Intentionally omitted 10.2 Stock Option Agreement dated February 4, 1993 entitling Joseph Stemler to purchase 35,000 shares of CommonStock(1) * 10.3 Intentionally omitted 10.4 Intentionally omitted 10.5 Intentionally omitted 10.6 Steven B. Engle Employment Agreement(1), Amendment No. 1(9) and Amendment No. 2(15)* 10.7 Form of Directors and Officers Indemnification Agreement(1) 10.8 Intentionally omitted 10.9 Intentionally omitted 10.10 Option and Collaborative Research Agreement dated June 10, 1991 regarding certain compounds for potentialtreatment of muscular dystrophies or myasthenia gravis between the Company and CepTor Corporation(1) 10.11 Intentionally omitted 10.12 Intentionally omitted 10.13 Form of Employee Invention and Confidential Information Agreement(1) 10.14 Industrial Real Estate Lease(1) 10.15 Intentionally omitted 10.16 Intentionally omitted 10.17 La Jolla Pharmaceutical Company 1989 Incentive Stock Option Plan and 1989 Nonstatutory Stock Option Plan(1)* 10.18 Form of Stock Option Agreement under the 1989 Nonstatutory Stock Option Plan(1) 10.19 La Jolla Pharmaceutical Company 1994 Stock Incentive Plan (Amended and Restated as of May 18, 2001)* 10.20 La Jolla Pharmaceutical Company 1995 Employee Stock Purchase Plan (Amended and Restated as of March 19,2001)* 10.21 Letter of Agreement dated June 7, 1993 between the Company and Vector Securities International regardingVector’s engagement as financial advisor to the Company with respect to potential corporate strategic alliances(1) 10.22 Intentionally omitted 10.23 Intentionally omitted 10.24 Intentionally omitted37Table of Contents Exhibit Number Description 10.25 Second Amendment to Lease dated June 30, 1994 by and between the Company and BRE Properties, Inc.(2) 10.26 Intentionally omitted 10.27 Third Amendment to Lease dated January 26, 1995 by and between the Company and BRE Properties, Inc.(3) 10.28 Intentionally omitted 10.29 Master Lease Agreement dated September 13, 1995 by and between the Company and Comdisco ElectronicsGroup(4) 10.30 Intentionally omitted 10.31 Agreement dated September 22, 1995 between the Company and Joseph Stemler regarding option vesting(5) * 10.32 Intentionally omitted 10.33 Building Lease Agreement effective November 1, 1996 by and between the Company and WCB II-S BRD LimitedPartnership(6) 10.34 Master Lease Agreement dated December 20, 1996 by and between the Company and Transamerica BusinessCredit Corporation(8) 10.35 License and Supply Agreement dated December 23, 1996 by and between the Company and AbbottLaboratories(7)(8) 10.36 Stock Purchase Agreement dated December 23, 1996 by and between the Company and Abbott Laboratories(8)and Waiver of Contractual Restrictions dated February 6, 2001(16) 10.37 Intentionally omitted 10.38 Master Lease Agreement No. 2 dated June 23, 1998 by and between the Company and Transamerica BusinessCredit Corporation(10) 10.39 Intentionally omitted 10.40 Supplement to employment offer letter for Matthew Linnik, Ph.D.(14)* 10.41 Supplement to employment offer letter for William J. Welch(18)* 10.42 Supplement to employment offer letter for Theodora Reilly(18)* 10.43 Supplement to employment offer letter for Paul Jenn, Ph.D.(18)* 23.1 Consent of Ernst & Young LLP, Independent Auditors* This exhibit is a management contract or compensatory plan or arrangement.(1) Previously filed with the Company’s Registration Statement on Form S-1 (No. 33-76480) as declared effective by the Securities andExchange Commission on June 3, 1994.(2) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 1994 and incorporated by reference herein.(3) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 1995 and incorporated by referenceherein.(4) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 1995 and incorporated by referenceherein.(5) Previously filed with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated by referenceherein.(6) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 1996 and incorporated by referenceherein.(7) Portions of the Exhibit 10.35 have been omitted and filed separately with the Securities and Exchange Commission pursuant to a requestfor confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934.(8) Previously filed with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated by referenceherein.38Table of Contents(9) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 1997 and incorporated by referenceherein.(10) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 1998 and incorporated by referenceherein.(11) Previously filed with the Company’s Registration Statement on Form 8-A (No. 000-24274) as filed with the Securities and ExchangeCommission on December 4, 1998.(12) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 1999 and incorporated by referenceherein.(13) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 1999 and incorporated by referenceherein.(14) Previously filed with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated byreference herein(15) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2000 and incorporated by referenceherein.(16) Previously filed with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated byreference herein.(17) Previously filed with the Company’s report on Form 8-K filed on January 26, 2001 and incorporated by reference herein. The changeseffected by the Amendment are also reflected in the Amendment to Application for Registration on Form 8-A/A filed on January 26, 2001.(18) Previously filed with the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2001 and incorporated by referenceherein. (b) Reports on Form 8-K. None.39Table of ContentsReport of Independent AuditorsThe Board of Directors and StockholdersLa Jolla Pharmaceutical CompanyWe have audited the accompanying balance sheets of La Jolla Pharmaceutical Company as of December 31, 2001 and 2000, and the relatedstatements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve 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 PharmaceuticalCompany at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young, LLP ERNST & YOUNG LLPSan Diego, CaliforniaFebruary 8, 2002F-1Table of ContentsLa Jolla Pharmaceutical CompanyBalance Sheets(In thousands, except share and per share data) December 31, 2001 2000 Assets Current assets: Cash and cash equivalents $9,932 $8,061 Short-term investments 37,028 31,838 Other current assets 568 590 Total current assets 47,528 40,489 Property and equipment, net 1,921 780 Patent costs and other assets, net 2,237 1,747 $51,686 $43,016 Liabilities and stockholders’ equity Current liabilities: Accounts payable $743 $468 Accrued clinical expenses 703 1,914 Accrued pre-marketing expenses 536 — Accrued expenses 541 560 Accrued payroll and related expenses 451 288 Current portion of obligations under capital leases 167 44 Total current liabilities 3,141 3,274 Commitments Stockholders’ equity: Preferred stock, $.01 par value; 8,000,000 shares authorized, no shares issuedor outstanding — — Common stock, $.01 par value; 100,000,000 shares authorized, 35,281,753and 29,393,078 shares issued and outstanding at December 31, 2001 and2000, respectively 353 294 Additional paid-in capital 158,223 124,909 Other comprehensive income 218 105 Accumulated deficit (110,249) (85,566) Total stockholders’ equity 48,545 39,742 $51,686 $43,016 See accompanying notes.F-2Table of ContentsLa Jolla Pharmaceutical CompanyStatements of Operations(In thousands, except per share data) Years Ended December 31, 2001 2000 1999 Revenues: Revenue from collaborative agreement - relatedparty $— $— $4,690 Expenses: Research and development 23,228 12,933 11,686 General and administrative 4,268 2,706 2,944 Total expenses 27,496 15,639 14,630 Loss from operations (27,496) (15,639) (9,940)Interest expense (30) (6) (20)Interest income 2,843 1,846 811 Net loss $(24,683) $(13,799) $(9,149) Basic and diluted net loss per share $(0.71) $(0.53) $(0.45) Shares used in computing basic and diluted net lossper share 34,604 26,138 20,135 See accompanying notes.F-3Table of ContentsLa Jolla Pharmaceutical CompanyStatements of Stockholders’ Equity(In thousands)For the Years Ended December 31, 1999, 2000 and 2001 Common stock Additional Other Total paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit income equity Balance at December 31, 1998 20,106 $201 $84,276 $(62,618) $— $21,859 Issuance of common stock underEmployee Stock Purchase Plan 78 1 53 — — 54 Exercise of stock options 20 — 29 — — 29 Net loss — — — (9,149) — (9,149) Balance at December 31, 1999 20,204 202 84,358 (71,767) — 12,793 Issuance of common stock, net 8,840 88 40,156 — — 40,244 Issuance of common stock underEmployee Stock Purchase Plan 186 2 189 — — 191 Exercise of stock options 159 2 196 — — 198 Exercise of warrants 4 — 10 — — 10 Net loss — — — (13,799) — (13,799) Net unrealized gains on available-for-sale securities — — — — 105 105 Comprehensive loss (13,694) Balance at December 31, 2000 29,393 294 124,909 (85,566) 105 39,742 Issuance of common stock, net 5,700 57 33,037 — — 33,094 Issuance of common stock underEmployee Stock Purchase Plan 145 2 226 — — 228 Exercise of stock options 44 — 51 — — 51 Net loss — — — (24,683) — (24,683) Net unrealized gains on available-for-sale securities — — — — 113 113 Comprehensive loss (24,570) Balance at December 31, 2001 35,282 $353 $158,223 $(110,249) $218 $48,545 See accompanying notes.F-4Table of ContentsLa Jolla Pharmaceutical CompanyStatements of Cash Flows(In thousands) Years Ended December 31, 2001 2000 1999 Operating activities Net loss $(24,683) $(13,799) $(9,149)Adjustments to reconcile net loss to net cash used for operatingactivities: Depreciation and amortization 684 381 357 Write-off of property and equipment 96 — — Accretion of interest income 117 (634) — Changes in operating assets and liabilities: Other current assets 22 (126) 53 Accrued clinical expenses (1,211) 1,914 — Accrued pre-marketing expenses 536 — — Accounts payable and accrued expenses 256 283 (1,084) Accrued payroll and related expenses 163 26 (93) Deferred revenue — related party — — (1,769) Net cash used for operating activities (24,020) (11,955) (11,685)Investing activities Purchases of short-term investments (33,886) (40,716) (12,289)Sales of short-term investments 3,488 13,439 6,667 Maturities of short-term investments 25,204 3,172 10,802 Additions to property and equipment (1,341) (541) (180)Proceeds from sale of property and equipment — 97 275 Increase in patent costs and other assets (554) (288) (275) Net cash (used for) provided by investing activities (7,089) (24,837) 5,000 Financing activities Net proceeds from issuance of common stock 33,373 40,643 83 Payments on obligations under capital leases (393) (199) (165) Net cash provided by (used for) financing activities 32,980 40,444 (82) Increase (decrease) in cash and cash equivalents 1,871 3,652 (6,767)Cash and cash equivalents at beginning of period 8,061 4,409 11,176 Cash and cash equivalents at end of period $9,932 $8,061 $4,409 Supplemental disclosure of cash flow information: Interest paid $30 $6 $20 Supplemental schedule of noncash investing and financingactivities: Capital lease obligations incurred for property and equipment $516 $— $405 Other comprehensive income on investments $113 $105 $— See accompanying notes.F-5Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements1. Organization and Summary of Significant Accounting PoliciesOrganization and Business ActivityLa Jolla Pharmaceutical Company (the “Company”) is a biopharmaceutical company focused on the research and development of highly specifictherapeutics for the treatment of certain life-threatening antibody-mediated diseases. These diseases, including autoimmune conditions such assystemic lupus erythematosus (“lupus”) and antibody-mediated stroke, are caused by abnormal B cell production of antibodies that attack healthytissues. Current therapies for these autoimmune disorders target the symptoms of the disease or nonspecifically suppress the normal operation ofthe immune system, frequently resulting in severe, adverse side effects and hospitalization. The Company’s drug candidates, called Toleragens®,are designed to treat the underlying cause of many antibody-mediated diseases without these severe, adverse side effects. The Company’sclinical drug candidates are known as LJP 394, a lupus treatment drug which is currently in a Phase III clinical study, and LJP 1082, an antibody-mediated stroke treatment drug which is currently in a Phase I/II clinical study.The Company actively seeks additional financing to fund its research and development efforts and commercialize its technologies. There is noassurance 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 toprotect technology, inventions and improvements to its inventions that are considered important to the development of its business. The patentpositions of biotechnology firms, including the Company, are uncertain and involve complex legal and factual questions for which important legalprinciples are largely unresolved. There can be no assurance that any additional patents will be issued, or that the scope of any patent protectionwill be sufficient, or that any current or future issued patent will be held valid if subsequently challenged.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management tomake estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes tothe financial statements. Actual results could differ from those estimates.ReclassificationCertain amounts in the 1999 and 2000 financial statements have been reclassified to conform to the 2001 presentation.Cash, Cash Equivalents and Short-term InvestmentsCash and cash equivalents consist of cash and highly liquid investments which include debt securities with maturities from original issuance dateof three months or less and are stated at market. Short-term investments mainly consist of debt securities with maturities from original issuancedate of greater thanF-6Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)three months. Management has classified the Company’s cash equivalents and short-term investments as available-for-sale securities in theaccompanying financial statements. Available-for-sale securities are stated at fair market value, with unrealized gains and losses reported in othercomprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securitiesare included in interest income and have been immaterial for each of the years presented. The cost of securities sold is based on the specificidentification method. Interest and dividends on securities classified as available-for-sale are included in interest income.Concentration of RiskCash, cash equivalents and short-term investments are financial instruments which potentially subject the Company to concentrations of creditrisk. The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. The Company invests itsexcess cash in United States government securities and debt instruments of financial institutions and corporations with strong credit ratings. TheCompany has established guidelines relative to the diversification of its cash investments and their maturities in an effort to maintain safety andliquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. To date, the Companyhas not experienced any impairment losses on its cash, cash equivalents and short-term investments.Derivative Instruments and Hedging ActivitiesIn June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 133, Accounting forDerivative Instruments and Hedging Activities (“SFAS 133”). SFAS 133 provides a comprehensive and consistent standard for the recognition andmeasurement of derivatives and hedging activities. SFAS 133 was amended in June 2000 by Statement of Financial Accounting StandardNo. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities — An Amendment of FASB Statement 133 (“SFAS 138”).SFAS 138 addresses a limited number of SFAS 133 implementation issues. SFAS 138 is effective for fiscal years beginning after June 15, 2000.The adoption of this statement did not have a significant effect on the financial position or results of operations of the Company.Impairment of Long-Lived Assets and Assets to Be Disposed OfThe Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that assets might beimpaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. TheCompany also records the assets to be disposed of at the lower of their carrying amount or fair value less cost to sell. To date, the Company hasnot experienced any impairment losses on its long-lived assets used in operations. While the Company’s current and historical operating and cashflow losses are indicators of impairment, the Company believes the future cash flows to be received support the carrying value of its long-livedassets and, accordingly, the Company has not recognized any impairment losses as of December 31, 2001.F-7Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)In August 2001, FASB issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets (“SFAS 144”). SFAS 144 supersedes the provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations —Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactionswith regard to discontinued operations and eliminates the provisions of Statement of Financial Accounting Standard No. 121, Accounting for theImpairment of Long-Lived Assets and for Assets to Be Disposed Of, with regard to the requirement to test the allocation of goodwill to long-livedassets for impairment. SFAS 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal otherthan by sale (e.g., abandonment, exchange and distribution). SFAS 144 is effective for fiscal years beginning after December 15, 2001. Theadoption of this statement is not expected to have a significant effect on the financial position or results of operations of the Company.Property and EquipmentProperty and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets (primarilyfive years). Leasehold improvements and equipment under capital leases are stated at cost and amortized on a straight-line basis over the shorterof the estimated useful life or the lease term.Property and equipment is comprised of the following (in thousands): December 31, 2001 2000 Laboratory equipment $3,649 $3,274 Computer equipment 779 521 Furniture and fixtures 238 115 Leasehold improvements 1,578 740 6,244 4,650 Less: Accumulated depreciation and amortization (4,323) (3,870) $1,921 $780 Depreciation and amortization expense for the periods ending December 31, 2001, 2000 and 1999 was $620,000, $322,000 and $311,000,respectively.Business Combinations and Goodwill and Other Intangible AssetsIn June 2001, FASB issued Statement of Financial Accounting Standard Nos. 141, Business Combinations (“SFAS 141”) and 142, Goodwill andOther Intangible Assets (“SFAS 142”). SFAS 141 replaces Accounting Principles Board Opinion No. 16, Business Combinations, and eliminatespooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets andaccounting for negative goodwill. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach.SFAS 141 and SFAS 142 are effective for all business combinations completed after June 30, 2001. Companies are required to adopt SFAS 142for fiscal years beginning after December 15, 2001, but early adoption is permitted underF-8Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)certain circumstances. The adoption of these statements will not have a significant effect on the financial position or results of operations of theCompany.PatentsThe Company has filed numerous patent applications with the United States Patent and Trademark Office and in foreign countries. Legal costsand expenses incurred in connection with pending patent applications have been deferred. Costs related to successful patent applications areamortized 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. Total cost and accumulated amortization were $2,313,000 and $288,000 at December 31, 2001 and$1,823,000 and $225,000 at December 31, 2000, respectively. Deferred costs related to patent applications are charged to operations at the time adetermination is made not to pursue such applications.Stock-Based CompensationAs allowed under Statement of Financial Accounting Standard No. 123, Accounting and Disclosure of Stock-Based Compensation (“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. Pursuant to APB 25, compensation expense for employee ordirector stock options represents the difference between the exercise price and the fair value of the common stock on the date of grant. Thiscompensation expense is amortized to expense in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation Rights andOther Variable Stock Option or Award Plans, over the vesting period of the options. The Company generally grants stock options for a fixednumber of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant and therefore, underAPB 25, recognized no compensation expense for such stock option grants.Options or stock awards issued to non-employees have been determined in accordance with SFAS 123 and EITF 96-18, Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Deferred charges foroptions granted to non-employees are periodically remeasured as the options vest. There were no options granted to non-employees or chargesrelated to non-employee stock options in the current period.In March 2000, FASB issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (“FIN 44”). FIN 44clarifies certain issues in the application of APB 25. FIN 44 was effective July 1, 2000, but certain conclusions cover specific events that occurafter either December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a material impact on the Company’s financialstatements.F-9Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)Revenue RecognitionRevenue from collaborative agreements typically consists of ongoing research and development funding and milestone, royalty and otherpayments, which are nonrefundable. Revenue from milestones is recognized when earned, as evidenced by written acknowledgement from thecollaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreementand (ii) the Company’s performance obligations for on-going research and development after the milestone achievement will continue to be fundedby the collaborator at a comparable level to that received prior to the milestone achievement. If both of these criteria are not met, the milestonepayment is recognized over the remaining minimum period of the Company’s performance obligations under the agreement.Revenue from funded research and development is recognized ratably over the term of the agreement, and the Company believes that suchrecognition approximates the costs incurred to perform the research and development. The Company does not have an obligation to refund, nordoes there exist the presumption of an obligation to refund, research and development payments.In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, Revenue Recognition in FinancialStatements (“SAB 101”). SAB 101 formalizes the basic revenue recognition criteria that must be met in order to record revenue. In June 2000,SAB 101 was amended to delay the implementation date to the fourth quarter of 2000 to provide additional time to study the guidance. There wereno up-front payments or license fees received during 2000 or in prior years which were subject to the adoption of SAB 101 as all fees receivedrelated to agreements under which the research portion of the collaboration had been completed, the scientific milestones had been achieved orthe agreements had been terminated entirely.Net Loss Per ShareBasic and diluted net loss per share is computed using the weighted-average number of common shares outstanding during the periods inaccordance with Statement of Financial Accounting Standard No. 128, Earnings per Share. As the Company has incurred a net loss for all threeyears presented, stock options and warrants are not included in the computation of net loss per share since their effect is anti-dilutive.Comprehensive LossIn accordance with Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income (Loss), unrealized gains and losses onavailable-for-sale securities are included in other comprehensive income (loss). The Company’s comprehensive net loss totaled $24,570,000 and$13,694,000 for the years ended December 31, 2001 and 2000, respectively.Segment InformationOn January 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 131, Segment Information (“SFAS 131”). SFAS 131redefines segments and requires companies to report financial andF-10Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)descriptive information about their operating segments. The Company has determined that it operates in one business segment.2. Collaborative AgreementsIn September 1999, following the May 1999 suspension of the jointly conducted Phase II/III clinical trial of LJP 394, Abbott and the Companyterminated the collaborative agreement which was entered into in December 1996 and all rights to LJP 394 were returned to the Company. Underthe former agreement, in exchange for an exclusive, worldwide license to market and sell LJP 394, Abbott, a diversified health-care company,agreed to pay an initial nonrefundable license fee of $4,000,000 upon signing, and agreed to fund the development of the Company’s lupus drugcandidate, LJP 394, in accordance with a mutually agreed upon budget, and to make certain payments to the Company upon the attainment ofspecific milestones, as well as royalty and sales incentive payments to the Company on sales of LJP 394.Under a separate stock purchase agreement, Abbott also purchased common stock of the Company in December 1996, September 1997 andOctober 1998 for an aggregate purchase price of $4,000,000 on each date at values based on the reported last sale price of the common stock oneach of the 20 trading days immediately preceding each purchase date. The stock purchase agreement originally allowed Abbott certainregistration rights and rights of first refusal and imposed transfer restrictions on the shares, among other matters, and allowed the Company certainrights of first refusal and imposed certain other continuing obligations on the Company. However, by waiver dated February 6, 2001, both Abbottand the Company have waived any material continuing obligations of the other party under the stock purchase agreement.Until its termination in September 1999, the Company incurred research and development costs under the collaborative agreement with Abbott ofapproximately $4,690,000 during the year ended December 31, 1999, for the development of LJP 394. In 1999, the Company recorded revenue of$4,690,000 from Abbott for the development of LJP 394, of which $2,921,000 was received in cash in 1999 and $1,769,000 was revenuerecognized from previously deferred revenue.3. Restructuring ChargesAs a result of the termination of the Company’s collaborative agreement with Abbott in September 1999, the Company restructured its operationsin order to reduce expenses and to focus its resources on its remaining potential drug candidates. In September 1999, the Company recordedestimated restructuring charges of approximately $742,000. When the restructuring was completed in December 1999, actual total restructuringexpenses paid and charged against the restructuring liability were approximately $640,000 and approximately $108,000 of the estimated liabilitywas reversed in November and December 1999. Total restructuring expenses paid consisted of termination benefits paid to 38 employeesterminated from various Company departments, and are included in both research and development and general and administrative expense. Therewere no material changes to the restructuring liability subsequent to December 31, 1999.F-11Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements4. Cash Equivalents and Short-term InvestmentsThe following is a summary of available-for-sale securities (in thousands): Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value December 31, 2001 Money market accounts $204 $— $— $204 United States corporate debt securities 34,931 225 60 35,096 Government-asset-backed securities 9,375 53 — 9,428 United States Treasury securities and obligationsof the United States government agencies 1,016 — — 1,016 $45,526 $278 $60 $45,744 December 31, 2000 Money market accounts $1,093 $— $— $1,093 United States corporate debt securities 31,344 121 36 31,429 Government-asset-backed securities 4,968 14 — 4,982 United States Treasury securities and obligationsof the United States government agencies 1,023 6 — 1,029 $38,428 $141 $36 $38,533 The net adjustment to unrealized holding gains (losses) on available-for-sale securities included in comprehensive income totaled $113,000 and$105,000 in 2001 and 2000, respectively. Included in cash and cash equivalents at December 31, 2001 and 2000 were $8,716,000 and $6,695,000,respectively, of securities classified as available-for-sale. As of December 31, 2001, available-for-sale securities of $38,906,000 mature in oneyear or less and $6,838,000 are due after one year through two years.5. CommitmentsLeasesIn July 1992, the Company entered into a non-cancellable operating lease for the rental of its office and research and development facilities, whichexpires in July 2004. The lease is subject to an escalation clause that provides for annual increases based on the Consumer Price Index. Thelease also contains options to extend the lease term for an additional five years and a one-time cancellation option with the payment of certainpenalties.In November 2001, the Company extended its other non-cancellable operating lease for the rental of office facilities until July 2004. The leasecontains a provision for scheduled annual rent increases and an option to extend the lease term for an additional five years.F-12Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements5. Commitments (continued)Annual future minimum lease payments as of December 31, 2001, are as follows (in thousands): Operating Capital Leases Leases Years ended December 31, 2002 $1,648 $173 2003 1,125 — 2004 617 — 2005 14 — 2006 — — Total $3,404 173 Less amount representing interest (6) Present value of net minimum lease payments 167 Less current portion (167) Noncurrent portion of capital lease obligations $— Rent expense under all operating leases totaled $2,330,000, $2,776,000, and $2,360,000 for the years ended December 31, 2001, 2000 and 1999,respectively. Equipment acquired under capital leases included in property and equipment totaled $168,000 and $36,000 (net of accumulatedamortization of $348,000 and $293,000) at December 31, 2001 and 2000, respectively. Amortization expense associated with these assets isincluded in depreciation and amortization expense for each of the three years in the period ended December 31, 2001.6. Stockholders’ EquityPreferred StockAs of December 31, 2001, the Company is authorized to issue 8,000,000 shares of preferred stock with a par value of $0.01 per share, in one ormore series.The Board of Directors has designated 75,000 of preferred stock as nonredeemable Series A Junior Participating Preferred Stock (“Series APreferred Stock”). In the event of liquidation, each share of Series A Preferred Stock is entitled to receive a preferential liquidation payment of$1,000 per share plus the amount of accrued unpaid dividends. The Series A Preferred Stock is subject to certain anti-dilution adjustments, andthe holder of each share is entitled to 1,000 votes, subject to adjustments. Cumulative quarterly dividends of the greater of $0.25 or, subject tocertain adjustments, 1,000 times any dividend declared on shares of common stock, are payable when, as and if declared by the Board ofDirectors, from funds legally available for this purpose.F-13Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements6. Stockholders’ Equity (continued)Stock Option PlansIn May 1989, the Company adopted the 1989 Stock Option Plan and the 1989 Nonstatutory Stock Option Plan (the “1989 Plan”), under which904,000 shares of common stock have been authorized for issuance upon exercise of options granted by the Company. The 1989 Plan expired in1999.In June 1994, the Company adopted the 1994 Stock Incentive Plan (the “1994 Plan”), under which 5,200,000 shares of common stock have beenauthorized for issuance upon exercise of options granted by the Company. The 1994 Plan provides for the grant of incentive and non-qualifiedstock options, as well as other stock-based awards, to employees, directors, consultants and advisors of the Company with various vestingperiods as determined by the compensation committee, as well as automatic fixed grants to non-employee directors of the Company.A summary of the Company’s stock option activity and related data follows: Outstanding Options Options Weighted- Available Number of Average For Grant Shares Exercise Price Balance at December 31, 1998 235,335 1,933,768 $3.75 Additional shares authorized 750,000 — — Expired (225,743) — $1.00 Granted (905,206) 905,206 $0.64 Exercised — (19,919) $1.49 Cancelled 559,204 (559,204) $3.89 Balance at December 31, 1999 413,590 2,259,851 $2.49 Additional shares authorized 1,000,000 — — Expired (7,988) — $1.00 Granted (1,081,544) 1,081,544 $5.28 Exercised — (159,170) $1.34 Cancelled 66,688 (66,688) $4.48 Balance at December 31, 2000 390,746 3,115,537 $3.47 Additional shares authorized 1,700,000 — — Expired (2,260) — $1.00 Granted (1,522,600) 1,522,600 $6.80 Exercised — (43,550) $1.35 Cancelled 63,427 (63,427) $6.61 Balance at December 31, 2001 629,313 4,531,160 $4.57 F-14Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements6. Stockholders’ Equity (continued) Years Ended December 31, 2001 2000 1999 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Exercisable at end ofyear 2,770,587 $3.20 2,121,134 $2.62 1,660,777 $2.43 Weighted-average fairvalue of optionsgranted during theyear $5.42 $4.18 $0.52 Exercise prices and weighted-average remaining contractual lives for the options outstanding as of December 31, 2001 follow: Weighted- Average Remaining Weighted- Weighted- Contractual Average AverageOptions Range of Life Exercise Options ExerciseOutstanding Exercise Prices (in years) Price Exercisable Price 874,932 $0.34 - $1.00 6.65 $0.56 862,339 $0.56 881,417 $1.28 - $3.69 7.26 $3.21 859,754 $3.21 862,170 $3.75 - $5.03 6.53 $4.42 623,087 $4.37 766,642 $5.08 - $7.00 8.17 $6.51 301,508 $6.32 1,086,079 $7.10 - $7.65 9.69 $7.41 90,208 $7.61 59,920 $7.75 - $12.06 7.19 $8.71 33,691 $8.63 4,531,160 $0.34 - $12.06 7.74 $4.57 2,770,587 $3.20 At December 31, 2001, the Company has reserved 5,160,473 shares of common stock for future issuance upon exercise of options granted or tobe granted under the 1989 and 1994 Plans.Employee Stock Purchase PlanEffective August 1, 1995, the Company adopted the 1995 Employee Stock Purchase Plan, as amended (the “Purchase Plan”). Under the amendedPurchase Plan, a total of 800,000 shares of common stock are reserved for sale to employees, as defined. Employees may purchase commonstock under the Purchase Plan every three months (up to but not exceeding 10% of each employee’s earnings) over the offeringF-15Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements6. Stockholders’ Equity (continued)period at 85% of the fair market value of the common stock at certain specified dates. The offering period may not exceed 24 months. For theyear ended December 31, 2001, 145,125 shares of common stock had been issued under the Purchase Plan (185,755 shares for the year endedDecember 31, 2000). To date, 520,773 shares of common stock have been issued under the Purchase Plan and 279,227 shares of common stockare available for issuance. Years Ended December 31, 2001 2000 1999 Weighted-average fair value of employee stock purchase planpurchases $2.84 $2.70 $0.91 Stock-Based CompensationPro forma information regarding net loss and net loss per share is required by SFAS 123, which also requires that the information be determined asif the Company has accounted for its employee stock plans granted after December 31, 1994 under the fair value method of that statement. Thefair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001,2000 and 1999, respectively: risk-free interest rate of 4.4%, 5.6% and 6.8%; volatility factor of the expected market price of the Company’scommon stock of 1.109, 1.113 and 1.09; a weighted-average expected life of 4.8 years, 4.5 years and 5 years and a dividend yield of 0% for allthree years presented.The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictionsand are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock pricevolatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and becausechanges in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do notnecessarily provide a reliable single measure of the fair value of its employee stock options.For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. TheCompany’s pro forma information follows (in thousands except for net loss per share information): Years Ended December 31, 2001 2000 1999 Pro forma net loss $(27,919) $(15,423) $(9,985) Pro forma basic and diluted net loss per share $(0.81) $(0.59) $(0.50) The effects of applying SFAS 123 for either recognizing compensation expense or providing pro forma disclosures are not likely to berepresentative of the effects on reported net loss for future years.F-16Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements6. Stockholders’ Equity (continued)Stockholder Rights PlanThe Company has adopted a Stockholder Rights Plan (the “Rights Plan”) which was amended in July 2000. The Rights Plan provides for adividend of one right (a “Right”) to purchase fractions of shares of the Company’s Series A Preferred Stock for each share of the Company’scommon stock. Under certain conditions involving an acquisition by any person or group of 15% or more of the common stock (or in the case ofState of Wisconsin Investment Board, 20% or more), the Rights permit the holders (other than the 15% holder, or in the case of State ofWisconsin Investment Board, 20% holder) to purchase the Company’s common stock at a 50% discount upon payment of an exercise price of $30per Right. In addition, in the event of certain business combinations, the Rights permit the purchase of the common stock of an acquirer at a 50%discount. Under certain conditions, the Rights may be redeemed by the Board of Directors in whole, but not in part, at a price of $.001 per Right.The Rights have no voting privileges and are attached to and automatically trade with the Company’s common stock. The Rights expire onDecember 2, 2008.7. 401(k) PlanThe Company has established a 401(k) defined contribution retirement plan (the “401(k) Plan”), which was amended in May 1999 to cover allemployees. The 401(k) Plan provides for voluntary employee contributions up to 20% of annual compensation (as defined). The Company does notmatch employee contributions or otherwise contribute to the 401(k) Plan.8. Income TaxesAt December 31, 2001, the Company had federal and California income tax net operating loss carryforwards of approximately $104,827,000 and$30,348,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization ofresearch and development expenses for California income tax purposes and the 55% percent limitation on California loss carryforwards. TheCompany also had federal and California research tax credit carryforwards of approximately $5,774,000 and $3,311,000, respectively. The federalnet operating loss and tax credit carryforwards will begin to expire in 2004 unless previously utilized. The California net operating losscarryforwards totaling approximately $834,000 expired in 2001.Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss and credit carryforwards may belimited if a cumulative change in ownership of more than 50% occurs within a three-year period.F-17Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Financial Statements8. Income Taxes (continued)Significant components of the Company’s deferred tax assets are shown below (in thousands): December 31, 2001 2000 Deferred tax assets: Net operating loss carryforwards $38,434 $29,462 Research and development credits 7,926 5,223 Capitalized research and development 4,010 3,760 Total deferred tax assets 50,370 38,445 Deferred tax liability (825) (152) 49,545 38,293 Valuation allowance for deferred tax assets (49,545) (38,293) Net deferred tax assets $— $— A valuation allowance of $49,545,000 has been recognized to offset the deferred tax assets as realization of such assets is uncertain.9. Subsequent EventIn January 2002, the Company issued 7,000,000 shares of common stock in a private placement to selected institutional investors and otheraccredited investors for gross proceeds to the Company of approximately $51,590,000 at a discounted per share value of the common stock onthe purchase date.F-18Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. LA JOLLA PHARMACEUTICAL COMPANY By:/s/ Steven B. EngleMarch 27, 2002 Steven B. EngleChairman of the Board andChief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Steven B. EngleSteven B. Engle Chairman of the Board and Chief ExecutiveOfficer (Principal Executive Officer andDirector) March 27, 2002 /s/ Gail A. SloanGail A. Sloan Controller and Secretary (Principal Financialand Accounting Officer) March 27, 2002 /s/ Thomas H. AdamsThomas H. Adams, Ph.D. Director March 27, 2002 /s/ William E. EngbersWilliam E. Engbers Director March 27, 2002 /s/ Robert A. FildesRobert A Fildes, Ph.D. Director March 27, 2002 /s/ Stephen M. MartinStephen M. Martin Director March 27, 2002 /s/ William R. RingoWilliam R. Ringo Director March 27, 2002 /s/ W. Leigh ThompsonW. Leigh Thompson, M.D., Ph.D. Director March 27, 2002 Table of ContentsExhibit Index Exhibit Number Description 10.19 La Jolla Pharmaceutical Company 1994 Stock Incentive Plan (Amended and Restated as of May 18, 2001) 10.20 La Jolla Pharmaceutical Company 1995 Employee Stock Purchase Plan (Amended and Restated as of March 19,2001) 23.1 Consent of Ernst & Young LLP, Independent Auditors EXHIBIT 10.19 LA JOLLA PHARMACEUTICAL COMPANY 1994 STOCK INCENTIVE PLAN ARTICLE I GENERAL PROVISIONS 1.01 Purpose of the Plan. La Jolla Pharmaceutical Company (the "Company"), by action of its Board ofDirectors and with the consent of its stockholders, has adopted this La JollaPharmaceutical Company Stock Incentive Plan (the "Plan") effective as of June10, 1994 to advance the interests of the Company and its stockholders by (a)providing Eligible Persons with financial incentives to promote the success ofthe Company's business objectives, and to increase their proprietary interest inthe success of the Company, and (b) giving the Company a means to attract andretain directors of appropriate experience and stature. 1.02 Definitions. Terms used herein and not otherwise defined shall have the meanings setforth below: (a) "Award" means an Incentive Award or a Nonemployee Director'sOption. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended.Where the context so requires, a reference to a particular Code section shallalso refer to any successor provision of the Code to such section. (d) "Commission" means the Securities and Exchange Commission. (e) "Committee" means the committee appointed by the Board toadminister the Plan. The Committee shall be composed entirely of members whomeet the requirements of Section 1.04(a). (f) "Common Stock" means the common stock of the Company, $0.01 parvalue. (g) "Dividend Equivalent" means a right granted by the Company underSection 2.07 to a holder of a Stock Option, Stock Appreciation Right, or otherIncentive Award denominated in shares of Common Stock to receive from theCompany during the Applicable Dividend Period (as defined in Section 2.07)payments equivalent to the amount of dividends 1payable to holders of the number of shares of Common Stock underlying such StockOption, Stock Appreciation Right, or other Incentive Award. (h) "Eligible Person" means any director, officer or key employee,consultant, or advisor of the Company (as determined by the Committee) includingNonemployee Directors and members of the Committee. (i) "Exchange Act" means the Securities Exchange Act of 1934, asamended. Where the context so requires, a reference to a particular section ofthe Exchange Act or rule thereunder shall also refer to any successor provisionto such section or rule. (j) "Fair Market Value" of capital stock of the Company shall bedetermined with reference to the closing price of such stock on the day inquestion (or, if such day is not a trading day in the U.S. securities markets,on the nearest preceding trading day), as reported with respect to the principalmarket or trading system on which such stock is then traded; or, if no suchclosing prices are reported, the mean between the high bid and low asked pricesthat day on the principal market or national quotation system on which suchshares are then quoted; provided, however, that when appropriate, the Committeein determining Fair Market Value of capital stock of the Company may take intoaccount such other factors as may be deemed appropriate under the circumstances.Notwithstanding the foregoing, the Fair Market Value of capital stock forpurposes of grants of Incentive Stock Options shall be determined in compliancewith applicable provisions of the Code. The Fair Market Value of rights orproperty other than capital stock of the Company means the fair market valuethereof as determined by the Committee on the basis of such factors as it maydeem appropriate. (k) "Incentive Award" means any Stock Option, Restricted Stock,Stock Appreciation Right, Stock Payment, Performance Award or DividendEquivalent granted or sold to an Eligible Person under this Plan, but not aNonemployee Director's Option. (l) "Incentive Stock Option" means a Stock Option that qualifies asan incentive stock option under Section 422 (or any successor section) of theCode and the regulations thereunder. (m) "Just Cause Dismissal" shall mean a termination of a Recipient'semployment for any of the following reasons: (i) the Recipient violates anyreasonable rule or regulation of the Board or the Recipient's superiors or theChief Executive Officer or President of the Company that results in damage tothe Company or which, after written notice to do so, the Recipient fails tocorrect within a reasonable time; (ii) any willful misconduct or grossnegligence by the Recipient in the responsibilities assigned to him or her;(iii) any willful failure to perform his or her job as required to meet Companyobjectives; (iv) any wrongful conduct of a Recipient which has an adverse impacton the Company or which constitutes a misappropriation of Company assets; (v)the Recipient's performing services for any other person or entity whichcompetes with the Company while he or she is employed by the Company, withoutthe written approval of the Chief Executive Officer or President of the Company;or (vi) any other conduct that the Board or Committee determines constitutesJust Cause for Dismissal. 2 (n) "Nonemployee Director" means a director of the Company whoqualifies as a "Nonemployee Director" under Rule 16b-3 under the Exchange Act. (o) "Nonemployee Director's Option" means a Stock Option granted toa Nonemployee Director pursuant to Article III of the Plan. (p) "Nonqualified Stock Option" means a Stock Option other than anIncentive Stock Option. (q) "Option" or "Stock Option" means a right to purchase stock ofthe Company granted under this Plan, and can be an Incentive Stock Option or aNonqualified Stock Option. (r) "Payment Event" means the event or events giving rise to theright to payment of a Performance Award. (s) "Performance Award" means an award, payable in cash, CommonStock or a combination thereof, which vests and becomes payable over a period oftime upon attainment of performance criteria established in connection with thegrant of the award. (t) "Performance-Based Compensation" means performance-basedcompensation as described in Section 162(m) of the Code and the regulationsthereunder. If the amount of compensation an Eligible Person will receive underany Incentive Award is not based solely on an increase in the value of CommonStock after the date of grant or award, the Committee, in order to qualify anIncentive Award as performance-based compensation under Section 162(m) of theCode and the regulations thereunder, can condition the grant, award, vesting, orexercisability of such an award on the attainment of a preestablished, objectiveperformance goal. For this purpose, a preestablished, objective performancegoal may include one or more of the following performance criteria: (i) cashflow, (ii) earnings per share (including earnings before interest, taxes, andamortization), (iii) return on equity, (iv) total stockholder return, (v) returnon capital, (vi) return on assets or net assets, (vii) income or net income,(viii) operating margin, (ix) return on operating revenue, (x) attainment ofstated goals related to the Company's research and development or clinicaltrials programs, (xi) attainment of stated goals related to the Company'scapitalization, costs, financial condition, or results of operations, and (xii)any other similar performance criteria contemplated by the regulations underSection 162(m). (u) "Permanent Disability" shall mean that the Recipient becomesphysically or mentally incapacitated or disabled so that he or she is unable toperform substantially the same services as he or she performed prior toincurring such incapacity or disability (the Company, at its option and expense,being entitled to retain a physician to confirm the existence of such incapacityor disability, and the determination of such physician to be binding upon theCompany and the Recipient), and such incapacity or disability continues for aperiod of three consecutive months or six months in any twelve-month period orsuch other period(s) as may be determined by the Committee with respect to anyOption. (v) "Purchase Price" means the purchase price (if any) to be paid bya Recipient for Restricted Stock as determined by the Committee (which priceshall be at least 3equal to the minimum price required under applicable laws and regulations forthe issuance of Common Stock which is nontransferable and subject to asubstantial risk of forfeiture until specific conditions are met). (w) "Recipient" means a person who has received an Award hereunder. (x) "Restricted Stock" means Common Stock that is the subject of anaward made under Section 2.04 and which is nontransferable and subject to asubstantial risk of forfeiture until specific conditions are met as set forth inthis Plan and in any statement evidencing the grant of such Incentive Award. (y) "Securities Act" means the Securities Act of 1933, as amended. (z) "Stock Appreciation Right" or "SAR" means a right granted underSection 2.05 to receive a payment that is measured with reference to the amountby which the Fair Market Value of a specified number of shares of Common Stockappreciates from a specified date, such as the date of grant of the SAR, to thedate of exercise. (aa) "Stock Payment" means a payment in shares of the Company'sCommon Stock to replace all or any portion of the compensation (other than basesalary) that would otherwise become payable to a Recipient.1.03 Common Stock Subject to the Plan. (a) Number of Shares. Subject to Section 1.05(b), the maximumnumber of shares of Common Stock that may be issued pursuant to Awards under thePlan shall be 5,200,000. (b) Source of Shares. The Common Stock to be issued under this Planwill be made available, at the discretion of the Board or the Committee, eitherfrom authorized but unissued shares of Common Stock or from previously issuedshares of Common Stock reacquired by the Company, including shares purchased onthe open market. (c) Availability of Unused Shares. Shares of Common Stock subjectto unexercised portions of any Award granted under this Plan that expire,terminate or are cancelled, and shares of Common Stock issued pursuant to anAward under this Plan that are reacquired by the Company pursuant to the termsof the Award under which such shares were issued, will again become availablefor the grant of further Awards under this Plan. (d) Grant Limits. Notwithstanding any other provision of this Plan,no Eligible Person shall be granted Awards with respect to more than 600,000shares of Common Stock in any one calendar year; provided, however, that thislimitation shall not apply if it is not required in order for the compensationattributable to Incentive Awards hereunder to qualify as Performance-BasedCompensation. The limitation set forth in this Section 1.03(d) shall be subjectto adjustment as provided in Section 1.05(b), but only to the extent suchadjustment would not affect the status of compensation attributable to Awardshereunder as Performance-Based Compensation. 4 1.04 Administration of the Plan. (a) The Committee. The Plan will be administered by the Committee,which will consist of two or more members of the Board each of whom must be aNonemployee Director; provided, however, that the number of members of theCommittee may be reduced or increased from time to time by the Board. Inaddition, if Awards are to be made to persons subject to Section 162(m) of theCode and such awards are intended to constitute Performance-Based Compensation,then each of the Committee's members must also be an "outside director," as suchterm is defined in the regulations under Section 162(m) of the Code.Notwithstanding the foregoing or any provision of the Plan to the contrary, theBoard may, in lieu of the Committee, exercise any authority granted to theCommittee pursuant to the provisions of the Plan. (b) Authority of the Committee. The Committee has authority in itsdiscretion to select the Eligible Persons to whom, and the time or times atwhich, Incentive Awards shall be granted or sold, the nature of each IncentiveAward, the number of shares of Common Stock or the number of rights that make upor underlie each Incentive Award, the period for the exercise of each IncentiveAward, the performance criteria (which need not be identical) utilized tomeasure the value of Performance Awards, and such other terms and conditionsapplicable to each individual Incentive Award as the Committee shall determine.The Committee may grant at any time new Incentive Awards to an Eligible Personwho has previously received Incentive Awards or other grants (including otherstock options) whether such prior Incentive Awards or such other grants arestill outstanding, have previously been exercised in whole or in part, or arecancelled in connection with the issuance of new Incentive Awards. TheCommittee may grant Incentive Awards singly or in combination or in tandem withother Incentive Awards as it determines in its discretion. The purchase priceor initial value and any and all other terms and conditions of the IncentiveAwards may be established by the Committee without regard to existing IncentiveAwards or other grants. Further, the Committee may, with the consent of anEligible Person, amend in a manner not inconsistent with the Plan the terms ofany existing Incentive Award previously granted to such Eligible Person,provided that neither the Board nor the Committee shall reduce the ExercisePrice of any outstanding Option without stockholder approval. (c) Plan Interpretation. Subject to the express provisions of thePlan, the Committee has the authority to interpret the Plan and any agreementsdefining the rights and obligations of the Company and Recipients, to determinethe terms and conditions of Incentive Awards and to make all otherdeterminations necessary or advisable for the administration of the Plan. TheCommittee has authority to prescribe, amend and rescind rules and regulationsrelating to the Plan. All interpretations, determinations and actions by theCommittee shall be final, conclusive and binding upon all parties. Any actionof the Committee with respect to the administration of the Plan shall be takenpursuant to a majority vote or by the unanimous written consent of its members. (d) Special Rules Regarding Article III. Notwithstanding anythingherein to the contrary, the Committee shall have no authority or discretion asto the selection of persons eligible to receive Nonemployee Directors' Optionsgranted under the Plan, the number of shares covered by Nonemployee Directors'Options granted under the Plan, the timing of such grants, or 5the exercise price of Nonemployee Directors' Options granted under the Plan,which matters are specifically governed by the provisions of the Plan. (e) No Liability. No member of the Board or the Committee or anydesignee thereof will be liable for any action or determination made in goodfaith by the Board or the Committee with respect to the Plan or any transactionarising under the Plan. 1.05 Other Provisions. (a) Documentation. Each Award granted under the Plan shall beevidenced by an award agreement duly executed on behalf of the Company and bythe Recipient or, in the Committee's discretion, a confirming memorandum issuedby the Company to the Recipient (in either case an "Award Document") evidencingthe Award and setting forth such terms and conditions applicable to the Award asthe Committee may in its discretion determine consistent with the Plan, providedthat the Committee shall exercise no discretion with respect to NonemployeeDirectors' Options, which shall reflect only the terms of the Award as set forthin Article III and certain administrative matters dictated by the Plan. AwardDocuments shall comply with and be subject to the terms and conditions of thePlan. A copy of the Plan shall be delivered to each Award Recipient togetherwith the Award Document, and shall constitute a part thereof. In case of anyconflict between the Plan and any Award Document, the Plan shall control.Various Award Documents covering the same types of Awards may but need not beidentical. (b) Adjustment Provisions. If (1) the outstanding shares of Common Stock of the Company are increased,decreased or exchanged for a different number or kind of shares or othersecurities, or if additional shares or new or different shares or othersecurities are distributed in respect of such shares of Common Stock (or anystock or securities received with respect to such Common Stock), through merger,consolidation, sale or exchange of all or substantially all of the properties ofthe Company, reorganization, recapitalization, reclassification, stock dividend,stock split, reverse stock split, spin-off or other distribution with respect tosuch shares of Common Stock (or any stock or securities received with respect tosuch Common Stock), or (2) the value of the outstanding shares of Common Stockof the Company is reduced by reason of an extraordinary cash dividend, anappropriate and proportionate adjustment may be made in (x) the maximum numberand kind of shares subject to the Plan as provided in Section 1.03, (y) thenumber and kind of shares or other securities subject to then outstandingAwards, and (z) the price for each share or other unit of any other securitiessubject to then outstanding Awards. No fractional interests will be issuedunder the Plan resulting from any such adjustments. (c) Continuation of Employment. (i) Nothing contained in this Plan (or in Award Documents or in anyother documents related to this Plan or to Awards granted hereunder) shallconfer upon any Eligible Person or Recipient any right to continue in the employof the Company or constitute any contract or agreement of employment orengagement, or interfere in any way with the right of the Company to reduce suchperson's compensation or other benefits or to terminate the 6employment of such Eligible Person or Recipient, with or without cause. Exceptas expressly provided in the Plan or in any statement evidencing the grant of anAward pursuant to the Plan, the Company shall have the right to deal with eachRecipient in the same manner as if the Plan and any such statement evidencingthe grant of an Award pursuant to the Plan did not exist, including, withoutlimitation, with respect to all matters related to the hiring, discharge,compensation and conditions of the employment or engagement of the Recipient. (ii) Any question(s) as to whether and when there has been atermination of a Recipient's employment, the reason (if any) for suchtermination, and/or the consequences thereof under the terms of the Plan or anystatement evidencing the grant of an Award pursuant to the Plan shall bedetermined by the Committee and the Committee's determination thereof shall befinal and binding. (d) Restrictions. All Awards granted under the Plan shall besubject to the requirement that, if at any time the Company shall determine, inits discretion, that the listing, registration or qualification of the sharessubject to Awards granted under the Plan upon any securities exchange or underany state or federal law, or the consent or approval of any governmentregulatory body, is necessary or desirable as a condition of, or in connectionwith, the granting of such an Award or the issuance, if any, or purchase ofshares in connection therewith, such Award may not be exercised in whole or inpart unless such listing, registration, qualification, consent or approval shallhave been effected or obtained free of any conditions not acceptable to theCompany. Unless the shares of stock to be issued upon exercise of an Awardgranted under the Plan have been effectively registered under the SecuritiesAct, the Company shall be under no obligation to issue any shares of stockcovered by any Award unless the person who exercises such Award, in whole or inpart, shall give a written representation and undertaking to the Companysatisfactory in form and scope to counsel to the Company and upon which, in theopinion of such counsel, the Company may reasonably rely, that he or she isacquiring the shares of stock issued to him or her pursuant to such exercise ofthe Award for his or her own account as an investment and not with a view to, orfor sale in connection with, the distribution of any such shares of stock, andthat he or she will make no transfer of the same except in compliance with anyrules and regulations in force at the time of such transfer under the SecuritiesAct, or any other applicable law, and that if shares of stock are issued withoutsuch registration, a legend to this effect may be endorsed upon the securitiesso issued. (e) Additional Conditions. Any Incentive Award may also be subjectto such other provisions (whether or not applicable to any other Award orRecipient) as the Committee determines appropriate including, withoutlimitation, provisions to assist the Recipient in financing the purchase ofCommon Stock through the exercise of Stock Options, provisions for theforfeiture of or restrictions on resale or other disposition of shares of CommonStock acquired under any form of benefit, provisions giving the Company theright to repurchase shares of Common Stock acquired under any form of benefit inthe event the Recipient elects to dispose of such shares, and provisions tocomply with federal and state securities laws and federal and state income taxwithholding requirements. (f) Privileges of Stock Ownership. Except as otherwise set forthherein, a Recipient or a permitted transferee of an Award shall have no rightsas a shareholder with respect 7to any shares issuable or issued in connection with the Award until the date ofthe receipt by the Company of all amounts payable in connection with exercise ofthe Award and performance by the Recipient of all obligations thereunder. Statusas an Eligible Person shall not be construed as a commitment that any Award willbe granted under this Plan to an Eligible Person or to Eligible Personsgenerally. No person shall have any right, title or interest in any fund or inany specific asset (including shares of capital stock) of the Company by reasonof any Award granted hereunder. Neither this Plan (or any documents relatedhereto) nor any action taken pursuant hereto shall be construed to create atrust of any kind or a fiduciary relationship between the Company and anyperson. To the extent that any person acquires a right to receive an Awardhereunder, such right shall be no greater than the right of any unsecuredgeneral creditor of the Company. (g) Amendment and Termination of Plan: Amendment of IncentiveAwards. (i) The Board or the Committee may, insofar as permitted by law, fromtime to time suspend or discontinue the Plan or revise or amend it in anyrespect except that no such amendment shall alter or impair or diminish anyrights or obligations under any Award theretofore granted under the Plan withoutthe consent of the person to whom such Award was granted , and except that suchamendments shall be subject to stockholder approval to the extent (A) requiredto comply with the listing requirements imposed by any exchange or tradingsystem upon which the Company's securities trade or applicable provisions of orrules under the Code, or (B) the Board determines in good faith that suchamendments are material to stockholders. (ii) The Committee may from time to time, with the consent of aRecipient, make such modifications in the terms and conditions of an IncentiveAward as it deems advisable, including to accelerate or extend the vesting orexercise period of any Incentive Award, provided that performance conditions tovesting of Restricted Stock shall not be waived, and provided further thatneither the Board nor the Committee shall reduce the Exercise Price of anyoutstanding Option without stockholder approval. (iii) Except as otherwise provided in this Plan or in the applicableAward Document, no amendment, suspension or termination of the Plan will,without the consent of the Recipient, alter, terminate, impair or adverselyaffect any right or obligation under any Award previously granted under thePlan. (h) Nonassignability. No Award granted under the Plan shall beassignable or transferable except (i) by will or by the laws of descent anddistribution, or (ii) subject to the final sentence of this subsection (h), upondissolution of marriage pursuant to a qualified domestic relations order or, inthe discretion of the Committee and under circumstances that would not adverselyaffect the interests of the Company. During the lifetime of a Recipient, anAward granted to him or her shall be exercisable only by the Recipient (or theRecipient's permitted transferee) or his or her guardian or legalrepresentative. Notwithstanding the foregoing, Incentive Stock Options (orother Awards subject to transfer restrictions under the Code) may not beassigned or transferred in violation of Section 422(b)(5) of the Code (or anycomparable or successor provision) or the Treasury Regulations thereunder, andnothing herein is intended to allow such assignment or transfer. 8 (i) Other Compensation Plans. The adoption of the Plan shall notaffect any other stock option, incentive or other compensation plans in effectfor the Company, and the Plan shall not preclude the Company from establishingany other forms of incentive or other compensation for employees, directors, oradvisors of the Company. (j) Plan Binding on Successors. The Plan shall be binding upon thesuccessors and assigns of the Company. (k) Participation By Foreign Employees. Notwithstanding anything tothe contrary herein, the Committee may, in order to fulfill the purposes of thePlan, modify grants of Incentive Awards to Recipients who are foreign nationalsor employed outside of the United States to recognize differences in applicablelaw, tax policy or local custom. (l) Effective Date And Duration of Plan. Awards may be grantedunder the Plan until the tenth anniversary of the effective date of the Plan,whereupon the Plan shall terminate. No Awards may be granted during anysuspension of this Plan or after its termination. Notwithstanding theforegoing, each Award properly granted under the Plan shall remain in effectuntil such Award has been exercised or terminated in accordance with its termsand the terms of the Plan. ARTICLE II INCENTIVE AWARDS 2.01 Grants of Incentive Awards. Subject to the express provisionsof this Plan, the Committee may from time to time in its discretion select fromthe class of Eligible Persons those individuals to whom Incentive Awards may begranted pursuant to its authority as set forth in Section 1.04(b). EachIncentive Award shall be subject to the terms and conditions of the Plan andsuch other terms and conditions established by the Committee as are notinconsistent with the purpose and provisions of the Plan. One or more IncentiveAwards may be granted to any Eligible Person. 2.02 Stock Options. (a) Nature of Stock Options. Stock Options may be Incentive StockOptions or Nonqualified Stock Options. (b) Option Price. The exercise price per share for each Option(other than a Nonemployee Director's Option) (the "Exercise Price") shall bedetermined by the Committee at the date such Option is granted and shall not beless than the Fair Market Value of a share of Common Stock (or other securities,as applicable) at the time of grant, except that the Exercise Price for aNonqualified Stock Option may reflect a discount of up to 15% of the Fair MarketValue at the time of grant if the amount of such discount is expressly in lieuof a reasonable amount of salary or cash bonus. Notwithstanding the foregoing,however, in no event shall the exercise price be less than the par value of theshares of Common Stock subject to the Option, and the exercise price of anIncentive Stock Option shall be not less than such amount as is necessary toenable such Option to be treated as an "incentive stock option" within themeaning of Section 422 of the Code. 9 (c) Option Period and Vesting. Options (other than NonemployeeDirectors' Options) hereunder shall vest and may be exercised as determined bythe Committee, except that exercise of such Options after termination of theRecipient's employment shall be subject to Section 2.02(g). Each Option grantedhereunder (other than a Nonemployee Directors Option) and all rights orobligations thereunder shall expire on such date as shall be determined by theCommittee, but not later than ten years after the date the Option is granted andshall be subject to earlier termination as herein provided. The Committee mayin its discretion at any time and from time to time after the grant of an Option(other than a Nonemployee Director's Option) accelerate vesting of such Optionin whole or part by increasing the number of shares then purchasable, providedthat the total number of shares subject to such Option may not be increased. (d) Exercise of Options. Except as otherwise provided herein, anOption may become exercisable, in whole or in part, on the date or datesspecified by the Committee (or, in the case of Nonemployee Directors' Options,the Plan) at the time the Option is granted and thereafter shall remainexercisable until the expiration or earlier termination of the Option. NoOption shall be exercisable except in respect of whole shares, and fractionalshare interests shall be disregarded. Not less than 100 shares of stock (orsuch other amount as is set forth in the applicable option agreement) may bepurchased at one time unless the number purchased is the total number at thetime available for purchase under the terms of the Option. An Option shall bedeemed to be exercised when the Secretary of the Company receives written noticeof such exercise from the Recipient, together with payment of the exercise pricemade in accordance with Section 2.02(e). Upon proper exercise, the Companyshall deliver to the person entitled to exercise the Option or his or herdesignee a certificate or certificates for the shares of stock for which theOption is exercised. Notwithstanding any other provision of this Plan, theCommittee may impose, by rule and in option agreements, such conditions upon theexercise of Options (including, without limitation, conditions limiting the timeof exercise to specified periods) as may be required to satisfy applicableregulatory requirements, including without limitation Rule 16b-3 (or anysuccessor rule) under the Exchange Act and any applicable section of or ruleunder the Internal Revenue Code. (e) Exercise Price. The Exercise Price shall be payable upon theexercise of an Option by delivery of legal tender of the United States orpayment of such other consideration as the Committee may from time to time deemacceptable in any particular instance, including without limitation delivery ofcapital stock of the Company (delivered by or on behalf of the person exercisingthe Option or retained by the Company from the Common Stock otherwise issuableupon exercise and valued at Fair Market Value as of the exercise date) orsurrender of other Awards previously granted to the Recipient exercising theOption; provided, however, that the Committee may, in the exercise of itsdiscretion, (i) allow exercise of an Option in a broker-assisted or similartransaction in which the Exercise Price is not received by the Company untilimmediately after exercise, and/or (ii) allow the Company to loan the ExercisePrice to the person entitled to exercise the Option, if the exercise will befollowed by an immediate sale of some or all of the underlying shares and aportion of the sales proceeds is dedicated to full payment of the ExercisePrice. Any shares of Company stock or other non-cash consideration assigned anddelivered to the Company in payment or partial payment of the Exercise Pricewill be valued at Fair Market Value on the exercise date. No fractional shareswill be issued pursuant to the exercise of an Option. 10 (f) Limitation on Exercise of Incentive Stock Options. Theaggregate Fair Market Value (determined as of the respective date or dates ofgrant) of the Common Stock for which one or more options granted to anyRecipient under the Plan (or any other option plan of the Company or any of itssubsidiaries or affiliates) may for the first time become exercisable asIncentive Stock Options under the federal tax laws during any one calendar yearshall not exceed $100,000. Any Options granted as Incentive Stock Optionspursuant to the Plan in excess of such limitation shall be treated asNonqualified Stock Options. (g) Termination of Employment. (i) Termination for Cause. Except as otherwise provided in a writtenagreement between the Company and the Recipient, which may be entered into atany time before or after termination, in the event of a Just Cause Dismissal ofa Recipient all of the Recipient's unexercised Options, whether or not vested,shall expire and become unexercisable as of the date of such Just CauseDismissal. (ii) Termination other than for Cause. Subject to subsection (i)above and subsection (iii) below, and except as otherwise provided in a writtenagreement between the Company and the Recipient, which may be entered into atany time before or after termination, in the event of a Recipient's terminationof employment for: (A) any reason other than for Just Cause Dismissal, death, orPermanent Disability, or normal retirement, the Recipient's Options shall,whether or not vested, expire and become unexercisable as of the earlier of (1)the date such Options would expire in accordance with their terms if theRecipient remained employed or (2) three calendar months after the date oftermination in the case of Incentive Stock Options, or six months after the dateof termination, in the case of Nonqualified Stock Options. (B)death or Permanent Disability, the Recipient's unexercised Optionsshall, whether or not vested, expire and become unexercisable as of the earlierof (1) the date such Options would expire in accordance with their terms if theRecipient remained employed or (2) twelve (12) months after the date oftermination. (C) normal retirement, the Recipient's unexercised Options shall,whether or not vested, expire and become unexercisable as of the earlier of (A)the date such Options expire in accordance with their terms or (B) twenty-four(24) months after the date of retirement. (iii) Alteration of Exercise Periods. Notwithstanding anything to thecontrary in subsections (i) or (ii) above, the Committee may in its discretiondesignate such shorter or longer periods to exercise Options (other thanNonemployee Directors' Options) following a Recipient's termination ofemployment; provided, however, that any shorter periods determined by theCommittee shall be effective only if provided for in the instrument thatevidences the grant to the Recipient of such Options or if such shorter periodis agreed to in writing by the Recipient. Notwithstanding anything to thecontrary herein, Options shall be exercisable by a Recipient (or his successorin interest) following such Recipient's termination of 11employment only to the extent that installments thereof had become exercisableon or prior to the date of such termination; provided, however, that theCommittee, in its discretion, may elect to accelerate the vesting of all or anyportion of any Options that had not become exercisable on or prior to the dateof such termination. 2.03 Performance Awards. (a) Grant of Performance Award. The Committee shall determine theperformance criteria (which need not be identical and may be established on anindividual or group basis) governing Performance Awards, the terms thereof, andthe form and time of payment of Performance Awards. (b) Payment of Award; Limitation. Upon satisfaction of theconditions applicable to a Performance Award, payment will be made to theRecipient in cash or in shares of Common Stock valued at Fair Market Value or acombination of Common Stock and cash, as the Committee in its discretion maydetermine. Notwithstanding any other provision of this Plan, no Eligible Personshall be paid a Performance Award in excess of $1,000,000 in any one calendaryear; provided, however, that this limitation shall not apply if it is notrequired in order for the compensation attributable to the Performance Awardhereunder to qualify as Performance-Based Compensation. (c) Expiration of Performance Award. If any Recipient's employmentwith the Company is terminated for any reason other than normal retirement,death, or Permanent Disability prior to the time a Performance Award or anyportion thereof becomes payable, all of the Recipient's rights under the unpaidportion of the Performance Award shall expire and terminate unless otherwisedetermined by the Committee. In the event of termination of employment byreason of death, Permanent Disability or normal retirement, the Committee, inits discretion, may determine what portions, if any, of the Performance Awardshould be paid to the Recipient. 2.04 Restricted Stock. (a) Award of Restricted Stock. The Committee may grant awards ofRestricted Stock to Eligible Participants. The Committee shall determine thePurchase Price (if any), the terms of payment of the Purchase Price, therestrictions upon the Restricted Stock, and when such restrictions shall lapse,provided that the restriction period shall be at least one year forperformance-based grants and three years for non-performance-based grants. (b) Requirements of Restricted Stock. All shares of RestrictedStock granted or sold pursuant to the Plan will be subject to the followingconditions: (i) No Transfer. The shares may not be sold, assigned, transferred,pledged, hypothecated or otherwise disposed of, alienated or encumbered untilthe restrictions are removed or expire; (ii) Certificates. The Committee may require that the certificatesrepresenting Restricted Stock granted or sold to a Recipient pursuant to thePlan remain in the physical custody of an escrow holder or the Company until allrestrictions are removed or expire; 12 (iii)Restrictive Legends. Each certificate representing Restricted Stockgranted or sold to a Recipient pursuant to the Plan will bear such legend orlegends making reference to the restrictions imposed upon such Restricted Stockas the Committee in its discretion deems necessary or appropriate to enforcesuch restrictions; and (iv) Other Restrictions. The Committee may impose such otherconditions on Restricted Stock as the Committee may deem advisable including,without limitation, restrictions under the Securities Act, under the ExchangeAct, under the requirements of any stock exchange upon which such RestrictedStock or shares of the same class are then listed and under any blue sky orother securities laws applicable to such shares. (c) Rights of Recipient. Subject to the provisions of Section2.04(b) and any restrictions imposed upon the Restricted Stock, the Recipientwill have all rights of a stockholder with respect to the Restricted Stockgranted or sold to such Recipient under the Plan, including the right to votethe shares and receive all dividends and other distributions paid or made withrespect thereto. (d) Termination of Employment. Unless the Committee in itsdiscretion determines otherwise, upon a Recipient's termination of employmentfor any reason, all of the Recipient's Restricted Stock remaining subject torestrictions imposed pursuant to the Plan on the date of such termination ofemployment shall be repurchased by the Company at the Purchase Price (if any). 2.05 Stock Appreciation Rights. (a) Granting of Stock Appreciation Rights. The Committee mayapprove the grant to Eligible Persons of Stock Appreciation Rights, related orunrelated to Options, at any time. (b) SARs Related to Options. (i) A Stock Appreciation Right granted in connection with an Optiongranted under this Plan will entitle the holder of the related Option, uponexercise of the Stock Appreciation Right, to surrender such Option, or anyportion thereof to the extent unexercised, with respect to the number of sharesas to which such Stock Appreciation Right is exercised, and to receive paymentof an amount computed pursuant to Section 2.05(b)(iii). Such Option will, tothe extent surrendered, then cease to be exercisable. (ii) A Stock Appreciation Right granted in connection with an Optionhereunder will be exercisable at such time or times, and only to the extentthat, the related Option is exercisable, and will not be transferable except tothe extent that such related Option may be transferable. (iii) Upon the exercise of a Stock Appreciation Right related to anOption, the Holder will be entitled to receive payment of an amount determinedby multiplying: (i) the difference obtained by subtracting the Exercise Price ofa share of Common Stock specified in the related Option from the Fair MarketValue of a share of Common Stock on the date of exercise of such StockAppreciation Right (or as of such other date or as of the occurrence of 13such event as may have been specified in the instrument evidencing the grant ofthe Stock Appreciation Right), by (ii) the number of shares as to which suchStock Appreciation Right is exercised. (c) SARs Unrelated to Options. The Committee may grant StockAppreciation Rights unrelated to Options to Eligible Persons. Section2.05(b)(iii) shall be used to determine the amount payable at exercise undersuch Stock Appreciation Right, except that in lieu of the Option Exercise Pricespecified in the related Option the initial base amount specified in theIncentive Award shall be used. (d) Limits. Notwithstanding the foregoing, the Committee, in itsdiscretion, may place a dollar limitation on the maximum amount that will bepayable upon the exercise of a Stock Appreciation Right under the Plan. (e) Payments. Payment of the amount determined under the foregoingprovisions may be made solely in whole shares of Common Stock valued at theirFair Market Value on the date of exercise of the Stock Appreciation Right or,alternatively, at the sole discretion of the Committee, in cash or in acombination of cash and shares of Common Stock as the Committee deems advisable.The Committee has full discretion to determine the form in which payment of aStock Appreciation Right will be made and to consent to or disapprove theelection of a Recipient to receive cash in full or partial settlement of a StockAppreciation Right. If the Committee decides to make full payment in shares ofCommon Stock, and the amount payable results in a fractional share, payment forthe fractional share will be made in cash. (f) Rule 16b-3. The Committee may, at the time a Stock AppreciationRight is granted, impose such conditions on the exercise of the StockAppreciation Right as may be required to satisfy the requirements of Rule 16b-3under the Exchange Act (or any other comparable provisions in effect at the timeor times in question). (g) Termination of Employment. Section 2.02(g) will govern thetreatment of Stock Appreciation Rights upon the termination of a Recipient'semployment with the Company. 2.06 Stock Payments. The Committee may approve Stock Payments of the Company's Common Stock toany Eligible Person for all or any portion of the compensation (other than basesalary) or other payment that would otherwise become payable by the Company tothe Eligible Person in cash. 2.07 Dividend Equivalents. The Committee may grant Dividend Equivalents to any Recipient who hasreceived a Stock Option, SAR, or other Incentive Award denominated in shares ofCommon Stock. Such Dividend Equivalents shall be effective and shall entitlethe recipients thereof to payments during the "Applicable Dividend Period,"which shall be (i) the period between the date the Dividend Equivalent isgranted and the date the related Stock Option, SAR, or other Incentive Award isexercised, terminates, or is converted to Common Stock, or (ii) such other timeas the Committee may specify in the written instrument evidencing the grant ofthe Dividend Equivalent. Dividend Equivalents may be paid in cash, Common Stock,or other 14Incentive Awards; the amount of Dividend Equivalents paid other than in cashshall be determined by the Committee by application of such formula as theCommittee may deem appropriate to translate the cash value of dividends paid tothe alternative form of payment of the Dividend Equivalent. DividendEquivalents shall be computed as of each dividend record date and shall bepayable to recipients thereof at such time as the Committee may determine.Notwithstanding the foregoing, if it is intended that an Incentive Award qualifyas Performance-Based Compensation and the amount of the compensation theEligible Person could receive under the award is based solely on an increase invalue of the underlying stock after the date of grant or award (i.e., the grant,vesting, or exercisability of the award is not conditioned upon the attainmentof a preestablished, objective performance goal described in Section 1.02(t)),then the payment of any Dividend Equivalents related to the award shall not bemade contingent on the exercise of the award. ARTICLE III NONEMPLOYEE DIRECTOR'S OPTIONS 3.01 Grants of Initial Options. Each Nonemployee Director shall, upon first becoming a NonemployeeDirector, receive a one-time grant of a Nonemployee Director's Option topurchase up to 40,000 shares of the Company's Common Stock at an exercise priceper share equal to the Fair Market Value of the Company's Common Stock on thedate of grant, subject to (i) vesting as set forth in Section 3.04, and (ii)adjustment as set forth in Section 1.05(b). Options granted under this Section3.01 are "Initial Options" for purposes hereof. 3.02 Grants of Additional Options. Immediately following the annual meeting of stockholders of the Companynext following a Nonemployee Director becoming such, and immediately followingeach subsequent annual meeting of stockholders of the Company, in each case ifthe Nonemployee Director has served as a director since his or her election orappointment and has been re-elected as a director at such annual meeting or iscontinuing as a director without being re-elected due to the classification ofthe Board, such Nonemployee Director shall automatically receive an option topurchase up to 10,000 shares of the Company's Common Stock at an exercise priceper share equal to the Fair Market Value of the Company's Common Stock on thedate of grant, subject to (a) vesting as set forth in Section 3.04, and (b)adjustment as set forth in Section 1.05(b). Options granted under this Section3.02 are "Additional Options" for purposes hereof. 3.03 Exercise Price. The exercise price for Nonemployee Directors' Options shall be payable asset forth in Section 2.02(e). Neither the Board nor the Committee shall reducethe exercise price of any outstanding Initial Option or Additional Optionwithout stockholder approval. 3.04 Vesting and Exercise. Initial Options shall vest and become exercisable with respect to 25% ofthe underlying shares on the grant date and with respect to an additional 25% ofthe underlying 15shares on the dates of each of the first three annual meetings of the Company'sstockholders following the grant date, but only if on the date of each suchannual meeting, the Recipient is continuing as a director of the Company for theensuing year, provided, however, that if the grant date is within six months ofthe ensuing annual meeting of the Company's stockholders, then after vesting ofthe Option with respect to 25% of the underlying shares on the grant date, theOption will vest with respect to an additional 25% of the underlying shares onthe dates of each of the second, third, and fourth annual meetings of theCompany's stockholders following the grant date, but only if, on the date ofeach such annual meeting, the Recipient is continuing as a director for theensuing year. Additional Options shall vest and become exercisable upon theearlier of (a) the first anniversary of the grant date or (b) immediately priorto the annual meeting of stockholders of the Company next following the grantdate, if the optionee has remained a director for the entire period from thedate of grant to such earlier date. Notwithstanding the foregoing, however,Initial Options and Additional Options that have not vested and becomeexercisable at the time the optionee ceases to be a director shall terminate. 3.05 Term of Options and Effect of Termination. No Nonemployee Directors' Option shall be exercisable after the expirationof ten years from the effective date of its grant. In the event that theRecipient of a Nonemployee Director's Option shall cease to be a director of theCompany, all Nonemployee Directors' Options granted to such Recipient shall beexercisable, to the extent already exercisable at the date such Recipient ceasesto be a director and regardless of the reason the Recipient ceases to be adirector, for a period of five (5) years after that date (or, if sooner, untilthe expiration of the option according to its terms). In the event of the deathof a Recipient of a Nonemployee Director's Option while such Recipient is adirector of the Company or within the period after termination of such statusduring which he or she is permitted to exercise such Option, such Option may beexercised by any person or persons designated by the Recipient on a BeneficiaryDesignation Form adopted by the Company for such purpose or, if there is noeffective Beneficiary Designation Form on file with the Company, by theexecutors or administrators of the Recipient's estate or by any person orpersons who shall have acquired the option directly from the Recipient by his orher will or the applicable laws of descent and distribution. ARTICLE IV RECAPITALIZATIONS AND REORGANIZATIONS 4.01 Corporate Transactions. If the Company shall be the surviving corporation in any merger orconsolidation, each outstanding Option shall pertain and apply to the securitiesto which a holder of the same number of shares of Common Stock that are subjectto that Option would have been entitled. In the event of a Change in Control(as defined below), all Nonemployee Directors' Options and any Incentive Awardsspecified by the Committee or the Board shall immediately vest and becomeexercisable, and all conditions thereto shall be deemed to have been met. Forpurposes hereof, a "Change in Control" means the following and shall be deemedto occur if any of the following events occur: 16 (i) Except as provided by subsection (iii) hereof, the acquisition (otherthan from the Company) by any person, entity or "group," within the meaning ofSection 13(d)(3) or 14(d)(2) of the Exchange Act (excluding, for this purpose,the Company or its subsidiaries, or any employee benefit plan of the Company orits subsidiaries which acquires beneficial ownership of voting securities of theCompany), of beneficial ownership (within the meaning of Rule 13d-3 promulgatedunder the Exchange Act) of forty percent (40%) or more of either the thenoutstanding shares of Common Stock or the combined voting power of the Company'sthen outstanding voting securities entitled to vote generally in the election ofdirectors; or (ii) Individuals who, as of the effective date of the Plan, constitute theBoard of Directors of the Company (the "Incumbent Board") cease for any reasonto constitute at least a majority of the Board of Directors of the Company,provided that any person becoming a director subsequent to the date hereof whoseelection, or nomination for election by the Company's shareholders, is or wasapproved by a vote of at least a majority of the directors then comprising theIncumbent Board (other than an election or nomination of an individual whoseinitial assumption of office is in connection with an actual or threatenedelection contest relating to the election of the directors of the Company, assuch terms are used in Rule 14a-11 of Regulation 14A promulgated under theExchange Act) shall be, for purposes of this Agreement, considered as thoughsuch person were a member of the Incumbent Board; or (iii) Approval by the stockholders of the Company of a reorganization,merger or consolidation with any other person, entity or corporation, other than (A)a merger or consolidation which would result in the voting securitiesof the Company outstanding immediately prior thereto continuing to represent(either by remaining outstanding or by being converted into voting securities ofanother entity) more than fifty percent (50%) of the combined voting power ofthe voting securities of the Company and such other entity outstandingimmediately after such merger or consolidation, or (B)a merger or consolidation effected to implement a recapitalization ofthe Company (or similar transaction) in which no person acquires forty percent(40%) or more of the combined voting power of the Company's then outstandingvoting securities; or (iv) Approval by the stockholders of the Company of a plan of completeliquidation of the Company or an agreement for the sale or other disposition bythe Company of all or substantially all of the Company's assets. 17Notwithstanding the preceding provisions of this Section 4.01, a Change inControl shall not be deemed to have occurred (l) if the "person" described inthe preceding provisions of this Section 4.01 is an underwriter or underwritingsyndicate that has acquired the ownership of 50% or more of the combined votingpower of the Company's then outstanding voting securities solely in connectionwith a public offering of the Company's securities, or (2) if the "person"described in the preceding provisions of this Paragraph is an employee stockownership plan or other employee benefit plan maintained by the Company that isqualified under the provisions of the Employee Retirement Income Security Act of1974, as amended. 4.02 Determination by the Committee. To the extent that the foregoing adjustments relate to stock or securitiesof the Company, such adjustments shall be made by the Committee, whosedetermination in that respect shall be final, binding and conclusive. The grantof an Option pursuant to the Plan shall not affect in any way the right or powerof the Company to make adjustments, reclassifications, reorganizations orchanges of its capital or business structure or to merge or to consolidate or todissolve, liquidate or sell, or transfer all of any part of its business orassets. 18 EXHIBIT 10.20 Amended in July 1996 to reduce the employment requirement for EligibleEmployees to 180 days and to coordinate Offering and Purchase Periods with LJP'sfiscal calendar. Amended in September 1996 to clarify the determination of FairMarket Value and Purchase Price. Amended in May 2000, with stockholder vote, toincrease the number of shares available under the Plan by 200,000. Amended July2000 to change the Purchase Periods to a quarterly period instead of asemi-annual period. Amended in September 2000 to eliminate any requirement thatan employee be employed 180 days prior to enrolling in an offering period and todouble the number of Offering Periods, by having 24-month offering periods beginevery calendar quarter. Amended and restated on March 19, 2001. Amended onFebruary 9, 2001 by Board, subject to stockholder approval, to increase theavailable shares by 300,000. Increase in available shares approved bystockholders on May 18, 2001. LA JOLLA PHARMACEUTICAL COMPANY 1995 EMPLOYEE STOCK PURCHASE PLAN The following constitutes the provisions of the La Jolla PharmaceuticalCompany 1995 Employee Stock Purchase Plan (as amended and restated effectiveMarch 19, 2001) (the "Plan").1. Purpose. The purpose of the Plan is to maintain competitive equity compensationprograms and to provide employees of La Jolla Pharmaceutical Company (the"Company") with an opportunity and incentive to acquire a proprietary interestin the Company through the purchase of the Company's Common Stock, thereby moreclosely aligning the interests of the Company's employees and stockholders. Itis the intention of the Company to have the Plan qualify as an "Employee StockPurchase Plan" under Section 423 of the Internal Revenue Code of 1986, asamended ("Section 423"). Accordingly, the provisions of the Plan shall beconstrued to extend and limit participation consistent with the requirements ofSection 423.2. Definitions. Capitalized terms used in this Plan and not otherwise defined have themeanings set forth below. "Administrator" means the Committee, or the Board if the Board assertsadministrative authority over the Plan pursuant to Section 13. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means a committee of members of the Board meeting thequalifications described in Section 13 and appointed by the Board to administerthe Plan. "Common Stock" shall mean the Common Stock of the Company. "Compensation" means base salary or hourly compensation and any cash bonuspaid to a participant. "Eligible Employee" means any employee of the Company whose customaryemployment is for more than five months per calendar year and for more than 20hours per week. For purposes of the Plan, the employment relationship shall betreated as continuing while the individual is on sick leave or other leave ofabsence approved by the Company, except that when the period of leave exceeds 90days and the individual's right to reemployment is not guaranteed either bystatute or by contract, the employment relationship will be deemed to haveterminated on the 91st day of such leave. "Enrollment Date" means the first day of each Offering Period. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Date" means the last day of each Purchase Period. "Fair Market Value" of the Common Stock as of the time of any determinationthereof means the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchangeor trades on the Nasdaq National Market, its Fair Market Value shall be the mostrecent closing sales price for such stock (or the closing bid, if no sales werereported), as quoted on such exchange or system (or the exchange or system withthe greatest volume of trading in the Common Stock) as of the time of suchdetermination as reported in the Wall Street Journal or such other source as theAdministrator deems reliable; or (2) If the Common Stock is not listed on any established stock exchangeor traded on the Nasdaq National Market its Fair Market Value shall be the meanbetween the most recent closing high and low asked prices for the Common Stockas of the time of such determination, as reported in the Wall Street Journal orsuch other source as the Administrator deems reliable; or (3) In the absence of an established market for the Common Stock, theFair Market Value of the Common Stock shall be determined in good faith by theAdministrator. "Offering Period" means (i) the period of twenty-three (23) monthscommencing on August 1, 1996 and terminating on June 30, twenty-three (23)months later; (ii) each period of twenty-four (24) months commencing on January1, 1997 and each January 1 thereafter for the duration of the Plan andterminating on the December 31 twenty-four (24) months later; (iii) each periodof twenty-four (24) months commencing on July 1, 1997 and each July 1 thereafterfor the duration of the Plan and terminating on the June 30 twenty-four (24)months later; (iv) each period of twenty-four (24) months commencing on October1, 2000 and each October 1 thereafter for the duration of the Plan andterminating on the September 30 twenty-four (24) months later; and (v) eachperiod of twenty-four (24) months commencing on April 1, 2001 and each April 1thereafter for the duration of the Plan and terminating on the March 31twenty-four (24) months later. The Administrator shall have the power to changethe duration of Offering Periods without stockholder approval as set forth inSection 12 or if such change is announced at least fifteen (15) days prior tothe scheduled beginning of the first Offering Period to be affected. 2 "Option" means the option granted to each participant pursuant to Section 4upon enrollment in an Offering Period. "Periodic Exercise Limit" has the meaning set forth in Section 4(a). "Plan Account" means an account maintained by the Company for eachparticipant in the Plan, to which are credited the payroll deductions made forsuch participant pursuant to Section 5 and from which are debited amounts paidfor the purchase of shares upon exercise of such participant's Option pursuantto Section 6. "Purchase Price" as of any Exercise Date means an amount equal to 85% ofthe Fair Market Value of a share of Common Stock as of the close of business onthe Exercise Date or the opening of business on the Enrollment Date for theOffering Period in which such Exercise Date occurs, whichever is lower. "Purchase Period" means (i) the period of five (5) months commencing onAugust 1, 1996 and ending on December 31, 1996; (ii) with respect to theOffering Periods beginning on January and July 1, 1997, January and July 1,1998, and January 1, 1999, each period of six (6) months within any suchOffering Period, commencing January 1, 1997 and each July 1 and January 1thereafter, and ending on the December 31 or June 30 following such commencementdate; (iii) with respect to the Offering Period beginning on July 1, 1999, theperiod of six (6) months commencing July 1, 1999 and ending on December 31,1999, the period of six (6) months commencing on January 1, 2000 and ending onJune 30, 2000, the period of six (6) months commencing on July 1, 2000 andending on December 31, 2000, the period of three (3) months commencing onJanuary 1, 2001 and ending on March 31, 2001, and the period of three (3) monthscommencing on April 1, 2001 and ending on June 30, 2001, (iv) with respect tothe Offering Period beginning on January 1, 2000, the period of six (6) monthscommencing on January 1, 2000 and ending on June 30, 2000, the period of six (6)months commencing on July 1, 2000 and ending on December 31, 2000, and eachperiod of three (3) months commencing on January 1, 2001 and each April 1, July1, and October 1 thereafter, and ending on the March 31, June 30, September 30and December 31 following such commencement date; (v) with respect to theOffering Period beginning on July 1, 2000, the period of six (6) monthscommencing on July 1, 2000 and ending on December 31, 2000, and each period ofthree (3) months commencing on January 1, 2001 and each April 1, July 1, andOctober 1 thereafter, and ending on the March 31, June 30, September 30 andDecember 31 following such commencement date; and (vi) for any Offering Periodcommencing on or after October 1, 2000, each period of three (3) months withinthe Offering Period commencing on October 1, 2000 and each January 1, April 1,July 1, and October 1 thereafter, and ending on the December 31, March 31, June30, and September 30 following such commencement date. "Reserves" means the number of shares of Common Stock covered by eachOption that has not yet been exercised and the number of shares of Common Stockthat have been authorized for issuance under the Plan, but not yet placed underany Option. "Rule 16b-3" means Rule 16b-3 under the Exchange Act and any successorprovision. "Subsidiary" has the meaning as set forth under SS 424(f) of the Code. 3 "Trading Day" means a day on which national stock exchanges and theNational Association of Securities Dealers Automated Quotation System are openfor trading.3. Offering Periods and Participation. The Plan shall be implemented through a series of consecutive andoverlapping Offering Periods. An Eligible Employee may enroll in an OfferingPeriod by delivering a subscription agreement in the form of Exhibit A hereto tothe Company's payroll office at least five (5) business days prior to theEnrollment Date for that Offering Period. Eligible Employees shall participatein only one Offering Period at a time, and a subscription agreement in effectfor a Plan participant for a particular Offering Period shall continue in effectfor subsequent Offering Periods if the participant remains an Eligible Employeeand has not withdrawn pursuant to Section 8.4. Options. (a) Grants. On the Enrollment Date for each Offering Period, eachEligible Employee participating in such Offering Period shall be granted anOption to purchase (i) on each Exercise Date for any six-month Purchase Periodin such Offering Period (at the applicable Purchase Price) up to that number ofshares of Common Stock determined by dividing $12,500 by the Fair Market Valueof a share of Common Stock as of the opening of business on the Enrollment Date,and (ii) on each Exercise Date for any three-month Purchase Period in suchOffering Period (at the applicable Purchase Price) up to that number of sharesof Common Stock determined by dividing $6,250 by the Fair Market Value of ashare of Common Stock as of the opening of business on the Enrollment Date(such number of shares being the "Periodic Exercise Limit"). The Option shallexpire immediately after the last Exercise Date of the Offering Period. (b) Grant Limitations. Any provisions of the Plan to the contrarynotwithstanding, no participant shall be granted an Option under the Plan: (i) if, immediately after the grant, such participant (or any otherperson whose stock would be attributed to such participant pursuant to Section424(d) of the Code) would own stock and/or hold outstanding options to purchasestock possessing five percent (5%) or more of the total combined voting power orvalue of all classes of stock of the Company or of any Subsidiary; or (ii) which permits such participant's rights to purchase stock underall employee stock purchase plans of the Company and its Subsidiaries to accrueat a rate that exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock(determined at the Fair Market Value of the shares at the time such Option isgranted) in any calendar year. (c) No Rights in Respect of Underlying Stock. The participant willhave no interest or voting right in shares covered by an Option until suchOption has been exercised. 45. Payroll Deductions. (a) Participant Designations. The subscription agreement applicableto an Offering Period shall designate payroll deductions to be made on eachpayday during the Offering Period as a whole number percentage not exceeding tenpercent (10%) of such Eligible Employee's Compensation for the pay periodpreceding such payday, provided that the aggregate of such payroll deductionsduring the Offering Period shall not exceed ten percent (10%) of theparticipant's Compensation during said Offering Period. (b) Plan Account Balances. The Company shall make payrolldeductions as specified in each participant's subscription agreement on eachpayday during the Offering Period and credit such payroll deductions to suchparticipant's Plan Account. A participant may not make any additional paymentsinto such Plan Account. No interest will accrue on any payroll deductions. Allpayroll deductions received or held by the Company under the Plan may be used bythe Company for any corporate purpose, and the Company shall not be obligated tosegregate such payroll deductions. (c) Participant Changes. A participant may discontinue his or herparticipation in the Plan as provided in Section 8, or may increase or decrease(subject to such limits as the Administrator may impose) the rate of his or herpayroll deductions during any Purchase Period by filing with the Company a newsubscription agreement authorizing such a change in the payroll deduction rate.The change in rate shall be effective with the first full payroll periodfollowing five (5) business days after the Company's receipt of the newsubscription agreement, unless the Company elects to process a given change inparticipation more quickly. (d) Decreases. Notwithstanding the foregoing, to the extentnecessary to comply with Section 423(b)(8) of the Code and Section 4(b) herein,a participant's payroll deductions may be decreased to 0% at such time duringany Purchase Period that is scheduled to end during a calendar year (the"Current Purchase Period") when the aggregate of all payroll deductionspreviously used to purchase stock under the Plan in a prior Purchase Periodwhich ended during that calendar year plus all payroll deductions accumulatedwith respect to the Current Purchase Period equal $21,250. Payroll deductionsshall recommence at the rate provided in such participant's subscriptionagreement at the beginning of the first Purchase Period that is scheduled to endin the following calendar year, unless terminated by the participant as providedin Section 8. (e) Tax Obligations. At the time of each exercise of aparticipant's Option, and at the time any Common Stock issued under the Plan toa participant is disposed of, the participant must adequately provide for theCompany's federal, state, or other tax withholding obligations, if any, thatarise upon the exercise of the Option or the disposition of the Common Stock.At any time, the Company may, but will not be obligated to, withhold from theparticipant's compensation the amount necessary for the Company to meetapplicable withholding obligations, including any withholding required to makeavailable to the Company any tax deductions or benefit attributable to sale orearly disposition of Common Stock by the participant. (f) Statements of Account. The Company shall maintain eachparticipant's Plan Account and shall give each Plan participant a statement ofaccount at least annually. Such statements will set forth the amounts ofpayroll deductions, the Purchase Price, the number of shares purchased and theremaining cash balance, if any, for the period covered. 56. Exercise of Options. (a) Automatic Exercise on Exercise Dates. Unless a participantwithdraws as provided in Section 8, his or her Option for the purchase of shareswill be exercised automatically on each Exercise Date within the Offering Periodin which such participant is enrolled for the maximum number of shares of CommonStock, including fractional shares, as can then be purchased at the applicablePurchase Price with the payroll deductions accumulated in such participant'sPlan Account and not yet applied to the purchase of shares under the Plan,subject to the Periodic Exercise Limit. During a participant's lifetime, aparticipant's Options to purchase shares hereunder are exercisable only by theparticipant. (b) Delivery of Shares. As promptly as practicable after eachExercise Date on which a purchase of shares occurs, the Company shall arrangethe delivery to each participant, as appropriate, of a certificate or book entrytransfer representing the shares purchased upon exercise of his or her Option,provided that the Company may in its discretion hold fractional shares for theaccounts of the participants pending aggregation to whole shares. (c) Compliance with Law. Shares shall not be issued with respect toan Option unless the exercise of such Option and the issuance and delivery ofsuch shares pursuant thereto comply with all applicable provisions of law,domestic or foreign, including, without limitation, the Securities Act of 1933,as amended, the Exchange Act, the rules and regulations promulgated thereunder,and the requirements of any stock exchange upon which the shares may then belisted, and shall be further subject to the approval of counsel for the Companywith respect to such compliance. As a condition to the exercise of an Option,the Company may require the participant for whom an Option is exercised torepresent and warrant at the time of any such exercise that the shares are beingpurchased only for investment and without any present intention to sell ordistribute such shares if, in the opinion of counsel for the Company, such arepresentation is required by any of the aforementioned applicable provisions oflaw. Shares issued upon purchase under the Plan may be subject to such transferrestrictions and stop-transfer instructions as the Administrator deemsappropriate. (d) Excess Plan Account Balances. If, due to application of thePeriodic Exercise Limit, there remains in a participant's Plan Accountimmediately following exercise of such participant's Option on an Exercise Dateany cash accumulated during the Purchase Period immediately preceding suchExercise Date and not applied to the purchase of shares under the Plan, suchcash shall promptly be returned to the participant.7. Automatic Transfer to Low Price Offering Period. If the Fair Market Value of the Common Stock as of the close of business onany Exercise Date is lower than the Fair Market Value of the Common Stock as ofthe opening of business on the Enrollment Date for the Offering Period in whichsuch Exercise Date occurs, then all participants in such Offering Period shallbe automatically withdrawn from such Offering Period immediately after theexercise of their Options on such Exercise Date and automatically re-enrolled inthe immediately following Offering Period as of the first day thereof. 68. Withdrawal; Termination of Employment. (a) Voluntary Withdrawal. A participant may withdraw from anOffering Period by giving written notice to the Company's payroll office atleast five (5) business days prior to the next Exercise Date. Such withdrawalshall be effective beginning five business days after receipt by the Company'spayroll office of notice thereof. On or promptly following the effective dateof any withdrawal, all (but not less than all) of the withdrawing participant'spayroll deductions credited to his or her Plan Account and not yet applied tothe purchase of shares under the Plan will be paid to such participant, and onthe effective date of such withdrawal such participant's Option for the OfferingPeriod will be automatically terminated, and no further payroll deductions forthe purchase of shares will be made during the Offering Period. If aparticipant withdraws from an Offering Period, payroll deductions will notresume at the beginning of any succeeding Offering Period unless the participantdelivers to the Company a new subscription agreement with respect thereto. (b) Termination of Employment. Promptly after a participant'sceasing to be an Eligible Employee for any reason the payroll deductionscredited to such participant's Plan Account and not yet applied to the purchaseof shares under the Plan will be returned to such participant or, in the case ofhis or her death, to the person or persons entitled thereto under Section 10,and such participant's Option will be automatically terminated, provided that,if the Company does not learn of such death more than five (5) business daysprior to an Exercise Date, payroll deductions credited to such participant'sPlan account may be applied to the purchase of shares under the Plan on suchExercise Date.9. Transferability. Neither payroll deductions credited to a participant's Plan Account nor anyrights with regard to the exercise of an Option or to receive shares under thePlan nor any Option itself may be assigned, transferred, pledged or otherwisedisposed of by the participant in any way other than by will, the laws ofdescent and distribution or as provided in Section 10 hereof. Any such attemptat assignment, transfer, pledge or other disposition shall be without effect,except that the Administrator may treat such act as an election to withdraw froman Offering Period in accordance with Section 8.10. Designation of Beneficiary. A participant may file a written designation of a beneficiary who is toreceive any cash from the participant's Plan Account in the event of suchparticipant's death and any shares purchased for the participant upon exerciseof his or her Option but not yet issued. If a participant is married and thedesignated beneficiary is not the spouse, spousal consent may be required forsuch designation to be effective. A designation of beneficiary may be changedby a participant at any time by written notice. In the event of the death of aparticipant and in the absence of a beneficiary validly designated under thePlan who is living at the time of such participant's death, the Company shalldeliver such shares and/or cash to the executor or administrator of the estateof the participant, or if no such executor or administrator has been appointed(to the knowledge of the Company), the Company, in its discretion, may deliversuch shares and/or cash to the spouse or to any one or more dependents orrelatives of the participant, or if no spouse, dependent or relative is known tothe Company, then to such other person as the Company may designate. 711. Stock. The maximum number of shares of the Company's Common Stock that shall bemade available for sale under the Plan shall be 800,000 shares, subject toadjustment upon changes in capitalization of the Company as provided in Section12. If on a given Enrollment Date or Exercise Date the number of shares withrespect to which Options are to be granted or exercised exceeds the number ofshares then available under the Plan, the Administrator shall make a pro rataallocation of the shares remaining available for purchase in as uniform a manneras shall be practicable and as it shall determine to be equitable. Shares ofCommon Stock subject to unexercised Options that expire, terminate or arecancelled will again become available for the grant of further Options under thePlan.12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action bythe stockholders of the Company, the Reserves as well as the Purchase Price,Periodic Exercise Limit, and other characteristics of the Options, shall beappropriately and proportionately adjusted for any increase or decrease orexchange in the issued shares of Common Stock resulting from a stock split,reverse stock split, stock dividend, combination or reclassification of theCommon Stock, exchange or any other increase or decrease in the number of sharesof Common Stock effected without receipt of consideration by the Company;provided, however, that conversion of any convertible securities of the Companyshall not be deemed to have been "effected without receipt of consideration."Such adjustment shall be made by the Administrator, whose determination in thatrespect shall be final, binding and conclusive. Except as expressly providedherein, no issuance by the Company of shares of stock of any class, orsecurities convertible into shares of stock of any class, shall affect, and noadjustment by reason thereof shall be made with respect to, the number or priceof shares of Common Stock subject to an Option. The Administrator may, if it sodetermines in the exercise of its sole discretion, provide for adjusting theReserves, as well as the Purchase Price, Periodic Exercise Limit, and othercharacteristics of the Options, in the event the Company effects one or morereorganizations, recapitalizations, rights offerings or other increases orreductions of shares of its outstanding Common Stock. (b) Dissolution or Liquidation. In the event of the proposeddissolution or liquidation of the Company, all pending Offering Periods willterminate immediately prior to the consummation of such proposed action, unlessotherwise provided by the Administrator, and all Plan Account balances will bepaid to participants as appropriate consistent with applicable law. (c) Merger or Asset Sale. In the event of a proposed sale of all orsubstantially all of the assets of the Company, or the merger or othercombination (the "Transaction") of the Company with or into another entity, eachOption under the Plan shall be assumed or an equivalent option shall besubstituted by such successor entity or a parent or subsidiary of such successorentity, unless the Administrator determines, in the exercise of its solediscretion and in lieu of such assumption or substitution, to shorten theOffering Periods then in progress by setting a new Exercise Date (the "NewExercise Date"). If the Administrator shortens the Offering Periods then inprogress in lieu of assumption or substitution, the Administrator shall notifyeach participant in writing, at least ten (l0) days prior to the New ExerciseDate, that the Exercise Date for such participant's Option has been changed tothe New Exercise Date and that such participant's Option will be exercisedautomatically on the New Exercise Date, unless prior to such date theparticipant has 8withdrawn from the Offering Period as provided in Section 8 (provided that, insuch case, the participant's withdrawal shall be effective if notice thereof isdelivered to the Company's payroll office at least two (2) business days priorto the New Exercise Date). For purposes of this Section, an Option grantedunder the Plan shall be deemed to be assumed if, following the Transaction theOption confers the right to purchase at the Purchase Price (provided that forsuch purposes the Fair Market Value of the Common Stock on the New Exercise Dateshall be the value per share of the consideration paid in the Transaction), foreach share of stock subject to the Option immediately prior to the Transaction,the consideration (whether stock, cash or other securities or property) receivedin the Transaction by holders of Common Stock for each share of Common Stockheld on the effective date of the transaction (and if such holders were offereda choice of consideration, the type of consideration chosen by the holders of amajority of the outstanding shares of Common Stock); provided, however, that ifsuch consideration received in the Transaction was not solely common equity ofthe successor entity or its parent (as defined in Section 424(e) of the Code),the Administrator may, with the consent of the successor entity and theparticipant, provide for the consideration to be received upon exercise of theOption to be solely common equity of the successor entity or its parent equal infair market value to the per share consideration received by holders of CommonStock in the Transaction.13. Administration. The Plan shall be administered by the Committee, which shall have theauthority to construe, interpret and apply the terms of the Plan and anyagreements defining the rights and obligations of the Company and participantsunder the Plan, to prescribe, amend, and rescind rules and regulations relatingto the Plan, to determine eligibility and to adjudicate all disputed claimsfiled under the Plan, and to make all other determinations necessary oradvisable for the administration of the Plan. The Administrator may, in itsdiscretion, delegate ministerial responsibilities under the Plan to the Company.Every finding, decision and determination made by the Committee shall, to thefull extent permitted by law, be final and binding upon all parties. Any actionof the Committee shall be taken pursuant to a majority vote or by the unanimouswritten consent of its members. The Committee shall consist of three or moremembers of the Board, each of whom shall be disinterested within the meaning ofRule 16b-3, provided, however, that the number of members of the Committee maybe reduced or increased from time to time by the Board to the number required orallowed by Rule 16b-3. The Board may from time to time in its discretionexercise any responsibilities or authority allocated to the Committee under thePlan. No member of the Committee or any designee thereof will be liable for anyaction or determination made in good faith with respect to the Plan or anytransaction arising under the Plan.14. Amendment or Termination. (a) Administrator's Discretion. The Administrator may, at any timeand for any reason, terminate or amend the Plan. Except as provided in Section12, no such termination can affect Options previously granted, provided that anOffering Period may be terminated by the Administrator on any Exercise Date ifthe Administrator determines that such termination is in the best interests ofthe Company and its stockholders. Except as provided herein, no amendment maymake any change in any Option theretofore granted that adversely affects therights of any participant. To the extent necessary to comply with and qualifyunder Rule 16b-3 or under Section 423 (or any successor rule or provision or anyother applicable law or regulation), the Administrator shall obtain stockholderapproval of amendments to the Plan in such a manner and to such a degree asrequired. 9 (b) Administrative Modifications. Without stockholder consent(except as specifically required by applicable law or regulation) and withoutregard to whether any participant rights may be considered to have been"adversely affected," the Administrator shall be entitled to amend the Plan tothe extent necessary to comply with and qualify under Rule 16b-3 and Section423, change the Purchase Periods and/or Offering Periods, limit the frequencyand/or number of changes in payroll deductions during Purchase Periods and/orOffering Periods, establish the exchange ratio applicable to amounts withheld ina currency other than U.S. dollars, permit payroll withholding in excess of theamount designated by a participant to adjust for delays or mistakes in theCompany's processing of properly completed withholding elections, establishreasonable waiting and adjustment periods and/or accounting and creditingprocedures to ensure that amounts applied toward the purchase of Common Stockfor each participant properly correspond with amounts withheld from theparticipant's Compensation, and establish such other limitations or proceduresas the Administrator determines in its sole discretion to be advisable and whichare consistent with the Plan.15. Term of Plan. The Plan shall become effective upon the first Enrollment Date after itsapproval by the stockholders of the Company and shall continue in effect for aterm of twenty (20) years unless sooner terminated pursuant to Section 14.16. Miscellaneous. (a) Notices. All notices or other communications by a participantto the Company under or in connection with the Plan shall be deemed to have beenduly given when received in the form specified by the Company at the location,or by the person, designated by the Company for the receipt thereof. (b) Subsidiaries. The Administrator may from time to time in itsdiscretion permit persons who are employees of any Subsidiary whose customaryemployment is for more than five months per calendar year and for more than 20hours per week to participate in the Plan on the same terms as EligibleEmployees hereunder. (c) Stockholder Approval. The Plan shall be subject to approval bythe stockholders of the Company within twelve months before or after the datethe Board adopts the Plan. If such stockholder approval is not obtained, thePlan and all rights to the Common Stock purchased under the Plan shall be nulland void and shall have no effect. (d) Additional Restrictions of Rule 16b-3. The terms and conditionsof Options granted hereunder to, and the purchase of shares by, persons subjectto Section 16 of the Exchange Act shall comply with the applicable provisions ofRule 16b-3. This Plan shall be deemed to contain, and such Options shallcontain, and the shares issued upon exercise thereof shall be subject to, suchadditional conditions and restrictions as may be required by Rule 16b-3 toqualify for the maximum exemption from Section 16 of the Exchange Act withrespect to Plan transactions. (e) No Employment Rights. The Plan does not, directly orindirectly, create any right for the benefit of an employee or class ofemployees to purchase any shares under the Plan, or create in any employee orclass of employees any right with respect to continuation of employment by theCompany, and it shall not be deemed to interfere in any 10way with the Company's right to terminate, or otherwise modify, an employee'semployment at any time. (f) Applicable Law. The laws of the State of California shallgovern all matters relating to the Plan, except to the extent (if any)superseded by the laws of the United States. (g) Headings. Headings used herein are for convenience of referenceonly and do not affect the meaning or interpretation of the Plan. 11 EXHIBIT A LA JOLLA PHARMACEUTICAL COMPANY 1995 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT_____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate_____ Change of Beneficiary(ies)1. I, ________________________, hereby elect to participate in the La JollaPharmaceutical Company 1995 Employee Stock Purchase Plan (the "Plan") andsubscribe to purchase shares of the Company's Common Stock in accordance withthis Subscription Agreement and the Plan.2. I hereby authorize payroll deductions from each paycheck in the amountof ____% (not to exceed 10%) of my Compensation (as defined in the Plan) on eachpayday during the Offering Period in accordance with the Plan. (Please notethat no fractional percentages are permitted.)3. I understand that said payroll deductions shall be accumulated for thepurchase of shares of Common Stock at the applicable Purchase Price determinedin accordance with the Plan. I understand that if I do not withdraw from anOffering Period, any accumulated payroll deductions will be used toautomatically exercise my Option on each Exercise Date within the OfferingPeriod.4. I have received a copy of the complete Plan. I understand that myparticipation in the Plan is in all respects subject to the terms of the Plan,that capitalized terms used herein have the same meanings as ascribed thereto inthe Plan, and that in case of any inconsistency between this SubscriptionAgreement and the Plan, the Plan shall govern. I understand that the grant ofthe Option by the Company under this Subscription Agreement is subject tostockholder approval of the Plan.5. Shares purchased for me under the Plan should be issued in the name(s)of (employee and/or spouse only):_________________________________________________________________________________.6. I understand that if I dispose of any shares received by me pursuant tothe Plan within two years after the Enrollment Date (the first day of theOffering Period during which I purchased such shares) or within one year afterthe Exercise Date (the date I purchased such shares), I will be treated forfederal income tax purposes as having received ordinary income at the time ofsuch disposition in an amount equal to the excess of the fair market value ofthe shares at the time such shares were delivered to me over the price which Ipaid for the shares, regardless of whether I disposed of the shares at a priceless than their fair market value at the Exercise Date. The remainder of thegain or loss, if any, recognized on such disposition will be treated as capitalgain or loss. I hereby agree to notify the Company in writing within 30 daysafter the date of any disposition of my shares, and I will make adequateprovision for Federal, State or other tax withholding obligations, if any, whicharise upon the disposition of the Common Stock. The Company may, but will notbe obligated to, withhold from my Compensation or other amounts payable to methe amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the one-year and two-year holding periods described above, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (a) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (b) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain or loss, if any, recognized on such disposition will be taxed as capital gain or loss. I understand that this tax summary is only a summary for general information purposes and is subject to change and I agree to consult with my own tax advisors for definitive advice regarding the tax consequences to me of participation in the Plan and sale of shares purchased thereunder.7. I agree to be bound by the terms of the Plan. The effectiveness of thisSubscription Agreement is dependent upon my eligibility to participate in thePlan.8. In the event of my death, I hereby designate the following as mybeneficiary(ies) to receive (in proportion to the percentages listed below) allpayments and shares due me under the Plan (use additional sheets to addbeneficiaries):NAME: (Please print) __________________________________________________ (First) (Middle) (Last)______________________________ ________________________________RelationshipPercentage: __________ ________________________________ (Address)NAME: (Please print) __________________________________________________ (First) (Middle) (Last)______________________________ ________________________________RelationshipPercentage: __________ ________________________________ (Address)Employee's SocialSecurity Number: ______________________________________Employee's Address: ______________________________________ ______________________________________ ______________________________________I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUTSUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. 2Dated: ___________________ ______________________________________ Signature of Employee ______________________________________ Spouse's Signature (If beneficiary other than spouse) 3 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORSWe consent to the incorporation by reference in the Registration Statement onForm S-8 (No. 333-69104) pertaining to the 1994 Stock Incentive Plan and the1995 Employee Stock Purchase Plan and in the Registration Statements on Form S-3(Nos. 333-31142, 333-43066, 333-55370 and 333-81432) of La Jolla PharmaceuticalCompany of our report dated February 8, 2002, with respect to the financialstatements of La Jolla Pharmaceutical Company included in its Annual Report(Form 10-K) for the year ended December 31, 2001. /s/ Ernst & Young, LLP ERNST & YOUNG LLPSan Diego, CaliforniaMarch 27, 2002

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