<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CYPRESS BIOSCIENCE, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 2831 22-2389839
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
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4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CA 92121
(619) 452-2323
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
JAY D. KRANZLER
CHIEF EXECUTIVE OFFICER, CHIEF SCIENTIFIC OFFICER AND
VICE CHAIRMAN OF THE BOARD OF DIRECTORS
CYPRESS BIOSCIENCE, INC.
4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CA 92121
(619) 452-2323
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
FREDERICK T. MUTO, ESQ.
CARL R. SANCHEZ, ESQ.
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CA 92121
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE
===============================================================================================================================
TITLE OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE(1) AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
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Common Stock, $.02 par value .... 100,000 $2.125 $212,500 $100
===============================================================================================================================
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(1) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the amount of the registration fee based on the average of
the high and low prices of the Registrant's Common Stock as reported on
the Nasdaq SmallCap Market on July 9, 1996.
- ------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
CYPRESS BIOSCIENCE, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
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ITEM NUMBER AND HEADING IN LOCATION IN PROSPECTUS
FORM S-1 REGISTRATION STATEMENT ----------------------
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus....... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges ................................. Prospectus Summary; Risk Factors
4. Use of Proceeds............................................... Use of Proceeds
5. Determination of Offering Price .............................. Not Applicable
6. Dilution...................................................... Not Applicable
7. Selling Security Holders...................................... Principal Stockholders and Selling Security Holder
8. Plan of Distribution.......................................... Outside Front and Inside Front Cover Pages; Plan
of Distribution
9. Description of Securities to be Registered.................... Outside Front Cover Page; Description of Capital
Stock
10. Interests of Named Experts and Counsel........................ Not Applicable
11. Information with Respect to the Registrant.................... Outside Front and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Dividend
Policy; Price Range of Common Stock; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Changes In and
Disagreements With Accountants on Accounting and
Financial Disclosure; Business; Management;
Certain Transactions; Principal Stockholders and
Selling Security Holder; Description of Capital
Stock; Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities................ Not Applicable
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JULY , 1996
PROSPECTUS
100,000 SHARES
CYPRESS BIOSCIENCE, INC.
COMMON STOCK
All of the 100,000 shares of Common Stock, par value $.02 per share
(the "Common Stock"), being offered hereby (the "Shares") are being offered by
Brean, Murray, Foster Securities, Inc. (the "Selling Security Holder"). Cypress
Bioscience, Inc. (the "Company") will not receive any of the proceeds from the
sale of any of the Shares by the Selling Security Holder. The Selling Security
Holder acquired the Shares from the Company in January 1996 in a private
placement of Common Stock of the Company at a purchase price of $1.50 per Share.
See "Plan of Distribution."
As of May 21, 1996, the Common Stock of the Company has been traded on
the Nasdaq SmallCap Market under the symbol "CYPB." Prior to May 21, 1996, the
Common Stock of the Company was traded on the Nasdaq SmallCap Market under the
symbol "IMRE." The last reported sales price of the Company's Common Stock on
the Nasdaq SmallCap Market on July 9, 1996 was $2.125 per share." See "Price
Range of Common Stock."
THE SECURITIES BEING OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated expenses payable by the Company in
connection with this offering are $37,600. The aggregate proceeds to the Selling
Security Holder from the sale of the Shares will be the sales price of the
Shares sold less the aggregate agents' commissions and underwriters' discounts,
if any, and other expenses of issuance and distribution not borne by the
Company. See "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS JULY , 1996.
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files annual and quarterly reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Judiciary
Plaza, Washington, D.C. 20549, and at the Commission's following Regional
Offices: Chicago Regional Office, 500 West Madison Street, Suite 1400, Northwest
Atrium Center, Chicago, Illinois 60661; and New York Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Common Stock of the Company is quoted on the Nasdaq
SmallCap Market. Reports and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
A registration statement on Form S-1 with respect to the Common Stock
offered hereby (the "Registration Statement") has been filed with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or any other
document filed as an exhibit to the Registration Statement are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement and the exhibits and schedules thereto may be inspected
by anyone without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
and copies of all or any part of the Registration Statement may be obtained from
the Public Reference Section of the Commission upon the payment of certain fees
prescribed by the Commission.
PROSORBA(R) is a registered trademark of the Company. All other brand
names or trademarks appearing in this Prospectus are the property of their
respective holders.
2.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 as
amended, that involve risks and uncertainties. The Company's actual results
could differ materially from those projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
THE COMPANY
Cypress Bioscience, Inc. (the "Company") was incorporated in 1981 to
research, develop, manufacture and market medical devices for the treatment and
diagnosis of select immune-mediated diseases, transplantations and cancers. The
Company's first product, the PROSORBA(R) column, a medical device, treats a
patient's defective immune system so that it can more effectively respond to
certain diseases. The Company's PROSORBA(R) column is a therapeutic,
extracorporeal immunoadsorption device which removes circulating immune
complexes (CICs) and immunoglobulin G (IgG) from a patient's plasma in a
procedure that takes place in an extracorporeal loop (i.e., outside the body)
and returns all other necessary plasma compounds back to the patient. During
PROSORBA(R) column therapy, blood is drawn from one arm of the patient, plasma
and red bloods cells are separated, the plasma is filtered through the
PROSORBA(R) column to remove unwanted CICs and IgG, then combined with the red
blood cells and returned to the patient's other arm. The PROSORBA(R) column
therapy is noninvasive and is administered on an outpatient basis.
The Company received marketing approval from the U.S. Food and Drug
Administration (the "FDA") in December 1987 to distribute the PROSORBA(R) column
for the treatment of idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. Since 1987, the Company has had approximately
$23 million of sales of the PROSORBA(R) column for use in ITP therapy.
The Company is currently in the process of conducting clinical trials
for the use of the PROSORBA(R) column therapy to treat rheumatoid arthritis. In
September 1995, the Company announced the results of its 15 patient pilot
clinical trial that used the PROSORBA(R) column therapy in the treatment of
rheumatoid arthritis. The Company believes that the clinical results, which
showed a statistically significant 76% reduction in painful joints and a 70%
reduction in swollen joints in 11 patients three months after completing the
PROSORBA(R) column treatment, confirms the potential utility of the PROSORBA(R)
column therapy in treating rheumatoid arthritis reported earlier in an
independent study published in the JOURNAL OF RHEUMATOLOGY in May 1994. In
November 1995, the FDA conditionally approved the Company's application to begin
a pivotal clinical trial at 12 centers using the PROSORBA(R) column in the
treatment of patients with rheumatoid arthritis. The Company has since commenced
such clinical trial.
The Company believes that its future success will depend on its ability
to improve PROSORBA(R) column sales for its currently approved indication, ITP,
obtain FDA marketing approval for additional disease indications and acquire
and/or develop complementary therapeutic and diagnostic therapies. The Company
recently terminated its exclusive distribution agreement with Baxter Healthcare
Corporation ("Baxter"), which granted to Baxter the exclusive right to
distribute the Company's PROSORBA(R) column in the United States and Canada. As
a result of the termination of the Baxter agreement, effective May 1, 1996, the
Company regained the right, among other things, to sell its PROSORBA(R) column
directly to customers who had previously purchased PROSORBA(R) columns through
Baxter, as well as directly to any other potential customers who wish to
purchase PROSORBA(R) columns. The Company has to establish its own sales force
to market and sell the PROSORBA(R) column, and is still in the process of
establishing such sales force. The Company believes that its own sales force,
dedicated solely to the marketing and sales of the PROSORBA(R) column, will be
more effective than distributing the PROSORBA(R) column through a third party.
The Company is in the process of implementing a substantial
restructuring plan intended to put in place experienced senior management and
consolidate the Company's operations. In December 1995, Jay D. Kranzler, M.D.,
Ph.D. was appointed as the Company's Chief Executive Officer and Vice Chairman
of the Board of Directors. In March 1996, Dr. Kranzler also assumed the position
of Chief Scientific Officer. Also in December 1995, Debby Jo Blank, M.D., was
appointed as the Company's President, Chief Operating Officer and Director.
3.
<PAGE> 6
The restructuring plan includes consolidating the Company's
manufacturing operations into one central facility in Redmond, Washington. In
addition, the restructuring plan includes relocating all of the Company's
operations, except manufacturing, from Seattle, Washington to San Diego,
California by the end of 1996. The Company believes that relocating its
operations to San Diego, widely recognized as the fourth largest biotechnology
center in the United States, will provide the Company with greater exposure
within the industry and better position the Company to market its products. In
addition, in the event the Company wishes to expand staffing, San Diego's highly
skilled work force will provide significant resources from which the Company may
draw to meet future staffing needs.
The Company was incorporated under the laws of the State of Delaware in
1981. The Company's executive offices are located at 4350 Executive Drive, Suite
325, San Diego, California 92121 and its telephone number is (619) 452-2323.
THE OFFERING
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Common Stock to be offered by the Selling Security Holder..... 100,000 shares
Common Stock to be outstanding after the offering............. 30,577,257(1) shares
Use of proceeds............................................... The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Security Holder. See
"Use of Proceeds."
Nasdaq SmallCap Market symbol for Common Stock................ CYPB
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(unaudited)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 2,905 $ 4,440 $ 5,545 $ 4,990 $ 4,223 $ 3,044 $ 138
Total costs and expenses ......... 4,359 7,921 10,514 11,141 11,049 2,687 2,339
Net (loss) income ................ (1,453) (3,443) (4,921) (6,151) (6,826) 357 (2,201)
Net (loss) income per share ...... $ (0.14) $ (0.25) $ (0.33) $ (0.40) $ (0.39) $ 0.02 $ (0.08)
======== ======== ======== ======== ======== ======== ========
Shares used in calculation of
net (loss) income per share(2).. 10,160 14,030 14,716 15,244 17,599 17,015 26,001
======== ======== ======== ======== ======== ======== ========
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<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
CONSOLIDATED BALANCE SHEET DATA: (unaudited)
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Cash, cash equivalents and investments................ $1,010 $11,364
Working capital (deficit)............................. (689) 10,939
Total assets.......................................... 4,564 14,353
Long term debt (net of current portion)............... 1,370,972 420,012
Accumulated deficit................................... (44,042) (46,243)
Total stockholders' equity (net capital deficiency)... (525) 11,849
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(1) Assumes the exercise of outstanding warrants to purchase 1,850,000 shares of
Common Stock of the Company issued in 1991. See "Description of Capital
Stock -- Warrants."
(2) See Note 2 in Notes to Consolidated Financial Statements for information
concerning the computation of net (loss) income per share.
4.
<PAGE> 7
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act that
involve risks and uncertainties. The Company's actual results could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited, to
those discussed in this section, as well as those discussed elsewhere in this
Prospectus. The following risk factors should be considered carefully in
addition to the other information contained in this Prospectus before purchasing
the Shares being offered hereby.
NEED FOR ADDITIONAL CAPITAL. The Company is actively seeking
opportunities to raise additional capital through the private equity market and
corporate partners. Such capital would be used primarily to develop new and
complete existing research and development activities, including funding
clinical trials for rheumatoid arthritis and certain platelet disorders. The
amount of capital required by the Company is primarily dependent upon the
following factors: results of clinical trials, results of current research and
development efforts, the FDA regulatory process, potential competitive and
technological advances and levels of product sales. Because the Company is
unable to predict the outcome of the previously noted factors, some of which are
beyond the Company's control, the Company is unable to estimate, with certainty,
its mid- to long-term total capital needs. There can be no assurance that the
Company will be able to raise additional capital through the private equity
market or corporate partnering transactions or that funds raised thereby will
allow the Company to maintain its current and planned operations as provided
herein. If the Company is unable to obtain additional financing, it may be
required to delay, scale back or eliminate some or all of its research and
development activities, to license to third parties technologies that the
Company would otherwise seek to develop itself, to seek financing through the
debt market at potentially higher costs to the Company and/or to seek additional
methods of financing.
HISTORY OF OPERATING LOSSES. The Company has operated at a loss since
its formation in October 1981. As of March 31, 1996, the Company had an
accumulated deficit of $46,242,725. The ability of the Company to achieve
profitability is dependent upon, among other things, successful completion of
anticipated clinical trials and obtaining FDA marketing approval of the
PROSORBA(R) column for the treatment of additional diseases in a timely manner.
The Company would have to significantly scale back its plans, curtail clinical
trials, and limit its present operations in order to become profitable or
operate on a break-even basis if it does not receive marketing approval from the
FDA for the PROSORBA(R) column for the treatment of diseases in addition to ITP.
There can be no assurance that the Company will successfully complete any
present or future clinical trials, gain approval to begin any new clinical
trials, meet applicable regulatory standards or successfully market its products
to generate sufficient revenues to render the Company profitable. See "--Prior
Exclusive Agreement with Baxter; Necessity of Establishing a Sales Force."
MANAGEMENT CHANGES; RESTRUCTURING PLAN; DEPENDENCE UPON KEY PERSONNEL.
The Company has recently undergone changes in senior management. In December
1995, Martin D. Cleary resigned as Chief Executive Officer and a member of the
Board of Directors of the Company. Mr. Cleary's resignation was a result of the
Company's determination that it would best be served by having senior management
resident on the West Coast near the Company's principal executive offices and
other operations. Mr. Cleary, resident on the East Coast, was unable to relocate
and consequently agreed to resign as Chief Executive Officer and as a director.
Also in December 1995, Harvey J. Hoyt, M.D. resigned as Executive Vice President
and as a director as a result of the appointments of new members of senior
management and the restructuring of the Company, which restructuring eliminated
Dr. Hoyt's position. In March 1996, Frank R. Jones resigned as Chief Scientific
Officer and as Chairman of the Board and in May 1996, Alex P. de Soto resigned
as the Company's Vice President, Chief Financial Officer, Secretary and
Treasurer. Messrs. Jones' and de Soto's resignations were a result of the
restructuring of the Company and the Company's relocation of its executive
offices to San Diego, California. In December 1995, Jay D. Kranzler, M.D., Ph.D.
was appointed as Chief Executive Officer and Vice Chairman of the Board of
Directors and Debby Jo Blank, M.D. was appointed as President, Chief Operating
Officer and a member of the Board of Directors of the Company. In April 1996,
Susan E. Feiner was appointed as the Company's Director of Finance, Controller,
Secretary and Treasurer.
The Company is in the process of implementing a substantial
restructuring plan. The restructuring plan is intended to reduce the Company's
overhead and recurring costs by reducing the Company's work force and
5.
<PAGE> 8
consolidating its two manufacturing facilities into one central manufacturing
facility located in Redmond, Washington. By eliminating approximately 20
positions, the Company expects to realize an annual salary savings in excess of
$1.0 million. However, the Company estimates it will incur approximately $1.0
million in capital expenditures associated with the consolidation of its
manufacturing operations. The restructuring plan also includes relocating all of
the Company's operations, except manufacturing, from Seattle, Washington to San
Diego, California by the end of 1996. The restructuring is not yet completed and
there can be no assurance that such a restructuring will be completed as
scheduled, if at all. Even if such a restructuring is completed, there can be no
assurance that it will be successfully implemented.
The Company's success is dependent upon certain key management and
technical personnel, including the new members of senior management. The loss of
the services of any of these key employees could have a material adverse effect
on the Company. The Company does not currently maintain any key employee
insurance coverage.
FDA APPROVAL AND REGULATIONS. The Company is currently planning to
conduct a controlled clinical trial of the PROSORBA(R) column for treatment of
rheumatoid arthritis. Although the FDA has approved the commercial sale of the
PROSORBA(R) column for the treatment of ITP, there can be no assurance that
current or future clinical trials will produce data satisfactory to the FDA to
establish the effectiveness of the PROSORBA(R) column for treatment of diseases
other than ITP, such as rheumatoid arthritis, transplantations and certain
cancers, or that the FDA will approve the PROSORBA(R) column for treatment of
such diseases in a timely manner, if at all.
The PROSORBA(R) column is commercially distributed under a premarket
approval ("PMA") application that was approved by the FDA in 1987. Changes to
the product and its manufacturing process, and certain types of labeling changes
must be approved by the FDA prior to implementation. The Company currently has
one supplement to the PMA pending with the FDA for a labeling change addressing
the use of ancillary equipment during the use of the PROSORBA(R) column therapy.
The FDA has indicated to the Company that the PMA supplement would be approvable
if certain additional information is provided. There can be no assurance that
the Company will receive approval of its pending PMA supplement or any future
PMA supplements will be approved by the FDA.
Even if FDA approval is granted to market a product for the treatment
of a particular disease, subsequent discovery of previously unknown problems may
result in restrictions on the product's future use or withdrawal of the product
from the market. In addition, any other products developed in the future will
require clinical testing and FDA marketing approval before they can be
commercially exploited in the United States. Such approval process is typically
very lengthy and there is no assurance that FDA approvals will be obtained.
The manufacture and distribution of medical devices are subject to
continuing FDA regulation. In addition to the requirement that the device be
marketed only for its approved use, applicable law requires compliance with the
FDA's good manufacturing practices ("GMP") regulations. Failure to comply with
the GMP regulations or with other applicable legal requirements can lead to
federal seizure of non-complying products, injunctive actions brought by the
federal government, and potential criminal liability on the part of the Company
and of the officers and employees of the Company who are responsible for the
activities that lead to the violations.
To date, production of commercial quantities of the raw materials
utilized in production of the PROSORBA(R) column has been performed at the
Redmond facility. Final assembly of the PROSORBA(R) column has been performed at
the Seattle facility. In conjunction with the Company's restructuring plan and
corresponding reduction in facilities, the Seattle and Redmond, Washington
facilities are in the process of being consolidated into a single manufacturing
facility in Redmond. The Company has already subleased a major portion of its
Seattle facility to a third party. Under the terms of the Company's sub-lease of
its Seattle facility, the Company must vacate the remainder of the facility no
later than December 31, 1996 or else be subject to substantial financial
penalties. The Redmond facility is under renovation in order to enable both the
production of raw materials, as well as the final assembly of the PROSORBA(R)
column, to be performed in the Redmond facility. The renovated Redmond facility,
when complete, must comply with the FDA's GMP regulations and must complete the
GMP re-approval process. There can be no assurance that the Company will
complete the renovations in time to sustain uninterrupted production of the
PROSORBA(R) column. In addition, there can be no assurance that the renovated
facility will receive GMP approval in a timely manner, if at all.
6.
<PAGE> 9
COMPETITIVE ENVIRONMENT; TECHNOLOGICAL CHANGE; EFFECTIVENESS OF
PRODUCTS. The field of medical devices in general and the particular areas in
which the Company will market its products are extremely competitive. In
developing and marketing medical devices to treat immune-mediated diseases and
cancers, the Company competes with other products, therapeutic techniques and
treatments which are offered by national and international healthcare and
pharmaceutical companies, many of which have greater marketing, human and
financial resources than the Company.
The immunological therapies market is characterized by rapid
technological change and potential introductions of new products or therapies.
To respond to these changes, the Company may be required to develop or purchase
new products to protect its technology from obsolescence. There can be no
assurance that the Company will be able to develop or obtain such products, or,
if developed or obtained, that such products will be commercially viable. In
addition, there can be no assurance that the Company's products will prove
effective in the treatment of diseases other than ITP.
DEPENDENCE ON THIRD PARTY ARRANGEMENTS. The Company's commercial sale
of its proposed products and its future product development may be dependent
upon entering into arrangements with corporate partners and other third parties
for the development, marketing, distribution and/or manufacturing of products
utilizing the Company's proprietary technology. While the Company is currently
seeking collaborative research and development arrangements and joint venture
opportunities with corporate sponsors and other partners, there can be no
assurance that the Company will be successful in entering into such arrangements
or joint ventures or that any such arrangements will prove to be successful.
PRIOR EXCLUSIVE AGREEMENT WITH BAXTER; NECESSITY OF ESTABLISHING A
SALES FORCE. In February 1994, the Company entered into a 10-year exclusive
distribution agreement with Baxter, granting to Baxter distribution rights to
its PROSORBA(R) column in the United States and Canada for the treatment of
thrombocytopenia and the first right to negotiate for new PROSORBA(R) column
indications. Baxter, at its own expense, was to provide sales and marketing
support for the sale of the product during the term of the agreement. Baxter
assumed the Company's sales and distribution responsibilities in April 1994.
In March 1996, the Company and Baxter terminated the exclusive
distribution agreement, whereby, effective May 1, 1996, the Company regained the
right, among other things, to sell its PROSORBA(R) column directly to customers
who had previously purchased PROSORBA(R) columns through Baxter as well as to
any other potential customers who wish to purchase PROSORBA(R) columns. As a
result of the termination of the distribution agreement, the Company has to
establish a domestic sales force to market and sell its PROSORBA(R) column.
There can be no assurances that the Company will be able to establish an
effective sales force to sell its PROSORBA(R) column directly to customers who
previously purchased PROSORBA(R) columns from Baxter or to any other potential
customers who wish to purchase PROSORBA(R) columns. In addition, even if the
Company can establish a sales force for its PROSORBA(R) column, there can be no
assurance that the Company will be successful in selling its PROSORBA(R) columns
directly to any new customers or to any customers who previously purchased
PROSORBA(R) columns through Baxter.
LIMITED INTERNATIONAL SALES AND MARKETING. The Company conducts limited
marketing of the PROSORBA(R) column outside the United States through foreign
distributors. Sales to foreign distributors have not been material to the
Company's results from operations. There can be no assurance that foreign sales
arrangements will become material to the Company's results of operations.
UNCERTAINTY OF PATENT PROTECTION AND CLAIMS TO TECHNOLOGY. The Company
currently holds nine United States and four foreign patents relating to its
technology and has also filed other patent applications related to its
technology. In addition, the Company has an exclusive license for a U.S. patent
for a genetic screening test to predict which rheumatoid arthritis patients will
develop severe disease. Neither the protection afforded by these patents nor
their enforceability can be assured. Furthermore, there can be no assurance that
additional patents will be obtained either in the United States or in foreign
jurisdictions or that, if issued, such additional patents will provide
sufficient protection to the Company's technology or be of commercial benefit to
the Company. Insofar as the Company relies on trade secrets and unpatented
proprietary know-how, there can be no assurance that others will not
independently
7.
<PAGE> 10
develop similar technology or that secrecy will not be breached. There can be no
assurance that the Company will be able to develop further technological
innovations.
Others have filed applications for, or have been issued, patents and
may obtain additional patents and other proprietary rights relating to products
or processes competitive with those of the Company. The scope and validity of
such patents is presently unknown. If existing or future patents are challenged
in litigation or interference proceedings, the Company may become subject to
significant liabilities to third parties or be required to seek licenses from
third parties. There can be no assurance that such licenses would be available
or, if available, obtainable on acceptable terms.
Various scientific personnel of the Company were previously associated
with non-profit research or education institutions that typically require
researchers to execute agreements giving such institutions broad rights to
inventions created or developed during the period that the scientist is
associated with such institution. While no such institution has to date asserted
rights to the Company's technology, such assertions may be made in the future,
and if made, there can be no assurances that the Company will be successful in
any such litigation.
CONCENTRATION OF OWNERSHIP. As of June 14, 1996, Allen & Company
Incorporated and Mr. Richard M. Crooks, a director of the Company, beneficially
owned approximately 17.9% and 4.1%, respectively, of the outstanding Common
Stock of the Company. Mr. Crooks is also a director and consultant to Allen &
Company Incorporated. Together, Mr. Crooks and Allen & Company Incorporated own
a significant amount of the total outstanding Common Stock of the Company and
may be able to exert substantial influence over the outcome of matters requiring
stockholder approval.
RECOVERABILITY OF ENDING INVENTORIES. As of March 31, 1996, the
Company's ending inventory balances consisted of $488,774 of raw materials,
$733,714 of work in progress and $56,881 of finished goods. In order to recover
such ending inventory balances, the Company would have to sell approximately 20%
more PROSORBA(R) column units to customers than that amount sold to customers by
Baxter during 1995. Such increase represents approximately 60% of the total
sales made by the Company's sales force in fiscal year 1993 prior to entering
into the Baxter agreement. As a result of the termination of the distribution
agreement with Baxter, the Company is actively seeking to establish a domestic
sales force to sell the PROSORBA(R) column directly to customers who previously
purchased PROSORBA(R) columns from Baxter and to other potential customers who
wish to purchase PROSORBA(R) columns directly from the Company. Although there
can be no assurances that the Company's sales force, when and if established,
will be successful in selling the Company's product, the Company believes, based
upon historical sales figures, that it can generate sufficient sales to recover
the ending inventory balances described above with a sales force of between 5
and 7 salespersons dedicated solely to selling the Company's PROSORBA(R) column.
In addition, on May 1, 1996, the Company increased the sales price of the
PROSORBA(R) columns to be sold directly to customers by approximately 9%. This
is the first such price increase implemented by the Company since January 1,
1994. The Company believes that such price increase reflects a nominal price
increase for a medical device for the period covered by such increase. However,
there can be no assurance that the Company will be successful in selling the
PROSORBA(R) column at the increased price, if at all. See "--Prior Exclusive
Agreement with Baxter; Necessity of Establishing a Sales Force."
INSURANCE REIMBURSEMENT. Successful commercialization of a new medical
product, such as the PROSORBA(R) column depends, in part, on reimbursement by
public and private health insurers to health care providers for use of such
product. The availability of such reimbursement is subject to a variety of
factors, many of which could affect the Company as it commercializes use of the
PROSORBA(R) column. Although the Company has been generally successful in
assisting health care providers in arranging reimbursement for the use of the
PROSORBA(R) column in the treatment of ITP, there can no assurance that public
and private insurers will continue to reimburse for the use of the PROSORBA(R)
column.
UNCERTAINTY OF HEALTH CARE REFORM. There are widespread efforts to
control health care costs in the U.S. and worldwide. Various federal and state
legislative initiatives regarding health care reform and similar issues continue
to be at the forefront of social and political discussion. These trends may lead
third-party payors to decline or limit reimbursement for the Company's product,
which could negatively impact the pricing and profitability of, or demand
8.
<PAGE> 11
for, the Company's product. The Company believes that government and private
efforts to contain or reduce health care costs are likely to continue. There can
be no assurance concerning the likelihood that any such legislative or
regulatory initiative will be enacted, or market reform initiated, or that, if
enacted such reform or initiative will not result in a material adverse impact
on the business, financial condition or results of operations of the Company.
PRODUCT LIABILITY. The use of the PROSORBA(R) column involves the
possibility of adverse effects occurring to end-users that could expose the
Company to product liability claims. The Company believes that its product
liability insurance coverage is adequate in light of the Company's business.
However, although the Company currently maintains product liability insurance
coverage, there can be no assurance that such coverage or any increased amount
of coverage will be adequate to protect the Company and there can be no
assurance that the Company will have sufficient resources to pay any liability
resulting from such a claim.
POSSIBLE VOLATILITY OF STOCK PRICE; ABSENCE OF DIVIDENDS. There has
been a history of significant volatility in the market prices of securities of
biotechnology companies, including the Company's Common Stock. Factors such as
announcements by the Company or others of technological innovations, results of
clinical trials, new commercial products, regulatory approvals or proprietary
rights developments, coverage decisions by third-party payors for therapies and
public concerns regarding the safety and other implications of biotechnology all
may have a significant impact on the Company's business and market price of the
Company's Common Stock. No dividends have been paid on the Company's Common
Stock to date, and the Company does not anticipate paying dividends on its
Common Stock in the foreseeable future.
HAZARDOUS MATERIAL. The Company's research and development programs
involve the controlled use of biohazardous materials such as viruses, and may
include the use of the HIV virus that causes AIDS. Although the Company believes
that its safety procedures for handling such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
LIMITATION OF NET OPERATING LOSS CARRYFORWARDS. The Company's sale of
Common Stock in November 1990 and September 1991 when taken together with prior
issuances, caused the limitation of Section 382 of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), to be applicable. This
limitation will allow the Company to use only a portion of the net operating
loss carryforwards to offset future taxable income, if any, for federal income
tax purposes. Based on the limitations of Section 382 and before consideration
of the effect of the sale of securities offered hereby, the Company may be
allowed to use no more than approximately $2,450,000 of such losses each year to
reduce taxable income, if any. To the extent not utilized by the Company, unused
losses will carry forward subject to the limitations to offset future taxable
income, if any, until such unused losses expire. All unused net operating losses
will expire 15 years after any year in which they were generated. The years in
which such expiration will take place range from 1998-2010.
9.
<PAGE> 12
USE OF PROCEEDS
The purpose of this offering is to register Common Stock sold by the Company to
the Selling Security Holder in the Private Placement. The Company will not
receive any of the proceeds from the sale of the Common Stock offered hereby by
the Selling Security Holder.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain any future earnings to
finance the growth and development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
10.
<PAGE> 13
PRICE RANGE OF COMMON STOCK
As of May 21, 1996, the Company's Common Stock has been traded on the
Nasdaq SmallCap Market under the symbol CYPB. Prior to May 21, 1996, the Common
Stock was traded on the Nasdaq SmallCap Market under the symbol IMRE. The
principal market for the Company's Common Stock is the over-the-counter market.
Set forth below are the high and low closing prices for the Company's Common
Stock for the first three quarters of 1996 (through July 9, 1996 of the third
quarter) and for each quarter of 1995 and 1994 as reported by the Nasdaq Stock
Market, Inc.
<TABLE>
<CAPTION>
Price Range of Common Stock
-----------------------------
High Low
-------- --------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter............................. $2 5/8 $1 7/8
Second Quarter............................ 2 9/16 2 1/4
Third Quarter (through July 9, 1996).... 2 3/16 2 1/8
YEAR ENDED DECEMBER 31, 1995
First Quarter............................. 2 1/8 1 1/4
Second Quarter ........................... 2 1/8 1 7/16
Third Quarter............................. 4 1/2 1 7/8
Fourth Quarter............................ 3 5/8 1 3/4
YEAR ENDED DECEMBER 31, 1994
First Quarter............................. 3 15/16 3 1/4
Second Quarter............................ 3 1/4 2 3/8
Third Quarter............................. 2 7/16 1 3/4
Fourth Quarter............................ 2 1/2 1 15/16
</TABLE>
The above quotations are interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
On July 9, 1996, the last reported sales price of the Common Stock was
$2.125 per share. As of June 14, 1996, there were approximately 1,073 holders of
record of the Common Stock of the Company.
11.
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below for the
fiscal years ended December 31, 1993, 1994, and 1995 and the consolidated
balance sheet data at December 31, 1994 and 1995 are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere herein. The consolidated statement of operations data for the
fiscal years ended December 31, 1991 and 1992, and the consolidated balance
sheet data at December 31, 1991, 1992 and 1993 are derived from audited
consolidated financial statements previously filed with the Commission. The
consolidated statement of operations data for the three months ended March 31,
1995 and 1996 and the consolidated balance sheet data at March 31, 1996 are
derived from unaudited consolidated financial statements previously filed with
the Commission, which, in the opinion of management, have been prepared on the
same basis as the audited consolidated financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations for such
periods. Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. This information is not necessarily indicative of the
Company's future performance.
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues $ 2,712,120 $ 4,076,021 $ 5,410,530 $ 4,918,126 $ 4,104,224 $ 3,016,463 $ 17,676
Interest income 192,526 363,539 134,483 71,986 118,994 27,081 120,294
----------- ----------- ----------- ----------- ----------- ----------- -----------
2,904,646 4,439,560 5,545,013 4,990,112 4,223,218 3,043,544 137,970
Costs and expenses:
Production costs 458,832 1,166,025 1,582,986 2,571,168 2,041,422 446,603 248,903
Sales and marketing 1,987,141 3,952,481 4,758,427 3,550,037 819,907 589,077 52,043
Research and development 920,993 1,506,742 2,059,129 2,107,694 3,219,324 975,105 427,233
General and administrative 988,046 1,279,077 2,105,743 2,694,489 2,626,817 599,727 960,151
Interest 4,441 16,721 7,659 218,036 261,958 76,397 25,367
Purchase of in process
research and - - - - 625,000 - -
development
Debt conversion expense - - - - 810,386 - 183,688
Restructuring expense - - - - 644,656 - 441,676
----------- ----------- ----------- ----------- ----------- ----------- -----------
4,359,453 7,921,046 10,513,944 11,141,424 11,049,470 2,686,909 2,339,061
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Loss) income from operations (1,454,807) (3,481,486) (4,968,931) (6,151,312) (6,826,252) 356,635 (2,201,091)
Minority interest in loss 1,435 38,260 47,711 - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income $(1,453,372) $(3,443,226) $(4,921,220) $(6,151,312) $(6,826,252) $ 356,635 $(2,201,091)
=========== =========== =========== =========== =========== =========== ===========
Net (loss) income per share $ (0.14) $ (0.25) $ (0.33) $ (0.40) $ (0.39) $ 0.02 $ (0.08)
=========== =========== =========== =========== =========== =========== ===========
Weighted average number of
shares 10,159,938 14,030,224 14,716,472 15,243,860 17,598,735 17,015,031 26,001,036
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------------------------------------- ------------
1991 1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
investments $ 1,897,021 $ 1,286,679 $ 2,283,583 $ 3,670,616 $ 1,009,878 $ 11,364,028
Total assets $ 11,109,825 $ 8,441,703 $ 7,761,598 $ 7,721,013 $ 4,563,709 $ 14,352,983
Long term debt (net of current
portion) $ - $ 25,903 $ 11,190 $ 4,247,759 $ 1,370,972 $ 420,012
Accumulated deficit $(22,699,694) $(26,142,850) $(31,064,070) $(37,215,382) $(44,041,634) $(46,242,725)
Working capital (deficit) $ 10,135,987 $ 6,902,330 $ 3,787,412 $ 4,360,749 $ (688,771) $ 10,939,026
Stockholders' equity (net capital $ 10,354,097 $ 7,492,047 $ 4,839,725 $ 1,980,719 $ (524,762) $ 11,849,096
deficiency)
</TABLE>
12.
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
projected in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, as well as in the sections entitled "Risk Factors," and
"Business."
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 compared to Three Months Ended March 31, 1995
First quarter revenue for 1996 primarily related to international sales
as there were no shipments to Baxter, the Company's then exclusive domestic
distributor of the PROSORBA(R) column. For the same period in 1995, the Company
received a $3.0 million take-or-pay payment with no shipments to Baxter. As a
result of the termination of the Baxter agreement, effective May 1, 1996, the
Company began to ship product directly to end users and therefore the Company
expects to increase its product revenue beginning in the second quarter of 1996.
See "Risk Factors -- Prior Exclusive Agreement with Baxter; Necessity of
Establishing a Sales Force."
Total operating expenses for the quarter ended March 31, 1996 decreased
13% to $2.4 million from $2.7 million for the same period in 1995. Production
costs were $249,000 and $447,000 for the quarters ended March 31, 1996 and 1995,
respectively. This 44% decrease was primarily a result of the restructuring and
increased utilization of production facilities. The Company did not produce any
product during the first quarter of 1995 and began to manufacture product in the
first quarter of 1996 in anticipation of the need to ship product to customers
as a result of the terminated Baxter agreement.
Sales and marketing expenses decreased to $52,000 for the quarter ended
March 31, 1996 from $590,000 for the same quarter of 1995, a 91% decrease. This
significant decrease is a result of the Company's March 1995 renegotiation of
its distribution agreement with Baxter. During the first quarter of 1995, the
Company was still obligated to provide marketing and promotional support to
Baxter. In March 1995, the Company was released from that obligation and, thus,
incurred significantly less expense for the quarter ended March 31, 1996. As a
result of the recent termination of the Baxter agreement, the Company
anticipates an increase in sales and marketing expenses in future quarters.
Research and development expenses decreased 56% to $427,000 for the
quarter ended March 31, 1996 compared to $975,000 for the quarter ended March
31, 1995. The decrease is primarily a result of a temporary decline in clinical
trial activity associated with the January 1996 restructuring and a reduction of
costs associated with the restructuring.
General and administrative expenses increased 60% to $960,000 for the
quarter ended March 31, 1996, compared to $600,000 for the same period in 1995.
The increase is principally a result of costs associated with the hiring of the
Company's new Chief Executive Officer and President, Chief Operating Officer,
both of which were hired in December 1995 and the resignation of the Company's
Chief Scientific Officer in March 1996. During the same period in 1995, the
Company's former President resigned in early February resulting in only one
month's salary expense and the Chief Scientific Officer's salary was recorded as
a research and development expense. The new Chief Executive Officer has assumed
the Chief Scientific Officer's duties. In addition, approximately $90,000 was
recorded as compensation expense in 1996 for stock options granted at less than
fair market value on the date of grant.
Interest expense decreased to $25,000 from $76,000 for the quarters
ended March 31, 1996 and 1995, respectively, because of the September 1995 and
March 1996 conversions of a portion of the 7% Debentures.
13.
<PAGE> 16
In January 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being terminated immediately as part of the restructuring. Such positions
were from all departments of the Company. In March 1996, the Company's Chief
Scientific Officer and Chairman of the Board resigned as part of the
restructuring. Costs related to these terminations were approximately $440,000
and were recorded as a charge to operations as a restructuring expense in the
quarter ending March 31, 1996.
The Company recorded a non-cash expense of approximately $184,000
related to debt conversion expense in the quarter ended March 31, 1996. Such
expense represents the fair market value of the increased number of shares
issued by the Company under the terms of an exchange offer to holders of the
Company's 7% Debentures to exchange one share of Common Stock for each $2.25 of
outstanding principal (including any accrued and unpaid interest on such
principal). $845,000 in outstanding principal was tendered for exchange, leaving
an outstanding principal balance of $400,000 as of March 31, 1996.
The decrease in revenues was only partially offset by a decrease in
total operating expenses thereby resulting in a net loss of $2.2 million for the
quarter ended March 31, 1996, compared to net income of $400,000 for the same
period in 1995.
Fiscal 1995 Compared to Fiscal 1994
Effective April 2, 1994, the Company entered into a 10-year exclusive
distribution agreement with Baxter granting distribution rights for the
treatment of thrombocytopenia and the first right to negotiate for new
PROSORBA(R) column indications. The agreement provided for an annual "take or
pay" commitment from Baxter for the first two sales years. These minimums were
subject to the Company having FDA product approval for ITP.
The Company received a response from the FDA in January 1995 to a
pre-market application (PMA) supplement filed in March 1993 requesting the name
of the Company's approved indication be changed from idiopathic thrombocytopenic
purpura to immune thrombocytopenic purpura. The request was made by the Company
as it believed the two names are used interchangeably by the medical community.
The FDA's response denied the Company's request for such a change.
As a result of the FDA action, Baxter exercised its right to
re-negotiate minimums in February 1995. In March 1995, the two companies amended
the agreement whereby Baxter: 1) made a take-or-pay payment for the first sales
year of $3.0 million compared to the original $3.5 million due March 31, 1995,
2) purchased $1.0 million of product during the second quarter of 1995, 3)
released the Company from its obligation to provide marketing and promotional
support for the second and third years of the agreement, 4) gave the Company the
right to co-market with Baxter, 5) relinquished its first right to negotiate for
new PROSORBA(R) column indications, and 6) under certain circumstances, agreed
to provide advance payments to the Company for Baxter's 1996 purchases. The
Company agreed to eliminate purchase minimums and the take- or-pay concept
included in the original agreement and freed Baxter to pursue competing
thrombocytopenia therapies. In March 1996, the Company and Baxter terminated the
distribution agreement effective as of May 1, 1996.
The impact of the revised Baxter agreement referred to above had a
variety of effects on the operations of the Company during the year ended
December 31, 1995. The Company's revenue included the $3.0 million take or pay
payment made by Baxter in March 1995 and sales and marketing costs relative to
sales decreased based on Baxter agreeing to assume all marketing and promotional
costs.
Net sales decreased 17% from $4.92 million in 1994 to $4.10 million in
1995. Approximately 91% of the 1995 sales were to Baxter, with the remaining 9%
primarily to international customers of the Company. The decrease in net sales
was due primarily to Baxter selling approximately 50% less product to customers
than when the Company sold directly to health care providers. In addition, there
was a lower sales price charged to Baxter than the Company previously charged to
its customers. A substantial number of PROSORBA(R) columns shipped by the
Company to Baxter remained in Baxter's ending inventory as of December 31, 1995
because of continued delays by Baxter in fully implementing a sales and
marketing program for the PROSORBA(R) column. In conjunction with the
14.
<PAGE> 17
termination of the Baxter agreement effective May 1, 1996, Baxter shipped the
majority of the columns in Baxter's ending inventory at December 31, 1995.
Total operating expenses, excluding $2.08 million of non-recurring
charges, decreased 20% from $11.14 million in 1994 to $8.97 million in 1995.
Production costs decreased 21% from $2.57 million in 1994 to $2.04 million in
1995. The decrease is primarily a result of the decrease in the number of
PROSORBA(R) column units shipped in 1995 compared to 1994. The majority of
production costs in 1995 represent labor and overhead charges as no significant
production occurred during the last six months of 1995. As a result of the
previously discussed restructuring, the Company is working to reduce its
manufacturing overhead, including a reduction of personnel.
Sales and marketing expenses decreased 77% from $3.55 million in 1994
to $820,000 in 1995. Such expenses decreased primarily because beginning April
1, 1995, under the revised distribution agreement, Baxter provided complete
sales and marketing support for the sale of the product and as part of the
amended Baxter agreement the Company terminated three sales employees in 1995.
Research and development expenses increased 53% to $3.22 million in
1995 from $2.11 million in 1994. The increase was primarily a result of the
Company conducting its rheumatoid arthritis clinical trial for 15 patients in
1995 and the commencement of a pilot clinical trial in kidney transplantation
during the last six months of 1995. In 1994, the Company began its rheumatoid
arthritis clinical trial during the last six months of the year and conducted no
other clinical trials. In January 1996, the Company suspended enrollment of
patients in its kidney transplantation study while it evaluates the merits of
continuing the study in light of other clinical opportunities.
General and administrative expenses decreased 3% to $2.63 million in
1995 from $2.69 million in 1994. The decrease is principally a result of a
reduction in investor relations and legal expenses partially offset by an
increase in salary expenses. This increase resulted from $400,000 of salary
expenses associated with the severance agreement for the Company's former Chief
Executive Officer who resigned in December 1995 and $100,000 of signing bonuses
paid to the Company's new Chief Executive Officer and its new President and
Chief Operating Officer. General and administrative salary expenses are expected
to increase in 1996 as the Chief Executive Officer and President positions were
held by one person in 1995.
In mid-1995, the Company and CELx Corporation ("CELx"), the Company's
former majority-owned subsidiary, agreed to the merger of CELx into the Company
and the exchange of capital stock of CELx held by persons other than the Company
into an aggregate of 312,500 shares of the Company's Common Stock. The merger of
CELx into the Company resulted in a charge of $625,000 recorded as purchased in
process research and development. The charge was based on the fair market value
of the Company's Common Stock at the time of the merger.
The Company recorded a non-cash expense of $810,000 in 1995 as a debt
conversion expense for the conversion of the 7% Debentures discussed above. The
expense represents the fair market value of the increased number of shares of
Common Stock issued under the terms of the exchange offer compared to the
original terms of the 7% Debentures.
In December 1995, the Company recorded a restructuring charge
aggregating $645,000 relating to the Company's restructuring plan. The
restructuring charge includes approximately $350,000 related to write-downs of
equipment and leasehold improvements for the manufacturing facility expected to
be vacated in 1996, $200,000 related to abandonment of leases, with the
remainder related to a severance agreement with its former Executive Vice
President. Costs related to the termination of employees in January 1996 as part
of the Company's restructuring plan were $150,000 and will be recorded as a
restructuring expense and charged to operations in the quarter ending March 31,
1996. The annual salary savings from these terminations will be in excess of
$1.0 million. The Company estimates it will incur approximately $300,000 in
costs associated with moving the administration, research and medical
departments to San Diego, with most costs being attributable to relocation costs
of the few members of management moving to San Diego. Such costs will be
expensed as incurred in 1996.
15.
<PAGE> 18
The increase in net loss from $6.15 million in 1994 to $6.83 million in
1995 was primarily a result of the decrease in revenues.
Fiscal 1994 Compared to Fiscal 1993
The impact of the Baxter agreement referred to above had a variety of
effects on the operations of the Company during the year ended December 31,
1994. The per unit sales price under the Baxter agreement was lower than
formerly charged to end users. The Company began expanding its manufacturing
capacity, however, in the short-term, this resulted in a lower utilization of
manufacturing overhead costs. Thus the gross margin on sales to Baxter was less
than the Company received when it sold directly to end users.
Net sales decreased 9% from $5.41 million to $4.92 million.
Approximately 70% of the 1994 sales were to Baxter, with the remaining 30%
primarily to domestic customers of the Company. There were no material sales to
international customers. The decrease in net sales was due primarily to the
lower sales price charged to Baxter than the Company previously charged to its
customers. This lower sales price did not offset the increased number of
PROSORBA(R) columns shipped by the Company in 1994 as compared to 1993. However,
a substantial amount of the PROSORBA(R) columns shipped by the Company to Baxter
remained in Baxter's ending inventory as of December 31, 1994 because of delays
by Baxter in fully implementing a sales and marketing program for the
PROSORBA(R) column in 1994.
Total operating expenses increased 6% from $10.51 million in 1993 to
$11.14 million in 1994. Production costs increased 63% from $1.58 million in
1993 to $2.57 million in 1994. The increase was primarily a result of an
increase in the number of units shipped in 1994 compared to 1993. Production
costs as a percentage of sales increased to approximately 52% in 1994 compared
to 29% in 1993 principally because the sales price charged to Baxter for the
nine months ended December 31, 1994 was less than the sales price the Company
formerly charged to end users. In addition, the Company began increasing its
manufacturing overhead in 1994 to meet the original shipment demands of Baxter.
Sales and marketing expenses decreased 25% from $4.76 million in 1993
to $3.55 million in 1994. Such expenses decreased primarily because Baxter
provided partial sales and marketing support for the sale of the product during
1994. Eight sales employees of the Company became employees of Baxter and five
other Company sales employees were terminated as a result of the Baxter
agreement thus resulting in lower salary, commission and travel costs.
Research and development expenses increased 2% from $2.06 million in
1993 to $2.11 million in 1994. The increase was less than expected primarily as
a result of the Company not beginning its rheumatoid arthritis clinical trial as
soon as expected. In addition, the Company did not conduct a clinical trial for
the treatment of the classical form of thrombotic thrombocytopenic purpura in
1994 as planned because of difficulties in agreeing upon an acceptable treatment
protocol with the FDA. The conditions mandated by the FDA would make the
clinical trial too costly to perform in relation to potential investment return
from product sales. The increase is primarily a result of increased payroll
costs for senior management hired in 1994 offset by a reduction in treatment
data costs.
General and administrative expenses increased 28% from $2.11 million in
1993 to $2.69 million in 1994. The increase is principally a result of costs
associated with the development of the Company's diagnostic business plan,
including expenses associated with seeking funding for the development of the
diagnostics technology. Such funding has not been obtained. The increase is also
a result of costs associated with hiring the Company's new Chief Executive
Officer and the annualized payroll cost effect of increasing the number of
management and support personnel in 1993.
Interest expense increased from $8,000 in 1993 to $220,000 in 1994
because of the issuance in April 1994 of $4.25 million of 7% Debentures due
March 31, 2001.
The increase in total operating expenses and the decrease in revenues
resulted in increasing the net loss from $4.92 million in 1993 to $6.15 million
in 1994.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of March 31, 1996 was $10.9 million
compared to a working capital deficit of $689,000 at December 31, 1995 and
positive balances of $4.36 million and $3.79 million at December 31, 1994 and
1993, respectively. The significant increase in working capital in the first
quarter of 1996 is principally attributable to the January 1996 Private
Placement, discussed below. The $5.05 million decrease in working capital in
1995 is principally attributable to the $6.83 million loss from operations for
the year ended December 31, 1995 and $715,000 of capital expenditures which were
partially offset by $2.50 million of expenses which did not impact working
capital. The $570,000 increase in working capital in 1994 is principally
attributable to $4.25 million of proceeds from the April 1994 issuance of 7%
Convertible Debentures due March 31, 2001, (the "7% Debentures") and $2.63
million of proceeds from a private placement of common stock in December 1994,
offset by the $6.15 million loss from operations for the year ended December 31,
1994.
The Company expects to incur further operating losses until it can
obtain marketing approval from the FDA for additional disease indications for
the PROSORBA(R) column or until sales for the PROSORBA(R) column for its
existing indication of idiopathic thrombocytopenic purpura increase
significantly. A clinical trial has commenced using the PROSORBA(R) column for
rheumatoid arthritis therapy to obtain the necessary clinical data to apply to
the FDA to obtain marketing approval. A successful pivotal clinical trial would
be necessary to obtain marketing approval from the FDA. The Company completed a
pilot clinical study for rheumatoid arthritis therapy in September 1995.
In September 1995, the Company completed an exchange offer to holders
of its 7% Debentures. The Company offered to exchange the outstanding principal
of the 7% Debentures (including accrued interest) for Common Stock at a price of
$2.25 per share. Of the original $4,245,000 outstanding principal amount of the
7% Debentures, $2,200,000 was converted pursuant to the exchange offer.
Subsequent to September 1995, an additional $700,000 of 7% Debentures was
converted into Common Stock under the original $2.875 per share conversion
price. As of December 31, 1995, there was outstanding principal of $1,345,000 of
the 7% Debentures.
In January 1996, the Company completed a private placement of 8,540,702
shares of Common Stock of the Company (the "Private Placement") as a per share
sales price of $1.50, for an aggregate offering price of $12,811,053, making it
the largest financing in the Company's history. In connection with the closing
of the Private Placement, the Company also converted $1.5 million of outstanding
Senior Convertible Debentures into 1,000,000 shares of Common Stock of the
Company.
In January 1996, the Company began implementing a restructuring plan
which includes consolidating its manufacturing facilities to one location in the
state of Washington and moving all other operations of the Company to San Diego,
California. The Company estimates it will incur approximately $1.0 million of
capital expenditures to consolidate its two Washington manufacturing facilities.
As part of the restructuring plan, the Company, in January 1996, notified
approximately twenty employees, which was slightly greater than half of its work
force, that their positions were being terminated immediately. In March 1996,
the Company's Chief Scientific Officer and Chairman of the Board resigned as
part of the restructuring. The annual salary savings from this reduction in the
work force is expected to be in excess of $1.0 million. In April 1996, the
Company entered into a sub-lease agreement for its existing Seattle facility
effective May 1, 1996. The Company has an existing lease obligation for its
Seattle facility through October 13, 1999, with a current monthly rent expense,
including operating expenses, of approximately $26,500. The sub-lease agreement
provides for the Company to receive monthly rent, beginning May 1, 1996, in an
amount equal to the Company's current lease commitment, including operating
expenses, through October 13, 1999. The company intends to remain an occupant in
a small portion of its existing Seattle facility through December 31, 1996, and
will be obligated to pay approximately $8,000 a month of the total monthly rent
through December 31, 1996. The Company will continue to be liable for its
existing lease obligation through October 13, 1999.
The Company believes that relocating its operations to San Diego,
recognized as the fourth largest biotechnology center in the United States, will
provide the Company with greater exposure within the industry and
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better position the Company to market its products. In addition, in the event
the Company wishes to expand staffing, San Diego's highly skilled work force
will provide significant resources from which the Company may draw upon to fill
any future staffing needs. The restructuring is not yet completed and there can
be no assurance that such a restructuring will be completed. The Company
believes that the funds received from the Private Placement and the savings
anticipated from the Company's restructuring will provide the resources
necessary to fund operations, including clinical trials, through the latter half
of 1997.
In March 1996, the Company completed a second exchange offer made to
holders of its 7% Debentures. The Company offered to exchange the 7% Debentures
for Common Stock of the Company at a price of $2.25 per share. Of the $1,245,000
outstanding principal amount of the 7% Debentures, $845,000 was converted into
399,252 shares of Common Stock of the Company (which amount includes 23,700
shares issued as interest on the 7% Debentures), pursuant to the exchange offer.
In April 1996, the Company issued 12,005 shares of its Common Stock as
payment of interest on the remaining outstanding $400,000 principal amount of
the 7% Debentures.
The Company will require additional financing in order to fund the
completion of a pivotal clinical trial in rheumatoid arthritis, initiate pivotal
clinical trials using the PROSORBA(R) column in other diseases and apply the
Company's technology to applications beyond the PROSORBA(R) column. The Company
is seeking corporate partners to fund additional clinical trials.
The principal changes in the components of working capital since
December 31, 1994 were a $2.66 million decrease in cash resulting from the
excess of cash expenditures for 1995 over the $1.0 million of proceeds received
from debt financing, a $390,000 decrease in trade accounts receivable resulting
from the lower amount of sales during the end of 1995 compared to 1994, a
decrease of $350,000 in inventory to reflect the lower purchase demands of
Baxter, and a combined increase of $540,000 in accounts payable, accrued
compensation and accrued liabilities due primarily to increasing payment cycles
to suppliers to preserve the Company's cash position as of December 31, 1995.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On June 23, 1994, the Audit Committee of the Board of Directors
approved the appointment of Ernst & Young LLP ("Ernst & Young") as the Company's
independent auditors to audit the Company's financial statements for the fiscal
year ending December 31, 1994 in place of Coopers & Lybrand L.L.P. ("Coopers &
Lybrand"). The decision to change independent auditors was authorized by the
Company's Board of Directors. The change was not made because of the
disagreement with Coopers & Lybrand discussed below.
The reports of Coopers & Lybrand on the registrant's consolidated
financial statements for fiscal years ended December 31, 1992 and 1993 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified as
to uncertainty, audit scope or accounting principles. In connection with the
audits of the Company's consolidated financial statements for its fiscal years
ended December 31, 1993 and 1992, and in the subsequent interim period, there
were no disagreements with Coopers & Lybrand on any matter of accounting
principles, financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of said firm would have
caused them to make reference in connection with their report to the subject
matter of the disagreements, except as follows:
During the preparation of the Company's financial statements for the
period ended September 30, 1993, the Company held preliminary discussions with
Coopers & Lybrand and based on those preliminary discussions, initially recorded
and reported revenues for sales under its customer storage program (as
originally recorded in the Company's report on Form 10-Q for the three months
ended September 30, 1993) before the Company's product was shipped to the
customer. The customer storage program had previously been disclosed by the
Company in its Form 10-K for the year ended December 31, 1993. During the fourth
quarter of 1993, the Company obtained accounting advice from Coopers & Lybrand's
Seattle office, which confirmed the preliminary discussions regarding
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the recognition of revenue for its customer storage program. The Company and the
Seattle office of Coopers & Lybrand also discussed during this time the form and
content of documentation required for the audit of the Company's financial
statements for the year ended December 31, 1993.
As the year end fieldwork for the audit of the 1993 financial
statements began in late January 1994, Coopers & Lybrand's National office was
consulted by the Seattle office regarding the recognition of storage program
revenues. Coopers & Lybrand concluded that revenue should not be recognized on
customer storage program sales until the product was shipped. The Company
accordingly restated its September 30, 1993 financial statements and did not
recognize significant storage program revenues for the year ended December 31,
1993.
Accordingly, for purposes of disclosure under Securities and Exchange
Commission Regulation S-K, Item 304, this issue represents a disagreement with
management and its auditors, which was subsequently resolved by the restatement
of the Company's September 30, 1993 financial statements.
The Audit Committee discussed the subject matter of the issue noted
above with Coopers & Lybrand at a meeting on March 28, 1994. However, Coopers &
Lybrand did not inform the Company or the Audit Committee that there was a
disagreement until June 15, 1994. The Company authorized Coopers & Lybrand to
respond fully to any inquiries of Ernst & Young regarding the above described
disagreement. By letter dated June 24, 1994, Coopers & Lybrand informed the
Company that it concurred with the foregoing statements regarding changes of the
Company's certifying accountants, which statements were originally included in
substantially the same form under Item 4 of the Company's current report on Form
8-K dated June 29, 1994.
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BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
INTRODUCTION AND OVERVIEW
The Company was incorporated in 1981 to research, develop, manufacture
and market medical devices for the treatment and diagnosis of select
immune-mediated diseases, transplantations, and cancers. The Company's first
product, the PROSORBA(R) column, is a medical device that treats a patient's
defective immune system so that it can more effectively respond to certain
diseases. The Company's PROSORBA(R) column is a therapeutic, extracorporeal
immunoadsorption device which removes circulating immune complexes (CICs) and
immunoglobulin G (IgG) from a patient's plasma in a procedure that takes place
in an extracorporeal loop (i.e. outside the body) and returns all the other
necessary plasma components back to the patient. During PROSORBA(R) column
therapy, blood is drawn from one arm of the patient, plasma and red blood cells
are separated, the plasma is filtered through the PROSORBA(R) column to remove
unwanted CICs and IgG, then combined with the red blood cells and returned to
the patient's other arm. The PROSORBA(R) column therapy is noninvasive and
administered on an outpatient basis. The Company received marketing approval
from the U.S. Food and Drug Administration ("FDA") in December 1987 to
distribute the PROSORBA(R) column for the treatment of ITP, an immune-mediated
bleeding disorder. Since 1987, the Company has had approximately $23 million of
sales of the PROSORBA(R) column for use in ITP therapy.
The PROSORBA(R) column treats a defective immune system by modulating
the immune system to respond more effectively. The modulation can result in the
clearance of antigens or control of an autoimmune disease. The Company believes
that the PROSORBA(R) column treats a dysfunctional immune system response rather
than treating the disease itself. The Company is providing financial support for
an extramural research program with leading academic laboratories to study the
mechanisms of action.
The PROSORBA(R) column is a plastic cylinder measuring three inches in
diameter and three and one half inches in height. The cylinder contains a solid
binding matrix composed of protein A bound to dry silica (sand) granules.
Protein A, a molecule produced by the fermentation of a bacterium, specifically
binds to both CICs and IgG, with a preference for CICs. The FDA classifies the
PROSORBA(R) column as a medical device. The Company produces the PROSORBA(R)
column at its own manufacturing facility which meets FDA good manufacturing
practice ("GMP") regulations for the manufacture of the product in commercial
quantities.
The Company believes that two key factors in the Company's commercial
performance will be its ability to improve PROSORBA(R) column sales for its
currently approved indication, obtain FDA marketing approval for additional
disease indications for the PROSORBA(R) column, and obtain and develop
complementary therapeutic and diagnostic technologies. The Company's current
clinical efforts are focused primarily on rheumatoid arthritis.
RHEUMATOID ARTHRITIS
Rheumatoid arthritis is a potentially crippling autoimmune disease that
is estimated to affect over 5,000,000 people in North America and Europe. In
rheumatoid arthritis, the body's immune system inappropriately makes antibodies,
called rheumatoid factors, that collect in the joints and surrounding soft
tissue causing inflammation and tissue damage. Joints, typically those in the
hand, become painful and swollen, lose movement, and become deformed. These
individuals not only suffer a significantly reduced quality of life, but also a
shortened life expectancy.
In September 1995, the Company announced the results of its 15 patient
pilot clinical trial that used the PROSORBA(R) column for therapy in rheumatoid
arthritis. The results showed a statistically significant 76% reduction in
painful joints and a 70% reduction in swollen joints in 11 patients three months
after completing
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treatment with the PROSORBA(R) column. The Company believes that these findings
confirm the potential utility of the PROSORBA(R) column in treating rheumatoid
arthritis reported by an earlier independent study published in the JOURNAL OF
RHEUMATOLOGY in May 1994.
Also in September 1995, the Company submitted the final results of the
pilot study as well as a proposed pivotal trial protocol to the FDA. The
protocol submitted to the FDA described a prospective, randomized, multi-center,
double-blind, controlled trial involving up to 268 patients at a minimum of
twelve centers. The patients are to be randomly entered into two treatment
groups. Approximately half of the patients will be treated with the PROSORBA(R)
column and the other half of the patients with a placebo treatment. In November
1995, the Company announced that the FDA had conditionally approved its
application to begin a pivotal trial at 12 centers using the PROSORBA(R) column
in the treatment of patients with rheumatoid arthritis. A conditional approval
grants the Company permission to begin a trial following approval by the
treating institution's institutional review board provided that the Company
agrees to submit information and revise the protocol as requested by the FDA.
The Company has since obtained final approval from the FDA and commenced this
clinical study.
OTHER INDICATIONS
While there are multiple additional indications in which the
PROSORBA(R) column has demonstrated some clinical effects through 1995, the
Company dedicated most of its internal resources, apart from rheumatoid
arthritis, toward the indication of kidney transplantation. About 25% of
patients awaiting kidney transplantation are ineligible for a transplant because
they have developed antibodies, called alloantibodies, to a variety of donor
tissues. These alloantibodies would immediately recognize a transplanted kidney
as "foreign" and mount an immune attack against it. Prevention of this acute
rejection involves the use of immunosuppressive drugs to reduce the body's
tendency to reject foreign tissue, but drug therapy does not remove the
sensitized antibodies. Patients waiting for a transplant are typically on
dialysis which is an expensive medical maintenance procedure which provides no
permanent therapeutic benefit.
In August 1995, the Company began a pilot clinical trial to evaluate
the PROSORBA(R) column as a means to increase the number of patients eligible
for kidney transplantation. The study was designed to determine if the
PROSORBA(R) column treatments will reduce the level of sensitizing antibodies
which cause acute organ rejection and which prevent a significant portion of the
patient population from receiving donor kidneys. The Company has suspended
enrollment of patients in this study and is in the process of evaluating the
merits of continuing the study in light of the other opportunities available to
it.
Additionally, the Company intends over-time to pursue applications for
the use of the PROSORBA(R) column in the treatment of certain other autoimmune
diseases, organ transplantations and cancers. The Company's Investigational
Device Exemptions ("IDEs") which allow the Company to perform human clinical
trials include the following diseases: rheumatoid arthritis, cancer, myasthenia
gravis, systemic lupus erythematosus, multiple sclerosis, thrombotic
thrombocytopenic purpura, and kidney transplantation. Such trials would be
initiated if sufficient financing is obtained and the business potential of each
therapeutic opportunity is consistent with the Company's goals. The Company is
presently unable to predict when, or if, FDA approval for any such indications
will be obtained.
OTHER TECHNOLOGY
In November 1994, the Company's diagnostic division entered into a
licensing agreement under which it has licensed the right to use proprietary
nucleic acid probe technology (a genetic screening test) to predict which
rheumatoid arthritis patients will develop severe disease and hence may benefit
from early aggressive therapy. The test is currently a manually performed
reference laboratory test. In January 1995, the Company obtained the rights to
hybridization and chemical signal generation technology as well as automated
clinical instrumentation which combined could provide the Company with the
opportunity to create an automated laboratory test using the nucleic acid probe
technology.
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The diagnostics division was originally formed in 1992 as a
majority-owned subsidiary of the Company called CELx Corporation ("CELx").
During the quarter ended June 30, 1995, the Company and CELx agreed to the
merger of CELx into the Company and the exchange of Capital Stock of CELx held
by persons other than the Company into an aggregate of 312,500 shares of the
Company's Common Stock. The merger of CELx into the Company resulted in a
$625,000 "purchased in process research and development" expense. The expense
was based on the fair market value of the Company's Common Stock as of the date
of the merger. The diagnostics division was originally created to employ
proprietary immunoassay technology to develop specific assays that provide
greater sensitivity and specificity than presently available in the market. The
diagnostics program is currently under evaluation within the Company and an
active effort to outlicense the technology is underway.
In 1995, 1994 and 1993, the Company spent approximately $3.22 million,
$2.11 million and $2.06 million, respectively, on research and development.
SCIENCE PROGRAM PROGRESS
The Company has established three scientific advisory boards to provide
scientific and clinical support and guidance related to the Company's products.
The areas of focus of the scientific advisory boards are immunology,
rheumatology and hematology.
The Immunology Advisory Board is currently composed of Gerald T. Nepom,
Ph.D., M.D., Scientific Director of the Virginia Mason Research Center in
Seattle, Washington and Eng Tan, M.D., Scripps Research Institute, San Diego.
The Company intends to add one more member to the Immunology Advisory Board in
the near future. The focus of this advisory board will be to provide guidance to
the extramural research investigating the PROSORBA(R) column's immunologic
mechanism of action.
The Rheumatology Advisory Board (the "RAB") is composed of Dr. David
Felson, Professor of Medicine and Public Health and Director, B.U. Arthritis
Health Services Center, Boston University, Dr. Richard Panush, Professor and
Chairman, Department of Medicine, St. Barnabas Medical Center, Livingston, New
Jersey and Dr. George Ehrlich, Adjunct Professor of Medicine, University of
Pennsylvania. The RAB will oversee and guide the Company's programs in
rheumatoid arthritis. The RAB members are all serving as advisers to the FDA in
the Drug Division which reviews New Drug Applications for rheumatology
pharmaceutical product.
In 1996, the Company began providing financial support to several
leading research facilities to further their efforts in studying the mechanism
of action of the PROSORBA(R) column in the treatment of rheumatoid arthritis.
The persons who will serve on the Hematology Advisory Board are
currently being considered by the Company.
The caliber of these Board members reflects the Company's commitment to
undertake new clinical trials to aimed at developing better information relating
to the profile of the PROSORBA(R) column through a rigorous, controlled
scientific study.
MARKETING AND CUSTOMERS
Prior Distribution Agreement With Baxter
Historically, the PROSORBA(R) column was sold by the Company's internal
sales force to physicians in the fields of immunology, hematology and oncology.
The Company's domestic sales force consisted of 15 sales representatives, all of
whom had technical backgrounds and prior sales experience in the medical
products area.
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The Company's marketing program included direct mail, telemarketing, journal
advertising, trade show participation, and physician seminars.
In February 1994, the Company entered into a 10-year exclusive
distribution agreement, with certain "take or pay" and purchase commitments,
with Baxter granting distribution rights of its PROSORBA(R) column in the United
States and Canada for the treatment of thrombocytopenia and the first right to
negotiate for new PROSORBA(R) column indications. Baxter assumed the Company's
sales and distribution responsibilities in April 1994. Baxter, at its own
expense, was to provide sales and marketing support for the sale of the product
during the term of the agreement.
On March 18, 1996, the Company and Baxter terminated the exclusive
distribution agreement. Under the termination agreement, effective May 1, 1996,
the Company regained the right, among other things, to sell its PROSORBA(R)
columns directly to customers who had previously purchased PROSORBA(R) columns
through Baxter as well as to any other potential customers who wish to purchase
the PROSORBA(R) columns. As a result of the termination of the distribution
agreement, it is necessary for the Company to establish its own domestic sales
force for the marketing and sale of the Company's PROSORBA(R) column. The
Company is actively recruiting a domestic sales force, and expects to complete
the hiring of the initial group of six sales representatives by the fall of
1996. See "Risk Factors -- Prior Exclusive Agreement with Baxter; Necessity of
Establishing a Sales Force."
Other
In the international arena, the Company has entered into exclusive
agreements for distribution of the PROSORBA(R) column in Spain, Korea, Mexico,
Brazil, Argentina, and Hong Kong. However, sales to international customers
represent less than 10% of the Company's product sales.
No customer represented more than 10% of the Company's annual sales
during the year ended December 31, 1993. For the years ended December 31, 1994
and 1995, sales to Baxter represented approximately 70% and 91%, respectively,
of the Company's sales.
RESTRUCTURING PLAN
The Company is in the process of implementing a substantial
restructuring plan. The restructuring plan is intended to reduce the Company's
overhead and recurring costs by reducing the Company's work force and
consolidating its two manufacturing facilities into one central manufacturing
facility located in Redmond, Washington. By eliminating approximately 20
positions, the Company expects to realize an annual salary savings in excess of
$1.0 million. In addition, although the Company estimates it will incur
approximately $1.0 million in capital expenditures associated with the
consolidation of its manufacturing operations, the Company believes such
consolidation will result in a reduction of overhead expenses. Furthermore, the
restructuring plan includes relocating all of the Company's operations, except
manufacturing, from Seattle, Washington to San Diego, California by the end of
1996. The Company believes that relocating its operations to San Diego, widely
recognized as the fourth largest biotechnology center in the United States, will
provide the Company with greater exposure within the industry and better
position the Company to market its products. In addition, in the event the
Company wishes to expand staffing, San Diego's highly skilled work force will
provide significant resources from which the Company may draw upon to fill any
future staffing needs. The restructuring is not yet completed and there can be
no assurance that such a restructuring will be completed. Even if such a
restructuring is completed, there can be no assurance that it will be
successfully implemented.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company believes that its success depends primarily on the
experience, capabilities, and skills of its personnel. Notwithstanding this
fact, however, the Company seeks to protect its intellectual property rights by
a variety of means, including patents, maintaining trade secrets and proprietary
know-how, and technological innovation to develop and maintain its competitive
position. There can be no assurance that the Company will be able to obtain
additional patents either in the United States or in foreign jurisdictions or
that, if issued, such patents
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will provide sufficient protection or be of commercial benefit to the Company.
Insofar as the Company relies on trade secrets and unpatented proprietary
know-how, there can be no assurance that others will not independently develop
similar technology or that secrecy will not be breached. Finally, there can be
no assurance that the Company will be able to develop further technological
innovations.
The Company presently owns nine issued U.S. patents and four foreign
patents which expire between 2004 and 2009. The process used in manufacturing
the PROSORBA(R) column is covered by one of these patents. The Company has an
exclusive license for a U.S. patent for a genetic screening test to predict
which rheumatoid arthritis patients will develop severe disease. In addition,
the Company has an exclusive license for a U.S. patent for treating cellular Fc
receptor-mediated hypersensitivity immune disorders.
There can be no assurance that the Company's patents will afford
commercially significant protection of its proprietary technology or have
commercial application. There has been no judicial determination of the validity
or scope of its proprietary rights. Moreover, the patent laws in foreign
countries may differ from those of the United States, and the degree of
protection afforded by foreign patents may be different. The prosecution and
defense of validity and infringement issues before the forums in which such
issues may be raised are complicated, and it is not possible to predict the
outcome with certainty.
Others have filed applications for, or have been issued, patents and
may obtain additional patents and other proprietary rights relating to products
or processes competitive with those of the Company. The scope and validity of
such patents is presently unknown. If existing or future patents are upheld as
valid by courts, the Company may be required to obtain licenses to use
technology covered by such patents.
Various scientific personnel of the Company in the past have been
associated with non-profit research or educational institutions that typically
require researchers to execute agreements giving such institutions broad rights
to inventions created or developed during the period that the scientist is
associated with such institution. The Company's former Chairman of the Board and
former Chief Scientific Officer Dr. Frank R. Jones has been a party to such
agreements in the past. While no such institution has to date asserted rights to
the Company's technology, such assertions may be made in the future. If such
assertions are made, the Company may be forced to litigate to protect its rights
to such technology.
PROSORBA(R) column is a registered trademark of the Company.
FDA REGULATIONS AFFECTING THE COMPANY
The PROSORBA(R) column is regulated by the FDA as a Class III device.
The regulatory approval of a Class III device in the United States intended for
therapeutic use in humans involves many steps including preclinical and clinical
testing. Preclinical evaluation of a Class III device includes testing to
demonstrate that in clinical studies with human subjects the product would not
present an unreasonable hazard. Preclinical evaluation of the PROSORBA(R) column
was conducted as part of the approval process for treatment of patients with
ITP.
For each additional disease that the Company wants to treat with the
PROSORBA(R) column, clinical testing must be conducted. Before such clinical
testing can begin, an investigational device exemption ("IDE") application must
be prepared and filed with the FDA. This application consists of (i) information
on the composition of the product, (ii) manufacturing data, (iii) results of all
preclinical safety and effectiveness studies, and (iv) a design of the study and
protocol. If the application has not been denied or if additional information
has not been requested by the FDA within 30 days of submission, the applicant
may then begin clinical trials.
The clinical testing of a device may consist of a preliminary
feasibility study leading to a larger study of safety and effectiveness, or it
may consist of only the larger safety and effectiveness study. Upon completion
of the study and compilation of the data, a PMA application can be filed. The
FDA is required to respond to the PMA submission within 180 days, although the
FDA may not and often does not adhere to this schedule and further review may
take additional time. After the FDA completes its review of the PMA application,
the clinical study data is reviewed by an advisory panel of medical experts who
are not part of the FDA. The applicant is required to
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answer questions posed by this panel. Based on its review of the data, the
advisory panel may make a recommendation of approval or nonapproval to the FDA.
The FDA usually follows the recommendation of the panel but is not required to.
Assuming the advisory panel recommends approval of the PMA, the FDA may approve
the application and the product may then be commercially distributed.
The manufacture and distribution of medical devices are subject to
continuing FDA regulation. In addition to the requirement that the device be
marketed only for its approved uses, applicable law requires compliance with the
FDA's GMP regulations. Failure to comply with the GMP regulations or with other
applicable legal requirements can lead to federal seizure of volatile products,
injunctive actions brought by the federal government, and potential criminal
liability on the part of the Company and of the officers and employees of the
Company who are responsible for the activities that lead to the violations.
Although the Company has received marketing approval from the FDA for
the treatment of ITP with the PROSORBA(R) column, there can be no assurance that
any marketing clearances for other diseases or products will be granted on a
timely basis, or at all, if that it will be economically feasible to
commercialize the PROSORBA(R) column for these other diseases. The FDA may also
require post-marketing testing and surveillance programs to monitor the
effectiveness and safety of the Company's products. Product marketing approvals
may be withdrawn for noncompliance with regulatory standards or the occurrence
of unforeseen problems following initial marketing.
The PROSORBA(R) column is commercially distributed under a PMA that was
approved by the FDA in 1987. Changes to the product and its manufacturing
process, and certain types of labeling changes must be approved by the FDA prior
to implementation. The Company currently has one supplement to the PMA pending
with the FDA for a labeling change addressing the use of ancillary equipment
during the PROSORBA(R) column therapy. The FDA has indicated to the Company that
the PMA supplement would be approvable if certain additional information is
provided. There can be no assurance that any future supplements will be approved
by the FDA.
COMPETITION
The PROSORBA(R) column, as well as other products which may be
developed by the Company in the future, are intended to compete with
conventional methods of treatment which generally consist of surgery, drug, or
radiation therapy and which have been accepted by the medical community as
classical treatment methods. In addition, the Company intends to compete with
methods of treatment focusing on the artificial stimulation and/or modification
of the human immune system by material or synthetic drugs or genetically
engineered compounds which are being pursued by numerous biotechnology and
medical companies and research institutions. Many of the Company's potential
competitors have significantly greater resources than the Company. The
PROSORBA(R) column represents a different approach to the treatment of
immune-related diseases inasmuch as it focuses on the removal of CICs that are
damaging in various autoimmune disorders. The Company is aware of a select
number of other companies which are known to be pursuing approaches to disease
treatment similar to the Company's methodology. In addition, it is always
possible that established companies and research institutions with greater
resources may develop other treatment methods for various diseases.
The Company believes that key factors in the Company's commercial
performance will be its ability to improve PROSORBA(R) column sales for its
currently approved indication, ITP, obtain marketing approval for additional
disease indications for the PROSORBA(R) column and obtain and develop
complementary technologies.
The Company's competitive success will also depend on market acceptance
of its therapeutic approach, its scientific expertise, the PROSORBA(R) column's
performance measured against competing products, adequate funding, on its
ability to develop, protect, and market products in the future its continued
ability to attract and retain skilled and experienced personnel, to develop and
secure the rights to advanced proprietary technology and to commercially exploit
its technology prior to the development of competitive products by others.
25.
<PAGE> 28
RAW MATERIALS SUPPLY
The Company believes that raw materials and other components are
available in sufficient quantities to meet production requirements for the
PROSORBA(R) column. Sales of the PROSORBA(R) column are not subject to seasonal
fluctuation.
PROPERTIES
In October 1991, the Company entered into an eight-year lease for
14,400 square feet of production, laboratory and administrative facilities in
Seattle, Washington. In conjunction with the Company's current restructuring
plan and corresponding reduction in facilities, this space was sub-leased to
another party in April 1996 for the remainder of the lease term. The Company
retained rights to use a small portion of the space until alternate facilities
are available or complete.
The Company leases an 8,000 square foot manufacturing facility in
Redmond, Washington. The facility is currently used to produce commercial
quantities of both protein A and the chemically coated silica matrix used in the
manufacture of the PROSORBA(R) column. Assembly of the PROSORBA(R) column has
historically been performed in the Company's Seattle, Washington facility. The
Redmond facility, however, is currently under renovation so that both raw
material production and assembly of the PROSORBA(R) column can be performed in a
single facility. Although the Redmond facility currently complies with the FDA's
GMP regulations, the renovated facility, when complete, must complete the FDA
GMP re-approval process. There can be no assurance that the renovated facility
will receive GMP approval in a timely manner, if at all. The Company's lease on
the Redmond facility expires in 2004.
In June 1996, the Company entered into a five-year lease for
approximately 2,800 square feet of administrative space in San Diego,
California. The Company's administrative, research and medical personnel will be
located in the San Diego facility.
EMPLOYEES
As of June 14, 1996, the Company employed 23 people, six of whom were
primarily engaged in research and development, two in marketing and sales, ten
in manufacturing and customer support and five in finance and administration.
Management believes the Company's relationship with its employees is good.
LEGAL PROCEEDINGS
On February 15, 1994, the Company issued a press release announcing the
restatement of its results of operations for the third quarter ended September
30, 1993. The Company filed a Current Report on Form 8-K, dated June 23, 1994,
with the Securities and Exchange Commission with respect to changing the
Company's certifying accountant. On August 16, 1994, the Company received a
letter from the Commission notifying the Company that the Commission was
conducting a preliminary inquiry into the restatement of the Company's results
of operations and the change in the Company's certifying accountant and
requesting certain information. The Company has cooperated with the Commission.
In January 1996, Commission staff notified the Company that it intended to
propose that the Commission initiate proceedings to seek injunctive relief
against the Company enjoining it from future violations of the federal
securities laws. The Commission staff further advised the Company that it
intended to seek similar injunctive relief and civil penalties against Alex P.
de Soto, the then Chief Financial Officer of the Company. The Commission invited
both the Company and Mr. de Soto to prepare and file with the Commission a Wells
Submission to provide the Commission with any additional relevant information
prior to formal action by the Commission. The Company is fully cooperating with
the Commission staff in order to resolve the matters as expeditiously as
possible.
The Company is not a party to any material legal proceedings.
26.
<PAGE> 29
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, the positions held
by them and their ages as of June 14, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jay D. Kranzler, M.D., Ph.D (4)........... 38 Chief Executive Officer, Chief Scientific Officer and Vice
Chairman of the Board of Directors
Debby Jo Blank, M.D.(4)................... 44 President, Chief Operating Officer and Director
Susan E. Feiner........................... 27 Director of Finance, Controller, Secretary and Treasurer
Richard M. Crooks, Jr.(1) (2) (3)......... 56 Chairman of the Board
Philip J. O'Reilly(1) (2) (3)............. 58 Director
Jack H. Vaughn(1) (2)..................... 75 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Stock Option Committee
(4) Member of Non-Executive Officer Stock Option Committee
Jay D. Kranzler, M.D., Ph.D. was appointed Chief Executive Officer and
Vice Chairman of the Board of Directors of the Company in December 1995. Dr.
Kranzler assumed the position of Chief Scientific Officer of the Company in May
1996. From January 1989 until August 1995, Dr. Kranzler served as President,
Chief Executive Officer and a director of Cytel Corporation, a publicly-held
biotechnology company. Dr. Kranzler has been an adjunct member of the Research
Institute of Scripps Clinic since January 1989. Before joining Cytel, Dr.
Kranzler was employed by McKinsey & Company, a management consulting firm, as a
consultant specializing in the pharmaceutical industry from 1985 to January
1989.
Debby Jo Blank, M.D. was appointed President, Chief Operating Officer
and Director of the Company in December 1995. Prior to joining the Company, from
1994 to December 1995, Dr. Blank was Senior Vice President, Marketing, for
Advanced Technology Laboratories, a publicly-held manufacturer and distributor
of ultrasound equipment. From 1993 to 1994, she was Vice President, U.S.
Marketing for Syntex. From 1989 to 1993, Dr. Blank held various positions at the
DuPont Company and the DuPont Merck Pharmaceutical Company ("DuPont"), including
Vice President Worldwide Marketing, Vice President, New Product Planning &
Licensing, and Vice President, Strategy and Business Development. Before joining
DuPont, she was employed by the management consulting firm Arthur D. Little,
from 1986 to 1989 as a consultant in its pharmaceutical practice.
Susan E. Feiner was appointed Director of Finance, Controller,
Corporate Secretary and Corporate Treasurer of the Company in April 1996. Prior
to joining the Company, from March 1994 until March 1996, Ms. Feiner held
various positions, including Finance Manager and Financial Accounting Manager at
Pyxis Corporation, a publicly-held manufacturer and distributor of automated
medication distribution systems. From July 1990 until March 1994 she was
employed by Ernst & Young LLP, as a senior auditor.
Mr. Richard M. Crooks, Jr. has been a director of the Company since
1994. Mr. Crooks has been President of RMC Consultants, a financial advisory
services firm, since June 1990. Mr. Crooks is a director of and consultant to
Allen & Company Incorporated, a privately held investment banking firm, which is
the Company's principal stockholder. He served as a Managing Director of Allen &
Company Incorporated for more than five years prior to June 1990. Mr. Crooks is
also a director of Excalibur Technologies Corporation.
27.
<PAGE> 30
Mr. Philip J. O'Reilly was appointed as a director of the Company in
1994. Mr. O'Reilly is a partner in the law firm of O'Reilly, Marsh, Kearney &
Corteselli P.C., in Mineola, New York. He has been in private practice for more
than twenty years. Mr. O'Reilly is also a director of Excalibur Technologies
Corporation.
Mr. Jack H. Vaughn was appointed as a director of the Company in 1991.
Currently, Mr. Vaughn is Chairman of ECOTRUST, a Portland, Oregon-based
foundation promoting environmentally friendly development in the Pacific
Northwest. From 1988 to 1992, he was the U.S. Government's Senior Environmental
Advisor for Central America. Mr. Vaughn was the founding Chairman of
Conservation International, a private foundation encouraging biological
diversity. Mr. Vaughn was a director of Allegheny & Western Energy Corporation
from 1981 through 1995 and was a member of its Compensation Committee.
Each officer serves at the discretion of the Board of Directors. See
"Employment Agreements." The Company's Bylaws permit the Board of Directors to
establish by resolution the authorized number of directors, and the Company
currently has six directors authorized. The Company's Restated Certificate of
Incorporation and Bylaws provide that the Board of Directors shall be divided
into three classes, each class consisting, as nearly as possible, of one-third
of the total number of directors, with each class having a three-year term. Each
director holds office until the annual meeting of stockholders of the Company
which coincides with the end of such director's three-year term and until such
director's successors have been elected and duly qualified. There are no family
relationships among any of the directors or officers of the Company.
BOARD COMMITTEES
The Board of Directors has an Audit Committee, a Compensation Committee
and a Stock Option Committee. In addition, the Stock Option Committee has a
Non-Executive Officer Stock Option Committee.
The Audit Committee meets with the Company's independent auditors at
least annually to review the results of the annual audit and discuss the
financial statements; recommends to the Board the independent auditors to be
retained; and receives and considers the accountants' comments (out of the
presence of management) as to controls, adequacy of staff and management
performance and procedures in connection with audit and financial controls. The
Audit Committee is composed of three directors: Messrs. Vaughn (Chairman),
Crooks and O'Reilly.
The Compensation Committee makes recommendations based on management's
inputs concerning salaries and incentive compensation, awards stock options to
employees and consultants under the Company's stock option plans and otherwise
determines compensation levels and performs such other functions regarding
compensation as the Board may delegate. The Compensation Committee is composed
of three directors: Messrs. Vaughn, Crooks and O'Reilly.
The Stock Option Committee considers and recommends to the Board of
Directors the number and terms of stock options to be granted to officers and
employees of the Company. The Stock Option Committee is composed of two
directors: Messrs. Crooks and O'Reilly.
The Non-Executive Officer Stock Option Committee was created by the
Stock Option Committee in February 1996. It has the authority to grant certain
numbers of options to employees who are not executive officers of the Company;
provided, however, that the number of options granted to employees by the
Non-Executive Officer Stock Option Committee is limited to 200,000 per each
period between Board meetings. The Non-Executive Officer Stock Option Committee
is comprised of two directors: Drs. Kranzler and Blank.
DIRECTOR COMPENSATION
Each nonemployee director is entitled to receive $12,000 per year for
services as a nonemployee director. Messrs. O'Reilly and Vaughn each received
$12,000 in cash compensation for service as a director during fiscal year 1995.
Under the Company's 1988 Nonqualified Stock Option Plan, each nonemployee
director is entitled to receive an option to purchase 10,000 shares of Common
Stock of the Company upon such person's initial election to the Board. In
addition, each nonemployee director shall receive an additional option to
purchase 10,000 shares of
28.
<PAGE> 31
Common Stock of the Company upon each annual reelection of such person to the
Board. See "--Equity Incentive Plans." Each of Messrs. Crooks, O'Reilly and
Vaughn received options to purchase 10,000 shares of Common Stock for service as
a director during fiscal year 1995. Directors who are employees of the Company
do not receive any fee for their services as directors. None of the Company's
directors receive any fees for their service on any of the Board's committees.
All of the Company's directors are reimbursed for their out-of-pocket travel and
accommodation expenses incurred in connection with their service as directors of
the Company.
EXECUTIVE COMPENSATION
The following table sets forth for the year ended December 31, 1995 all
compensation awarded or paid to each person who served as Chief Executive
Officer of the Company during the fiscal year ended December 31, 1995 as well as
those executive officers whose salary and bonus were in excess of $100,000 for
services rendered to the Company during the fiscal year ended December 31, 1995
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------
Number of
Annual Compensation Securities All Other
------------------------- Underlying Compensation
Name Salary($) Bonus($) Options (#) ($)(1)
- -------------------------------- --------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Jay D. Kranzler, M.D., Ph.D, (2) - $50,000 - -
Debby Jo Blank, M.D., (3) - $50,000 - -
Martin D. Cleary (4) $ 225,000 - - $403,170 (5)
Frank R. Jones, Ph.D. (6) $ 220,000 - - $ 9,240
Harvey J. Hoyt, M.D. (7) $ 175,000 - 47,500 $ 94,430 (8)
</TABLE>
(1) All Other Compensation includes Company 401(k) contributions in the
form of Common Stock of the Company.
(2) Dr. Kranzler was appointed Chief Executive Officer of the Company on
December 28, 1995 and received $20,000 as a consultant to the Company
during 1995. The $50,000 received during 1995 by Dr. Kranzler as
"Bonus" was attributable to his signing bonus which Dr. Kranzler
received upon joining the Company. Dr. Kranzler's base salary for
fiscal year 1996 will be $240,000. In addition, on January 19, 1996,
Dr. Kranzler was granted options to purchase 3,025,327 shares of Common
Stock of the Company pursuant to his employment agreement with the
Company. See "--Employment Agreements."
(3) Dr. Blank was appointed President and Chief Operating Officer on
December 28, 1995, and received $20,000 as a consultant to the Company
during 1995. The $50,000 received by Dr. Blank during 1995 as "Bonus"
was attributable to her signing bonus which Dr. Blank received upon
joining the Company. Dr. Blank's base salary for fiscal year 1996 will
be $210,000. In addition, on January 19, 1996, Dr. Blank was granted
options to purchase 1,134,497 shares of Common Stock of the Company
pursuant to her employment agreement with the Company. See
"--Employment Agreements."
(4) Mr. Cleary resigned as the Company's Chief Executive Officer,
President, Chief Operating Officer and Director on December 28, 1995.
29.
<PAGE> 32
(5) Includes $393,750 of compensation to be paid in 1996 and 1997 under the
terms of a Severance Agreement dated December 28, 1995 between Mr.
Cleary and the Company. See "Certain Transactions."
(6) Dr. Jones was Chief Executive Officer until September 30, 1994, at
which time he became Chief Scientific Officer. Dr. Jones resigned as
Chief Scientific Officer and Director of the Company effective March
29, 1996. Pursuant to his resignation agreement with the Company, Dr.
Jones received $251,500 as a severance payment in 1996. See "Certain
Transactions."
(7) Dr. Hoyt resigned as Executive Vice President and Director of the
Company on December 28, 1995.
(8) Includes $87,500 of compensation to be paid in 1996 as part of a
Severance/Consulting Agreement dated December 28, 1995 between Dr. Hoyt
and the Company. See "Certain Transactions."
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1995, to the Named Executive
Officers.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------
% of Total
Number of Options Potential Realizable Value at
Securities Granted to Assumed Annual Rates of Stock
Underlying Employees in Exercise Price Appreciation
Options Fiscal Price Expiration for Option Term (2)
Name Granted (#)(1) Year ($/Share) Date 5% 10%
---- -------------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Harvey J. Hoyt(3) 5,000 0.5% $2.125 09/30/96 $398 $797
42,500 4.2% $1.75 09/30/96 $2,789 $5,578
</TABLE>
(1) On January 19, 1996, Drs. Kranzler and Blank were granted options to
purchase 3,025,327 and 1,134,497 shares of Common Stock of the Company,
respectively. Neither Dr. Kranzler nor Dr. Blank received any options
in fiscal year 1995. See "--Employment Agreements."
(2) The potential realizable value is based on the assumption that the
price of the Common Stock appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the
option term which, with respect to Mr. Hoyt's options, was nine months.
Actual realizable value, if any, on stock option exercises is dependent
on the future performance of the Common Stock and overall market
conditions, as well as the option holder's continued employment through
the vesting period.
(3) Dr. Hoyt resigned as Executive Vice President and Director of the
Company on December 28, 1995. See "Certain Transactions."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information as of December 31,
1995, regarding options held by the Named Executive Officers. None of such
individuals exercised any options during the fiscal year ended December 31,
1995.
30.
<PAGE> 33
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at FY- In-The-Money Options at FY-End(1)
End(#) ($)
------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Martin D. Cleary 500,000 250,000 $312,500 $156,250
Frank R. Jones(2) 705,000 - $466,939 -
Harvey J. Hoyt 47,500 - $ 48,594 -
</TABLE>
(1) Calculation based on the product of (a) $2.8125, the closing price of
the Common Stock on the Nasdaq SmallCap Market on December 31, 1995,
less the exercise price, and (b) the number of applicable shares.
(2) Pursuant to Dr. Jones resignation from the Company, 705,000 options to
purchase Common Stock then held by Dr. Jones were canceled and replaced
with 705,000 new options to purchase shares of Common Stock of the
Company at a per share exercise price of $2.25. See "Certain
Transactions."
EQUITY INCENTIVE PLANS
1988 Nonqualified Stock Option Plan
In 1988, the Board adopted the Company's 1988 Nonqualified Stock Option
Plan (the "1988 Plan") pursuant to which were reserved 2,750,000 shares of the
Company's Common Stock for issuance to directors, officers, and other key
employees of and consultants to the Company. As of June 14, 1996, the Company
had outstanding options to purchase 494,500 shares Common Stock of the Company
under the 1988 Plan at a weighted average exercise price of $2.08.
The 1988 Plan permits the granting of stock options that do not qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1996, as amended (the "Code"). The 1988 Plan is administered by
the Board which, as authorized by the 1988 Plan, has delegated such
administration to the Stock Option Committee.
The terms, including exercise price and duration of options, shall be
as determined by the Stock Option Committee. Stock options granted under the
1988 Plan are nontransferable, except by will or applicable laws of descent and
distribution, or pursuant to a "qualified domestic relations order" as defined
by the Code and generally expire three months after the termination of an
optionee's service to the Company.
Under the 1988 Plan, each nonemployee director of the Company, upon
becoming a director of the Company, shall be granted an option to purchase
10,000 shares of Common Stock of the Company. Moreover, each nonemployee
director shall automatically receive an annual option to purchase an additional
10,000 shares of Common Stock of the Company upon the first business day
following the date of each annual stockholder meeting. The stock option exercise
price shall in all cases be equal to the fair market value of the Company'
Common Stock on the date of grant.
1996 Equity Incentive Plan
In January 1996, the Board adopted the Company's 1996 Equity Incentive
Plan (the "1996 Plan") under which there are reserved 7,000,000 shares of the
Company's Common Stock which may be issued to directors, officers and key
employees of, and consultants and certain advisors to, the Company.
The 1996 Plan permits the granting of options intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code to
employees of the Company (including officers and employee directors) and
31.
<PAGE> 34
the granting of options that do not so qualify or nonstatutory stock options. In
addition, the 1996 Plan permits the granting of stock appreciation rights
("SARs") in connection with incentive or nonstatutory stock options. The 1996
Plan also permits the granting of stock bonuses and rights to purchase
restricted stock. (All permitted grants of options, SARs, stock bonuses and
rights to purchase restricted stock are sometimes hereinafter collectively
referred to as the "Stock Awards"). Pursuant to the 1996 Plan, no person shall
be eligible to be granted Stock Awards covering more than 3,050,000 shares of
Common Stock in any 12-month period. As of June 14, 1996, the Company had
outstanding options to purchase 4,959,157 shares of Common Stock of the Company
under the 1996 Plan at a weighted average exercise price of $1.58.
The 1996 Plan is administered by the Board, which generally has the
power to perform such acts as the Board deems necessary or expedient to promote
the best interests of the Company which are not in conflict with the provisions
of the Plan. In addition, the Board has the power to construe and interpret the
1996 Plan and, subject to the provisions of the 1996 Plan to, among other
things, determine the persons to whom and the dates on which Stock Awards will
be granted, the type of Stock Award to be granted, the number of shares to be
subject to each Stock Award, the time or times during the term of each Stock
Award within which all or a portion of such Stock Award may be exercised, the
exercise price, the type of consideration and other terms of the Stock Award. As
authorized by the 1996 Plan, the Board has delegated administration of the 1996
Plan to the Stock Option Committee of the Board. The Board may abolish the Stock
Option Committee at any time and revest in the Board the administration of the
1996 Plan. As used herein with respect to the 1996 Plan, the "Board" refers to
the Stock Option Committee as well as to the Board itself.
The maximum term of options granted under the 1996 Plan is 10 years.
The aggregate fair market value of the Common Stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000. Stock Awards granted under the 1996 Plan are generally
nontransferable and expire three months after the termination of an optionee's
service to the Company. In general, if an optionee is permanently disabled or
dies during his or her service to the Company, such person's option may be
exercised up to 12 months following such disability and up to 18 months
following such death.
The exercise price of incentive stock options granted under the 1996
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant. In addition, the exercise price of incentive stock options
granted to any person who at the time of grant owns stock representing more than
10% of the total combined voting power of all classes of capital stock must be
at least 110% of the fair market value of such stock on the date of grant and
the term of such incentive stock option cannot exceed five years. The exercise
price of stock options that do not so qualify as incentive stock options (i.e.,
nonstatutory stock options) must be no less than 85% of the fair market value of
the Common Stock on the date of grant.
All Stock Awards granted under the 1996 Plan shall be in such form and
contain such terms and conditions as the Board shall deem appropriate. The
purchase price under any restricted stock purchase award shall not be less than
85% of the fair market value of the Common Stock of the date of grant.
Non-Plan Options.
As of June 14, 1996, there were outstanding options to purchase
1,150,835 shares of Common Stock of the Company at a weighted average exercise
price of $2.26 per share, which options were granted outside of the Company's
1988 Plan and 1996 Plan (the "Non-Plan Options"). The options were granted by
the Company to certain directors, officers, key employees of and consultants to
the Company in connection with services rendered to the Company.
The Non-Plan Options are generally for a five year term and are subject
to vesting. Holders of the Non-Plan Options may generally exercise such options
only if they are employed by the Company on the date of exercise and have been
continuously employed by the Company through such exercise date; provided
however, that upon the cessation of employment with Company, other than due to
death, a holder of Non-Plan Options may exercise such options within 30 days
after such cessation. The Non-Plan Options are nontransferable except by will or
by the laws of descent and distribution. In the event the holder of Non-Plan
Options dies while in the employ of the
32.
<PAGE> 35
Company (and such person has been continuously employed by the Company since the
date of the original grant of the Non-Plan Options to such employee), the
transferee of such options shall have the right, at any time within three months
of the original holders death, to exercise the Non-Plan Option to the extent
such option could have then been exercised by the original holder.
401(K) PLAN
The Company sponsors a defined contribution pension plan pursuant to
Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan"). The
401(k) Plan covers substantially all employees who provide more than 1,000 hours
of service during the year.
The 401(k) Plan provides for matching contributions whereby the Company
contributes Common Stock of the Company to the 401(k) Plan on behalf of
participants in an amount equal to 100% of the participant's contributions
during the six-month periods ending on the last day of June and December of each
year. The Common Stock contributed by the Company generally will vest six months
after the amount of the contribution is determined; provided that the employee
is still employed by the Company at the end of the vesting period. Contributions
made on behalf of employees who have been employed by the Company for more than
five years vest immediately.
EMPLOYMENT AGREEMENTS
On December 28, 1995, the Company entered into a five year employment
agreement with Dr. Kranzler, the Company's Chief Executive Officer and Chief
Scientific Officer. Dr. Kranzler's annual compensation consists of base salary
of $240,000, performance based bonuses of up to an additional twenty-five
percent (25%) of annual base salary and certain options to purchase Common Stock
of the Company, as described below. In addition, Dr. Kranzler's employment
agreement provides for a sign-on bonus of $185,000, payable upon certain
milestones. As of the date hereof, approximately $100,000 of the total sign-on
bonus has been paid to Dr. Kranzler.
Dr. Kranzler was also granted an option to purchase 3,025,327 shares of
Common stock of the Company (which amount represented eight percent (8%) of the
Company's Common Stock on a fully diluted basis on the date of grant) at an
exercise price equal to $1.50 per share. The options vest twenty-five percent
(25%) immediately upon grant and thereafter ratably and daily over a four (4)
year period.
On December 28, 1995, the Company entered into a five year employment
agreement with Dr. Debby Jo Blank, the Company's President and Chief Operating
Officer. Dr. Blank's annual compensation consists of base salary of $210,000,
performance based bonuses of up to an additional twenty-five percent (25%) of
annual base salary and certain options to purchase Common Stock of the Company,
as described below. In addition, Dr. Blank's employment agreement provides for a
sign-on bonus of $185,000, payable upon certain milestones. As of the date
hereof, approximately $100,000 of the sign-on bonus has been paid to Dr. Blank.
Dr. Blank was also granted an option to purchase 1,134,497 shares of
Common Stock of the Company (which amount represented three percent (3%) of the
Company's Common Stock on a fully diluted basis on the date of grant) at an
exercise price equal to $1.50 per share. The options vest twenty-five percent
(25%) immediately upon grant and thereafter ratably and daily over a four (4)
year period.
On May 6, 1996, the Company entered into a resignation agreement (the
"Resignation Agreement") with Alex P. de Soto, the Company's former Vice
President, Chief Financial Officer, Secretary and Treasurer, whereby Mr. de Soto
resigned as an officer of the Company effective May 6, 1996, but remains an
employee of the Company through June 30, 1996. The Company is obligated to pay
Mr. de Soto $8,000 per month, including any unaccrued and unused vacation time,
while he is an employee of the Company. In addition, the Company will grant to
Mr. de Soto that number of freely tradable shares of the Company's Common Stock
equal to $25,000 divided by the last quoted sales price of the Company's Common
Stock as quoted on the Nasdaq SmallCap Market on July 19, 1996. Mr. de Soto is
entitled to retain the option to purchase 60,000 shares of Common Stock of the
Company at an exercise price of $1.50 per share granted to him by the Company
under his previous employment agreement.
33.
<PAGE> 36
Also on May 6, 1996, the Company entered into an agreement with Mr. de
Soto which provides for the retention of Mr. de Soto as a consultant to the
Company pursuant to a consulting agreement (the "Consulting Agreement") for a
period of ten months commencing July 1, 1996; as long as certain conditions
precedent are satisfied on or before that date. The Consulting Agreement
provides for the payment to Mr. de Soto of $7,000 per month.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Under Section 145 of the Delaware General Corporation Law (the "DGCL"),
the Company has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933.
The Company's Certificate of Incorporation and By-laws include
provisions to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Section 102(b)(7) of the DGCL and (ii) require the Company to indemnify its
directors and officers to the fullest extent permitted by applicable law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the DGCL, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' or officers' duty of care, and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under the DGCL. In addition,
each director will continue to be subject to liability pursuant to Section 174
of the DGCL, for breach of the director's duty of loyalty to the Company, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Company or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Company or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Company or its stockholders, for acts
or omission that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its stockholders, for
improper transactions between the director and the Company and for improper
loans to directors and officers. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities law or
state or federal environmental laws.
The Company has entered into a letter agreement with a certain former
executive officer whereby the Company has agreed to pay for expenses (including
attorney's fees) incurred by such executive officer in connection with an
ongoing SEC inquiry in advance of any final disposition of such inquiry. In the
event it is ultimately determined that such executive officer is not entitled to
indemnification under the terms of the Company's Bylaws or other applicable laws
or regulations such executive officer is obligated to repay all amounts advanced
by the Company on such executive officer's behalf.
The Company has an insurance policy covering the officers and directors
of the Company with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
34.
<PAGE> 37
CERTAIN TRANSACTIONS
On May 6, 1996, the Company entered into a resignation agreement (the
"Resignation Agreement") with Alex P. de Soto, the Company's former Vice
President, Chief Financial Officer, Secretary and Treasurer, whereby Mr. de Soto
resigned as an officer of the Company effective May 6, 1996, but remained an
employee of the Company through June 30, 1996. The Company is obligated to pay
Mr. de Soto $8,000.00 per month, including any unaccrued and unused vacation
time, while he is an employee of the Company. In addition, the Company will
grant to Mr. de Soto that number of freely tradable shares of the Company's
Common Stock equal to 25,000 divided by the last quoted sales price of the
Company's Common Stock as quoted on the Nasdaq SmallCap Market on July 19, 1996.
Mr. de Soto is entitled to retain the option to purchase 60,000 shares of Common
Stock of the Company at an exercise price of $1.50 per share granted to him by
the Company under his previous employment agreement.
Also on May 6, 1996, the Company entered into an agreement with Mr. de
Soto which provides for the retention of Mr. de Soto as a consultant to the
Company pursuant to a consulting agreement (the "Consulting Agreement") for a
period of ten months commencing July 1, 1996. The Consulting Agreement
provides for the payment to Mr. de Soto of $7,000 per month.
On March 29, 1996, the Company entered into a letter of resignation
(the "Letter of Resignation") with Dr. Frank Jones relating to the terms and
conditions of Dr. Jones resignation as Chief Scientific Officer and Director of
the Company. Pursuant to the Letter of Resignation, the Company paid to Dr.
Jones a severance payment in the aggregate amount of $251,500 (which amount is
net of amounts paid by Dr. Jones to purchase certain personal property from the
Company). Under the terms of the Letter of Resignation, options and warrants
held by Dr. Jones to purchase 705,000 shares of Common Stock of the Company at
various exercise prices were canceled and non-plan stock options to purchase
705,000 shares of the Company's Common Stock at an exercise price of $2.25 per
share were issued to Dr. Jones in their place.
In February 1996, the Company entered into a letter agreement (the
"Letter Agreement") with Mr. de Soto whereby the Company agreed to pay for
expenses (including attorney's fees) incurred by Mr. de Soto in connection with
the defense of the below-referenced Commission inquiry in advance of any final
disposition of such inquiry. In the event it is ultimately determined that Mr.
de Soto is not entitled to indemnification under the terms of the Company's
Bylaws or other applicable laws or regulations, Mr. de Soto is obligated to
repay all amounts advanced by the Company on his behalf in connection with the
Commission inquiry.
In January 1996, the Company completed a private placement of 8,540,702
shares of its Common Stock with certain accredited investors at a purchase price
of $1.50 per share, resulting in net proceeds to the Company of approximately
$12.0 million (the "Private Placement"). Allen & Company Incorporated acted as a
non-exclusive placement agent for the Company and received 20,000 shares of
Common Stock of the Company as a placement agent fee. As of June 14, 1996, Allen
& Company Incorporated beneficially held approximately 17.9% of the Company's
outstanding Common Stock. Mr. Richard M. Crooks, Jr. is a director of the
Company and is also a director of and a consultant to Allen & Company
Incorporated. See "Management." As of June 14, 1996, Mr. Crooks beneficially
held approximately 4.1% of the Company's Common Stock. See "Management" and
"Principal Stockholders and Selling Security Holder."
On December 29, 1995, Allen & Company Incorporated purchased from the
Company $500,000 principal amount of Senior Debentures due July 1, 1996. The
Senior Debentures were convertible at a rate of one share of Common Stock for
each $1.50 of outstanding principal amount of the Senior Debentures. In January
1996, in conjunction with the closing of the Private Placement, the Senior
Debentures held by Allen & Company Incorporated automatically converted into
333,333 shares of the Company's Common Stock.
35.
<PAGE> 38
On December 28, 1995, the Company entered into a five year employment
agreement with Dr. Jay D. Kranzler, the Company's Chief Executive Officer and
Chief Scientific Officer. Dr. Kranzler's annual compensation consists of a base
salary of $240,000 and performance-based bonuses of up to $60,000. In addition,
Dr. Kranzler's employment agreement provides for a $185,000 sign-on bonus,
payable upon the satisfaction of certain milestones, and grants Dr. Kranzler
options to purchase 3,025,327 shares of Common Stock of the Company at an
exercise price equal to $1.50 per share. Such options are subject to vesting.
See "Management -- Employment Agreements."
On December 28, 1995, the Company entered into a five year employment
agreement with Dr. Debby Jo Blank, the Company's President and Chief Operating
Officer. Dr. Blank's annual compensation consists of a base salary of $210,000
and performance-based bonuses of up to $52,500. In addition, Dr. Blank's
employment agreement provides for a sign-on bonus of $185,000, payable upon
certain milestones, and grants Dr. Blank options to purchase 1,134,497 shares of
Common Stock of the Company at an exercise price equal to $1.50 per share. Such
options are subject to vesting. See "Management -- Employment Agreements."
On December 28, 1995, the Company entered into a severance agreement
("Severance Agreement") with Mr. Martin D. Cleary relating to Mr. Cleary's
resignation from his positions as Chief Executive Officer, President, Chief
Operating Officer and Director of the Company. Under the Severance Agreement,
the Company will pay Mr. Cleary a total of $393,750 during 1996 and 1997.
On December 28, 1995 the Company entered into a consulting agreement
("Consulting Agreement") with Dr. Harvey J. Hoyt. Dr. Hoyt accepted a consulting
engagement in lieu of his positions as Executive Vice President and Director of
the Company and resigned from those positions. Under the terms of the Consulting
Agreement, the Company agreed to pay Dr. Hoyt compensation at an annual rate of
$175,000 and accelerate the vesting of options to purchase 47,500 shares of
Common Stock previously granted by the Company to Dr. Hoyt. The Consulting
Agreement expires by its terms on June 30, 1996, unless extended by the parties.
On February 15, 1994, the Company issued a press release announcing the
restatement of its results of operations for the third quarter ended September
30, 1993. The Company filed a Current Report on Form 8-K, dated June 23, 1994,
with the Securities and Exchange Commission (the "Commission") with respect to
changing the Company's certifying accountant. On August 16, 1994, the Company
received a letter from the Commission notifying the Company that the Commission
was conducting a preliminary inquiry into the restatement of the Company's
results of operations and the change in the Company's certifying accountant and
requesting certain information. The Company has cooperated with the Commission.
In January 1996, Commission staff notified the Company that it intended to
propose that the Commission initiate proceedings to seek injunctive relief
against the Company enjoining it from future violations of the federal
securities laws. The Commission staff further advised the Company that it
intended to seek similar injunctive relief and civil penalties against Alex P.
de Soto, who was then Vice President, Chief Financial Officer, Secretary, and
Treasurer of the Company (Mr. de Soto subsequently resigned from all such
positions). The Commission invited both the Company and Mr. de Soto to prepare
and file with the Commission a Wells Submission to provide the Commission with
any additional relevant information prior to formal action by the Commission.
The Company is fully cooperating with the Commission staff in order to resolve
the matters as expeditiously as possible.
36.
<PAGE> 39
PRINCIPAL STOCKHOLDERS AND SELLING SECURITY HOLDER
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's stock as of June 14,
1996 by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of a class of the Company's Common Stock; (ii) each of the
Company's directors, (iii) each Named Executive Officer, and (iv) all executive
officers and directors as a group. Unless otherwise indicated in the footnotes
to this table, each of the stockholders named in this table has sole voting
power and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 28,727,257 shares of Common Stock
outstanding on June 14, 1996, adjusted as required by rules promulgated by the
Commission (and assuming the number of shares of Common Stock beneficially owned
by any such security holder remained unchanged since the filing of any relevant
Schedule 13D filed with the Commission by or on behalf of such security holder).
Ownership information is based, in part, upon information furnished by the
respective entities and individuals, including any Schedule 13D or 13G and any
Section 16 filings.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
SHARES BENEFICIALLY ---------------------------------
OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Allen & Company Incorporated 5,322,462(2) 17.9% 17.9%
711 Fifth Avenue
New York, New York 10022
Aries Financial Services 1,790,832(3) 6.2% 6.2%
375 Park Avenue, Suite 1501
New York, New York 10152
Richard M. Crooks, Jr. 1,181,565(4) 4.1% 4.1%
Frank R. Jones 400,411 1.3% 1.3%
Martin D. Cleary 503,982(5) 1.7% 1.7%
Jay D. Kranzler 1,298,467(6) 4.4% 4.4%
Debby Jo Blank 623,725(6) 2.1% 2.1%
Jack Vaughn 66,000(7) * *
Philip J. O'Reilly 74,625(8) * *
Harvey J. Hoyt 51,683(9) * *
All Directors and Named Executive Officers as
a Group (5 persons) 3,244,382(10) 10.7% 10.7%
<CAPTION>
SELLING SECURITY HOLDER
- --------------------------------------
Brean, Murray, Foster Securities, Inc. 100,000 * 0%(11)
</TABLE>
- ------------------------
*less than one percent
(1) Except as shown otherwise in the table, the address of each stockholder
listed is in care of the Company at 4350 Executive Drive, Suite 325,
San Diego, California 92121.
37.
<PAGE> 40
(2) Includes warrants to purchase 1,060,590 shares of Common Stock. Does
not include 2,303,890 shares of Common Stock and warrants to purchase
31,600 shares of Common Stock owned by certain individuals who may be
considered affiliates of Allen & Company Incorporated. Allen & Company
Incorporated disclaims beneficial ownership of these shares of Common
Stock. This information was derived from a Schedule 13D dated January
22, 1996, filed with the Securities and Exchange Commission by Allen &
Company Incorporated.
(3) This information was derived from a Schedule 13D dated January 22,
1996, filed by Aries Financial Services with the Securities and
Exchange Commission.
(4) Includes warrants and options to purchase 40,000 shares of Common Stock
exercisable within 60 days of June 14, 1996. Includes 712,498 shares of
Common Stock and presently exercisable warrants to purchase 26,666
shares of Common Stock held by Allen & Company in which Mr. Crooks has
a pecuniary interest pursuant to an arrangement with Allen & Company
Incorporated. This information was derived from a Schedule 13D dated
January 22, 1996, filed with the Securities and Exchange Commission by
Allen & Company Incorporated.
(5) Includes options to purchase 500,000 shares of Common Stock
exercisable within 60 days of June 14, 1996.
(6) Includes 218,881 shares of Common Stock held by the Company's 401(k)
plan for which the officer as co-trustee of the plan has voting rights
to such shares. Also includes, with respect to Dr. Kranzler, options to
purchase 1,079,586 shares of Common stock of the Company and, with
respect to Dr. Blank, options to purchase 404,844 shares of Common
Stock of the Company exercisable within 60 days of June 14, 1996.
(7) Includes options to purchase 65,000 shares of Common Stock exercisable
within 60 days of June 14, 1996.
(8) Includes warrants and options to purchase 58,825 shares of Common Stock
exercisable within 60 days of June 14, 1996.
(9) Includes options to purchase 22,500 shares of Common Stock exercisable
within 60 days of June 14, 1996.
(10) Includes warrants and options to purchase 1,648,255 shares of Common
Stock exercisable within 60 days of June 14, 1996.
(11) Assumes all of the Shares offered hereby are sold by the Selling
Security Holder.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 60,000,000 shares of Common Stock,
$.02 par value per share, and 15,000,000 shares of undesignated Preferred Stock,
$.02 par value per share.
COMMON STOCK
As of June 14, 1996, there were issued and outstanding 28,727,257
shares of the Company's Common Stock held by approximately 1,073 persons.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board out of funds legally available for the payment of dividends. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. The Company's Board of Director's is presently composed
38.
<PAGE> 41
of five (5) members divided into two classes of two directors each and one class
consisting of one director. Each class of directors is elected to a three-year
term of office.
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law, an anti-takeover law. In general, Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date that the person became an interested stockholder, unless
(with certain exceptions) the "business combination" or the transaction in which
the person became an interest stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder," is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision could have an
anti-takeover effect with respect to transactions not approved in advance by the
Board, including discouraging attempts that might result in a premium over the
market price for the shares of Common Stock held by stockholders.
PREFERRED STOCK
The Board has the authority, without further stockholder action, to
issue up to 15,000,000 shares of Preferred Stock in one or more series of any
number of shares, provided, however, that the number of shares so issued shall
not exceed in the aggregate the number authorized. Each series of Preferred
Stock may have such designations, powers, preferences and privileges and such
qualification, limitations or restrictions as shall be designated by the Board.
The issuance of Preferred Stock by the Company could adversely affect the voting
power of holders of Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation, and may have the effect
of delaying, deterring or preventing a change of control of the Company, which
could have a depressive effect on the market price of the Company's Common
Stock. As of June 14, 1996, there was no Preferred Stock issued and outstanding
and the Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
Registered Warrants. As of June 14, 1996 there were outstanding
1,850,000 warrants to purchase Common Stock of the Company, which warrants have
been registered under the Securities Act (the "Warrants"). The Warrants were
issued in August 1991 as a part of a "Unit," consisting of three shares of
Common Stock of the Company and one Warrant to purchase one share of Common
Stock of the Company. As of November 27, 1991, the Warrants and shares of
Common Stock comprising the Units became separately transferable. The Warrants
were issued in registered form under a Warrant Agreement, dated as of September
6, 1991 (the "Warrant Agreement"), between the Company and Manufacturers
Hanover Trust Company of California, San Francisco, California ("MHT"), as
warrant agent. The Warrant Agreement was subsequently transferred to American
Stock Transfer and Trust Company to serve as the warrant agent for the Warrants
(the "Warrant Agent"). The following summary of the provisions of the Warrants
is qualified in its entirety by reference to the Warrant Agreement, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Each Warrant entitles the registered holder to purchase one share of
Common Stock at $2.50 per Share (the "Exercise Price") during the period
commencing on the date such Warrants are separately transferable to and
including August 29, 1996 (the "Exercise Period), subject to adjustment in
certain events referred to below. Each holder of Warrants may exercise such
Warrants by surrendering the certificate evidencing such Warrants, with the form
of election to purchase on the reverse side of such certificate properly
completed and executed, together with payment of the exercise price and any
transfer tax, to the Warrant Agent. If less than all of the Warrants evidenced
by a Warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants. Warrants that are not exercised prior to the
expiration of the Exercise Period shall become void. Payment of the Exercise
Price shall be made in the form of a certified check in an amount equal to the
aggregate Exercise price.
The Company will not issue fractional shares of Common Stock upon
exercise of the Warrants. In lieu of fractional shares, there will be paid to
the holder of the Warrants at the time of exercise an amount per share equal to
39.
<PAGE> 42
the same fraction of the then current market value of a share of Common Stock.
Warrant holders, as such, do not have any voting rights or any other rights as
stockholders of the Company.
As of the date hereof, all or any portion of the Warrants are
redeemable, in whole or in part, at the option of the Company at a redemption
price of $0.75 per Warrant (the date of such redemption being the "Redemption
Date"). Notice of redemption will be mailed to all Warrant holders at least 20
days but not more than 45 days before the Redemption Date. In addition, notice
of such redemption will be published in The Wall Street Journal not less than 10
days nor more than 20 days prior to the mailing of the notice. Any Warrant so
called for redemption may be exercised until the close of business on the fifth
business day preceding the Redemption Date specified in such notice of
redemption. If less than all the Warrants are to be redeemed, the Warrant Agent
shall select the Warrants to be redeemed by a method the Warrant Agent considers
fair and appropriate.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of each Warrant are subject to adjustment in certain events,
including: (i) the issuance of a stock dividend to holders of shares or a
combination, subdivision or reclassification of shares of Common Stock; (ii) the
issuance to all holders of the outstanding shares of Common Stock of rights,
warrants or options (expiring within 45 days after the record date for
determining stockholders entitled to receive such rights, warrants or options)
to subscribe for or purchase shares of Common Stock at less than the then
current market price; and (iii) the distribution to all holders of shares of
stock (other than shares of Common Stock), evidences of indebtedness, or assets
(excluding cash dividends or distributions payable out of consolidated earnings
and earned surplus and dividends and distributions payable in shares of Common
Stock) of rights, warrants or options to subscribe for or purchase shares of
Common Stock. No adjustment in the number of shares of Common Stock purchasable
upon exercise of the Warrants or in the exercise price will be required until
cumulative adjustments require an adjustment of at least 1% thereof. At any time
prior to the expiration of the Exercise Period then in effect, the Company may
extend the Exercise Period and increase or decrease the Exercise Price payable
during such extension. In addition, the Company may, at its option, reduce the
exercise price at any time.
Notwithstanding the foregoing, in case of any consolidation, merger or
sale or lease of all or substantially all of the property of the Company, the
holder of each Warrant shall have the right, upon subsequent exercise thereof,
only to receive the kind and amount of shares and other securities and property
(including cash) which such holder would have been entitled to receive by virtue
of such transaction had the Warrants been exercised immediately prior to such
transaction.
The Warrant Agreement contains provisions permitting the Company and
the Warrant Agent, without the consent of any Warrant holder, to supplement or
amend the Warrant Agreement in order to cure any ambiguity, to correct or
supplement any provision contained therein which may be defective or
inconsistent with any other provision therein, or to make any other provisions
in regard to matters or questions arising thereunder which the Company and the
Warrant Agent may deem necessary or desirable and which do not adversely affect
the interest of the Warrant holders. The Company and the Warrant Agent also may
supplement or amend the Warrant Agreement in any other respect with the written
consent of the holders of at least two-thirds in number of the Warrants then
outstanding; however, no such supplement nor amendment may (i) make any
modification of the terms upon which the Warrants are exercisable or may be
redeemed or (ii) change the percentage of the holders of the Warrants who must
consent to such amendment or supplement, without the consent of each Warrant
holder affect thereby.
The Warrants are listed on the Nasdaq SmallCap Market under the symbol
CYPBW.
Other Warrants. As of June 14, 1996, there were warrants outstanding to
purchase 334,800 shares of Common Stock of the Company at an exercise price of
$1.875 per share, which warrants were originally issued by the Company to
directors, officers, employees of and consultants to the Company as compensation
for services rendered to the Company (the "Compensation Warrants"). The
Compensation Warrants are fully exercisable as of the date hereof and will
generally expire in June 2001 unless earlier exercised.
40.
<PAGE> 43
Holders of the Compensation Warrants generally may exercise such
warrants provided that the holder has been, from the original issue date up
through and including the time of exercise, continuously providing services as a
director, officer, employee or consultant to the Company or one of its
subsidiaries or affiliates.
The Company is obligated to register pursuant to the Securities Act the
shares of Common Stock underlying the Compensation Warrants. The Company shall
undertake to keep any such registration statement and prospectus filed with the
Commission to register the Compensation Warrants effective for the life of the
Compensation Warrants. The Company shall bear all expenses of registration of
the shares underlying the Compensation Warrants.
Also as of June 14, 1996, there were warrants outstanding to purchase
300,000 Shares of Common Stock of the Company at an exercise price of $2.875
per share, which warrants were originally issued by the Company in April 1994
to Allen & Company Incorporated as a placement agent fee in connection with a
private placement of 7% Convertible Debentures of the Company. The warrants are
fully exercisable as of the date hereof and will expire in April 1999 unless
earlier exercised.
NASDAQ SMALLCAP MARKET LISTING
The Company's Common Stock (and its registered Warrants) are traded on
the Nasdaq SmallCap Market. The current rules of the National Association of
Securities Dealers, Inc. effectively preclude the trading or quotation through
the Nasdaq SmallCap Market of any securities of an issuer that has issued
securities or taken other corporate action that would have the effect of
nullifying, restricting or disparately reducing the per share voting rights of
holders of an outstanding class or classes of equity securities registered under
Section 12 of the Exchange Act. The Company does not intend to issue any
additional shares of any stock that would make it ineligible for inclusion on
the Nasdaq SmallCap Market. However, in the event the Company issues any
additional securities that causes it to become ineligible for continued
inclusion on the Nasdaq SmallCap Market, such ineligibility would be likely to
reduce materially the liquidity of an investment in the Common Stock of the
Company and would likely depress its market value below that which would
otherwise prevail.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and
registrar for the Company's Common Stock and the Company's registered Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 28,727,257
shares of Common Stock outstanding, assuming no exercise of outstanding options
and warrants. Of these shares, 26,023,756 shares of Common Stock including the
100,000 shares of Common Stock being offered hereby will be freely transferable
without restriction under the Securities Act and the regulations promulgated
thereunder. The remaining 2,703,501 shares of Common Stock held by officers,
directors, employees, consultants and other stockholders of the Company were
sold by the Company in reliance on exemptions from the registration requirements
of the Securities Act and are "restricted securities" within the meaning of Rule
144 under the Securities Act. An additional 26,003,756 shares of Common Stock
will become eligible for sale under Rule 144 beginning in December 1996 upon
satisfaction of the holding period provision of Rule 144 under the Securities
Act. In addition, an aggregate of approximately 2,184,800 shares of Common Stock
issuable upon exercise of outstanding warrants are eligible for immediate sale
under Rule 144 upon exercise of such warrants.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least two years is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) one percent
of the then outstanding Common Stock (approximately 287,273 shares immediately
after this offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding such sale, subject to the filing
of a Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years,
would be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations described above or certain other restrictions of Rule 144.
Under Rule 701, an employee, officer or director of, or consultant to,
the Company who purchased shares pursuant to a written compensatory plan or
contract, and who is not an affiliate of the Company, is entitled to sell
41.
<PAGE> 44
such shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell such shares without having to comply with the Rule 144
holding period restrictions.
Sales of a substantial number of shares of Common Stock by the Selling
Security Holder or other holders of the Company's capital stock could have a
negative impact on the market price of the Common Stock.
PLAN OF DISTRIBUTION
The Shares being offered hereby are being sold by the Selling Security
Holder. The Shares were acquired by the Selling Security Holder from the
Company in January 1996 in a private placement at a purchase price of $1.50
per Share. The Company will not receive any of the proceeds from the sale of
the Shares being offered hereby.
The Company has been advised that the Selling Security Holder or
pledgees, donees, transferees of or other successors in interest to the Selling
Security Holder may sell the Shares as soon as practicable after the
effectiveness of the Registration Statement directly to purchasers in
transactions on the Nasdaq SmallCap Market, in privately negotiated transactions
or a combination of such methods of sale, at fixed prices which may be changed,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Alternatively, the Selling
Security Holder may sell the Shares to or through underwriters, broker-dealers
or agents, and such underwriters broker-dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
Selling Security Holder or the purchasers of the Shares for whom such
underwriters, broker-dealers or agents may act or to whom they sell as
principal, or both (which compensation might be in excess of customary
commission).
At any time a particular offer of Shares is made, to the extent
required, a supplemental Prospectus will be distributed which will set forth the
number of Shares offered and the terms of the offering including the name or
names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the Shares purchased from the Selling Security Holder, any
discounts, commission and other items constituting compensation from the Selling
Security Holder and any discounts, concessions or commissions allowed or
reallowed or paid to dealers.
Because the Selling Security Holder is a registered broker-dealer, the
sales of the Shares registered hereunder may be deemed to be sales on behalf of
the Company. Accordingly, the Selling Security Holder and any broker-dealers who
act in connection with the sale of Shares hereunder may be deemed to be
"underwriters" as that term is defined in the Securities Act, and any
commissions received by them and profit on any resale of the Shares as principal
might be deemed to be underwriting discounts and commissions under the
Securities Act.
Any or all of the sales or other transactions involving the Shares
described above, whether effected by the Selling Security Holders, any
broker-dealer or others, may be made pursuant to this Prospectus. In addition,
any Shares that qualify for sale pursuant to Rule 144 under the Act may be sold
under Rule 144 rather than pursuant to this Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Shares may be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the Shares may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
Pursuant to applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the Shares may not simultaneously
engage in market making activities with respect to the Company's Common Stock
for a period of nine business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the Selling
Security Holder will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, which provisions may limit the timing of
purchases and sales of the Shares by the Selling Security Holder.
All costs of registration associated with the shares being offered
hereunder will be paid by the Company.
42.
<PAGE> 45
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Cooley Godward Castro Huddleson & Tatum, San
Diego, California.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for the years then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The consolidated statements of operations, cash flows and stockholders'
equity of the Company for the year ended December 31, 1993, included in this
Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
43.
<PAGE> 46
CYPRESS BIOSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Ernst & Young LLP, Independent Auditors ..........................F-2
Report of Coopers & Lybrand L.L.P., Independent Accountants.................F-3
Consolidated Balance Sheets.................................................F-4
Consolidated Statements of Operations.......................................F-5
Consolidated Statements of Cash Flows.......................................F-6
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)....F-7
Notes to Consolidated Financial Statements..................................F-8
F-1
<PAGE> 47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cypress Bioscience, Inc.
We have audited the consolidated balance sheets of Cypress Bioscience, Inc.
(formerly IMRE Corporation) as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1994 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Cypress Bioscience, Inc. as of December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Seattle, Washington
January 23, 1996
F-2
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Cypress Bioscience Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Cypress Bioscience Inc. (formerly IMRE
Corporation) for the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Cypress Bioscience Inc. for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Seattle, Washington
March 15, 1994
F-3
<PAGE> 49
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
ASSETS 1994 1995 1996
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,670,616 $ 1,009,878 $ 11,364,028
Accounts receivable:
Trade 418,399 23,850 31,614
Other 61,398 533,989 27,482
Inventories 1,494,311 1,148,506 1,279,369
Prepaid expenses 208,560 143,755 151,658
------------ ------------ ------------
Total current assets 5,853,284 2,859,978 12,854,151
Property and equipment, net 1,347,532 1,425,020 1,459,521
Convertible debenture issuance costs, net 520,197 278,711 39,311
------------ ------------ ------------
Total assets $ 7,721,013 $ 4,563,709 $ 14,352,983
============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 610,478 $ 892,501 $ 814,559
Accrued compensation 266,395 456,939 442,896
Accrued liabilities 606,609 672,488 630,849
Senior convertible debentures - 1,500,000 -
Current portion of notes payable 9,053 26,821 26,821
------------ ------------ ------------
Total current liabilities 1,492,535 3,548,749 1,915,125
Convertible debentures 4,245,000 1,345,000 400,000
Notes payable, net of current portion 2,759 25,972 20,012
Accrued compensation - 168,750 168,750
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Common stock, $.02 par value; authorized 35,000,000
shares; issued and outstanding, 17,000,012,
18,693,595 and 28,715,252 shares at December 31,
1994 and 1995, and March 31, 1996, respectively 340,000 373,872 574,305
340,000
Additional paid-in capital 38,856,101 43,143,000 59,120,035
Deferred compensation - - (1,602,519)
Accumulated deficit (37,215,382) (44,041,634) (46,242,725)
------------ ------------ ------------
Total stockholders' equity (net capital deficiency) 1,980,719 (524,762) 11,849,096
------------ ------------ ------------
Total liabilities and stockholders' equity (net
capital deficiency) $ 7,721,013 $ 4,563,709 $ 14,352,983
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 50
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues (Note 4) $ 5,410,530 $ 4,918,126 $ 4,104,224 $ 3,016,463 $ 17,676
Interest income 134,483 71,986 118,994 27,081 120,294
------------ ------------ ------------ ------------ ------------
5,545,013 4,990,112 4,223,218 3,043,544 137,970
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Production costs 1,582,986 2,571,168 2,041,422 446,603 248,903
Sales and marketing 4,758,427 3,550,037 819,907 589,077 52,043
Research and development 2,059,129 2,107,694 3,219,324 975,105 427,233
General and administrative 2,105,743 2,694,489 2,626,817 599,727 960,151
Interest expense 7,659 218,036 261,958 76,397 25,367
Purchased in-process
research and development
(Note 2) - - 625,000 - -
Debt conversion expense
(Note 10) - - 810,386 - 183,688
Restructuring expense - - 644,656 - 441,676
------------ ------------ ------------ ------------ ------------
10,513,944 11,141,424 11,049,470 2,686,909 2,339,061
------------ ------------ ------------ ------------ ------------
(Loss) income from operations (4,968,931) (6,151,312) (6,826,252) 356,635 (2,201,091)
Minority interest in loss of
subsidiary 47,711 - - - -
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (4,921,220) $ (6,151,312) $ (6,826,252) $ 356,635 $ (2,201,091)
============ ============ ============ ============ ============
Net (loss) income per common
share and common share
equivalents $ (0.33) $ (0.40) $ (0.39) $ 0.02 $ (0.08)
============ ============ ============ ============ ============
Weighted average number of
common shares and common
share equivalents 14,716,472 15,243,860 17,598,735 17,015,031 26,001,036
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 51
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Receipts from customers $ 4,987,231 $ 5,629,001 $ 4,486,792 $ 3,383,839 $ 13,844
Interest received 183,169 71,986 118,994 27,081 120,294
Payments to suppliers and employees (10,120,964) (10,539,166) (7,202,948) (2,410,055) (2,264,047)
Interest paid (7,659) (11,824) (322,968) (3,042) (4,334)
------------ ------------ ----------- ----------- -----------
Net cash (used) provided by operating activities (4,958,223) (4,850,003) (2,920,130) 997,823 (2,134,243)
------------ ------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (563,645) (549,486) (714,947) (475,364) (49,113)
Proceeds from sale of fixed assets - - 30,393 - 6,075
Maturity of short-term investments, net 4,438,934 - - - -
Other 1,329 - - - -
------------ ------------ ----------- ----------- -----------
Net cash (used) provided by investing activities 3,876,618 (549,486) (684,554) (475,364) (43,038)
------------ ------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures - 4,245,000 1,000,000 - 500,000
Principal payments under capital lease obligation - - (22,140) (20,425) (5,980)
Debt conversion costs - - (22,102) - -
Notes payable, net (14,900) (12,853) (11,812) - -
Net proceeds from issuance of common stock 2,093,409 2,648,228 - - 12,109,340
Debt issuance costs - (93,853) - - (71,929)
------------ ------------ ----------- ----------- -----------
Net cash (used) provided by financing activities 2,078,509 6,786,522 943,946 (20,425) 12,531,431
------------ ------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 996,904 1,387,033 (2,660,738) 502,034 10,354,150
Cash and cash equivalents at beginning of period 1,286,679 2,283,583 3,670,616 3,670,616 1,009,878
------------ ------------ ----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,283,583 $ 3,670,616 $ 1,009,878 $ 4,172,650 $11,364,028
============ ============ =========== =========== ===========
RECONCILIATION OF NET LOSS (INCOME) TO
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES:
Net (loss) income $ (4,921,220) $ (6,151,312) $(6,826,252) $ 356,635 $(2,201,091)
Adjustments to reconcile net (loss) income to net cash
(used) provided by operating activities:
Depreciation and amortization 162,144 325,549 373,306 97,074 44,862
Amortization of deferred compensation - - - - 111,686
Loss on disposal of fixed assets - - 23,437 - -
Purchased in-process research and development - - 625,000 - -
Debt conversion expense - - 810,386 - -
Restructuring expense - - 644,656 - 183,688
Common stock issued for services and expenses 175,489 161,078 248,884 85,945
Minority interest in loss of subsidiary (47,711) (3,436) - - -
Net change in operating accounts: - - - - -
Accounts receivable (2,075,019) 2,228,102 394,549 366,465 (7,764)
Other receivables 39,938 (14,634) 30,034 17,274 6,507
Inventories (317,241) (159,292) 345,806 (49,500) (130,863)
Prepaid expenses (9,431) 174,232 64,805 (15,334) (7,903)
Accounts payable and accrued expenses 2,034,828 (1,410,290) 345,259 139,264 (133,365)
------------ ------------ ----------- ----------- -----------
Net cash (used) provided by operating
activities $ (4,958,223) $ (4,850,003) $(2,920,130) $ 997,823 $(2,134,243)
============ ============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 52
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Deferred Accumulated
Shares Par Value Paid-in Capital Compensation Deficit Total
---------- --------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 14,073,343 $ 281,467 $ 33,353,430 $ - $(26,142,850) $ 7,492,047
Stock options exercised 10,000 200 19,800 - - 20,000
Stock warrants exercised 43,400 868 85,932 - - 86,800
Stock issued for services 348 7 493 - - 500
Stock issued to match 401(k)
contributions 56,481 1,129 173,860 - - 174,989
Stock issued in private placement 888,900 17,778 1,968,831 - - 1,986,609
Net loss - - - - (4,921,220) (4,921,220)
---------- --------- ------------ ----------- ------------ ------------
Balances at December 31, 1993 15,072,472 301,449 35,602,346 - (31,064,070) 4,839,725
Stock options exercised 1,000 20 2,605 - - 2,625
Stock warrants exercised 6,500 130 12,058 - - 12,188
Stock warrants issued for services - - 483,000 - - 483,000
Stock issued to match 401(k)
contributions 70,040 1,401 159,677 - - 161,078
Stock issued in private placement 1,850,000 37,000 2,596,415 - - 2,633,415
Net loss - - - - (6,151,312) (6,151,312)
---------- --------- ------------ ----------- ------------ ------------
Balances at December 31, 1994 17,000,012 340,000 38,856,101 - (37,215,382) 1,980,719
Stock issued for services 61,141 1,223 86,322 - - 87,545
Stock issued to match 401(k)
contributions 65,125 1,303 160,036 - - 161,339
Stock issued for minority interest in
CELx 312,500 6,250 618,750 - - 625,000
Stock issued for debt conversion 1,254,817 25,096 3,421,791 - - 3,446,887
Net loss - - - - (6,826,252) (6,826,252)
---------- --------- ------------ ----------- ------------ ------------
Balances at December 31, 1995 18,693,595 373,872 43,143,000 - (44,041,634) (524,762)
Stock options granted (unaudited) - - 1,714,205 (1,602,519) - 111,686
Stock options exercised (unaudited) 25,000 500 43,250 - - 43,750
Stock issued for services (unaudited) 20,000 400 29,600 - - 30,000
Stock issued in private placement
(unaudited) 8,540,702 170,814 11,787,267 - - 11,958,081
Stock issued for debt conversion
(unaudited) 1,435,955 28,719 2,402,713 - - 2,431,432
Net loss (unaudited) - - - - (2,201,091) (2,201,091)
---------- --------- ------------ ------------ ------------ ------------
Balances at March 31, 1996 (unaudited) 28,715,252 $ 574,305 $ 59,120,035 $ (1,602,519) $(46,242,725) $ 11,849,096
========== ========= ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 53
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1995 and
for the three months ended March 31, 1995 and 1996 is unaudited)
1. FORMATION AND BUSINESS OF THE COMPANY
Cypress Bioscience, Inc. (the "Company") is engaged in the business of
developing, manufacturing and bringing to market devices and products applicable
to the treatment and diagnosis of certain types of immune-mediated diseases,
transplantations and cancer. The Company commenced business activities in
January 1982.
The U.S. Food and Drug Administration ("FDA") approved the Company's
product, the PROSORBA(R) column, for commercial sale on December 23, 1987, for
the treatment of patients with idiopathic thrombocytopenic purpura ("ITP"), an
immune-related bleeding disorder. The product is approved for the removal of
immunoglobulin G ("IgG") and circulating immune complexes containing IgG from
plasma of patients with ITP with platelet counts below 100,000/mm3.
The Company continues to devote most of its efforts to obtaining FDA
marketing approval for additional autoimmune diseases, transplantations and
certain cancers. The Company is currently planning to conduct a controlled
clinical trial in 1996 using the PROSORBA(R) column for therapy for rheumatoid
arthritis as a follow on to a pilot clinical trial completed in September 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material inter-company accounts
and transactions have been eliminated.
In 1995, the Company and CELx Corporation ("CELx"), the Company's
former majority owned subsidiary, agreed to the merger of CELx into the Company
and the exchange of shares of CELx by persons other than the Company into an
aggregate of 312,500 shares of the Company's common stock. The dissolution of
CELx resulted in a charge of $625,000 recorded as purchased in-process research
and development. The charge was based on the fair market value of the Company's
common stock.
Interim financial Information
The financial information at March 31, 1996 and for the three-month
periods ended March 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results for the interim
periods are not necessarily indicative of the results for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 54
Cash Equivalents
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents primarily
represent funds invested in a money market fund whose costs approximate market
value.
Concentration of Credit Risk
The Company invests its excess cash in money market funds with major
financial institutions. The securities in such money market funds typically
mature within 90 to 180 days and, therefore, bear minimal risk. The Company
has not experienced any losses on these investments.
Until May 1, 1996, the PROSORBA(R) column was sold to the Company's
exclusive distributor in North America, Baxter Healthcare Corporation (see Note
4), and a diverse group of international health-care institutions. The Company
has not experienced any material losses from the collection of its accounts
receivable. Approximately 91% of the Company's sales for the year ended December
31, 1995, were for shipments to Baxter. Effective May 1, 1996 the Company
regained sales and marketing rights from Baxter. (See Note 4).
Inventories
Inventories are stated at average weighted cost, determined on the
first-in, first-out method, but not in excess of net realizable value. The
Company maintains access to adequate sources of supply of raw materials.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
by the straight-line method over estimated useful lives of three to five years,
and leasehold improvements are amortized over the shorter of the term of the
related lease or the estimated useful lives of the assets.
Convertible Debenture Issuance Costs
Convertible debenture issuance costs are comprised primarily of the
value assigned to stock warrants issued for placement agent services (see Note
10), other placement agent fees and legal expenses. Such costs are being
amortized over the life of the related debentures using the interest method.
Stock and Stock Warrants Issued for Services
Common stock and common stock warrants issued for services rendered to
the Company are generally recorded at the fair market value of the stock or
stock warrant issued or the value of the services rendered, whichever is more
clearly determinable.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options. Generally stock compensation, if
any, is measured as the difference between the exercise price of a stock option
and the fair market value of the Company's stock at the date of grant, which is
then amortized over the related service period.
Revenue Recognition
The Company records sales of its product as earned revenue when the
product is shipped.
F-9
<PAGE> 55
Revenue resulting from the settlement of the annual take-or-pay
provisions of the Company's distribution agreement with Baxter Healthcare
Corporation (see Note 4) was recognized upon such settlement during the three
months ended March 31, 1995.
Net Income (Loss) Per Share
The computation of net income (loss) per share is based on the weighted
average number of shares of common stock outstanding for each period. For loss
periods, common stock equivalents arising from options, warrants and Convertible
Debentures have not been considered in the calculation inasmuch as they would
have been anti-dilutive.
3. RESTRUCTURING EXPENSE
In December 1995, the Company recorded a restructuring charge
aggregating $645,000 relating to the Company's plan to consolidate its
manufacturing facilities to one location in the state of Washington and to move
all other operations to San Diego, California. This charge includes
approximately $350,000 related to write-downs of equipment and leasehold
improvements for the manufacturing facility expected to be vacated in 1996,
$200,000 related to abandonment of leases in Seattle and Princeton with the
remainder related to a severance commitment with its former Executive Vice
President who resigned on December 28, 1995. There were no changes in these
estimates as of March 31, 1996.
The Company believes that relocating its operations to San Diego,
recognized as the fourth largest biotechnology center in the United States, will
provide the Company with greater exposure within the industry and better
position the Company to market its products. In addition, in the event the
Company wishes to expand staffing, San Diego's highly skilled work force will
provide significant resources from which the Company may draw upon to fill any
future staffing needs. The restructuring is not yet completed and there can be
no assurance that such a restructuring will be completed.
The Company estimates it will incur approximately $300,000 in costs
associated with moving the administration, research and medical departments to
San Diego, with most costs being attributable to relocation costs of the few
members of management moving to San Diego. Such costs will be recorded as
general and administrative expenses as incurred in 1996. The Company estimates
it will incur approximately $1,000,000 of capital expenditures to consolidate
its two Washington manufacturing facilities.
In January 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being terminated immediately as part of the restructuring. Such positions
were from all departments of the Company. The Company's Chief Scientific Officer
and Chairman of the Board resigned in March 1996 as part of the restructuring.
Costs related to these terminations were approximately $440,000 and were
recorded as a charge to operations as a restructuring expense in the quarter
ending March 31, 1996. Also as part of the restructuring, in May 1996 the
Company's Chief Financial Officer resigned. Costs relating to such termination
were not material to the consolidated financial statements.
4. DISTRIBUTION AGREEMENT
On February 15, 1994, the Company entered into a 10-year exclusive
distribution agreement with Baxter Healthcare Corporation ("Baxter") granting
distribution rights of its PROSORBA(R) column in the United States and Canada
for the treatment of thrombocytopenia and the first right to negotiate for new
PROSORBA(R) column indications. Baxter assumed its sales and distribution
responsibilities on April 2, 1994. The agreement provided for an annual
"take-or-pay" and purchase commitment from Baxter to the Company for the first
two sales years.
Baxter, at its own expense, provided sales and marketing support for
the sale of the product during the term of the Agreement, however, the Company
was to provide significant marketing and promotional support to Baxter
F-10
<PAGE> 56
for the first three years of the agreement. During 1994, eight sales and
marketing employees of the Company became employees of Baxter and five other
sales and marketing employees of the Company were terminated, eliminating the
Company's domestic sales force. There was no material impact on net loss
associated with these terminations.
The purchase minimums were primarily subject to the Company having FDA
product approval for immune thrombocytopenic purpura and the lack of any new
significant competitive technology being introduced before October 1995 to the
thrombocytopenic therapy marketplace. The Company received a response from the
FDA in January 1995 to a Pre-market Application (PMA) supplement filed in March
1993 requesting the name of the Company's approved indication be changed from
idiopathic thrombocytopenic purpura to immune thrombocytopenic purpura. The
request was made by the Company as it believes the two names are used
interchangeably by the medical community. The FDA's response denied the
Company's request for such a change.
As a result of the FDA action, Baxter exercised its right to
re-negotiate minimums in February 1995. In March 1995, the two companies amended
the agreement whereby Baxter: 1) made a take-or-pay payment for the first sales
year of $3.0 million compared to the original $3.5 million due March 31, 1995,
2) purchased $1.0 million of product during the second quarter of 1995, 3)
released the Company from its obligation to provide marketing and promotional
support for the second and third years of the agreement, 4) gave the Company the
right to co-market with Baxter, 5) relinquished its first right to negotiate for
new PROSORBA(R) column indications, and 6) under certain circumstances, would
provide advance payments to the Company for Baxter's 1996 purchases. The Company
agreed to eliminate purchase minimums and the take-or-pay concept included in
the original agreement and freed Baxter to pursue competing thrombocytopenia
therapies. The term of the agreement remained ten years and, consistent with the
original agreement, both companies agreed to review the terms at the end of the
third year.
On March 18, 1996, the Company and Baxter entered into a termination
agreement terminating the exclusive distribution agreement. Under the
termination agreement effective May 1, 1996, the Company may, among other
things, sell its PROSORBA(R) column directly to customers who had previously
purchased PROSORBA(R) columns through Baxter as well as to any other potential
customers who wish to purchase PROSORBA(R) columns. The Company is actively
recruiting a domestic sales force, and expects to complete the hiring of the
initial group of six sales representatives by the fall of 1996.
5. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Raw materials and components $ 571,800 $ 513,883 $ 488,774
Work in progress 884,373 557,222 733,714
Finished goods 38,138 77,401 56,881
---------- ---------- ----------
$1,494,311 $1,148,506 $1,279,369
========== ========== ==========
</TABLE>
F-11
<PAGE> 57
6. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Laboratory and production equipment $ 681,149 $ 602,152 $ 590,326
Office equipment 498,190 281,914 327,325
Vehicles 108,651 52,097 52,097
Leasehold improvements 385,565 48,585 48,585
Construction in progress 366,309 976,671 1,036,672
----------- ----------- -----------
2,039,864 1,961,419 2,055,005
Accumulated depreciation and amortization (692,332) (536,399) (595,484)
----------- ----------- -----------
$ 1,347,532 $ 1,425,020 $ 1,459,521
=========== =========== ===========
</TABLE>
7. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- -------- --------
(unaudited)
<S> <C> <C> <C>
Accrued clinical trial fees $169,151 $250,858 $253,531
Accrued convertible debenture interest 206,212 64,200 26,908
Other 231,246 357,430 350,410
-------- -------- --------
$606,609 $672,488 $630,849
======== ======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
In October 1991, the Company entered into an eight-year lease for
14,400 square feet of production, laboratory and administrative facilities in
Seattle, Washington. The lease requires the Company to pay the costs associated
with building operations including property taxes, insurance, maintenance and
other operating costs, and provides for scheduled rent increases during the term
of the lease. In connection with the restructuring plan described in Note 3,
this space was sub-leased to another party in April 1996 for the remainder of
the lease term. The Company leases approximately 8,000 square feet of material
preparation facilities in Redmond, Washington. This lease expires in 2004.
The table below indicates future minimum lease payments due over the
remaining life of the leases, under the agreements in place as of December 31,
1995:
<TABLE>
<S> <C>
1996 $ 397,000
1997 397,000
1998 397,000
1999 397,000
2000 96,000
Thereafter through 2004 384,000
----------
$2,068,000
==========
</TABLE>
F-12
<PAGE> 58
Total rental expense was approximately $521,000, $417,000 and $463,000
for the years ended December 31, 1995, 1994 and 1993, respectively. Total rent
expense was approximately $112,000 and $128,000 for the three month periods
ended March 31, 1996 and 1995, respectively.
In April 1996, the Company entered into a sub-lease agreement for its
existing Seattle facility effective May 1, 1996. The Company has an existing
lease obligation for its Seattle facility through October 13, 1999, with a
current monthly rent expense, including operating expenses, of approximately
$26,500. The sub-lease agreement provides for the Company to receive monthly
rent, beginning May 1, 1996, in an amount equal to the Company's current lease
commitment, including operating expenses, through October 13, 1999. The company
intends to remain an occupant in a small portion of its existing Seattle
facility through December 31, 1996, and will be obligated to pay approximately
$8,000 a month of the total monthly rent through December 31, 1996. The Company
will continue to be liable for its existing lease obligation through October 13,
1999.
Defined Contribution Pension Plan
The Company sponsors a defined contribution pension plan pursuant to
Section 401(k) of the Internal Revenue Code of 1986. This plan covers
substantially all employees who provide more than 1,000 hours of service during
the year.
The Plan provides for matching contributions whereby the Company
contributes common stock to the Plan on behalf of participants in an amount
equal to 100% of the participants' contributions during the six-month periods
ending on the last day of June and December. The Company's contributions will
vest six months after the amount of the contribution is determined if the
employee is still employed by the Company at the end of the vesting period,
except for employees who have been with the Company more than five years for
whom contributions will vest immediately. The expense recognized for shares
contributed on behalf of employees was approximately $161,000, $161,000 and
$175,000 for the years ended December 31, 1995, 1994 and 1993, respectively,
based on the market value of the Company's common stock on the date of the
contribution. Comparable expense recognized for the three month periods ended
March 31, 1996 and 1995 was $39,000 and $58,000, respectively.
Severance Agreement
The Company entered into a severance agreement as of December 28, 1995
with its former Chief Executive Officer. The terms of the severance agreement
were based primarily on the termination clause of the employment agreement
entered into between the former officer and the Company in September 1994. Such
terms include the payment of $225,000 in 1996 and $168,750 by December 31, 1997.
As of December 31, 1995, the officer had vested in options, under the Company's
Non-Qualified Stock Option Plan, to purchase 500,000 shares of common stock at
$2.1875. Such options will expire on March 30, 1996. The total cost of this
severance agreement of $393,750 has been included in general and administrative
expenses in the 1995 statement of operations.
F-13
<PAGE> 59
Employment Agreements
The Company entered into employment agreements (the "Agreements") as of
December 28, 1995, with a new Chief Executive Officer and a new President and
Chief Operating Officer. The Agreements are each for five year terms, ending on
December 31, 2000, unless they are earlier terminated by the parties. The
Agreements provide for specified compensation that includes base salary, signing
bonuses, annual performance bonuses, stock options, and a lump sum payment in
the event of termination of employment without cause, as defined in the
Agreements. Signing bonuses of $100,000 were paid in December 1995 and charged
to expense in 1995. In January 1996, an additional $100,000 in signing bonuses
were paid and were included in general and administrative expenses in the
accompanying 1996 Consolidated Statements of Operations. An additional $170,000
of bonuses are payable upon certain events which may occur in 1996.
The Agreements provide for the granting of options to purchase an
aggregate of 11% of the fully diluted shares of Common Stock then outstanding,
(including the options to be issued under the Agreements), at an exercise price
equal to the price of the Company's common stock sold in the January 1996
private placement (see Note 13). Options to purchase an aggregate of 4,159,824
shares of Common Stock at $1.50 per share were granted in January 1996 and
approved by the stockholders of the Company on April 15, 1996. Options to
purchase 25% of the total amount granted vested on the date of grant with the
remainder to vest ratably and daily over a four year period. The vesting of such
options will accelerate and the options will become fully exercisable upon a
merger of the Company or in the event of a termination of employment without
cause, as defined in the Agreements. The closing bid price of the Company's
common stock on the Nasdaq SmallCap Market on the date of such grant was $1.88
per share. In accordance with APB 25, the Company recorded $1.7 million of
deferred compensation expense, representing the difference between the exercise
price of $1.50 per share and the Nasdaq quote. Such compensation expense is
being recognized over the related service period.
The Company entered into an employment agreement as of December 28,
1995 with its Chief Scientific Officer. The Agreement provides for specified
compensation for 1996 and a lump sum payment equal to one year's salary in the
event of termination of employment in 1996. In March 1996, the Company's Chief
Scientific Officer resigned as both an officer and a director of the Company.
Pursuant to the resignation agreement, the officer received $251,500 as a
severance payment in 1996.
9. INCOME TAXES
Significant components of the Company's deferred income tax assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net operating loss carry forwards $ 9,139,000 $ 7,874,000
Other 741,000 448,000
----------- -----------
9,880,000 8,322,000
Valuation allowance (9,880,000) (8,322,000)
----------- -----------
Net deferred income tax assets $ - $ -
=========== ===========
</TABLE>
As of December 31, 1995, the Company had net operating loss
carryforwards of approximately $39,100,000 which expire beginning 1998 through
2010. Additionally, the Company had research and development tax credit
carryforwards of approximately $400,000 as of December 31, 1995.
As a result of the Company's sales of Common Stock in November 1990 and
September 1991, the utilization of net operating loss carryforwards which had
accumulated as of those dates will be limited to a
F-14
<PAGE> 60
prescribed amount in each successive year. Based on these limitations the
Company may be allowed to use no more than approximately $2,450,000 of such
losses each year to reduce taxable income, if any. Approximately $12,200,000 of
net operating loss carryforwards are expected to expire prior to utilization due
to the annual Internal Revenue Code Section 382 limitation, accordingly, the tax
on this portion of the net operating loss carryforwards has been excluded from
the above table.
10. 7% CONVERTIBLE DEBENTURES
On April 22, 1994, the Company completed a private placement of
$4,245,000 principal amount of 7% convertible debentures due March 31, 2001 ("7%
Convertible Debentures"). Interest is payable on the 7% Convertible Debentures
in cash or shares of Common Stock at the option of the Company. The conversion
price for the principal amount is $2.875 per share of registered Common Stock,
the fair market value on the date of closing. The conversion price for the
interest is the lower of $4.00 per share of Common Stock or the average closing
price for the 10 days prior to the annual April 30 interest payment date. The
debentures are redeemable by the Company after April 1, 1998 at a redemption
price of 106% of the principal amount reduced to 104% and 102% the following two
years. Allen & Company Incorporated ("Allen & Company"), a shareholder of the
Company, acted as placement agent with respect to a majority of this private
placement and received a five-year warrant valued at $483,000 to purchase
300,000 shares of Common Stock at $2.875 for its services as placement agent.
The cost of issuing the 7% Convertible Debentures, including the value of the
warrant, has been deferred and is reported on the accompanying balance sheet net
of amortization expense being recorded over the term of the 7% Convertible
Debentures. Of the total $4,245,000 principal amount of 7% Convertible
Debentures, $1,000,000 was purchased by Allen & Company.
In September 1995, the Company completed an exchange offering to
holders of the 7% Convertible Debentures. The Company offered to exchange the 7%
Convertible Debentures for restricted Common Stock at $2.25 per share. Of the
original $4,245,000 outstanding principal amount, $2,200,000 of the 7%
Convertible Debentures were converted. The Company recorded a non-cash expense
of $810,000 which represents the fair market value of the increased number of
shares issued under the terms of the offering compared to the original
conversion terms. Subsequent to September 1995, an additional $700,000 of 7%
Convertible Debentures were converted into common stock at the original
conversion price. For substantially all 7% Convertible Debentures that were
converted, the interest accrued up to the date of conversion was paid through
the issuance of common stock at either $2.25 per share or $2.875 per share. The
Company also charged $314,000 to additional paid-in capital for the year ended
December 31, 1995 for the unamortized deferred debt issuance costs related to
the converted debentures.
11. SENIOR CONVERTIBLE DEBENTURES
On December 29, 1995, the Company completed a private placement of
$1,500,000 principal amount of senior convertible debentures due July 1, 1996
("Senior Convertible Debentures") to a group of investors including $500,000
issued to Allen & Company. The Company received $1,000,000 of cash on December
29, 1995. The remaining $500,000 was received during the first week of January
1996 and is recorded in Other Receivables on the accompanying balance sheet as
of December 31, 1995. The cost of issuing the Senior Convertible Debentures was
approximately $140,000, including placement agent fees of $90,000, and has been
deferred and reported on the accompanying balance sheet as convertible debenture
issuance costs.
In January 1996, the Senior Convertible Debentures, under their
original terms, were automatically converted at $1.50 per share into 1,000,000
shares of the Company's Common Stock. The conversion was made simultaneously
with the closing of a private placement of Common Stock (See Note 15). At that
time, the remaining unamortized deferred debt issuance costs were charged to
additional paid-in capital.
F-15
<PAGE> 61
12. STOCKHOLDERS' EQUITY
Authorized Shares
In December 1995, the stockholders of the Company authorized 15,000,000
shares of "blank check" preferred stock. Terms and rights of such preferred
stock shall be determined by the Board of Directors when such preferred stock,
if any, is issued. As of March 31, 1996, the Company had not amended its
Certificate of Incorporation with the State of Delaware for this authorization.
Stock Options
Incentive Stock Options. In June 1985, the Company adopted an Incentive
Stock Option and Appreciation Plan. The plan authorizes options to purchase, and
appreciation rights with respect to, the Company's common stock, which may be
granted to such officers and key employees as may be selected by the Board of
Directors or a committee appointed by the Board to administer the plan. The plan
was amended in June 1992 to increase the number of shares reserved for issuance
to 750,000. The plan expired in 1995, however options granted under the plan
remain effective according to their respective terms and conditions.
Non-Qualified Stock Options. The Company has reserved 2,750,000 shares
of common stock for issuance under its 1988 Non-qualified Stock Option Plan, as
amended in 1992 and 1995 (the "1988 Plan"). Under the 1988 Plan, directors,
officers, employees and consultants may be granted non-qualified stock options
at exercise prices determined by the Board of Directors. Stock options granted
under the 1988 Plan will become exercisable for terms up to 10 years in one or
more installments in the manner and at the times specified by the Board.
Stock Options-Other. The Company has, at various times, granted to
employees and others options to purchase common stock, other than from under a
formal option plan.
1996 Equity Incentive Plan. In January 1996, the Board adopted the
Company's 1996 Equity Incentive Plan under which there are reserved 7,000,000
shares of the Company's Common Stock which may be issued to directors, officers
and key employees of, and consultants and certain advisors to, the Company.
Warrants
The Company has issued warrants to purchase Common Stock as
compensation for services rendered in connection with raising capital. Warrants
were also issued in connection with private placements and the 1991 public
offering of Common Stock.
In 1991, the Company granted warrants to purchase 749,900 shares of
Common Stock to certain officers, directors and employees, which are now
exercisable at $1.875 per share. The warrants will expire on June 10, 2001. In
September 1991, the Company granted warrants to purchase 1,850,000 shares of
Common Stock at an exercise price of $2.50 per share in connection with its
public offering of units. The warrants will expire on August 29, 1996, and are
now redeemable by the Company at $0.75 each. The Company issued Allen & Company
a five-year warrant to purchase 300,000 shares of Common Stock at $2.875 for its
services as a placement agent for the April 22, 1994 7% Convertible Debenture
private placement (see Note 10).
F-16
<PAGE> 62
The following table summarizes the activity of the Company's stock
options and warrants:
<TABLE>
<CAPTION>
Number of Warrants/Options
---------------------------------------------------------------
Non- 1996
Incentive Qualified Equity
Stock Stock Incentive Other
Warrants Options Options Plan Options
--------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 2,643,300 236,000 10,000 - 590,230
Granted - 77,100 75,000 - 228,605
Exercised (43,400) - (10,000) - -
Canceled (30,200) (96,900) - - (56,000)
--------- -------- ---------- --------- ---------
Balance, December 31, 1993 2,569,700 216,200 75,000 - 762,835
Granted 300,000 100,500 810,000 - 110,000
Exercised (6,500) (1,000) - - -
Canceled (20,300) (5,000) - - -
Expired - - (65,000) - (40,000)
--------- -------- ---------- --------- ---------
Balance, December 31, 1994 2,842,900 310,700 820,000 - 832,835
Granted - - 1,179,000 - 20,000
Canceled - - (476,500) - -
Expired (23,100) (42,100) - - (177,000)
--------- -------- ---------- --------- ---------
Balance, December 31, 1995 2,819,800 268,600 1,522,500 - 675,835
Granted (unaudited) - - - 4,639,157 929,000
Exercised (unaudited) - - (25,000) - -
Canceled (unaudited) (335,000) (207,600) (1,033,000) - (454,000)
--------- -------- ---------- --------- ---------
Balance, March 31, 1996
(unaudited) 2,484,800 61,000 464,500 4,639,157 1,150,835
========= ======== ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Non- 1996
Incentive Qualified Equity
Stock Stock Incentive Other
Warrants Options Options Plan Options
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Remaining options/warrants
available to be issued at
March 31, 1996 - - 2,235,500 2,360,843 -
Exercisable options and warrants
at March 31, 1996 2,484,800 61,000 174,250 1,127,569 396,835
Range of exercise price of $1.875 to $2.00 to $1.75 to $1.50 to $1.500 to
exercisable options and $2.000 $3.875 $3.375 $2.438 $3.875
warrants
</TABLE>
13. SUBSEQUENT EVENT
In January 1996, the Company sold approximately 8,500,000 shares of
common stock for $1.50 per share in a private placement. The shares were
registered in May 1996 for re-sale, under the Securities Act of 1933, as
amended. The net proceeds to the Company were approximately $12,000,000, or
$1.41 per share, after placement
F-17
<PAGE> 63
costs and other expenses aggregating approximately $800,000. As a result of this
private placement, the Senior Convertible Debentures described in Note 11
automatically converted to 1,000,000 shares of common stock. In addition, upon
closing of the private placement, the Company issued stock options to the new
Chief Executive Officer and President and Chief Operating Officer aggregating
4,159,824 shares at an exercise price of $1.50 per share.
F-18
<PAGE> 64
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
Page
Available Information ..................................................... 2
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 5
Use of Proceeds ........................................................... 10
Dividend Policy ........................................................... 10
Price Range of Common Stock ............................................... 11
Selected Consolidated Financial Data ...................................... 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................ 13
Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure ................................... 18
Business .................................................................. 20
Management ................................................................ 27
Certain Transactions ...................................................... 35
Principal Stockholders and Selling Security
Holder ................................................................... 37
Description of Capital Stock .............................................. 38
Shares Eligible for Future Sale ........................................... 41
Plan of Distribution ...................................................... 42
Legal Matters ............................................................. 43
Experts ................................................................... 43
Index to Consolidated Financial Statements ................................ F-1
100,000 shares
CYPRESS BIOSCIENCE, INC.
COMMON STOCK, $.02 par value
Prospectus dated July , 1996
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant
in connection with the sale of the Common Stock being registered. All of the
amounts shown are estimates, except for the registration fee and the Nasdaq fee.
<TABLE>
<S> <C>
SEC Registration fee ........................ $ 100
Nasdaq fee .................................. -
Legal fees and expenses ..................... 30,000
Accounting fees and expenses ................ 7,500
-------
Total ............................... $37,600
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law (the "DGCL"),
the Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation and By-laws include
provisions to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Section 102(b)(7) of the DGCL and (ii) require the Registrant to indemnify
its directors and officers to the fullest extent permitted by applicable law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the DGCL, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' or officers' duty of care, and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under the DGCL. In addition,
each director will continue to be subject to liability pursuant to Section 174
of the DGCL, for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Registrant or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Registrant or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Registrant or its stockholders, for
acts or omission that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
stockholders, for improper transactions between the director and the Registrant
and for improper loans to directors and officers. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities law or state or federal environmental laws.
The Registrant has entered into a letter agreement with a certain
former executive officer whereby the Registrant has agreed to pay for expenses
(including attorney's fees) incurred by such executive officer in connection
with an ongoing SEC inquiry in advance of any final disposition of such inquiry.
In the event it is ultimately determined that such executive officer is not
entitled to indemnification under the terms of the Registrant's Bylaws or other
applicable laws or regulations such executive officer is obligated to repay all
amounts advanced by the Registrant on such executive officer's behalf.
The Registrant has an insurance policy covering the officers and
directors of the Registrant with respect to certain liabilities, including
liabilities arising under the Securities Act or otherwise.
II-1
<PAGE> 66
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 14, 1993, the Registrant has sold and issued the following
unregistered securities:
1. Between June 14, 1993 and June 14, 1996, the Registrant granted to
employees, directors and consultants of the Registrant options to purchase
8,214,657 shares of Common Stock at a weighted average exercise price of $1.85.
During that same period, options to purchase 36,000 shares of Common Stock were
exercised for an aggregate purchase price of $66,375.
2. In April 1994, the Registrant completed a private placement of 7%
Convertible Debentures ("7% Debentures") in the aggregate principal amount of
$4,245,000. The 7% Debentures were convertible into 1,476,522 shares of Common
Stock of the Registrant. In conjunction with the private placement of the 7%
Debentures, the Registrant issued to Allen & Company Incorporated who acted as a
placement agent for the 7% Debentures, certain warrants to purchase up to
300,000 shares of Common Stock at a purchase price of $2.875 per share.
3. In December 1994, the Registrant completed a private placement of
1,850,000 shares of its Common Stock at a per share sales price of $1.625, with
net proceeds to the Registrant (after paying certain costs associated with the
private placement) of approximately $2,627,000.
4. In June 1995, the Registrant issued 312,500 shares of its Common
Stock (the "Merger Shares") in connection with the merger of CELx Corporation
("CELx"), the Company's former majority owned subsidiary, with and into the
Company. The Merger Shares were issued to persons, other than the Company, who
held capital stock of CELx. The fair market value of the Merger Shares at the
time of the merger was $625,000.
5. In September 1995, the Registrant issued to holders of certain 7%
Convertible Debentures (the "7% Debentures") of the Registrant, 1,254,817 shares
of Common Stock of the Registrant in connection with an offer by the Registrant
to exchange one share of its Common Stock for each $2.25 of outstanding
principal balance of the 7% Debentures.
6. In December 1995, the Registrant completed a private placement of
$1,500,000 of Senior Convertible Debentures (the "Senior Debentures") to certain
accredited investors. The Debentures were convertible into shares of Common
Stock of the Company at the rate of one share of Common Stock for each $1.50 of
then outstanding principal amount of the Senior Debentures. Allen & Company
Incorporated purchased $500,000 of the Debentures. In January 1996, the Senior
Debentures automatically converted into 1,000,000 shares of the Company's Common
Stock in connection with the closing of the Private Placement described in
paragraph 7 below. Allen & Company Incorporated acted as a non-exclusive
placement agent for the Registrant with respect to the Senior Debenture offering
and received a placement fee in the form of 20,000 shares of Common Stock of the
Company in connection with the Senior Debenture offering.
7. In January 1996, the Company completed a private placement of
8,540,702 shares of Common Stock of the Company (the "Private Placement") with
certain accredited investors at a per share sales price of $1.50, for an
aggregate offering price of $12,811,053. Allen & Company Incorporated acted as a
non-exclusive placement agent for the Company with respect to the Private
Placement and received a placement fee of $225,000, or 6% of the gross proceeds
attributable to securities actually placed by Allen & Company Incorporated in
the Private Placement.
8. In March 1996, the Registrant issued to holders of certain 7%
Debentures of the Registrant, 399,252 shares of Common Stock of the Registrant
in connection with an offer by the Registrant to exchange one share of its
Common Stock for each $2.25 of outstanding principal amount, including accrued
and unpaid interest, of the Registrant's 7% Debentures.
9. On April 30, 1996, the Registrant issued to various holders of 7%
Debentures an aggregate of 12,005 shares of Common Stock of the Registrant with
respect to accrued interest on the outstanding principal balance of the
Registrant's 7% Debentures.
II-2
<PAGE> 67
The sales and issuances of securities in the transactions described in
paragraphs 1 - 9 above were deemed to be exempt from registration under the
Securities Act principally by virtue of Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder. The purchasers in each case
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends are affixed to
the stock certificates issued in such transactions. Similar legends were imposed
in connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information. In addition, the sale
and issuance of the securities in the transaction described in paragraph 8 above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 3(a)9 of the Securities Act. The recipients of the securities were
existing holders of securities of the Registrant and no commissions were
directly or indirectly paid or given in connection with the Exchange Offer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT INCORPORATED BY REFERENCE TO
- ------- ----------------------- ----------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Exhibit 3.1 to Form 10-K for the year ended
Incorporation of the Registrant December 31, 1995 ("1995 Form 10-K")
3.2 Amended and Restated Bylaws of the Registrant Exhibit 3.2 to 1995 Form 10-K
4.1 Specimen Stock Certificate Exhibit 4.1 to Form S-1 Registration
Statement No. 33-41225 ("Form S-1")
4.2 Form of Common Stock Purchase Warrants Exhibit 4.1 to Form S-1
4.3 Incentive Stock Option Exhibit 28.2 to Form S-8 Registration
Statement No. 33-20188 ("Form S-8")
4.4 Form of Nonqualified Stock Option Exhibit 28.2 to Form S-8
4.5 Form of Stock Option - Other Exhibit 4.5 to Form 10-K for the year
ended December 31, 1993
("1993 Form 10-K")
4.6 Form of Employee Stock Warrant Exhibit 10.13 of Form S-1
4.7 Form of 7% Convertible Debentures Exhibit 10.1 to Form 10-Q for the quarter
ended March 31, 1994 (the "1994 10-Q")
4.8 Warrant Agreement dated as of April 22, 1994 Exhibit 10.3 to the 1994 10-Q
between IMRE Corporation and Allen
& Company Incorporated
4.9 Form of 7% Convertible Debenture Exhibit 10.4 to the 1994 10-Q
Purchase Agreement
4.10 Form of Senior Convertible Debenture Exhibit 4.10 to 1995 Form 10-K
4.11 Form of Senior Convertible Debenture Exhibit 4.11 to 1995 Form 10-K
Convertible Debenture Purchase Agreement
</TABLE>
II-3
<PAGE> 68
<TABLE>
<S> <C> <C>
4.12 Form of a Stock Purchase Agreement Exhibit 4.12 to 1995 Form 10-K
for January 1996 Private Placement
5.1 Opinion of Cooley Godward Castro Huddleson &
Tatum
10.1 Stock Option and Stock Appreciation Plan Exhibit 28.1 to Form S-8
10.2 1988 Nonqualified Exhibit 28.3 to Form S-8
Stock Option Plan
10.3 Sub-lease Agreement Exhibit 10.3 to 1993 Form
dated October 11, 1991 10-K
10.4 Lease Agreement dated April 26, 1994 Exhibit 10.4 to Form 10-K for
("1994 Form 10-K") the year ended December 31,
10.5 Warrant Agreement dated as of August 29, Exhibit 99.1 to Form S-3
1991 between IMRE Corporation and Registration Statement No.
Manufacturers Hanover Trust Company of 33-71278
California (now known as Chemical Trust
Company of California)
10.6 Severance Agreement Exhibit 10.6 to 1995 Form
with Martin D. Cleary 10-K
10.7 Consulting Agreement Exhibit 10.7 to 1995 Form
with Harvey J. Hoyt 10-K
10.8 Employment Agreement Exhibit 10.8 to 1995 Form
with Jay D. Kranzler 10-K
10.9 Employment Agreement Exhibit 10.9 to 1995 Form
with Debby Jo Blank 10-K
10.10 Employment Arrangement Exhibit 10.10 to 1995
with Frank R. Jones Form 10-K
10.11 Employment Agreement Exhibit 10.11 to 1995
with Alex P. de Soto Form 10-K
10.12 Baxter Distribution Exhibit 10.1 to Form 8-K dated
Agreement March 18, 1994
10.13 Amendment No. 1 dated March 28. 1995 Exhibit 10.1 to Form
to Baxter Distribution Agreement 8-K dated March 25, 1995
10.14 Resignation Agreement with Alex P. de Soto
10.15 Consulting Agreement with Alex P. de Soto
10.16 Letter of Resignation with Frank R. Jones
</TABLE>
II-4
<PAGE> 69
<TABLE>
<S> <C> <C>
10.17 Lease dated May 3, 1996 between the Company and
the Thomas M. and Dorothy K. McMillan Family
Trust and OM Interests, Inc.
10.18 Sublease Agreement dated April 15, 1996 between Exhibit 99.1 to Form 10-Q for the period
the Company and Bristol-Myers Squibb Company ended March 31, 1996
11.1 Statement regarding computation of Item 8 of 1995 Form 10-K
per share income (loss)
16.1 Letter regarding change in certifying Exhibit 16.1 to 1994 Form 10-K
accountant
23.1 Consent of Ernst & Young LLP, 1994
and 1995 independent auditors
23.2 Consent of Coopers & Lybrand LLP,
1993 independent auditors
23.3 Report of Ernst & Young LLP, Reference is made to page F-2 of this
1995 independent auditors Registration Statement
23.4 Report of Coopers & Lybrand LLP, Reference is made to page F-3 of this
1993 independent auditors Registration Statement
23.5 Consent of Townsend Exhibit 23.4 to 1995
and Townsend and Crew Form 10-K/A
24.1 Power of Attorney Reference is made to page II-7 of this
Registration Statement
27.1 Financial Data Schedule Exhibit 27.1 to 1995 Form 10-K
</TABLE>
- -------------------------
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 or otherwise, the
Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant undertakes that: (1) for the purpose of
determining any liability under the Securities Act, the information omitted from
and form of prospectus filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective; and (2) for the purpose of determining any liability under the
Securities Act, each post-effective
II-5
<PAGE> 70
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on July 12, 1996.
CYPRESS BIOSCIENCE, INC.
By: /s/ Jay D. Kranzler, M.D., Ph.D.
----------------------------------------------------
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer and Chief Scientific Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jay D. Kranzler, M.D., Ph.D. and Susan E.
Feiner, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ JAY D. KRANZLER, M.D., PH.D. Chief Executive Officer, Chief Scientific July 11, 1996
- --------------------------------- Officer and Vice Chairman of the Board
Jay D. Kranzler, M.D., Ph.D. (Principal Executive Officer)
/s/ DEBBY JO BLANK, M.D. President, Chief Operating Officer and July 11, 1996
- --------------------------------- Director
Debby Jo Blank, M.D.
/s/ SUSAN E. FEINER Director of Finance, Controller, July 11, 1996
- --------------------------------- Secretary and Treasurer (Principal
Susan E. Feiner Financial Officer)
/s/ RICHARD M. CROOKS, JR. Chairman of the Board July 11, 1996
- ---------------------------------
Richard M. Crooks, Jr.
/s/ PHILIP J. O'REILLY Director July 11, 1996
- ---------------------------------
Philip J. O'Reilly
/s/ JACK H. VAUGHN Director July 11, 1996
- ---------------------------------
Jack H. Vaughn
</TABLE>
II-7
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT INCORPORATED BY REFERENCE TO
- ------- ----------------------- ----------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Exhibit 3.1 to Form 10-K for the year ended
Incorporation of the Registrant December 31, 1995 ("1995 Form 10-K")
3.2 Amended and Restated Bylaws of the Registrant Exhibit 3.2 to 1995 Form 10-K
4.1 Specimen Stock Certificate Exhibit 4.1 to Form S-1 Registration
Statement No. 33-41225 ("Form S-1")
4.2 Form of Common Stock Purchase Warrants Exhibit 4.1 to Form S-1
4.3 Incentive Stock Option Exhibit 28.2 to Form S-8 Registration
Statement No. 33-20188 ("Form S-8")
4.4 Form of Nonqualified Stock Option Exhibit 28.2 to Form S-8
4.5 Form of Stock Option - Other Exhibit 4.5 to Form 10-K for the year
ended December 31, 1993
("1993 Form 10-K")
4.6 Form of Employee Stock Warrant Exhibit 10.13 of Form S-1
4.7 Form of 7% Convertible Debentures Exhibit 10.1 to Form 10-Q for the quarter
ended March 31, 1994 (the "1994 10-Q")
4.8 Warrant Agreement dated as of April 22, 1994 Exhibit 10.3 to the 1994 10-Q
between IMRE Corporation and Allen
& Company Incorporated
4.9 Form of 7% Convertible Debenture Exhibit 10.4 to the 1994 10-Q
Purchase Agreement
4.10 Form of Senior Convertible Debenture Exhibit 4.10 to 1995 Form 10-K
4.11 Form of Senior Convertible Debenture Exhibit 4.11 to 1995 Form 10-K
Convertible Debenture Purchase Agreement
4.12 Form of a Stock Purchase Agreement Exhibit 4.12 to 1995 Form 10-K
for January 1996 Private Placement
5.1 Opinion of Cooley Godward Castro Huddleson &
Tatum
10.1 Stock Option and Stock Appreciation Plan Exhibit 28.1 to Form S-8
10.2 1988 Nonqualified Exhibit 28.3 to Form S-8
Stock Option Plan
10.3 Sub-lease Agreement Exhibit 10.3 to 1993 Form
dated October 11, 1991 10-K
10.4 Lease Agreement dated April 26, 1994 Exhibit 10.4 to Form 10-K for
("1994 Form 10-K") the year ended December 31,
10.5 Warrant Agreement dated as of August 29, Exhibit 99.1 to Form S-3
1991 between IMRE Corporation and Registration Statement No.
Manufacturers Hanover Trust Company of 33-71278
California (now known as Chemical Trust
Company of California)
10.6 Severance Agreement Exhibit 10.6 to 1995 Form
with Martin D. Cleary 10-K
10.7 Consulting Agreement Exhibit 10.7 to 1995 Form
with Harvey J. Hoyt 10-K
10.8 Employment Agreement Exhibit 10.8 to 1995 Form
with Jay D. Kranzler 10-K
10.9 Employment Agreement Exhibit 10.9 to 1995 Form
with Debby Jo Blank 10-K
10.10 Employment Arrangement Exhibit 10.10 to 1995
with Frank R. Jones Form 10-K
10.11 Employment Agreement Exhibit 10.11 to 1995
with Alex P. de Soto Form 10-K
10.12 Baxter Distribution Exhibit 10.1 to Form 8-K dated
Agreement March 18, 1994
10.13 Amendment No. 1 dated March 28. 1995 Exhibit 10.1 to Form
to Baxter Distribution Agreement 8-K dated March 25, 1995
10.14 Resignation Agreement with Alex P. de Soto
10.15 Consulting Agreement with Alex P. de Soto
10.16 Letter of Resignation with Frank R. Jones
10.17 Lease dated May 3, 1996 between the Company and
the Thomas M. and Dorothy K. McMillan Family
Trust and OM Interests, Inc.
10.18 Sublease Agreement dated April 15, 1996 between Exhibit 99.1 to Form 10-Q for the period
the Company and Bristol-Myers Squibb Company ended March 31, 1996
11.1 Statement regarding computation of Item 8 of 1995 Form 10-K
per share income (loss)
16.1 Letter regarding change in certifying Exhibit 16.1 to 1994 Form 10-K
accountant
23.1 Consent of Ernst & Young LLP, 1994
and 1995 independent auditors
23.2 Consent of Coopers & Lybrand LLP,
1993 independent auditors
23.3 Report of Ernst & Young LLP, Reference is made to page F-2 of this
1995 independent auditors Registration Statement
23.4 Report of Coopers & Lybrand LLP, Reference is made to page F-3 of this
1993 independent auditors Registration Statement
23.5 Consent of Townsend Exhibit 23.4 to 1995
and Townsend and Crew Form 10-K/A
24.1 Power of Attorney Reference is made to page II-7 of this
Registration Statement
27.1 Financial Data Schedule Exhibit 27.1 to 1995 Form 10-K
</TABLE>
<PAGE> 1
Exhibit 5.1
[COOLEY GODWARD CASTRO HUDDLESON & TATUM LETTERHEAD]
July 12, 1996
Cypress Bioscience, Inc.
4275 Executive Square
Suite 800
La Jolla, CA 92037
Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Cypress Bioscience, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission, including a related prospectus filed with the Registration
Statement (the "Prospectus"), covering the resale prospectus of up to 100,000
shares of the Company's Common Stock, par value $.02 (the "Shares"), that may
be sold by Brean, Murray, Foster Securities, Inc. ("The Selling Stockholder"),
as described in the Registration Statement.
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, both as amended, and the originals or copies
certified to our satisfaction of such records, documents, certificates,
memoranda and other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below. We have assumed the
genuineness and authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as copies thereof and
the due execution and delivery of all documents where due execution and delivery
are a prerequisite to the effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares, when sold and issued in accordance with the Registration
Statement and related Prospectus, are validly issued, fully paid, and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By: /s/ THOMAS A. COLL
-----------------------------
Thomas A. Coll
<PAGE> 1
[LOGO]
CYPRESS
BIOSCIENCE, INC.
EXHIBIT 10.14
May 6, 1996
Mr. Alex P. de Soto
c/o Cypress Bioscience, Inc.
401 Queen Anne Avenue, North
Seattle, Washington 98109
Dear Alex:
This letter sets forth the terms and conditions of our agreement (the
"Agreement") regarding the termination of your employment with Cypress
Bioscience, Inc. (the "Company"). This Agreement is made and entered into as
of May 6, 1996 (the "Effective Date"). You and the Company hereby agree as
follows:
1. The Company accepts your resignation as Vice-President/Chief
Financial Officer, Secretary and Treasurer of the Company as of May 6, 1996.
You and the Company agree that you shall remain a transition employee of the
Company through June 30, 1996 (the "Separation Date").
2. During the period commencing as of the Effective Date hereof
and ending as of the Separation Date (the "Transition Period"), we will
facilitate the transition of your employment as follows:
a) During the Transition Period, you shall be
responsible for transition activities as assigned by the
Company's President, Chief Executive Officer ("CEO"), and/or
Director of Finance. You agree that, throughout the
Transition Period, you will continue to be bound by the
Company's policies, procedures and practices. You shall
report to the Director of Finance throughout the Transition
Period.
b) During the Transition Period, the Company shall pay
you a base salary of $8,000.00 per month, such payments to be
paid on the Company's current payroll dates and subject to
withholding of any and all applicable state and federal taxes
and any and all applicable payroll withholding taxes and
obligations
401 QUEEN ANNE AVE. NORTH SEATTLE, WASHINGTON 98109-4517 TEL 206 298-9400
FAX 206 298-9494
<PAGE> 2
Mr. Alex P. de Soto
May 6, 1996
Page Two
c) Commencing as of the Effective Date, you shall have
no power, right or authority to execute contracts on behalf of
the Company or otherwise represent or purport to represent the
Company in any manner whatsoever to any third party unless
expressly authorized to do so in writing by the CEO of the
Company.
d) The Company will pay you all accrued and unused
vacation time earned through the Separation Date within five
business days thereof, subject to standard payroll deductions
and withholdings.
e) You will be entitled to continue your participation
in all employee benefit plans in which you are currently a
participant through the Separation Date.
3. Within five business days of the Separation Date of this
Agreement, you agree to submit your final documented expense reimbursement
statements reflecting all business expenses incurred through the Separation
Date, if any, for which you seek reimbursement. The Company agrees to
reimburse your expenses pursuant to Company policy and regular business
practice. The Company shall reimburse you for all reasonable business expenses
pursuant to Company policy and regular business practice. As of the Separation
Date, the Company shall not reimburse you for any other expenses.
4. The Company agrees that in consideration of the terms and
conditions of this Agreement, you will be entitled to keep the laptop computer
provided to you by the Company.
5. In consideration of the terms and conditions of this Agreement
and services rendered to the Company, you will be granted that number of shares
of freely tradable common stock equal to the quotient of 25,000 divided by the
last quoted sales price of the Company's common stock as quoted on July 19,
1996 on the NASDAQ SmallCap Market.
6. You hereby acknowledge that, except as expressly provided in
this Agreement and except for the Replacement Option Agreement provided for in
the Employment Agreement dated January 18, 1996, all benefits and compensation
that you may otherwise be entitled to pursuant to any other agreement, written
or oral, entered into prior to this Agreement shall cease as of the Effective
Date.
<PAGE> 3
Mr. Alex P. de Soto
May 6, 1996
Page Three
7. You hereby represent and warrant to the Company that you have
previously disclosed all material transactions involving, arising from, or
relating to your employment with the Company as Chief Financial Officer.
8. You acknowledge and agree that you will continue to be bound
by the terms of your Employee Agreement regarding Confidential Information of
the Company, dated September 2, 1993, which is attached hereto as Exhibit A.
9. You agree not to disparage the Company or its officers,
directors, employees, stockholders, accountants, attorneys or agents in any
manner likely to be harmful to it or the business or personal reputation of its
officers, directors, employees, stockholders, accountants, attorneys or agents;
provided that you shall respond accurately and fully to any question, inquiry
or request for information when required by legal process. The Company agrees
not to disparage you in any manner likely to be harmful to your business or
personal reputation; provided that the Company shall respond accurately and
fully to any question, inquiry or request for information when required by
legal process.
10. You agree that you will not engage in any activity to solicit
any officer, director or employee of the Company to depart from the Company and
Join any business with which you may become affiliated for a period of three
(3) years.
11. You hereby release, acquit, and forever discharge the Company,
its officers, directors, agents, servants, employees, shareholders, partners,
successors, assigns, affiliates, insurers, attorneys, customers, and clients of
and from any and all liabilities, demands, causes of action, costs, expenses,
attorneys' fees, damages, and obligations of every kind and nature, at law, in
equity, or otherwise, known and unknown, suspected and unsuspected, disclosed
and undisclosed, arising out of or in any way related to agreements, acts or
conduct at any time prior to the date of this Agreement, including, without
limitation: all such claims and demands directly or indirectly arising out of
or in any way connected with the Company's employment of you, the termination
of that employment, and the Company's performances of its obligations as your
former employer; claims or demands related to salary, bonuses, commissions,
stock, stock options, vacation pay, fringe benefits, expense reimbursements or
any form of compensation; claims pursuant to any federal, state or local law or
cause of action including, but not limited to, the federal Civil Rights Act of
1964, as amended; the Americans With Disabilities Act; fraud; wrongful
discharge; discrimination; defamation; emotional distress; and breach of the
implied covenant of good faith and fair dealing;
<PAGE> 4
Mr. Alex P. de Soto
May 6, 1996
Page Four
provided, however that by this release you do not release or waive your right
to indemnification by and from the Company as provided for in the Company's
Articles of Incorporation and Bylaws. The effective date of this release shall
be the Effective Date.
12. You acknowledge that you have read and understand Section 1542
of the Civil Code of the State of California which reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
You hereby expressly waive and relinquish all rights and benefits under this
section and any law or legal principle of similar effect in any Jurisdiction
with respect to the release granted in this Agreement.
13. The parties hereto each hereby agree and acknowledge that they
will keep the terms, amount and existence of this Agreement completely
confidential, and that neither party will hereafter disclose any such
information to anyone other than the party's accountants and legal
representatives and, in your case, your immediate family, future employers
and/or investors, which persons shall be informed of and bound by this
confidentiality clause, unless otherwise legally required to do so.
14. Any controversy, dispute or claim arising out of, in
connection with or in relation to the interpretation or performance of this
Agreement shall be resolved through binding and nonappealable arbitration
administered by the Judicial Arbitration and Mediation Services, Inc. ("JAMS")
in San Diego County, California. Any such arbitration shall be conducted
before a single arbitrator to be appointed by the parties from JAMS' roster.
If the parties fail to agree as to the identity of the single arbitrator, JAMS
shall have the right to make such appointment. Discovery prior to the
arbitration hearing shall be limited to the exchange of witness lists and
copies of documentary evidence and documents relating to or arising out of the
issues to be arbitrated. The nonprevailing party shall pay the prevailing
party's costs and expenses (including attorneys' fees) of any such arbitration.
Other than as specified herein, the arbitration shall be governed by the
standard rules governing JAMS arbitrations.
15. The parties acknowledge that the drafting and negotiation of
this Agreement has been participated in by each of the parties and, for
purposes of interpreting this Agreement, it shall be deemed to have been
Jointly drafted by the parties. The parties
<PAGE> 5
Mr. Alex P. de Soto
May 6, 1996
Page Five
expressly warrant and represent that you have been given the opportunity to
consult with an attorney with respect to the terms of this Agreement.
16. This Agreement shall bind the heirs, personal representatives,
successors and assigns of each party, and inure to the benefit of each party,
its agents, directors, officers, employees, servants, successors and assigns.
17. If a court of competent jurisdiction determines that any term
or provision of this Agreement is invalid or unenforceable, in whole or in
part, then the remaining terms and provisions hereof shall be unimpaired.
Such court will have the authority to modify or replace the invalid or
unenforceable term or provision with a valid and enforceable term or provision
that most accurately represents the parties' intentions with respect to the
invalid or enforceable term or provision.
18. This Agreement shall be deemed to have been entered into and
shall be construed and enforced in accordance with the laws of the State of
California as such laws are applied to contracts among California residents
made and to be performed entirely within California.
19. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
<PAGE> 6
Mr. Alex P. de Soto
May 6, 1996
Page Six
Please confirm your assent to the foregoing terms and conditions of our
Agreement by signing both of the enclosed copies of this letter and returning
one of those signed copies to me.
Sincerely,
CYPRESS BIOSCIENCE, INC.
/s/ JAY KRANZLER
- -------------------------------
Jay Kranzler
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
HAVING READ AND REVIEWED THE FOREGOING, I HEREBY AGREE TO AND ACCEPT THE
TERMS AND CONDITIONS AS STATED ABOVE.
/s/ ALEX P. DE SOTO
- -------------------------------
ALEX P. DE SOTO
<PAGE> 7
AGREEMENT
THIS AGREEMENT ("AGREEMENT") is entered into as of the 6th day of May, 1996 by
and between ALEX P. DE SOTO ("Employee") and CYPRESS BIOSCIENCE, INC. (THE
"COMPANY").
RECITALS
WHEREAS, the Employee is currently the subject of an investigation by
the Securities and Exchange Commission ("SEC") for alleged violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934.
WHEREAS, the SEC has offered to settle with the Employee subject to the
Employee agreeing, among other things, to certain limitations with respect to
his service with public companies (the "SEC Settlement").
WHEREAS, the Company desires to further facilitate the Employee's
transition to new employment within the bounds of the proposed SEC Settlement
by providing the Employee with a Consulting Agreement, which is attached hereto
as Exhibit A;
WHEREAS, this Agreement is entered into between the parties in
conjunction with a letter agreement dated May 6, 1996 (the "Letter Agreement")
which sets forth and defines the terms and conditions of the Employees
termination from the Company and which is incorporated herein as if set forth
in full;
WHEREAS, the Letter Agreement and this Agreement constitute the
complete, final and exclusive embodiment of the entire agreement between the
Employee and the Company with regard to the subject matter hereof and which is
entered into without any reliance on any promise or representation, written or
oral, other than those expressly contained in such agreements.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements set forth herein, and for other good and
valuable consideration, the parties hereto agree as follows:
1.
<PAGE> 8
1. The Employee will be retained as a Consultant to the Company
for a period of ten (10) months beginning July 1, 1996, if the Employee agrees
to be bound by the SEC Settlement and the Company receives no later than June
30, 1996 either a written offer of settlement which has been filed by the
Employee with the SEC or a written representation from the Employee's counsel
that such an offer is being prepared and will be filed ("Consultant Terms").
The Company shall have no obligation to retain the Employee as a Consultant, if
the Employee has not complied with the above Consultant Terms. If at anytime
after June 30, 1996 the SEC commences either contested litigation or a
contested administrative proceeding against the Employee, the Consulting
Agreement shall terminate and the Company shall have no further obligation to
retain the Employee as a Consultant.
2. The parties agree that if the Employee fulfills his obligation
as set forth in paragraph I of this Agreement, that the Consulting Agreement
will be executed and given full force and effect as of July 1, 1996 and for a
period of ten (10) months hereafter, subject to termination only as described
in such Consulting Agreement.
3. The parties further acknowledge and agree that they will
keep the terms of this Agreement completely confidential, and that they will
not hereafter disclose any information regarding the terms of this Agreement to
anyone other than the officers and directors of the Company, and in the case of
the Employee, his immediate family. All such persons shall be informed of and
bound by this confidentiality clause, unless legally required to do otherwise.
4. The Employee expressly warrants and represents that he has
been given an opportunity to consult with an attorney with respect to the terms
of this Agreement.
5. This Agreement and the Letter Agreement (the "Agreements")
referenced above and incorporated herein, contain the entire agreement between
the parties hereto and constitute the complete, final and exclusive embodiment
of their agreement with respect to the subject matter hereof, and all prior or
contemporaneous agreements, understandings, representations and statements,
oral or written, including without limitation, the Employment Agreement dated
January 8, 1996, are merged into and superseded by the Agreements.
6. This Agreement shall be deemed to be entered into and shall be
construed and enforced in accordance with the laws of the State of California
as applied to contracts made and to be performed entirely in California; it
shall be interpreted and construed mutually in accordance with the plain
meaning of the language contained herein and shall not be preemptively
construed against the drafters.
2.
<PAGE> 9
7. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, all of which together shall
constitute one and the same instrument
IN WITNESS WHEREOF, the parties have duly authorized and caused this Agreement
to be executed on the date set forth below
CYPRESS BIOSCIENCE, INC.
By: /s/ JAY D. KRANZLER
----------------------------
JAY D. Kranzler, M.D., Ph.D.
Chief Executive Officer
/s/ ALEX P. DE SOTO
----------------------------
ALEX P.de Soto
APPROVED AS TO FORM:
ROHAN, GOLDFARB & SHAPIRO
By: TONY SHAPIRO
---------------------------
TONY SHAPIRO
3.
<PAGE> 1
EXHIBIT 10.15
CYPRESS BIOSCIENCE, INC. CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("AGREEMENT") is entered into as of the day
of _________, 1996 by and between ALEX P. DE SOTO ("CONSULTANT") and CYPRESS
BIOSCIENCE, INC. (THE "COMPANY").
RECITAL
The Company desires to engage the services of Consultant to provide
certain consulting services to the Company and Consultant desires to provide
such consulting services, as set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements set forth herein, and for other good and
valuable consideration, the parties hereto agree as follows:
1. ENGAGEMENT OF SERVICES. Consultant is hereby retained by the
Company to perform certain services for the Company related to his area of
expertise. Consultant shall perform services as requested by the Company,
including providing assistance to the officers of the Company and Company
counsel with respect to regulatory filings, operational and financial matters
and other matters in Consultant's area of expertise. In this role, Consultant
will report primarily to the Company's Director of Finance. Consultant agrees
to perform services for the Company for as much time as he is reasonably
available, subject to his efforts to obtain other full-time employment.
Consultant agrees to exercise the highest degree of professionalism, and
utilize his expertise in providing such services.
2. COMPENSATION. As full and complete compensation for
Consultant's services and for the discharge of all Consultant's obligations
hereunder, the Company shall pay Consultant a fee of $7,000.00 per month,
payable on the fifth business day of each month.
3. TAXES. As an independent contractor, the Company will not
withhold or make payments for state or federal income tax or social security;
make unemployment insurance or disability insurance contributions; or obtain
workers' compensation insurance on Consultant's behalf. The Company will issue
an IRS Form 1099 with respect to Consultant's consulting fees. Consultant
agrees to accept exclusive liability for complying with all applicable state
and federal laws governing self-employed individuals,
1.
<PAGE> 2
including obligations such as payment of quarterly taxes, social security,
disability and other contributions based on the fees paid to Consultant, his
agents or employees under this Agreement. Consultant hereby indemnifies and
defends the Company against any and all such taxes or contributions.
4. BUSINESS EXPENSES. The Company will reimburse Consultant for
travel and other out-of-pocket costs reasonably incurred by Consultant in the
course of performing services under this Agreement, provided, however, that the
Company shall not be obligated hereunder unless the Company has agreed in
advance to the incurrance by Consultant of any such costs, and Consultant
provides the Company with appropriate receipts or other relevant documentation
for all such costs as part of any submission by Consultant for reimbursement.
5. INDEPENDENT CONTRACTOR. It is understood and agreed that
Consultant is an independent contractor and not an employee, agent, joint
venturer or partner of the Company. Consultant agrees not to hold himself out
as, or give any person or entity any reason to believe, that Consultant is an
employee, agent, joint venturer or partner of the Company or that Consultant
has the authority to contractually bind the Company. Consultant has no
authority to obligate or bind the Company by contract or otherwise. Consultant
will not be eligible for any employee benefits such as paid holidays,
vacations, sick leave or other paid time off, or participate in
Company-sponsored health insurance or other employee benefit plans.
6. TERM AND TERMINATION. This Agreement shall be effective as of
July 1, 1996 and shall continue in effect for a period of ten (10) months (the
"Term"), unless terminated earlier as follows:
A) Either party may terminate this Agreement in the
event of a material breach by the other party of any of the covenants contained
herein if such breach continues uncured for a period of thirty days after
written notice of such breach;
B) The parties may mutually agree in writing to
terminate this Agreement; and
C) The Consultant may terminate the Agreement if he
obtains new full-time employment with another company and desires to terminate
this Agreement; however, in that event, he shall be entitled to compensation
for the entire Term of the Agreement, payable on a monthly basis throughout the
remainder of the Term of this Agreement, so long as he remains a full-time
employee with another company.
7. CONFIDENTIAL INFORMATION. During the term of this Agreement
and in the course of Consultant's performance hereunder, Consultant may receive
and otherwise be exposed to confidential and proprietary information relating
to the Company's business
2.
<PAGE> 3
practices, strategies and technologies. Such confidential and proprietary
information may include but not be limited to confidential and proprietary
information supplied to Consultant relating to the Company's marketing and
customer support strategies the Company's financial information, including
sales, costs, profits and pricing methods, the Company's internal
organization, employee information and customer lists, the Company's
technology, including discoveries, inventions, research and development
efforts, processes, hardware/software design and maintenance tools, samples,
media (and procedures and formulations for producing any such samples and/or
media), formulas, methods, product know-how and show-how, and all derivatives,
improvements and enhancements to any of the above which are created or
developed by Consultant under this Agreement and information of third parties
as to which the Company has an obligation of confidentiality (collectively
referred to as "Information").
Consultant acknowledges the confidential and proprietary
character of the Information, and agrees that the Information is the sole,
exclusive and extremely valuable property of the Company. Accordingly,
Consultant agrees not to reproduce any of the Information without the
applicable prior written consent of the Company, not to use the Information
except in the performance of this Agreement, and not to disclose all or any
part of the Information in any form to any third party, either during or after
the term of this Agreement. Upon termination of this Agreement for any reason,
including expiration or early termination of the Term, Consultant agrees to
cease using and to return to the Company all whole and partial copies and
derivatives of the Information, whether in Consultant's possession or under
Consultant's direct or indirect control. Consultant shall not disclose or
otherwise make available to the Company in any manner any confidential
information of Consultant or received by Consultant from third parties.
This Section 7 shall survive the termination of this Agreement
for any reason, including expiration or early termination of the Term, but in
no event shall the provisions of this Section 7 apply following the date that
is five (5) years after the date of this Agreement.
8. OWNERSHIP OF WORK PRODUCT. Consultant agrees that any and all
ideas, improvements, inventions and works of authorship written or first
reduced to practice or, where directly related to work performed under this
Agreement, conceived or created in the performance of work under this Agreement
shall be the sole and exclusive property of the Company and hereby assigns to
the Company all its right, title and interest in mid to any and all such ideas,
improvements, inventions and works of authorship. This Section shall survive
the termination of this Agreement for any reason, including expiration of term.
9. INDEMNIFICATION. The Consultant shall not be liable to the
Company, any shareholder, affiliate, officer, director, agent or employee of
the Company, or to any other person, with respect to any action taken or
omitted to be taken by the Consultant in connection with rendering services
hereunder, unless such action or omission (i)
3.
<PAGE> 4
constitutes gross negligence or willful misconduct on the part of the
Consultant and (ii) was not done or omitted to be done substantially in
accordance with the instructions of the Chief Executive Officer or any Senior
Vice President of the Company as communicated to the Consultant. The Company
hereby agrees to indemnify the Consultant from, and hold him harmless against
any and all loss, liability or expense (including, without limitation,
attorneys' fees and expense) incurred by the Consultant as a result of or
arising out of a claim brought by any person against the Consultant that is
not conclusively and finally determined by a court of competent jurisdiction to
be a direct consequence of the Consultant's gross negligence or willful
misconduct, and whenever such a claim is brought, the Company shall pay or
reimburse the Consultant, at the Consultant's option, for all such loss,
liability and expense as incurred, subject to an obligation on the part of the
Consultant to return the amounts so advanced if such a court determination is
subsequently made.
10. ARBITRATION. Any controversy, dispute or claim arising out of
in connection with or in relation to the interpretation or performance of this
Agreement shall be resolved through binding and nonappealable arbitration
administered by the Judicial Arbitration and Mediation Services, Inc. ("JAMS")
in San Diego County, California. Any such arbitration shall be conducted
before a single arbitrator to be appointed by the parties from JAMS' roster. If
the parties fail to agree as to the identity of the single arbitrator, JAMS
shall have the right to make such appointment. Discovery prior to the
arbitration hearing shall be limited to the exchange of witness lists and
copies of documentary evidence and documents relating to or arising out of the
issues to be arbitrated. The nonprevailing party shall pay the prevailing
party's costs and expenses (including attorneys' fees) of any such
arbitration. Other than as specified herein, the arbitration shall be governed
by the standard rules governing JAMS arbitrations.
11. SUCCESSORS. This Agreement is personal to the Consultant
and, without the prior written consent of the Company, shall not be assignable
by the Consultant.
12. MISCELLANEOUS.
A) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California, without reference to
principles of conflict laws. The captions/headings of this Agreement are not
part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified except by a written agreement executed
by the parties hereto or their respective Successors and legal representatives.
This Agreement does not create, and shall not be construed as creating, rights
enforceable by any person or entity not a party hereto.
4.
<PAGE> 5
b) This Agreement constitutes the complete, final and exclusive
embodiment of the entire Agreement between the parties hereto with respect to
the terms and conditions of the subject matter hereof. This Agreement is
entered into without relying upon any promise, warranty or representation,
written or oral, other than those expressly contained in this Agreement, and it
supersedes any other such promises, warranties, representations or agreements.
c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, or by facsimile
with receipt confirmed, addressed as follows:
If to the Consultant:
Alex P. de Soto
1808 Terrace Avenue
Snohomish, WA 98290
Telecopy No.: (360)568-5700
If to the Company:
Cypress Bioscience, Inc.
401 Queen Anne Avenue, North
Seattle, Washington 98109
Attention: Jay D. Kranzler, M.D., Ph.D.
Telecopy No.: (619) 546-2924
With copies to:
Cooley Godward Castro Huddleson & Tatum
4365 Executive Drive, Suite 1100
San Diego, California 92121
Attention: Frederick T. Muto
Telecopy No.: (619) 453-3555
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communication shall be effective
when actually received by the addressee.
5.
<PAGE> 6
IN WITNESS WHEREOF, Cypress Bioscience, Inc. has caused this Agreement
to be signed by one of its duly authorized officers and the Consultant has
hereunto set his hand, all as of the day and year first above written.
______________________________
ALEX P. DE SOTO
CYPRESS BIOSCIENCE, INC.
By:______________________________
JAY D. KRANZLER, M.D., PH.D.
CHIEF EXECUTIVE OFFICER
6.
<PAGE> 1
EXHIBIT 10.16
[IMRE LOGO]
401 QUEEN ANNE AVENUE NORTH
SEATTLE, WASHINGTON 98109-4517
U.S.A.
TELEPHONE: (206) 298-9400
FACSIMILE: (206) 298-9494
March 29, 1996
Frank R. Jones, Ph.D.
13813 68th Avenue West
Edmonds, Washington 98026
Dear Frank:
This letter sets forth the terms and conditions of our agreement
(the "Agreement") regarding the termination of your employment with
IMRE Corporation (the "Company"). You and the Company hereby agree
as follows:
1. The Company accepts your resignation as Chief Scientific Officer
and as an Officer, Director and Chairman of the Board of the Company
effective March 29, 1996 (the "Separation Date").
2. The Company agrees to pay you a severance payment in the amount
of $244,000.00 payable within 10 business days after the Separation Date.
The Company also agrees to pay you $25,000.00, which represents payment
for your accrued vacation benefits, which amount is also payable within 10
business days after the Separation Date. You understand that you shall be
responsible for the payment of any and all applicable state and federal
taxes with respect to such payments, and that the Company shall withhold
from such payments any and all applicable payroll withholding taxes.
3. The Company agrees that you shall be entitled to purchase from
the Company your company car, office furniture currently used by you, an
H/P 700 facsimile machine maintained at your residence, a Nikon microscope
and a cellular phone for a purchase price of $17,500.00. The total purchase
price of $17,500.00 payable for the foregoing personal property will be
deducted from the $244,000.00 severance payment identified in paragraph 2.
4. It is agreed that the stock options and warrants to purchase
an aggregate of 705,000 shares of Common Stock of the Company granted to
you, whether vested or unvested, identified in Exhibit A attached hereto,
shall be canceled as of the Separation Date.
<PAGE> 2
Frank R. Jones, Ph.D.
March 29, 1996
Page Two
5(a) In consideration of the terms and conditions of this Agreement,
as of the Separation Date, the Company shall grant to you, pursuant to its
standard form of nonqualified stock option agreement, options to purchase a
total of 705,000 shares of the Company's Common Stock (the "Options") at an
exercise price of $2.25 per share. The Options shall be subject to vesting and
shall have such expiration dates as set forth in Exhibit B attached hereto.
(b) Upon the filing by the Company of the next registration
statement ("Registration Statement") with the Securities and Exchange
Commission to register for sale any of the Company's securities, the Company
shall include in the Registration Statement all securities issuable to you
pursuant to the exercise of the Options granted to you hereunder. The Company
shall keep the Registration Statement effective for and until such period of
time that the shares issuable upon exercise of the Options granted hereunder
are sold by you or until such shares may be sold pursuant to Rule 144 of the
Securities Act of 1933, as amended (the "Act") and bear all expenses incurred
in connection with the filing of the Registration Statement. You agree, after
the filing of the Registration Statement, not to effect any disposition of the
securities issuable to you pursuant to the exercise of your Options that would
constitute a sale within the meaning of the Act, without complying with the Act
or the rules and regulations of the Commission promulgated thereunder.
(c) The Options granted to you hereunder are freely transferable
to your heirs, successors and assigns upon your death, subject to the terms and
conditions of this Agreement.
6. As of the Separation Date, you represent and warrant to the
Company that you beneficially own an aggregate of approximately 400,141 shares
of Common Stock of the Company (the "Lock-Up Shares"). You agree not to offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly, or
announce an offering of, any Lock-Up Shares or any securities convertible into,
or exchange for shares of Common Stock of the Company for a period of 180 days
following the Separation Date without the prior written consent of the Company.
7. You hereby acknowledge that except as expressly provided in
this Agreement all benefits and compensation payable to you by the Company
shall cease as of the Separation Date.
8. You hereby represent and warrant to the Company that you have
previously disclosed all material transactions involving, arising from, or
relating to your former employment with the Company as Chief Scientific
Officer.
<PAGE> 3
Frank R. Jones, Ph.D.
March 29, 1996
Page Three
9. You hereby represent and agree that, except as set forth in
paragraph 3 above, upon the Separation Date, you will return to the Company all
documents constituting Company property (and all copies thereof) and other
property of the Company in your possession or control, including, but not
limited to, Company files, notes, drawings, records, business plans and
forecasts, financial information, data, notebooks, technical charts or
diagrams, customer lists or information, sales and marketing information,
specifications, computer recorded information, tangible property, (including,
but not limited to, keys, access cards and Company credit cards) and any other
materials of any kind (and all reproductions thereof) which contain or embody
any proprietary information of the Company, as that term is defined in
paragraph 10 below.
10. You hereby acknowledge that you have had access to
confidential and proprietary information and trade secrets of the Company in
connection with your relationship therewith. You hereby acknowledge that such
information includes, but is not limited to: (a) inventions, developments,
designs, applications, improvements, trade secrets, know-how, methods or
processes, discoveries, techniques and data (hereinafter "Inventions"); and (b)
plans for research, development, new products, marketing and selling,
information regarding business plans, budgets and unpublished financial
statements, licenses, prices and costs, information concerning suppliers and
customers and information regarding the skills and compensation of employees of
the Company (collectively with Inventions, hereinafter as "Proprietary
Information"). In view of the foregoing, you hereby agree, warrant and
acknowledge that:
a) You have held and will continue to hold in confidence
and trust all Proprietary Information and shall not use or
disclose any Proprietary Information or anything related to
such information without the prior written consent of the
Company.
b) You have and will continue to assign to the Company
as it becomes necessary your entire right title and interest
in and to any inventions (and all Proprietary Rights with
respect thereto) whether or not patentable or registrable
under copyright or similar statutes, made, conceived of,
reduced to practice, or learned, by you, either alone or
jointly with others, during the course of your relationship
with the Company.
c) Your breach of the foregoing agreements and
acknowledgments may result in unique and special harm to the
Company and therefore the Company shall have the right to
enforce this Agreement and any of its provisions by
injunctions, specific performance or other equitable relief
without prejudice to any other rights and remedies that the
Company may have for a breach of this Agreement.
<PAGE> 4
Frank R. Jones, Ph.D.
March 29, 1996
Page Four
11. You agree that, for a period of one year following the
Separation Date, you will not, either as a principal, agent, consultant,
employee, or otherwise, engage in any research, development production, or
marketing of products, processes, or technology that is the same as or similar
to the products, processes, or technology of the Company which has been
conceived, developed, produced, or marketed by the Company or its agents prior
to the Separation Date.
12. You agree not to disparage the Company or its officers,
directors, employees, shareholders, accountants, attorneys or agents in any
manner likely to be harmful to it or the business or personal reputation of its
officers, directors, employees, shareholders, accountants, attorneys or agents;
provided that you shall respond accurately and fully to any question, inquiry
or request for information when required by legal process. The Company agrees
not to disparage you in any manner likely to be harmful to your business or
personal reputation; provided that the Company shall respond accurately and
fully to any question, inquiry or request for information when required by
legal process.
13. You agree to have no further contact or communications with
the employees, officers and directors of the Company regarding the conduct of
its business and to remain off Company property, except as may be necessary in
your capacity as a stockholder and investor in the Company.
14. You agree that you will not engage in any activity to solicit
any officer, director or employee of the Company who has been offered
continuing employment by the Company to depart from the Company and join any
business with which you may become affiliated.
15. You hereby release, acquit and forever discharge the Company,
its officers, directors, agents, servants, employees, shareholders, partners,
successors, assigns, affiliates, insurers, customers, and clients of and from
any and all liabilities, demands, causes of action, costs, expenses, attorneys'
fees, damages, indemnities and obligations of every kind and nature, at law, in
equity, or otherwise, known and unknown, suspected and unsuspected, disclosed
and undisclosed, arising out of or in any way related to agreements, acts or
conduct at any time prior to the date of this Agreement, including, without
limitation: all such claims and demands directly or indirectly arising out of or
in any way connected with the Company's employment of you, the termination of
that employment, and the Company's performances of its obligations as your
former employer; claims or demands related to salary, bonuses, commissions,
stock, stock options, vacation pay, fringe benefits, expense reimbursements or
any form of
<PAGE> 5
Frank R. Jones, Ph.D.
March 29, 1996
Page Five
compensation; claims pursuant to any federal, state or local law or cause of
action including, but not limited to, the federal Civil Rights Act of 1964, as
amended; the Americans With Disabilities Act; fraud; wrongful discharge;
discrimination; defamation; emotional distress; and breach of the implied
covenant of good faith and fair dealing. The effective date of this release
shall be the date it is executed by you; provided, however, that in the event
you are over forty (40) years of age when this Agreement is executed, the
effective date shall be the eighth day after this release is signed by you.
You further acknowledge that you knowingly and voluntarily waive and
release any rights you may have under the Age Discrimination in Employment Act
of 1967, as amended ("ADEA"). You also acknowledge that the consideration given
for the waiver and release in the preceding paragraphs hereof is in addition to
anything of value to which you are already entitled. If you are more than
forty (40) years of age or older when this release is signed, you hereby
provide the further acknowledgment that you are advised by this writing, as
required by the Older Workers Benefit Protection Act, that: (a) your waiver and
release does not apply to any rights or claims that may arise after the
effective date of this release; (b) you should consult with an attorney prior
to executing this release (although you may voluntarily choose not to do so);
(c) you may have at least twenty-one (21) days to consider this Agreement
(although you may by your own choice execute this release earlier); (d) you
have seven (7) days following the execution of this release to revoke the
release; and (e) this Agreement shall not be effective until the date upon
which the revocation period has expired, therefore making the effective date
the eighth day after this release is signed by you.
16. The Company hereby releases, acquits and forever discharges
you and your successors of and from any and all liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and obligations
of every kind and nature, at law, in equity or otherwise, arising out of or in
any way related to agreements, acts or conduct at any time prior to the
Separation Date; provided, however, that the Company shall not release you with
respect to liability for misappropriation of trade secrets of the Company, or
liability to the Company arising under a violation of Paragraphs 9 and/or 10 of
this Agreement.
17. The parties hereto each hereby agree and acknowledge that they
will keep the terms, amount and existence of this Agreement completely
confidential, and that neither party will hereafter disclose any such
information to anyone other than the party's accountants and legal
representatives and, in your case, your immediate family, future employers
and/or investors, which persons shall be informed of and bound by this
confidentiality clause, unless otherwise legally required to do so.
<PAGE> 6
Frank R. Jones, Ph.D.
March 29, 1996
Page Six
18. As of the Separation Date, the Company agrees to indemnify,
defend and hold you harmless from all claims, liabilities and expenses that
arise out of actions or omissions by you within the course and scope of your
employment during the period of your employment with the Company or by reason
of your position as an officer or director of the Company.
19. The parties acknowledge that the drafting and negotiation of
this Agreement has been participated in by each of the parties and, for
purposes of interpreting this Agreement, it shall be deemed to have been
jointly drafted by the parties. The parties expressly warrant and represent
that you have been given the opportunity to consult with an attorney with
respect to the terms of this Agreement.
20. This Agreement shall bind the heirs, personal representatives,
successors and assigns of each party, and inure to the benefit of each party,
its agents, directors, officers, employees, servants, successors and assigns.
21. You acknowledge that this Agreement contains the entire
agreement between you and Company and is the complete, final and exclusive
embodiment of our Agreement with regard to this subject matter and supersedes
all other prior agreements with regard to this subject matter. It is entered
into without reliance on any promise or representation, written or oral, other
than those expressly contained herein. This Agreement may not be modified or
amended except in a writing signed both by you and by an officer or director of
the Company.
22. This Agreement shall be deemed to have been entered into and
shall be construed and enforced in accordance with the laws of the State of
Delaware as such laws are applied to contracts among Delaware residents made
and to be performed entirely within Delaware.
23. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
<PAGE> 7
Frank R. Jones, Ph.D.
March 29, 1996
Page Seven
Please confirm your assent to the foregoing terms and conditions of our
Agreement by signing both of the enclosed copies of this letter and returning
one of those signed copies to me.
Sincerely,
IMRE CORPORATION
JAY D. KRANZLER
- -------------------------------
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
HAVING READ AND REVIEWED THE FOREGOING, I HEREBY AGREE TO AND ACCEPT THE
TERMS AND CONDITIONS AS STATED ABOVE.
FRANK R. JONES
- -------------------------------
FRANK R. JONES
<PAGE> 8
EXHIBIT A
<TABLE>
<CAPTION>
GRANTED UNDERLYING
GRANT VEST EXPIRATION AS OF SHARES
TYPE OF STOCK OPTION DATE DATE DATE PRICE 03/05/96 REGISTERED
- -------------------- ------- -------- ---------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Formal Non-Qualified Option Plan 02/05/93 02/05/93 02/05/03 2.6250 15,000 Yes
Formal Non-Qualified Option Plan 03/28/94 03/28/94 03/28/04 3.3750 10,000 Yes
Incentive Stock Option 03/15/92 02/05/93 03/15/02 3.8750 36,000 Yes
No Option Plan 03/15/92 02/05/93 03/15/97 1.9375 189,000 No
No Option Plan 03/15/92 03/15/92 03/15/97 1.9375 20,000 No
No Option Plan 02/05/93 02/05/93 02/05/03 2.6250 75,000 No
No Option Plan 03/28/94 03/28/94 03/28/04 3.3750 75,000 No
Outstanding Warrants 06/10/91 11/11/91 06/10/01 1.8750 285,000 Yes
-------
Totals 705,000
=======
</TABLE>
<PAGE> 9
EXHIBIT B
NONQUALIFIED STOCK OPTION SCHEDULE
<TABLE>
<CAPTION>
# SHARES
UNDERLYING GRANT VESTING EXPIRATION EXERCISE
OPTION DATE DATE DATE PRICE
---------- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C>
15,000 3/27/96 10/1/96 2/5/03 $2.25
10,000 3/27/96 10/1/96 3/28/04 $2.25
36,000 3/27/96 10/1/96 3/15/02 $2.25
189,000 3/27/96 10/1/96 3/15/00 $2.25
20,000 3/27/96 1/1/97 3/15/00 $2.25
75,000 3/27/96 1/1/97 2/5/03 $2.25
75,000 3/27/96 1/1/97 3/28/04 $2.25
80,000 3/27/96 1/1/97 6/10/01 $2.25
205,000 3/27/96 4/1/97 6/10/01 $2.25
=======
TOTAL 705,000
</TABLE>
<PAGE> 1
EXHIBIT 10.17
PARK PLAZA BUILDING
OFFICE LEASE
This Lease dated as of May 3, 1996, by and between THE THOMAS M. AND
DOROTHY K. McMILLAN FAMILY TRUST, and OM INTERESTS, INC., a California
corporation having an office at 4350 Executive Drive, Suite 300, San Diego,
California, 92121, ("Landlord"), and CYPRESS BIOSCIENCE, INC., a Delaware
corporation having an office at 4275 Executive Square, Suite 800, La Jolla,
California 92037 ("Tenant").
I. DEMISE OF PREMISES
In consideration of the Rent and the covenants and agreements made
herein, including the General Terms, Covenants and Conditions attached hereto
and made a part hereof, Landlord leases to Tenant and Tenant accepts from
Landlord the Premises (as outlined on the plan attached hereto as Exhibit A)
located in the Building, together with the nonexclusive right to use, in common
with Landlord and others, the following portions of the Building: the entrance
foyer and lobby; the corridors and lavatories on the floor on which the
Premises are situated; all exterior walkways, landscaping, and driveways; and
the stairways, elevators, shipping and receiving areas (sometimes referred to
as the "Common Areas").
II. TERMS
As used in this Lease, the following terms shall have the following
meanings:
A. Building: the building on the real property situated at 4350
Executive Drive, San Diego, California, 92121 (the "Land").
B. Premises: that part of the Building outlined on Exhibit A,
called Suite 325, on the third (3rd) floor of the Building, including all
tenant improvements made by Landlord pursuant to the Work Letter attached
hereto as Exhibit C. The Base Rent at the Commencement Date is based on the
rate of $18.30 per rentable square foot per annum and 2,852 rentable square
feet within the Premises. If the actual usable square feet within the Premises
is more or less than 2,631 (to be computed after completion of the tenant
improvements), the usable square feet, the rentable square feet (and any
calculations based on the usable and rentable square feet), the Base Rent,
Monthly Installments of Base Rent, and Tenant's Proportionate Share shall be
increased or decreased accordingly, and the parties shall execute an amendment
to this lease evidencing such changes.
C. Building Manager: OliverMcMillan Management Services Inc., or
such other person as Landlord may designate.
D. Commencement Date: July 1, 1996
E. Termination Date: Sixty (60) months following the
Commencement Date unless sooner terminated as provided in this Lease.
F. Term: a period commencing on the Commencement Date and
expiring at midnight on the Termination Date, unless extended as provided in
this Lease.
G. Base Rent: $52,191.60 per annum. [SEE RIDER THREE FOR
ADDITIONAL PROVISIONS.]
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<PAGE> 2
H. Monthly Installments of Base Rent: $4,349.30
I. Tenant's Proportionate Share: 4.316 percent.
J. Base Year: The calendar year Not Applicable.
K. Security Deposit: $4,349.30 SEE RIDER THREE FOR ADDITIONAL
PROVISIONS.
L. Landlord's Mailing Address: 4350 Executive Drive, Suite 300,
San Diego, California 92121.
Tenant's Mailing Address: Prior to the Commencement Date: 4275
Executive Square, Suite 800, La Jolla, California 92037; Following the
Commencement Date: 4350 Executive Drive, Suite 325, San Diego, California,
92121.
M. Normal Business Hours: the hours from 8:00 a.m. to 6:00 p.m.
Monday through Friday and 9:00 a.m. to 1:00 p.m. on Saturday, except recognized
holidays.
N. State: The State of California.
O. Parking Spaces: Tenant shall be entitled to the non-exclusive
use in common with Landlord and others of a maximum of twelve (12) parking
spaces in the parking area located on the Land (the "Parking Spaces"). [SEE
RIDER THREE FOR ADDITIONAL PROVISIONS.]
P. CPI: Not applicable.
Q. Broker: Business Real Estate/New America Network and Biotech
Realty Partnerships. [SEE SECTION 24 OF THE GENERAL TERMS, COVENANTS, AND
CONDITIONS FOR ADDITIONAL PROVISIONS.]
R. Permitted Use (if other than or in addition to general office
purposes): None
S. Tenant's Representatives: Tenant's employees, agents,
contractors, subcontractors, and licensees.
III. EXHIBITS AND RIDERS
The exhibits and riders listed below are incorporated in this Lease
and are to be construed as part hereof:
A. "A" - Space Plan showing the Premises as currently
improved.
B. "B" - Plan showing the Footprint of the Premises.
C. "C" - Work Letter.
D. "D" - Rules and Regulations.
E. "E" - Guaranty (if applicable).
F. "F" - Hazardous Materials and Air Pollution
Control Questionnaires
G. Riders (If Applicable).
RIDER ONE - Not Applicable
RIDER TWO - Not Applicable
RIDER THREE - Additional Provisions
In witness whereof, Landlord and Tenant have executed or caused to be executed
this Lease as of the date
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<PAGE> 3
first written above.
LANDLORD: TENANT:
OLIVERMcMILLAN MANAGEMENT SERVICES, CYPRESS BIOSCIENCE, INC., a Delaware
INC., a California corporation corporation
Managing Agent
By: SUSAN E. FEINER
------------------------------
By: Its: Secretary
------------------------------ ------------------------------
Dated: June 14, 1996
------------------------------
Date:
------------------------------
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<PAGE> 4
PARK PLAZA BUILDING
RIDER ONE (BASE YEAR)
To Lease dated May 3, 1996
Between THE THOMAS M. AND DOROTHY K. McMILLAN FAMILY TRUST, and OM INTERESTS,
INC. (Landlord) and CYPRESS BIOSCIENCE, INC. (Tenant).
INTENTIONALLY DELETED
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<PAGE> 5
PARK PLAZA BUILDING
RIDER TWO (CPI)
To Lease dated May 3, 1996
Between THE THOMAS M. AND DOROTHY K. McMILLAN FAMILY TRUST, and OM INTERESTS,
INC. (Landlord) and CYPRESS BIOSCIENCE, INC. (Tenant).
INTENTIONALLY DELETED
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<PAGE> 6
PARK PLAZA BUILDING
RIDER THREE (ADDITIONAL PROVISIONS)
To Lease dated May 3, 1996
Between THE THOMAS M. AND DOROTHY K. McMILLAN FAMILY TRUST, and OM INTERESTS,
INC. (Landlord) and CYPRESS BIOSCIENCE, INC. (Tenant).
The parties agree as hereinafter set forth. The section numbers below
are consistent with the section numbers of the Lease.
II.B. At the end of this section add: "Tenant is hereby granted a
right of first offer to lease the contiguous office space located adjacent to
the Premises (the "Right of First Offer to Lease Space"), as follows: Landlord
and Tenant hereby agree that whenever Landlord either (i) markets or intends to
market the Right of First Offer to Lease Space, or (ii) receives an offer from
a third party to rent the Right of First Offer to Lease Space, the terms of
which offer are either acceptable to Landlord or sufficiently acceptable that
Landlord would enter into negotiations with said offeror, Landlord will so
notify Tenant in writing, and Tenant will have five (5) business days to
exercise this right of first offer to lease. Landlord's written notification
to Tenant shall include all economic terms ("Rental Terms") upon which it would
be willing to lease the Right of First Offer to Lease Space to Tenant. If within
five (5) business days after receipt of Landlord's notice, Tenant agrees in
writing to lease the Right of First Offer to Lease Space for a term not to
exceed the remaining Term of this Lease at the Rental Terms, Landlord and
Tenant will execute a Lease for the Right of First Offer to Lease Space within
ten (10) business days after Landlord's receipt of Tenant's notice of intent to
lease on all the same terms as this Lease except for the Rental Terms. If
Tenant does not deliver its notice of intent to lease the Right of First Offer
to Lease Space offered in Landlord's notice within such 5 business day period,
or if Landlord and Tenant do not enter into a fully executed lease for the
Right of First Offer to Lease Space within such ten (10) day period, then,
this right of first offer to lease the Right of First Offer to Lease Space or
any portion thereof will lapse and will be of no further force and effect and
Landlord will have the right to lease the Right of First Offer to Lease Space
to a third party on the same or any other terms and conditions, whether or not
such terms and conditions are more or less favorable than those offered to
Tenant. This right of first offer to lease the Right of First Offer to Lease
Space is personal to Cypress Bioscience, Inc. and is non-transferrable."
II.K. At the end of this Section add: "In addition to the Security
Deposit, Tenant shall, concurrent with its execution of this Lease, deliver to
Landlord, as security for the prompt, timely and faithful performance by Tenant
of each and every one of Tenant's obligations under this Lease, at Tenant's
option, either an immediately effective, irrevocable, standby letter of credit
(the "Security Letter of Credit") in the face amount of $35,000.00, or a
certificate of deposit in such amount (the "Security CD").
The Security Letter of Credit shall (i) be issued by a bank reasonably
acceptable to Landlord, (ii) contain such bank's undertaking in the amount
required by this Section II.K, (iii) be transferrable and assignable to an
assignee or mortgagee of Landlord's interest under this Lease, (iv) be payable,
in whole or in part, upon Landlord's presentation to the issuing bank of a
statement that Tenant is in default pursuant to the terms of this Lease,
together with a draft or other document in the amount therein stated to be due
for Rent or any other amount due to Landlord from Tenant pursuant to this
Lease, (v) have a date of expiry no earlier than the third (3rd) anniversary of
the Commencement Date, and (vi) be issued in form and substance satisfactory to
Landlord. In the event of a default by Tenant prior to the third (3rd)
anniversary of the Commencement Date, Landlord shall have the right to apply
the Security Letter of Credit in the same fashion as the Security Deposit.
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<PAGE> 7
The Security CD shall (i) be issued by a bank acceptable to Landlord,
(ii) be issued to Landlord, as the owner thereof, (iii) be transferrable and
assignable to an assignee or mortgagee of Landlord's interest under this Lease,
and (iv) be issued in form and substance satisfactory to Landlord. Provided
that Tenant is not then in default of any of its material obligations pursuant
to the terms of this Lease, the Security CD together with any and all interest
accrued thereon shall be returned to Tenant on the third (3rd) anniversary of
the Commencement Date. In the event of a default by Tenant prior to the third
(3rd) anniversary of the Commencement Date, Landlord shall have the right to
apply the Security CD in the same fashion as the Security Deposit.
II.O. At the end of this Section add: "The Parking Spaces shall be
available to Tenant during the Term at no charge to Tenant, subject to the
terms of Section 36 of the General Terms, Covenants, and Conditions of this
Lease relating to the sums required to be paid to the Environmental Protection
Agency or other governmental authority."
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<PAGE> 8
PARK PLAZA BUILDING
GENERAL TERMS, COVENANTS AND CONDITIONS
INDEX
<TABLE>
<CAPTION>
SECTION
<S> <C> <C>
1. Change in Commencement of Term .................................. 1
2. Rent ............................................................ 2
3. Late Payments ................................................... 2
4. Use of the Premises ............................................. 2
5. Services ........................................................ 4
6. Condition of the Premises ....................................... 5
7. Repairs and Maintenance ......................................... 6
8. Alterations ..................................................... 6
9. Tenant's Property and Leasehold Improvements .................... 7
10. Rules and Regulations ........................................... 7
11. Certain Rights Reserved to the Landlord ......................... 7
12. Assignment and Subletting ....................................... 8
13. Holding Over .................................................... 10
14. Surrender of the Premises ....................................... 10
15. Destruction or Damage ........................................... 10
17. Indemnification ................................................. 12
18. Tenant's Insurance .............................................. 12
19. Subordination and Attornment .................................... 13
20. Estoppel Certificate ............................................ 14
21. Transfer of Landlord's Interest ................................. 14
22. Default ......................................................... 14
23. Bankruptcy ...................................................... 15
24. Brokerage Fees .................................................. 16
25. Notices ......................................................... 16
26. Government Energy or Utility Controls ........................... 16
27. Security Deposit ................................................ 16
28. Relocation of Premises .......................................... 17
29. Quiet Enjoyment ................................................. 17
30. Observance of Law ............................................... 17
31. Force Majeure ................................................... 18
32. Curing Tenant's Default; Additional Rent ........................ 18
33. Limitation of Landlord's Liability .............................. 18
34. Shoring ......................................................... 18
35. Sign Control .................................................... 19
36. Parking ......................................................... 19
37. Warranty of Authority ........................................... 20
38. Miscellaneous ................................................... 20
</TABLE>
<PAGE> 9
PARK PLAZA BUILDING
GENERAL TERMS, COVENANTS AND CONDITIONS
1. CHANGE IN COMMENCEMENT OF TERM
(a) Landlord and Tenant hereby acknowledge and agree that the
Commencement Date set forth in Section II.D. of the Lease is an estimate by
Landlord of the date Landlord shall substantially complete (as defined in
subparagraph (d) below) the Premises. In the event the Premises are not
substantially completed on said date in Section II.D. or in the event the
Premises are substantially completed prior or following said date in Section
II.D., the Commencement Date set forth in Section II.D. shall be revised in
accordance with the provisions of this Section 1.
(b) If Landlord is unable to deliver possession of the Premises to
Tenant on the Commencement Date because the Premises are not substantially
completed, or for any other reason, this Lease shall continue in effect and
Landlord shall not be liable to Tenant or any third party for such inability;
provided, however, the Commencement Date shall be changed to reflect the
earlier of (i) the date Tenant actually takes possession of the Premises or any
portion thereof, or (ii) that date which is five (5) days after Landlord gives
Tenant notice that the Premises are substantially complete. Notwithstanding
the foregoing, in the event substantial completion does not occur on or before
the date set forth in Section II.D. of this Lease due to a Tenant Delay (as
hereinafter defined), the Commencement Date shall remain that date Landlord
would have substantially completed the Premises but for said Tenant Delay(s).
Unless due to a Tenant Delay, if substantial completion does not occur within
one hundred fifty (150) days after the Commencement Date, Tenant shall have
the right to terminate this Lease by notice to Landlord given within ten (10)
business days of the end of said 150-day period, even if such delay is due to
an event of force majeure (as defined in Section 31 of this Lease).
(c) If Landlord gives Tenant permission to enter into possession
of the Premises prior to the Commencement Date for the sole purpose of
performing work within the Premises and not for the purpose of occupying the
Premises, such possession shall be deemed to be upon all the terms, covenants,
conditions and provisions of this Lease, excluding payment of the Rent.
(d) Subject to the provisions of Section 1 (e) below, the Premises
shall be deemed substantially completed and ready for occupancy upon the
issuance of a certificate of substantial completion by Landlord's architect or
of a Building Inspection Card executed by the local building authority,
notwithstanding that minor or insubstantial details of construction, mechanical
adjustment or decoration which do not materially interfere with Tenant's use of
the Premises remain to be performed.
(e) Notwithstanding anything to the contrary in Section 1(d)
above, if the substantial completion of the Premises by Landlord is delayed due
to any act or omission of Tenant or Tenant's Representatives, including any
delays by Tenant in the submission of plans, drawings, specifications or other
information or in approving any working drawings or estimates or in giving any
authorization or approval (a "Tenant Delay," as further defined in Paragraph 8
of Exhibit C of this Lease), the Commencement Date (and the commencement of
Tenant's obligation to pay Rent) shall be accelerated by the number of days of
such delay and the Premises shall be deemed substantially completed on the date
when they would have been ready but for such delay.
(f) In the event substantial completion of the Premises is
estimated by Landlord to occur prior to the Commencement Date set forth in
Section II.D. of the Lease, Landlord shall provide Tenant with ten (10)
business days' prior written notice of the same. Said notice by Landlord shall
set forth the new estimated Commencement Date and date a "walk through" shall
be performed by Landlord, Tenant, and the Contractor pursuant to paragraph
10(a) of Exhibit C of the Lease.
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<PAGE> 10
(g) The date upon which the Term of this Lease commences pursuant
to the foregoing provisions shall be the Commencement Date, and if such date is
other than the date set forth in Section II.D of this Lease, Landlord and
Tenant shall execute an amendment to this Lease setting forth the Commencement
Date determined in accordance with this Section 1.
2. RENT
(a) Tenant shall pay Monthly Installments of Base Rent in advance
on the first (1st) day of each month of the Term. If the Term shall commence
and end on a day other than the first day of a month, the Monthly Installments
of Base Rent for the first and last partial month shall be prorated on a per
diem basis. Upon the execution of this Lease, Tenant shall pay one (1) Monthly
Installment of Base Rent for the first month of the Term and a prorated Monthly
Installment of Base Rent for any partial month which may precede it.
(b) All costs and expenses which Tenant assumes or agrees to pay
and any other sum payable by Tenant pursuant to this Lease shall be deemed
additional rent (together with Base Rent sometimes referred to as the "Rent").
The Rent shall be paid in lawful money of the United States of America to the
Building Manager or to such other person or at such other place as Landlord may
from time to time designate in writing, without any prior notice or demand
therefor and without deduction or offset.
3. LATE PAYMENTS
If, on more than one (1) occasion, any part of the Rent is not paid
within ten (10) days after it is due, then on the third (3rd) such occasion,
and on each occasion thereafter, Tenant shall pay Landlord the greater of: (a)
a late charge of five percent (5%) of the amount due and (b) interest at the
highest rate permitted by law on the amount due from its due date until paid.
This late payment charge is intended to compensate Landlord for its
administrative costs resulting from Tenant's failure to pay the Rent as set
forth herein, and has been agreed upon by Landlord and Tenant, after
negotiation, as a reasonable estimate of the additional administrative costs
which will be incurred by Landlord as a result of such failure. The actual
costs of each instance is extremely difficult, if not impossible, to determine.
The payment of this late payment charge will not constitute a waiver by
Landlord of any default by Tenant under this Lease.
4. USE OF THE PREMISES
(a) Tenant shall use the Premises only for general office purposes
and the Permitted Use (if any); all other uses or purposes are strictly
prohibited. Tenant shall not at any time use or occupy, or suffer or permit
anyone to use or occupy, the Premises or do or permit anything to be done in
the Premises which: (a) causes or is liable to cause injury to persons, to the
Building or its equipment, facilities or systems; (b) impairs or tends to
impair the proper and economic maintenance, operation and repair of the
Building or its equipment, facilities or systems; (c) annoys or inconveniences
or tends to annoy or inconvenience other tenants or occupants of the Building;
or, (d) impairs the appearance of the Building. In addition, Tenant shall not
permit any of its employees, agents, or contractors to smoke, or allow the
smoking of, any substances anywhere in the restrooms, hallways, or stairwells
located throughout the Building.
(b) Tenant shall at all times and in all respects comply with all
federal, state and local laws, ordinances and regulations ("Hazardous Materials
Laws") relating to industrial hygiene, environmental protection or the use,
analysis, generation, manufacture, storage, disposal or transportation of any
oil, flammable explosives, asbestos, urea formaldehyde, radioactive materials
or waste, or other hazardous, toxic, contaminated or polluting materials,
substances or wastes, including, without limitation, any "hazardous
substances," "hazardous wastes," "hazardous materials" or "toxic substances"
under any such laws, ordinances or regulations (collectively, "Hazardous
Materials").
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<PAGE> 11
Tenant shall at its own expense procure, maintain in effect
and comply with all conditions of any and all permits, licenses and other
governmental and regulatory approvals required for Tenant's use of the
Premises. Tenant shall cause any and all Hazardous Materials removed from the
Premises to be removed and transported solely by duly licensed haulers to duly
licensed facilities for final disposal of such materials and wastes. Tenant
shall in all respects handle, treat, deal with and manage any and all Hazardous
Materials in, on, under, or about the Premises in total conformity with all
applicable Hazardous Materials Laws and prudent industry practices regarding
management of such Hazardous Materials. Upon expiration or earlier termination
of the term of the Lease, Tenant shall cause all Hazardous Materials to be
removed from the Premises and transported for use, storage or disposal in
accordance and compliance with all applicable Hazardous Materials Laws. Tenant
shall not take any remedial action in response to the presence of any Hazardous
Materials in or about the Premises or the Project, nor enter into any
settlement agreement, consent decree or other compromise in respect to any
claims relating to any Hazardous Materials in any way connected with the
Premises, or Project, without first notifying Landlord of Tenant's intention to
do so and affording Landlord ample opportunity to appear, intervene or
otherwise appropriately assert and protect Landlord's interest with respect
thereto.
Tenant shall immediately notify Landlord in writing of: (i)
any enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Laws;
(ii) any claim made or threatened by any person against Tenant or the Premises
relating to damage, contribution, cost recovery, compensation, loss or injury
resulting from or claimed to result from any Hazardous Materials; and (iii) any
reports made to any environmental agency arising out of or in connection with
any Hazardous Materials in or removed from the Premises, including any
complaints, notices, warnings or asserted violations in connection therewith.
Tenant shall also supply to Landlord as promptly as possible, and in any event
within five (5) business days after Tenant first receives or sends the same,
copies of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to the Premises or Tenant's use thereof. Tenant
shall promptly deliver to Landlord copies of hazardous waste manifests
reflecting the legal and proper disposal of all Hazardous Materials removed
from the Premises.
Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord), protect, and hold Landlord, and each of Landlord's
partners, employees, agents, attorneys, successors and assigns, free and
harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by (i) the presence in, on,
under or about the Premises or discharge in or from the Premises of any
Hazardous Materials as a result of Tenant's acts, or Tenant's use, analysis,
storage, transportation, disposal, release, threatened release, discharge or
generation of Hazardous Materials to, in, on, under, about or from the
Premises, or (ii) Tenant's failure to comply with any Hazardous Materials Law.
Tenant's obligations hereunder shall include, without limitation, and whether
foreseeable or unforeseeable, all costs of any required or necessary repair,
cleanup or detoxification or decontamination of the Premises or the Building,
and the preparation and implementation of any closure, remedial action or other
required plans in connection therewith, and shall survive the expiration or
earlier termination of the term of the Lease. For purposes of the release and
indemnity provisions hereof, any acts or omissions of Tenant, or by employees,
agents, assignees, contractors or subcontractors of Tenant or others acting for
or on behalf of Tenant (whether or not they are negligent, intentional, willful
or unlawful) shall be strictly attributable to Tenant.
If at any time it reasonably appears to Landlord that Tenant
is not maintaining sufficient insurance or other means of financial capacity to
enable Tenant to fulfill its obligations to Landlord hereunder, whether or not
then accrued, liquidated, conditional or contingent, Tenant shall procure and
thereafter maintain in full force and effect such insurance or other form of
financial assurance, with or from companies or persons and in forms reasonably
acceptable to Landlord, as Landlord may from time to time reasonably request.
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<PAGE> 12
Landlord represents and warrants to Tenant that, to Landlord's
knowledge, no Hazardous Materials have been used in connection with, or are
located in, on or under the Premises, except as permitted by and in accordance
with Hazardous Materials Laws. Landlord shall indemnify, defend (by counsel
reasonably acceptable to Tenant), protect, and hold Tenant, and each of
Tenant's partners, employees, agents, attorneys, successors and assigns, free
and harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by Landlord's failure to
comply with any Hazardous Materials Law. Landlord's obligations hereunder
shall include, without limitation, and whether foreseeable or unforeseeable,
all costs of any required or necessary repair, cleanup or detoxification or
decontamination of the Premises or the Building, and the preparation and
implementation of any closure, remedial action or other required plans in
connection therewith, and shall survive the expiration or earlier termination
of the term of the Lease. For purposes of the release and indemnity provisions
hereof, any acts or omissions of Landlord, or by employees, agents, assignees,
contractors or subcontractors of Landlord or others acting for or on behalf of
Landlord (whether or not they are negligent, intentional, willful or unlawful)
shall be strictly attributable to Landlord. Notwithstanding the foregoing,
Landlord's obligation to indemnify Tenant pursuant to this Section 4 shall not
extend to any act or failure to act of Tenant or other tenants of the Building.
5. SERVICES
(a) Climate Control: Landlord shall provide climate control to the
Premises during Normal Business Hours as required in Landlord's reasonable
judgment for the comfortable use and occupation of the Premises. If Tenant
requires climate control at any other time, Landlord shall use reasonable
efforts to furnish such service upon reasonable notice from Tenant, and Tenant
shall pay Landlord the sum of $25.00 per hour, or such other rate as is
comparable in the La Jolla Village Drive office sub-market, on demand.
Use of the Premises or any part thereof in a manner exceeding the
heating, ventilating or air-conditioning design conditions (including occupancy
and connected electrical load), including rearrangement of partitioning which
interferes with normal operation of the heating, ventilating or air
conditioning in the Premises, or the use of computer or data processing
machines or other machines or equipment, may require changes in the heating,
ventilating, air-conditioning or plumbing systems or controls servicing the
Premises or portions thereof, in order to provide comfortable occupancy. Any
such required change shall be made by Landlord at Tenant's expense as
alterations in accordance with the provisions of Section 8, but only to the
extent permitted and upon the conditions set forth in that Section.
(b) Elevator Service: If the Building is equipped with elevators,
Landlord shall furnish elevator service during Normal Business Hours to be used
by Tenant in common with others. At least one elevator shall remain in service
during all other hours. Landlord may designate a specific elevator for use as a
service elevator.
(c) Janitorial Services: Landlord shall provide janitorial and
cleaning services to the Premises Monday through Friday, except recognized
holidays; however, Tenant shall pay to Landlord on demand the costs incurred by
Landlord for (i) extra cleaning in the Premises required because of (A) misuse
or neglect on the part of Tenant or Tenant's representatives, (B) the use of
portions of the Premises for special purposes requiring greater or more
difficult cleaning work than office areas, (C) interior glass partitions or
unusual quantities of interior glass surfaces and (D) non-building standard
materials or finishes installed by Tenant or at its request. Additionally,
Tenant shall pay to Landlord on demand the costs incurred by Landlord for
removal from the Premises of any refuse and rubbish of Tenant in excess of that
ordinarily accumulated in general office occupancy or at times other than
Landlord's standard cleaning times.
(d) Water and Electricity: (i) Landlord shall make available
domestic water in reasonable quantities to the Common Areas (and to the
Premises if so designated in Exhibit C) and cause electric
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<PAGE> 13
service to be supplied for lighting the Premises, for the operation of ordinary
office equipment, and as required in the Tenant's Working Drawings described in
Exhibit C. "Ordinary office equipment" shall mean office equipment wired for
120 volt electric service and rated and using less than 6 amperes or 750 watts
of electric current. (ii) Landlord shall replace, at Landlord's cost, all
Building Standard (as that term is defined in Schedule 1 attached hereto)
lamps, fluorescent tubes and lamp ballasts in the Premises and Tenant shall
replace, at Tenant's cost, all non-Building Standard lamps, fluorescent tubes
and lamp ballasts in the Premises. Landlord may adopt a system of relamping
and ballast replacement periodically on a group basis in accordance with good
management practice. (iii) Tenant's use of electric energy in the Premises
shall not at any time exceed the capacity of any of the risers, piping,
electrical conductors and other equipment in or serving the Premises. In order
to insure that such capacity is not exceeded and to avert any possible adverse
effect upon the Building's electric system, Tenant shall not, without
Landlord's prior written consent in each instance, connect appliances or heavy
duty equipment, other than ordinary office equipment, to the Building's
electric system or make any alteration or addition to the Building's electric
system. Should Landlord grant such consent, all additional risers, piping and
electrical conductors or other equipment therefor shall be provided by Landlord
and the cost thereof shall be paid by Tenant within ten (10) days of Landlord's
demand therefor. As a condition to granting such consent, Landlord may require
Tenant to agree to an increase in Base Rent by the expected cost to Landlord of
such additional service, that is, the cost of the additional electric energy to
be made available to Tenant based upon the estimated additional capacity of
such additional risers, piping and electrical conductors or other equipment.
If Landlord and Tenant cannot agree thereon, such cost shall be determined by
an independent electrical engineer, to be selected by Landlord and paid equally
by both parties.
(e) Landlord may install separate meters for the Premises to
register the usage of all or any one of the utilities and in such event Tenant
shall pay for the cost of electricity usage as metered which is in excess of
that usage reasonably anticipated by Landlord.
(f) Landlord does not warrant that any of the services referred to
above, or any other services which Landlord may supply, will be free from
interruption, and Tenant acknowledges that any one or more such services may be
suspended by reason of accident, repairs, inspections, alterations or
improvements necessary to be made, or by strikes or lockouts, or by reason of
operation of law, or causes beyond the reasonable control of Landlord. Any
interruption or discontinuance of service shall not be deemed an eviction or
disturbance of Tenant's use and possession of the Premises, or any part
thereof, nor render Landlord liable to Tenant for damages by abatement of the
Rent or otherwise, nor relieve Tenant from performance of Tenant's obligations
under this Lease. Landlord shall, however, exercise reasonable diligence to
restore any service so interrupted.
6. CONDITION OF THE PREMISES
Tenant's taking possession of the Premises shall be conclusive
evidence that the Premises were in good order, condition and repair when Tenant
took possession, except for such matters of which Tenant gives Landlord notice
on or before the Commencement Date, and further subject to Landlord's
warranties set forth herein. No promise of Landlord to alter, remodel, repair
or improve the Premises, the Building or the Land and no representation, either
expressed or implied, respecting any matter or thing relating to the Building,
the Land or this Lease (including the condition of the Premises or the
Building) has been made by Landlord to Tenant, other than as may be contained
herein or in a separate Exhibit signed by Landlord and Tenant. Tenant's
execution of this Lease shall constitute specific acknowledgment and acceptance
of the various start-up inconveniences that may be associated with the use of
the Building Common Areas such as certain construction obstacles including
scaffolding; delays in the use of the freight elevator service; certain
elevators not being available to Tenant; the passage of work crews using
elevators; uneven air conditioning services; and other typical conditions
incident to installation of tenant improvements within the Building.
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7. REPAIRS AND MAINTENANCE
(a) Tenant shall keep the Premises, including the Leasehold
Improvements and Tenant's Property, neat, clean and in good order and
condition. Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Premises, the Leasehold
Improvements, or the Building (including mechanical, electrical, plumbing,
heating, ventilating, air conditioning and other equipment facilities and
systems located within or serving the Building, hereinafter the "Building
Systems"). Tenant shall be responsible for all repairs, replacements and
alterations in and to the Premises, the Leasehold Improvements, and Tenant's
Property and for all repairs, replacements and alterations in and to the
Building and the Building Systems, the need for which arises out of: (i)
Tenant's use or occupancy of the Premises; (ii) the installation or use of
Tenant's Property in the Premises; (iii) the moving of Tenant's Property into
or out of the Building; or, (iv) any other act or omission of Tenant or
Tenant's Representatives; provided, however, that such repairs, replacements or
alterations (other than to Tenant's Property) shall be made by Landlord and
Tenant shall pay Landlord within ten (10) days of demand the cost therefor plus
fifteen percent (15%) for Landlord's overhead and profit. Landlord may, before
commencing any such work or at any time thereafter, require Tenant to furnish
to Landlord such security in form (including a bond issued by a surety
satisfactory to Landlord) and amount as Landlord shall deem necessary.
(b) Tenant shall not place a load upon any floor of the Premises
which exceeds the load per square foot which such floor was designed to carry.
(C) Tenant shall not install business machines or mechanical
equipment which cause noise or vibration that may be transmitted to the
structure of the Building.
(d) Landlord (except as provided in Section 7(a)) shall, at
Landlord's expense, repair, replace and maintain the external and structural
parts of the Building which do not constitute a part of the Premises and are
not leased to others, and shall perform such repairs, replacements and
maintenance with reasonable dispatch, in a good and workmanlike manner.
(e) Except as provided herein, Landlord shall have no liability to
Tenant nor shall Tenant's covenants and obligations under this Lease be reduced
or abated in any manner whatsoever by reason of any inconvenience, annoyance,
interruption or injury to business arising from Landlord's making any repairs
or changes which Landlord is required or permitted by this Lease or by any
other tenant's lease or required by law to make in or to any portion of the
Premises, the Building or the Building Systems. Landlord shall nevertheless
use its best efforts to minimize any interference with Tenant's business in the
Premises.
8. ALTERATIONS
(a) Tenant shall not make any alteration in or to the Premises
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. If alterations requested by Tenant are made
by Landlord, Tenant shall pay Landlord within ten (10) days of demand the cost
therefor plus fifteen percent (15%) for Landlord's overhead and profit. If
Landlord gives its consent to the making of alterations by Tenant, all such
work shall be done in accordance with such requirements and upon such
conditions as Landlord, in its reasonable discretion, may impose. Any review
or approval by Landlord of any plans or specifications with respect to any
alteration is solely for Landlord's benefit, and without any representation or
warranty whatsoever to Tenant with respect to the adequacy, correctness or
efficiency thereof or otherwise.
(b) Tenant shall defend, indemnify and save harmless Landlord from
and against any and all mechanics' and other liens and encumbrances filed by
any person claiming through or under Tenant, including security interests in
any materials, fixtures, equipment or any other improvements or appurtenances
installed in and constituting part of the Premises and against all costs,
expenses and
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liabilities (including reasonable attorneys' fees) incurred in connection with
any such lien or encumbrance or any action or proceeding brought thereon.
Tenant at its expense shall procure the satisfaction or discharge of record of,
or bond around, all such liens and encumbrances within twenty (20) days after
the filing thereof.
9. TENANT'S PROPERTY AND LEASEHOLD IMPROVEMENTS
(a) All fixtures, equipment, improvements and appurtenances
attached to or built into the Premises, whether or not by or at the expense of
Tenant, and any carpeting or other personal property in the Premises on the
Commencement Date installed by Landlord (collectively hereinafter "Leasehold
Improvements"): (i) shall be and remain a part of the Premises; (ii) shall be
deemed the property of Landlord; and, (iii) shall not be removed by Tenant.
(b) All movable partitions, other business and trade fixtures,
furnishings, furniture, machinery and equipment, communications equipment, and
other personal property located in the Premises and acquired by or for the
account of Tenant, without expense to Landlord, which can be removed without
damage to the Building (collectively sometimes hereinafter called "Tenant's
Property"), shall be and shall remain the property of Tenant and, except as
otherwise prohibited by this Lease, may be removed by it at any time during the
Term; provided that, if any of Tenant's Property is removed, Tenant shall pay
the cost of repairing any damage to the Premises or to the Building resulting
from such removal in accordance with Section 7(a).
10. RULES AND REGULATIONS
Tenant shall comply with (and cause Tenant's Representatives to comply
with) the rules and regulations attached hereto as Exhibit D and with such
reasonable modifications thereof and additions thereto as Landlord may from
time to time make; provided, however, in no event shall such rules or
regulations contradict or abrogate any right or privilege herein expressly
granted to Tenant in this Lease. Landlord shall not be responsible for the
violation by anyone of any of said rules and regulations, but agrees to take
reasonable steps to ensure compliance by other tenants.
11. CERTAIN RIGHTS RESERVED TO THE LANDLORD
Landlord reserves the following rights, exercisable without liability
to Tenant for damage or injury to property, person or business and without
effecting an eviction, constructive or actual, or disturbance of Tenant's use
or possession or giving rise to any claim:
(a) To name the Building and/or Project and to change the name or
street address of the Building and/or Project;
(b) To install and maintain all signs on the exterior and interior
of the Building and otherwise within the Project;
(c) To designate all sources furnishing sign painting and
lettering;
(d) During the last 90 days of the Term, if Tenant has vacated the
Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises
for reoccupancy, without affecting Tenant's obligation to pay Rent for the
Premises;
(e) To have pass keys to the Premises and all doors therein,
excluding Tenant's vaults and safes;
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(f) On reasonable prior notice to Tenant, during normal business
hours, to exhibit the Premises to any prospective purchaser, mortgagee, or
assignee of any mortgage on the Building, Project or Land and to others having
an interest therein at any time during the Term, and to prospective tenants
during the last six months of the Term;
(g) To take any and all measures, including entering the Premises
for the purpose of making inspections, repairs, alterations, additions and
improvements to the Premises or to the Building (including for the purpose of
checking, calibrating, adjusting and balancing controls and other parts of the
Building Systems), as may be necessary or desirable for the operation,
improvement, safety, protection or preservation of the Premises or the
Building, or in order to comply with all laws, orders and requirements of
governmental or other authority, or as may otherwise be permitted or required
by this Lease; provided, however, that Landlord shall use its best efforts
(except in an emergency) to minimize interference with Tenant's business in the
Premises;
(h) To construct and/or relocate various facilities within the
Building and on the Land if Landlord shall determine such relocation to be in
the best interest of the development of the Building, Land or Project, provided
that such construction and/or relocation shall not materially restrict access
to, or use of, the Premises or parking areas; and
(i) To install vending machines of all kinds in the Premises and
the Building and to receive all of the revenue derived therefrom, provided,
however, that no vending machines shall be installed by Landlord in the
Premises unless Tenant so requests.
12. ASSIGNMENT AND SUBLETTING
(a) (i) Tenant acknowledges that the economic concessions and
rental rates set forth in this Lease were negotiated by Landlord and Tenant in
consideration of, and would not have been granted by Landlord but for, the
specific nature of the leasehold interest granted to Tenant hereunder, as such
interest is limited and defined by various provisions throughout this Lease,
including, but not limited to, the provisions of this Article 12 which define
and limit the transferability of such leasehold interest. Prior to taking
occupancy of the Premises, Tenant shall not assign, mortgage, or encumber this
Lease, nor sublet, suffer, or permit the Premises or any part thereof to be
used by others. Thereafter, Tenant shall not assign, mortgage or encumber this
Lease, nor sublet, suffer or permit the Premises or any part thereof to be used
by others, without the prior written consent of Landlord in each instance,
which, with respect to any assignment or subletting, shall not be unreasonably
withheld. By way of example and without limitation, the parties agree it shall
be reasonable for Landlord to take into consideration the following: (1)
whether the proposed use within the Premises conflicts with the use provision
set forth herein and proposes no greater burden on Common Area facilities or
utilities or parking; (2) whether the proposed use within the Premises requires
substantial alterations to the Premises, shall cause greater amounts of noise
or disturbances, or presents a greater hazard for hazardous waste liability;
(3) whether the business reputation, experience, and character of the proposed
transferee is sufficient for it to operate a business of the type and quality
permitted under this Lease; (4) whether the net worth and the probable future
net worth of the proposed transferee is sufficient to operate said business on
the Premises and to carry out all of its obligations under this Lease; (5)
whether the proposed transferee has been involved in bona fide negotiations
with Landlord for space in the Building within the preceding six (6) months;
and (6) whether the proposed transferee is a current or past occupant of the
Building.
If Tenant desires at any time to enter into
assignment or subletting of the Premises or any portion thereof, it shall first
notify Landlord of its desire to do so and shall submit in writing to Landlord
(a) the name of the proposed transferee; (b) the nature of the proposed
transferee's business to be carried on within the Premises; (c) the terms and
provisions of the proposed transfer; and (d) such information required by
Landlord to make the aforestated determinations with respect to any proposed
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transferee. If this Lease be assigned, or if the Premises or any part thereof
be sublet or occupied by anyone other than Tenant without Landlord's prior
written consent, Landlord may collect rent from the assignee, subtenant or
occupant, and apply the net amount collected to the Rent, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, subtenant or occupant as
tenant, or a release of Tenant from the further performance of its covenants
herein contained. The consent by Landlord to an assignment or subletting shall
not be construed to relieve Tenant from obtaining Landlord's written consent to
any further assignment or subletting.
(ii) For the purposes of this Lease, an "assignment" shall
be deemed to include, but shall not be limited to, the following: if Tenant is
a partnership, a withdrawal or change (voluntary, involuntary, by operation of
law or otherwise) of any of the partners thereof, or the dissolution of the
partnership; or, if Tenant consists of more than one person, a purported
assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by
operation of law or otherwise) from one thereof unto the other or others
thereof; or, if Tenant is a corporation, any dissolution of Tenant, or any
change in the ownership (voluntary, involuntary, by operation of law, creation
of new stock or otherwise) of fifty percent (50%) or more of its capital stock
from the ownership existing on the date of execution hereof in one transaction;
or, the sale of fifty percent (50%) of the value of the assets of Tenant's
parent.
(iii) Notwithstanding the foregoing, without Landlord's
consent but upon ten (10) days notice to Landlord, this Lease may be assigned,
or the Premises may be sublet, to any corporation which is a parent, subsidiary
or affiliate of Tenant. For the purposes of this Section a "parent" shall mean
a corporation which owns not less than seventy percent (70%) of the outstanding
stock of Tenant, a "subsidiary" shall mean any corporation not less than
seventy percent (70%) of whose outstanding stock shall be owned by Tenant, and
an "affiliate" shall mean any corporation not less than seventy percent (70%)
of whose outstanding stock shall be owned by Tenant's parent.
(b) Intentionally deleted.
(C) If Landlord rejects or is deemed to have rejected Tenant's
offer of reconveyance and if Landlord gives its consent to any assignment of
this Lease or to any sublease, Tenant shall in consideration therefor, pay to
Landlord, as additional rent:
(i) in the case of an assignment, an amount equal to
fifty percent (50%) of all sums and other consideration paid to Tenant by the
assignee for or by reason of such assignment (including any sums paid for the
sale, rental or use of Tenant's Property in excess of the then unamortized
value of Tenant's Property as reflected in Tenant's federal income tax returns)
less the cost of re-modeling and reasonable brokerage commissions and legal
fees, if any, actually paid by Tenant in connection with such assignment; and
(ii) in the case of a sublease, fifty percent (50%) of any
rents, additional charges or other consideration payable under the sublease to
Tenant by the subtenant (including any sums paid for the sale, rental or use of
Tenant's Property in excess of the then unamortized value of Tenant's Property
as reflected in Tenant's federal income tax returns) which are in excess of the
Rent during the term of the sublease in respect of the subleased space, less
the cost of re-modeling and reasonable brokerage commissions and legal fees, if
any, actually paid by Tenant in connection with such subletting.
The sums payable hereunder shall be paid to Landlord as and
when payable by the assignee or subtenant to Tenant.
(d) Tenant shall reimburse Landlord on demand for any reasonable
costs that Landlord may incur in connection with said assignment or sublease,
including the reasonable costs of investigating the
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acceptability of the proposed assignee or subtenant, and reasonable legal costs
incurred in connection with the granting of any requested consent, not to
exceed five hundred dollars ($500.00).
(e) No assignment or subletting shall affect the continuing
primary liability of Tenant (which, following assignment, shall be joint and
several with the assignee).
13. HOLDING OVER
If Tenant retains possession of the Premises or any part thereof after
the Termination Date, Tenant's occupancy of the Premises shall be as a tenant
at will, terminable at any time by Landlord. Tenant shall pay Landlord rent as
follows:
(i) for the first (1st) two (2) months that Tenant remains in
possession at the rate of one hundred twenty-five percent (125%) of
the total amount of the Rent payable hereunder for the month
immediately preceding the Termination Date;
(ii) for the third (3rd) month that Tenant remains in possession at
the rate of one hundred fifty percent (150%) of the total amount of
the Rent payable hereunder for the month immediately preceding the
Termination Date; and
(iii) thereafter, at the rate of two hundred percent (200%) of the
total amount of the Rent payable hereunder for the month immediately
preceding the Termination Date.
The provisions of this Section do not exclude Landlord's rights of re-entry or
any other right hereunder.
14. SURRENDER OF THE PREMISES
(a) Tenant, on the Termination Date, shall peaceably surrender the
Premises, including the Leasehold Improvements, in broom-clean condition and
otherwise in as good condition as when Tenant took possession, except for: (i)
reasonable wear and tear subsequent to the last repair, replacement,
restoration, alteration or renewal required by this Lease; (ii) loss by fire or
other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's
request, remove Tenant's Property on or before the Termination Date and pay the
cost of repairing all damage to the Premises or the Building caused by such
removal in accordance with Section 7(a).
(b) If Tenant abandons or surrenders the Premises, or is
dispossessed by process of law, or otherwise, any of Tenant's Property (except
money, securities and other like valuables) left on the Premises shall be
deemed abandoned; and, at Landlord's option, title shall pass to Landlord under
this Lease as by a bill of sale, or, if Landlord elects to remove all or any
part of such Tenant's Property, the cost of such removal, including repairing
any damage to the Premises or Building caused by such removal, shall be paid by
Tenant within ten (10) days of Landlord's demand therefor; this obligation
shall survive the termination of this Lease. On the Termination Date Tenant
shall surrender all keys to the Premises.
15. DESTRUCTION OR DAMAGE
(a) If the Building or the Premises are damaged or destroyed by
fire or other casualty, and this Lease is not terminated as provided below,
Landlord shall repair the damage and restore and rebuild the Building and the
Premises (as the case may be), at its expense, as provided below; provided,
however, that Landlord shall not be required to repair or replace any of
Tenant's Property or any alteration of Leasehold Improvements made by Tenant.
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(b) If the Building or the Premises are damaged or destroyed by
fire or other casualty, Landlord shall notify Tenant in writing, within
forty-five (45) days of said casualty, whether Landlord is willing and able to
cause the repairs to said casualty damage to be completed within two hundred
seventy (270) days after the date of said casualty. If Landlord notifies
Tenant that it cannot cause the repairs to be completed within two hundred
seventy (270) days of said casualty, then Landlord or Tenant may terminate this
Lease. If Landlord fails to give such notice within forty-five (45) days of
said casualty, then Tenant may terminate this Lease. If Landlord, within
forty-five (45) days of said casualty, gives Tenant notice that it is willing
and able to complete the repair of said damage within two hundred seventy (270)
days of the date of said casualty, the rent shall be prorated to the date of
the casualty and shall thereafter equitably abate until the repairs are
completed. Regardless of whether Landlord has given Tenant notice within
forty-five (45) days of the casualty regarding the repair of casualty damage, if
the repair of casualty damage is not completed within two hundred seventy (270)
days of the date of the casualty, even if such failure to repair is the result
of an event of force majeure, Tenant may terminate this Lease. In the event of
termination under the provisions of this Section 15(b), Tenant shall vacate and
surrender the Premises to Landlord.
(C) Except as otherwise provided in this Article 15, Tenant may
not terminate this Lease or repair the Premises at Landlord's expense as a
result of a casualty, and no damages, compensation or claim shall be payable by
Landlord for any casualty or any inconvenience, loss of business or annoyance
arising from any repair or restoration of any portion of the Premises or of the
Building pursuant to this Section. Landlord shall use its best efforts to make
such repair or restoration promptly and in such manner as will not unreasonably
interfere with Tenant's use and occupancy of the Premises, but Landlord shall
not be required to do such repair or restoration work except during Normal
Business Hours.
(d) Nothing contained in this Article 15 shall relieve, discharge,
or in any way affect Tenant's liability to Landlord in connection with any
damage or destruction to the Premises, the Building or any portion of the Land
arising out of the negligent or willful acts or omissions of Tenant or Tenant's
Representatives.
16. EMINENT DOMAIN
(a) If the whole of the Building or the parking area located on
the Land is lawfully taken by condemnation or any other manner for any public
or quasi-public purpose, this Lease shall terminate as of the date of vesting
of title in such condemning authority (which date is hereinafter also referred
to as the "date of taking"), and the Rent shall be prorated to such date. If
any part of the Building or Land (including the parking area) is so taken, this
Lease shall be unaffected by such taking, except that (i) Landlord may
terminate this Lease by notice to Tenant within ninety (90) days after the date
of taking, and (ii) if twenty percent (20%) or more of the Premises or the
parking area shall be taken and the remaining area of the Premises or the
parking area shall not be reasonably sufficient for Tenant to continue
operation of its business, Tenant may terminate this Lease by notice to
Landlord within ninety (90) days after the date of taking. This Lease shall
terminate on the thirtieth (30th) day after such notice by which date Tenant
shall vacate and surrender the Premises to Landlord. The Rent shall be
prorated to the earlier of the Termination Date or such date as Tenant is
required to vacate the Premises by reason of the taking. If this Lease
continues in force upon such partial taking, the Rent and Tenant's
Proportionate Share shall be equitably adjusted according to the rentable area
of the Premises and Building remaining.
(b) In the event of any taking, all of the proceeds of any award,
judgment or settlement payable by the condemning authority shall be and remain
the sole and exclusive property of Landlord, and Tenant hereby assigns all of
its right, title and interest in and to any such award, judgment or settlement
to Landlord. Tenant, however, shall have the right, to the extent that the
same shall not reduce or prejudice Landlord's award, to claim from the
condemning authority, but not from Landlord, such compensation as may be
recoverable by Tenant in its own right for moving expenses and damage to
Tenant's Property.
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17. INDEMNIFICATION
(a) Tenant shall indemnify Landlord and save it harmless from all
claims, suits, actions, damages, liabilities and expenses in connection with
loss of life, bodily or personal injury or property damage occurring on or
arising from or out of the use or occupancy of the Premises or any part
thereof, or occasioned wholly or in part by any act or omission of Tenant or
Tenant's Representatives, whether occurring in or about the Premises or in
Common Areas or elsewhere within the Building, or Project or on the Land. The
foregoing indemnification shall not apply to injury, loss or damage proximately
caused solely by the gross negligence or intentional act of Landlord or its
agents, contractors or employees, unless such injury, loss or damage is covered
by insurance Tenant is required to provide or does provide. This obligation to
indemnify includes reasonable attorneys' fees and investigation costs and all
other reasonable costs, expenses and liabilities from the first notice that any
claim or demand is or may be made.
(b) Landlord shall not be responsible or liable to Tenant or to
those claiming by, through or under Tenant for any injury, loss or damage that
may be occasioned by or through the acts or omissions of persons occupying
other premises in the Building or within the Project. Unless proximately
caused solely by the gross negligence of Landlord, its agents, contractors or
employees, Landlord shall not be responsible or liable to Tenant for any defect
or failure, latent or otherwise, in (or any act or omission in the construction
of) the Building, the Project, the Premises or any of the Building Systems, nor
shall it be responsible or liable for any injury, loss or damage to any person
or property of Tenant or any other person caused by or resulting from bursting,
breakage, leakage, steam, snow or ice, running, backing up, seepage, or the
overflow of water or sewerage in any part of the Building or for any injury,
loss or damage caused by or resulting from acts of God or the elements.
Landlord shall in no event be liable to Tenant for indirect or consequential
damages. Tenant shall give prompt notice to Landlord in case of fire,
casualty, defect or accident in the Premises or in the Building or of defects
therein or in any Building Systems. Notwithstanding the foregoing, Landlord
warrants all work performed by Landlord in making the Premises ready for
Tenant's occupancy for the greater of (i) one (1) year or (ii) the term of any
warranty given by Contractor or any subcontractor.
(C) In case any action or proceeding is brought against Landlord
to which this indemnification shall be applicable, Tenant shall pay all costs,
attorneys' fees, expenses and liabilities resulting therefrom and shall defend
such action or proceeding if Landlord shall so request, at Tenant's expense, by
counsel reasonably satisfactory to Landlord.
18. TENANT'S INSURANCE
(a) Tenant shall maintain at its own cost and expense (i)
insurance against fire and such other perils as may be included in a standard
fire and special extended coverage insurance form on Tenant's Property in an
amount not less than one hundred percent (100%) of their actual replacement
cost from time to time during the Term; and (ii) comprehensive general
liability insurance on an occurrence basis with limits of liability in an
amount not less than One Million Dollars ($1,000,000) combined single limit for
each occurrence with respect to loss of life, bodily or personal injury and
damage to property by water or otherwise. Not more frequently than once each
two (2) years during the Term, if in the opinion of Landlord's lender or of the
insurance broker retained by Landlord, the amount of public liability and
property damage insurance coverage at that time is inadequate and lower than
required by comparable properties in the area where the Building is located,
Tenant shall increase the insurance coverage as required by either Landlord's
lender or Landlord's insurance broker. All such insurance shall be issued by
insurers approved by Landlord (which approval shall not be unreasonably
withheld) and authorized to do business in the state, shall name Landlord as an
additional insured party, shall provide for a deductible not greater than One
Thousand Dollars ($1,000) from any loss payable, and shall contain a provision
whereby each insurer agrees not to cancel such insurance without thirty (30)
days' prior written notice to Landlord. On or before the Commencement Date
Tenant shall furnish Landlord with a certificate evidencing the aforesaid
insurance
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coverage, and renewal certificates shall be furnished to Landlord at least
thirty (30) days' prior to the expiration date of such insurance.
(b) If during the Term insurance premiums on any insurance policy
carried by Landlord on the Building or the Premises are increased due to or
resulting from Tenant's occupancy hereunder, Tenant shall pay to Landlord as
additional rent the amount of such increase in insurance premiums. Any amount
payable by Tenant hereunder shall be paid to Landlord within ten (10) days
after notice to Tenant accompanied by the premium notice or other evidence of
the amount due.
(C) Landlord shall carry insurance on the building of the type and
in the amounts and with such deductibles as Landlord in its commercially
reasonable discretion shall deem appropriate, taking into consideration the
types and amounts of insurance held by owners of comparable buildings and/or
projects located in the area in which the Building is located. The cost of
such insurance shall be included as an Operating Expense. All Tenant
Improvements (as defined in Exhibit C) installed by Landlord or Landlord's
Contractor or installed by Tenant as alterations which are considered Leasehold
Improvements shall be covered by insurance obtained by Landlord.
(d) Landlord and Tenant each waive any and all rights to recover
against the other or against any other tenant or occupant of the building, or
against the officers, directors, shareholders, partners, joint venturers,
employees, agents, customers, invitees, or business visitors of each other or
of the other tenants or occupants of the Building, for any loss or damage to
the waiving party arising from any cause carried by any property insurance
required to be carried by the party pursuant to this Article 18 or any other
property insurance actually carried by the party to the extent of the limits of
the policy. Landlord and Tenant from time to time will cause their respective
insurers to issue appropriate waiver of subrogation rights endorsements to all
property insurance policies carried in connection with the Building or the
Premises or the contents of the Building or the Premises. Tenant agrees to
cause all other occupants of the Premiss claiming by, under, or through Tenant
to execute and deliver to Landlord a waiver of claims and to obtain waiver of
subrogation rights endorsements.
19. SUBORDINATION AND ATTORNMENT
(a) This Lease and all rights of Tenant hereunder shall be, at the
option of Landlord, subordinate to all ground leases, overriding leases and
underlying leases (collectively referred to as the "leases") of the Building,
Project or Land now or hereafter existing and to all mortgages and deeds of
trust (collectively referred to as the "mortgages") which may now or hereafter
affect the Building, Project, or Land, whether or not the leases or mortgages
shall also cover other lands, buildings, or leases, and to all renewals,
modifications, replacements and extensions of the leases and mortgages. This
Section shall be self-operative and no further instruments of subordination
shall be required. In confirmation of such subordination, Tenant shall
promptly execute, acknowledge and deliver any instrument that Landlord, the
lessor under any lease or the holder of any mortgage or any of their respective
assigns or successors in interest may reasonably request to evidence such
subordination; and if Tenant fails to execute, acknowledge, or deliver any such
instruments within ten (10) business days after request therefor, Tenant
hereby irrevocably constitutes and appoints Landlord as Tenant's
attorney-in-fact, coupled with an interest, to execute and deliver any such
instrument for and on behalf of Tenant. Any lease to which this Lease is
subject and subordinate is herein called "Superior Lease" and the lessor under
a Superior Lease or its assigns or successors in interest is herein called
"Superior Lessor," and any mortgage to which this Lease is subject and
subordinate is herein called "Superior Mortgage" and the holder of a Superior
Mortgage is herein called "Superior Mortgagee." If a Superior Lessor or
Superior Mortgagee requires that such instruments be executed by Tenant,
Tenant's failure to do so within twenty (20) days after request therefore shall
be deemed a default under this Lease.
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(b) If any Superior Lessor or Superior Mortgagee (or any purchaser
at a foreclosure sale) succeeds to the rights of Landlord under this Lease,
whether through possession or foreclosure action or delivery of a new lease or
deed, (a "Successor Landlord") Tenant shall attorn to and recognize such
Successor Landlord as Tenant's landlord under this Lease and shall promptly
execute and deliver any instrument that such Successor Landlord may reasonably
request to evidence such attornment. Landlord shall, if requested by Tenant in
writing, use its best efforts to obtain from each Superior Lessor and Superior
Mortgagee an agreement that if as a result of the exercise of their rights they
acquire Landlord's interest in and to the Premises, then as Successor Landlord
they shall recognize the validity and continuance of this Lease and shall not
disturb Tenant's possession of the Premises so long as Tenant shall not be in
default of this Lease, except that Successor Landlord shall in no event: (i) be
liable for any previous act or omission of a prior landlord under this Lease;
(ii) be subject to any offset for a claim arising prior to its succession to
the rights of Landlord under this Lease; or, (iii) after notice to Tenant of
the existence of a Superior Lessor or a Superior Mortgagee, be bound by any
subsequent modification of this Lease or by any subsequent prepayment of more
than one month's Rent, unless such modification or prepayment shall have been
expressly approved by the Successor Landlord.
20. ESTOPPEL CERTIFICATE
At any time and from time to time on not more than ten (10) business
days' written notice from a party to this Lease, the other party shall execute,
acknowledge and deliver to the requesting party a written estoppel certificate.
Any such estoppel certificate may be relied upon by any permitted assignee of
Tenant or by any prospective purchaser or lender upon the security of the real
property of which the Building and the Premises are a part. A party's failure
to deliver such estoppel certificate within such time shall be conclusive and
binding upon the party that the statements included in the estoppel certificate
provided by the other party are true and correct, without exception.
21. TRANSFER OF LANDLORD'S INTEREST
The term "Landlord" as used in this Lease, so far as covenants or
agreements on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners of Landlord's interest in this Lease at the
time in question. Upon any transfer or transfers of such interest, Landlord
herein named (and in case of any subsequent transfer, the then transferor)
shall thereafter be relieved of all liability for the performance of any
covenants or agreements on the part of Landlord contained in this Lease after
the date of such transfer.
22. DEFAULT
(a) The following shall be events of default under this Lease: (i)
if Tenant defaults in payment of the Rent for a period of five (5) days after
written notice of default in any payment of the Rent shall become due and
payable; (ii) if Tenant defaults in the performance of any other term,
covenant, condition or obligation of Tenant under this Lease and fails to cure
such default within a period of thirty (30) days after notice from Landlord
specifying such default (or if such default specified by Landlord is not
capable of cure within such 30-day period, if Tenant fails immediately after
notice from Landlord to commence to cure such default and diligently to pursue
completion of such cure during and after such 30-day period); (iii) if Tenant
abandons or vacates or manifests an intent to abandon or vacate any portion of
the Premises; (iv) if Tenant makes any transfer, assignment, conveyance, sale,
pledge or disposition of all or a substantial portion of Tenant's Property, or
removes a substantial portion of Tenant's Property from the Premises other than
by reason of an assignment or subletting of the Premises permitted under this
Lease; (v) if Tenant's interest herein is sold under execution; (vi) if Tenant
repudiates this Lease prior to taking occupancy of the Premises; or (vii) if
Tenant manifests an intent not to take occupancy of the Premises.
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Any notice required to be given pursuant to this Section 22(a) shall be in lieu
of, and not in addition to, any notice required under California Code of Civil
Procedure, Section 1161.
(b) Upon any such event of default, Landlord may without prejudice
to its other rights hereunder:
(i) maintain this Lease in full force and effect and
recover the rent and other monetary charges as they become due, without
terminating Tenant's right of possession, irrespective of whether Tenant shall
have abandoned the Premises. In the event Landlord elects to not terminate the
Lease, Landlord shall have the right to re-enter the Premises and re-let the
Premises as such rent and upon such conditions and for such a term, and to do
all acts necessary to maintain or preserve the Premises as Landlord deems
reasonable and necessary without being deemed to have elected to terminate the
Lease, including removal of all subtenants, persons and property from the
Premises. Such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant. In the event any such
re-letting occurs, this Lease shall terminate automatically upon the new
tenant taking possession of the Premises. Notwithstanding that Landlord fails
to elect to terminate this Lease initially, Landlord at any time during the
Term of this Lease may elect to terminate this Lease by virtue of such previous
uncured default of Tenant.
(ii) terminate Tenant's right to possession by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Premises to Landlord. In such event Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason
of Tenant's default including without limitation thereto, the following: (a)
the worth at the time of award of the unpaid rent which had been earned at the
time of such termination; plus (b) the worth at the time of award of the amount
by which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that is proved could
have been reasonably avoided; plus (c) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; plus (d) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom; plus (e) at Landlord's election, such other amounts
in addition to or in lieu of the foregoing as may be permitted from time to
time by applicable state law. Upon any such re-entry Landlord shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises, which Landlord in its sole discretion deems reasonable and necessary.
As used in the subparagraphs (a) and (b) above, the "worth at the time of
award" is computed by allowing interest at the maximum rate allowed by law at
the time of award. As used in subparagraph (c) above, the "worth at the time
of award" is computed by discounting such amount at the discount rate of the
U.S. Federal Reserve Bank of San Francisco, at the time of award plus one
percent (1%).
(c) After default, the acceptance of the Rent or failure to
re-enter by Landlord shall not be held to be a waiver of its right to terminate
this Lease, and Landlord may re-enter and take possession of the Premises as if
no Rent had been accepted after such default. All of the remedies given to
Landlord in this Lease in the event of default by Tenant are in addition to all
other rights or remedies to which Landlord may be entitled under the laws of
the state; all such remedies shall be deemed cumulative and the election of one
shall not be deemed a waiver of any other or further rights or remedies.
23. BANKRUPTCY
If Tenant shall file a voluntary petition pursuant to the United
States Bankruptcy Code or any successor thereto or take the benefit of any
insolvency act or be dissolved, or if an involuntary petition be filed against
Tenant pursuant to the U. S. Bankruptcy Code or any successor thereto and said
petition is not dismissed within thirty (30) days after such filing, or if a
receiver shall be appointed for its business or its
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assets and the appointment of such receiver is not vacated within thirty (30)
days after such appointment, or if it shall make an assignment for the benefit
of its creditors, then and forthwith thereafter Landlord shall have all of the
rights provided in Section 22 above in the event of nonpayment of the Rent.
24. BROKERAGE FEES
Tenant warrants and represents that it has not dealt with any realtor, broker or
agent in connection with this Lease except the Broker. Tenant shall indemnify
and hold Landlord harmless from any cost, expense or liability (including cost
of suit and reasonable attorneys' fees) for any compensation, commissions or
charges claimed by any other realtor, broker or agent in connection with this
Lease or by reason of any act of Tenant.
25. NOTICES
All notices, demands or other communications ("notices") permitted or
required to be given hereunder shall be in writing and, if mailed postage
prepaid by certified or registered mail, return receipt requested, shall be
deemed given three (3) days after the date of mailing thereof or on the date of
actual receipt, if sooner; all other notices not so mailed shall be deemed
given on the date of actual receipt. Notices shall be addressed as follows:
(a) if to Landlord, to the Landlord's Mailing Address and to the Building
Manager, and (b) if to Tenant, to the Tenant's Mailing Address. Landlord and
Tenant may from time to time by notice to the other designate such other place
or places for the receipt of future notices.
26. GOVERNMENT ENERGY OR UTILITY CONTROLS
In the event of the imposition of federal, state, or local
governmental control, rules, regulations, or restrictions on the use or
consumption of energy or other utilities during the Term, both Landlord and
Tenant shall be bound thereby. In the event of a difference in interpretation
of any governmental control, rule, regulation or restriction between Landlord
and Tenant, the interpretation of Landlord shall prevail, and Landlord shall
have the right to enforce compliance, including the right of entry into the
Premises to effect compliance.
27. SECURITY DEPOSIT
Tenant has deposited with Landlord the Security Deposit as security for the full
and faithful performance of every provision of this Lease to be performed by
Tenant. If Tenant defaults with respect to any provision of this Lease,
including payment of the Rent, Landlord may use, apply or retain all or any part
of the Security Deposit for the payment of any Rent, or to compensate Landlord
for any other loss, cost or damage which Landlord may suffer by reason of
Tenant's default. If any portion of the Security Deposit is so used or applied,
Tenant shall, within five days after notice thereof, deposit cash with Landlord
in an amount sufficient to restore the Security Deposit to its original amount,
and Tenant's failure to do so shall be a breach of this Lease, Landlord shall
not, unless otherwise required by law, be required to keep the Security Deposit
separate from its general funds, nor pay interest to Tenant. If Landlord is
required to maintain the Security Deposit in an interest bearing account,
Landlord shall retain the maximum amount permitted under applicable law as a
book-keeping and administrative charge. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the Security
Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last transferee of Tenant's interest hereunder) at the expiration
of the Term and upon Tenant's vacation of the Premises. If the Building is
sold, the Security Deposit may be transferred to the new owner, and Landlord
shall be discharged from further liability with respect thereto.
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28. RELOCATION OF PREMISES
(a) On one, and only one, occasion during the Term, Landlord may,
before or after the Commencement Date, elect by notice to Tenant to substitute
for the Premises other office space in the Building (herein called the
"Substitute Premises") designated by Landlord, provided that the Substitute
Premises shall contain at least the same usable area as the Premises, have a
configuration substantially similar to the Premises, Landlord's notice shall be
accompanied by a plan of the Substitute Premises, and such notice or plan shall
set forth the usable area of the Substitute Premises. Tenant shall vacate and
surrender the Premises and shall occupy the Substitute Premises promptly (and,
in any event, not later than fifteen (15) days) after Landlord has substantially
completed the work to be performed by Landlord in the Substitute Premises
pursuant to Subsection (b). Tenant shall pay the same Rent with respect to the
Substitute Premises as was payable with respect to the Premises, without regard
to the usable area of the Substitute Premises. This Lease shall remain in full
force and effect, and the Substitute Premises shall thereafter be deemed to be
the Premises.
(b) Tenant shall not be entitled to any compensation for any
inconvenience or interference with Tenant's business, nor to any abatement or
reduction of the Rent, but Landlord shall, at Landlord's expense, do the
following: (i) furnish and install in the Substitute Premises fixtures,
equipment, improvements, appurtenances and Leasehold Improvements at least
equal in kind and quality to those contained or to be contained in the Premises
at the time such notice of substitution is given by Landlord; (ii) provide
personnel to perform under Tenant's direction the moving of Tenant's Property
from the Premises to the Substitute Premises; (iii) promptly reimburse Tenant
for Tenant's actual and reasonable out-of-pocket costs incurred in connection
with the relocation of any telephone or other communications equipment from the
Premises to the Substitute Premises; and, (iv) promptly reimburse Tenant for
any other actual and reasonable out-of-pocket costs incurred by Tenant in
connection with Tenant's move from the Premises to the Substitute Premises
provided such costs are approved by Landlord in advance, which approval shall
not be unreasonably withheld. Tenant agrees to cooperate with Landlord so as
to facilitate the prompt completion by Landlord of its obligations under this
Section and the prompt surrender by Tenant of the Premises. Without limiting
the generality of the preceding sentence, Tenant agrees (A) to provide to
Landlord promptly any approvals or instructions and any plans and
specifications or any other information reasonably requested by Landlord and
(B) to perform promptly in the Substitute Premises any work to be performed
therein by Tenant to prepare the same for Tenant's occupancy.
29. QUIET ENJOYMENT
Tenant, upon paying the Rent and performing all of the terms on its
part to be performed, shall peaceably and quietly enjoy the Premises subject,
nevertheless, to the terms of this Lease and to any Superior Mortgage or
Superior Lease or other agreement to which this Lease is subordinated.
30. OBSERVANCE OF LAW
(a) Tenant shall comply with all provisions of law, including
federal, state, county and city laws, ordinances and regulations, building
codes and any other governmental, quasi-governmental or municipal regulations
which relate to the partitioning, equipment operation, alteration, occupancy
and use of the Premises, and to the making of any repairs, replacements,
additions, changes, substitutions or improvements of or to the Premises as a
result of Tenant's specific use of the Premises. Moreover, Tenant shall comply
with all police, fire and sanitary regulations imposed by any federal, state,
county or municipal authority (or made by insurance underwriters as a result of
Tenant's specific use of the Premises), and shall observe and obey all other
requirements governing the conduct of any business conducted in the Premises.
In accordance with State Law AB3205, Chapter 1589-Statutes 1988, effective July
1, 1989, Tenant must complete the (i) Hazardous Materials and (ii) Air
Pollution Control Questionnaires attached hereto as Exhibit
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G pursuant to the instructions thereon, and deliver said completed forms to
"Landlord's Representative" set forth in Paragraph 1 of Exhibit C.
(b) Notwithstanding the foregoing, it shall be Landlord's
responsibility to comply with all provisions of law, including federal, state,
county and city laws, ordinances and regulations, building codes, and any other
governmental, quasi-governmental or municipal regulations which relate to the
Building insofar as they may require structural changes in the Building,
provided nevertheless, that such changes shall be the responsibility of Tenant
if they are changes required by reason of a condition which has been created by
or at the instance of Tenant, or are required by reason of a default by Tenant
hereunder.
31. FORCE MAJEURE
Landlord and Tenant shall each be excused for the period of any delay
in the performance of any obligation hereunder when prevented from so doing by
a cause or causes beyond its control, including all labor disputes, civil
commotion, war, war-like operations, invasion, rebellion, hostilities, military
or usurped power, sabotage, governmental regulations or controls, fire or other
casualty, inability to obtain any material, services or financing, or through
acts of God. The foregoing shall not apply to any obligation to pay Rent or
make other payments of money pursuant to this Lease.
32. CURING TENANT'S DEFAULT, ADDITIONAL RENT
(a) If Tenant defaults in the performance of any of its obligations
under this Lease, Landlord without thereby waiving such default may (but shall
not be obligated to) perform the same for the account and at the expense of
Tenant, without notice in a case of emergency, and in any other case only if
such default continues after the expiration of the later of: (i) ten (10) days
from the date Landlord gives Tenant notice of its intention so to do; or, (ii)
the expiration of the applicable grace period provided in Section 22 or
elsewhere in this Lease for cure of such default.
(b) Any costs or expenses incurred by Landlord, including
reasonable attorneys' fees, involved in collection or endeavoring to cure any
default of Tenant, under or in connection with this Lease, or pursuant to law,
including any such cost, expense or disbursement involved in instituting and
prosecuting summary proceedings, shall be due and payable within 10 days of
Landlord's demand therefor as additional rent.
33. LIMITATION OF LANDLORD'S LIABILITY
If Landlord becomes obligated to pay Tenant a money judgment arising
out of any failure by Landlord to perform or observe any of the terms,
covenants, conditions or provisions to be performed or observed by Landlord
hereunder, Tenant shall be limited for the satisfaction of said money judgment
solely to Landlord's interest in the Building and Land or any proceeds arising
from the sale thereof and no other property or assets of Landlord or the
individual partners, directors, officers, or shareholders of Landlord shall be
subject to levy, execution or other enforcement procedure whatsoever for the
satisfaction of said money judgment.
34. SHORING
If any excavation or construction is made adjacent to, upon or within
the Building, or any part thereof, Tenant shall afford to any and all persons
causing or authorized to cause such excavation or construction license to enter
upon the Premises for the purpose of doing such work as such persons shall deem
necessary to preserve the Building or any portion thereof from injury or damage
and to support the same by proper foundations, braces and supports, without any
claim for damages or indemnity or
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abatement of the Rent, or of a constructive or actual eviction of Tenant.
Landlord shall use its best efforts to minimize any interference with Tenant's
use of the Premises.
35. SIGN CONTROL
Tenant shall not obstruct or permit the obstruction of light, halls,
Common Areas, roofs, parapets, stairways or entrances to the Building or the
Premises and will not affix, paint, erect or inscribe any sign, projection,
awning, signal or advertisement of any kind to any part of the Building or the
Premises, including the inside or outside of the windows or doors, without the
written consent of Landlord. Landlord shall have the right to withdraw such
consent at any time and to remove any sign, projection, awning, signal or
advertisement to be affixed to the Building or the Premises. If such work is
done by Tenant through any person, firm or corporation not designated by
Landlord, or without the express written consent of Landlord, Landlord shall
have the right to remove such signs, projections, awnings, signals or
advertisements without being liable to the Tenant by reason thereof and to
charge the cost of such removal to Tenant as additional rent, payable within 10
days of Landlord's demand therefor.
Landlord at its cost shall, place, construct, and maintain a directory
located in the lobby of the Building, to be used exclusively for the display of
the names of tenants in the Building and their respective suite numbers.
Tenant shall be entitled to display its name in the directory at a cost of
Twenty Dollars ($20) per line on said directory.
Landlord shall affix Tenant's name to the door that is the principal
entry to the Premises, the cost of the signage and its installation shall be
paid by Tenant upon Landlord's demand therefor.
Landlord has the sole right to determine the type of directory and
door signage (including, without limitation, size of letters, style, color, and
location).
36. Parking
(a) Landlord hereby grants to Tenant the right to use the Parking
Spaces. Landlord, at its sole election, may designate the locations of the
Parking Spaces and Landlord shall have the right, at Landlord's sole election,
to change said locations from time to time.
(b) Landlord shall have the right to impose a parking charge at
any time to include therein any amounts levied, assessed, imposed or required
to be paid to any governmental authority on account of the parking of motor
vehicles, including all sums required to be paid pursuant to transportation
controls imposed by the Environmental Protection Agency under the Clean Air Act
of 1979, or otherwise required to be paid by any governmental authority with
respect to the parking, use, or transportation of motor vehicles, or the
reduction or control of motor vehicle traffic, or motor vehicle pollution.
(c) If requested by Landlord, Tenant shall notify Landlord of the
license plate number, year, make and model of the automobiles entitled to use
the Parking Spaces and if requested by Landlord, such automobiles shall be
identified by automobile window stickers provided by Landlord, and only such
designated automobiles shall be permitted to use the Parking Spaces. If
Landlord institutes such an identification procedure, Landlord may provide
additional parking spaces for use by customers and invitees of Tenant on a
daily basis at prevailing parking rates. At Landlord's sole election, Landlord
may make validation stickers available to any other tenant in the Building, and
Landlord shall make such validation stickers available to Tenant.
(d) The Parking Spaces and additional parking spaces provided for
herein are provided solely for the accommodation of Tenant and Landlord assumes
no responsibility or liability of any kind whatsoever
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from whatever cause with respect to the automobile parking areas, including
adjoining streets, sidewalks, driveways, property and passageways, or the use
thereof by Tenant or Tenant's Representatives.
37. WARRANTY OF AUTHORITY
(a) If either party is a corporation, the person or persons
executing this Lease on behalf of such party hereby covenant and warrant as of
the Effective Date that: (a) such party is a duly constituted corporation,
qualified to do business in the State of California; (b) such party has paid
all applicable franchise and corporate taxes; and (c) such party will file when
due all future forms, reports, fees and other documents necessary to comply
with applicable laws,
(b) If either party is a partnership, the person or persons
executing this Lease on behalf of such party hereby covenant and warrant as of
the Effective Date that: (a) such party is a duly constituted partnership,
qualified to do business in the State of California; (b) such party has paid
all applicable federal, state, and local taxes; and (c) such party will file
when due all future forms, reports, fees and other documents necessary to
comply with applicable laws.
38. MISCELLANEOUS
(a) The failure of either party to insist in any one or more
instances upon the strict performance of any one or more of the obligations of
this Lease, or to exercise any election herein contained, shall not be
construed as a waiver or relinquishment for the future of the performance of
such one or more obligations of this Lease or of the right to exercise such
election, but the same shall continue and remain in full force and effect with
respect to any subsequent breach, act or omission. No agreement to accept a
surrender of all or any part of the Premises shall be valid unless in writing
or signed by Landlord. The receipt by Landlord of full or partial Rent with
knowledge of a breach by Tenant of any obligation of this Lease shall not be
deemed a waiver of such breach.
(b) In any action or proceeding which Landlord or Tenant may be
required to prosecute to enforce its respective rights hereunder, the
unsuccessful party agrees to pay all costs incurred by the prevailing party
therein, including reasonable attorneys' fees.
(C) If any clause or provision of this Lease is or becomes illegal
or unenforceable because of present or future laws or any rule or regulation of
any governmental body or entity, effective during the Term, the intention of
the parties hereto is that the remaining parts of this Lease shall not be
affected thereby unless such clause or provision is, in the reasonable
determination of Landlord, essential and material to its rights, in which event
Landlord shall have the right to terminate this Lease by notice to Tenant.
(d) If Landlord commences any summary proceedings or an action for
nonpayment of Rent, Tenant shall not interpose any non-mandatory counterclaim
of any nature or description in any such proceedings or action. Tenant and
Landlord both waive a trial by jury of any or all issues arising in any action
or proceeding between the parties hereto or their successors, under or
connected with this Lease, or any of its provisions.
(e) All the terms and provisions of this Lease shall be binding
upon and, except as prohibited or limited by Section 12, inure to the benefit
of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
(f) This Lease shall be deemed to have been made in and shall be
construed in accordance with the laws of the State.
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(g) This Lease sets forth all the covenants, promises, agreements,
conditions and understandings between Landlord and Tenant concerning the
Premises, Building and Land, and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between them other than
as are herein set forth. Except as herein otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by them.
(h) The captions appearing within the body of this Lease have been
inserted as a matter of convenience and for reference only and in no way
define, limit or enlarge the scope or meaning of this Lease or of any provision
hereof.
(i) No payment by Tenant or receipt by Landlord of a lesser amount
than the Rent payment herein stipulated shall be deemed to be other than on
account of the Rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as Rent be deemed an accord and
satisfaction (unless Landlord expressly agrees to an accord and satisfaction in
a separate agreement duly accepted by Landlord's appropriate officer or
officers), and Landlord may accept such check or payment without prejudice to
Landlord's rights to recover the balance of such Rent or pursue any other
remedy provided in this Lease. Landlord may receive and retain, absolutely and
for itself, any and all payments so tendered, notwithstanding any accompanying
instructions by Tenant to the contrary, and any such payment shall be treated
by Landlord at its option as being received solely on account of any amounts
due and owing Landlord, including the Rent, and to such items and in such order
as Landlord in its sole discretion shall determine.
(j) At the request of either party, Landlord and Tenant shall
promptly execute, acknowledge and deliver a memorandum with respect to this
Lease sufficient for recording. In no event shall this Lease be recorded and
if Tenant records this Lease in violation of the terms hereof, in addition to
any other remedy available to Landlord upon Tenant's default, Landlord shall
have the option to terminate this Lease by recording a notice to such effect.
If a memorandum of lease is recorded, on the Termination Date, Tenant shall
execute, acknowledge and deliver to Landlord an instrument in writing releasing
and quitclaiming to Landlord all right, title and interest of Tenant in and to
the Premises by reason of this Lease or otherwise.
(k) Tenant shall have no claim, and hereby waives the right to any
claim, against Landlord for money damages by reason of any refusal, withholding
or delaying by Landlord of any consent, approval or statement of satisfaction,
and in such event, Tenant's only remedies therefor shall be an action for
specific performance, injunction or declaratory judgment to enforce any such
requirement.
(l) If any provision contained in an exhibit, rider or addenda is
inconsistent with any other provision of this Lease, the provision contained in
said exhibit, rider or addenda shall supersede said other provision, unless
otherwise provided in said exhibit, rider or addenda.
(m) The use of the neuter singular pronoun to refer to either
party shall be deemed a proper reference even though it may be an individual,
partnership, corporation or a group of two or more individuals or corporations.
The necessary grammatical changes required to make the provisions of this Lease
apply in the plural number where there is more than one Landlord or Tenant and
to either corporations, associations, partnerships or individuals, males or
females, shall in all instances be assumed as though in each case fully
expressed.
(n) This Lease has been executed in several counterparts, all of
which constitute one and the same instrument.
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(o) As used in this Lease, any list of one or more items preceded
by the word "including" shall not be deemed limited to the stated items but
shall be deemed without limitations.
(p) The language of this Lease shall be construed according to its
normal and usual meaning and not strictly for or against either Landlord or
Tenant.
(q) If more than one person or entity executes this Lease as
Tenant, each such person or entity shall be jointly and severally liable for
observing and performing each of the terms, covenants, conditions and
provisions to be observed or performed by Tenant.
(r) Tenant shall assume and pay to Landlord at the time of paying
the Rent any excise, sales, use gross receipts or other taxes (other than a net
income or excess profits tax) which may be imposed on or measured by such Rent
or may be imposed on or on account of the letting and which Landlord may be
required to pay or collect under any law now in effect or hereafter enacted.
(S) The voluntary or other surrender of this Lease by Tenant or a
mutual cancellation thereof shall not work a merger and shall, at Landlord's
option, either terminate all or any existing subleases or subtenancies or
operate as an assignment to Landlord or any or all of such subleases or
subtenancies.
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<PAGE> 31
[EXHIBIT A FLOORPLAN]
________________________________________________________________________________
PARK PLAZA OFFICE BUILDING
4350 Executive Drive
San Diego, California 92121
APRIL 24, 96
N.T.S.
2,852 R.S.F.
Oliver McMillan
MAGGETTI ELAM ASSOCIATES
3160 CAMINO DEL RIO S. #207
San Diego, CA 92106 624-0521
<PAGE> 32
[EXHIBIT B 3RD FLOOR PLAN]
________________________________________________________________________________
PARK PLAZA OFFICE BUILDING
THIRD FLOOR
4358 EXECUTIVE DRIVE
SAN DIEGO, CALIFORNIA 92121
21,622 U.
22,330 R.
1084 R/U
MAGGETTI ELAM ASSOCIATES
3160 CAMINO DEL RIO S #207
SAN DIEGO, CALIFORNIA 92108 834-0521
OLIVER McMillan
<PAGE> 33
EXHIBIT C
WORK LETTER AGREEMENT
TURN KEY
Landlord and Tenant are executing simultaneously with this Work
Letter Agreement, a written lease ("Lease") covering those certain premises
more particularly described in Exhibit "A" to the Lease ("Premises"). To
induce Tenant to enter into the Lease (which is hereby incorporated by
reference to the extent that the provisions of this agreement may apply
thereto) and in consideration of the mutual covenants hereinafter contained,
Landlord and Tenant mutually agree as follows:
1. Representatives and Definitions,
Landlord appoints Landlord's Representative to act for Landlord and
Tenant appoints Tenant's Representative to act for Tenant in all matters
covered by this Work Letter. All inquiries, requests, instructions,
authorizations and other communications with respect to the matters covered by
this Work Letter will be made to Landlord's or Tenant's Representative, as the
case may be. Tenant will not make any inquiries of or requests to, and will
not give any instructions or authorizations to, any other employee or agent of
Landlord, including Landlord's architect, engineers and contractors or any of
their agents or employees, with regard to matters covered by this Work Letter.
Either party may change its Representative under this Work Letter at any time
with three (3) days' prior written notice to the other party.
Tenant's Representative:______________________________
Landlord's Representative: Robert Garwood
Space Planner: Maggetti Elam Associates
Contractor:______________________________
2. Tenant's Plans and Specifications.
(a) Landlord and Tenant hereby agree that (i) the "Space Plan" for
the Premises which is attached hereto as Attachment 1 is a complete and
accurate description of the Tenant Improvements and (ii) all materials used to
construct the Tenant Improvements (as defined hereinbelow) shall be Building
Standard as specified in Schedule 1 attached hereto, except as may specifically
be noted on the Space Plan. Within three (3) business days after Tenant
receives a copy of the Lease executed by Landlord, Tenant will meet with the
Space Planner and provide such additional information ("Tenant Information") as
may be necessary to enable the Space Planner to prepare complete architectural,
mechanical, plumbing and electrical layout plans and specifications required
for the improvement of the Promises (the "Tenant Improvements". Such plans
include partition layout; reflected ceiling plans; locations of electrical
fixtures, outlets, and switches; location of telephone outlets; locations of
doors; locations of plumbing fixtures; extraordinary floor loads; and other
special requirements (the "Working Drawings"). It shall be the responsibility
of Landlord to provide, or cause to be provided, to the Space Planner working
drawings and calculations with respect to the mechanical, electrical,
sprinkler, and plumbing components for the Building necessary to enable the
Contractor to secure a permit(s) for construction of the Tenant Improvements.
(b) It is understood and agreed that the services of the Space
Planner are limited to preparation of the Space Plan and the Working Drawings
for the design of the physical configuration of the Premises. The services of
the Space Planner do not extend to matters of interior decorating beyond what
is described in the Space Plan. The cost of any such decorator services
required by Tenant shall be Tenant's sole responsibility.
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<PAGE> 34
3 Definition of Costs.
As used herein the term "Costs" shall mean and refer to all costs
expended by Landlord relative to the construction of the Tenant Improvements,
which shall include, but shall not be limited to, costs of equipment, material
and labor; Contractor's field overhead and fees; costs of preparation of the
Space Plan and Working Drawings (as limited in paragraph 2(b) above);
governmental agency fees; costs of any requirements regarding construction
which are imposed by any federal, state or local governmental entity or agency
which are not reflected in the Working Drawings; a supervision fee to Landlord
in the amount of fifteen percent (15%) of the cost of construction as charged
by the Contractor; sales and use taxes (but not real property taxes); permits;
plan check fees; bonds and other costs directly related to the construction of
the Tenant Improvements.
4. Change Orders. Tenant may authorize changes in the work described on
the Space Plan during construction only by written instructions to Landlord's
Representative on a form approved by Landlord. All such changes will be
subject to landlords prior written approval in accordance with Paragraph 5, and
shall be performed at Tenant's sole expense. Prior to commencing any change,
Landlord will prepare and deliver to Tenant, for Tenant's approval, a change
order (the "Change Order") setting forth the total cost of such change, which
will include associated architectural, engineering and construction
contractor's fees, and the cost of Landlord's overhead at the rate of fifteen
percent (15%) of the amount of the Change Order. If Tenant fails to approve
such Change Order within five (5) days after delivery by Landlord, Tenant will
be deemed to have withdrawn the proposed Change Order and Landlord will not
proceed to perform the change. Upon Landlord's receipt of Tenant's approval,
Contractor will proceed to perform the change and Tenant will pay Landlord for
such Change Order at the time Contractor starts work on such Change Order.
5. Landlord's Approval.
The Space Plan (including any revisions requested by Tenant), Working
Drawings, or Change Orders shall be subject to Landlord's prior written
approval, which shall not be unreasonably withheld. Without limiting the
foregoing, it shall not be unreasonable for Landlord to disapprove any of the
foregoing if they require work which:
(a) exceeds or affects the structural integrity of the Building,
or any part of the heating, ventilating, air conditioning, plumbing,
mechanical, electrical, communication or other systems of the Building;
(b) is not approved by the holder of any mortgage or deed of trust
encumbering the Project at the time the work is proposed;
(c) would not be approved by a prudent owner of property similar
to the Project;
(d) violates any agreement which affects the Project or binds
Landlord;
(e) Landlord reasonably believes will increase the cost of
operation or maintenance or any of the systems of the Building;
(f) Landlord reasonably believes will reduce the market value of
the Premises or the Project at the end of the Term;
(g) does not conform to applicable building code or is not
approved by any governmental authority with jurisdiction over the Premises; or
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<PAGE> 35
(h) does not conform to a quality consistent with the Building
Standard Tenant Improvements.
6. Completion and Rental Commencement Date.
It is agreed that Tenant's obligation for the payment of rental under
the Lease shall not commence until Landlord has substantially completed all
work to be performed by Landlord as hereinabove set forth; provided, however,
that if Landlord shall be delayed in substantially completing said work as a
result of the following situations (hereinafter referred to as a "Tenant
Delay"):
(a) Tenant's failure to furnish plans and specifications or
approve pricing in accordance with the time frames specified hereinabove;
(b) Tenant's request for materials, finishes, or installations
other than Landlord's "Building Standard" items;
(C) Tenant's changes in the said plans and specifications after
their submission to Landlord; or
(d) Tenant's failure to perform any act or obligation imposed on
Tenant by this Lease or Work Letter Agreement;
then such delay shall be the responsibility of Tenant, and the term of
the Lease shall commence on the day when Landlord would have substantially
completed all work to be performed by Landlord but for such Tenant Delay.
7. Construction of the Premises.
Contractor shall construct the Tenant Improvements within the Premises
in accordance with the Space Plan, and under contract with Landlord. Except in
the event (i) Tenant requires Change Orders or (ii) non-Building Standard
materials which are not specifically noted on the Space Plan, the Tenant
Improvements shall be constructed at Landlord's sole expense. In the event
Tenant requires Change Orders or non-Building Standard materials which are not
specifically noted on the Space Plan, the same shall be provided at Tenant's
sole expense. Following approval of the Working Drawings, Contractor will
cause application to be made to the appropriate governmental authorities for
necessary approvals and building permits. Upon receipt of the necessary
approvals and permits and subject to receipt of the payment, if any, required
under Paragraph 4, Contractor will begin construction.
8. Tenant's Punch Lost.
(a) Once the Tenant Improvements are substantially completed and
prior to Landlord's delivery of the Premises to Tenant, Landlord shall give
Tenant three (3) days prior notification of a meeting for Tenant to inspect the
Tenant Improvements. Tenant's Representative shall completely examine the
Premises and prepare with Landlord's Representative and Contractor a list of
all visible items to be completed by Contractor to finish the Tenant
Improvements. The list shall be signed by Landlord, Tenant and Contractor and
all items will be completed as soon as possible.
(b) Any items damaged during Tenant's move in or occupancy shall
be repaired or replaced by Contractor at Tenant's sole cost and expense.
9. Responsibility for Design.
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<PAGE> 36
Tenant will be responsible for the design, function and maintenance
of all Tenant Improvements which are not Building Standard, whether or not
approved by Landlord or installed by Landlord at Tenant's request. Landlord's
preparation of the Working Drawings will not constitute any representation or
warranty as to the adequacy, efficiency, performance or desirability of
Tenant's Improvements in the Premises.
10. Miscellaneous.
In the event of any conflict between the terms of this Work Letter
Agreement and the Lease, the terms of this Work Letter Agreement will control.
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<PAGE> 37
SCHEDULE I
TENANT SPECIFICATIONS
PARK PLAZA BUILDING
<TABLE>
<S> <C> <C>
1. PARTITIONS
A. Demising Partitions 2 1/2", 25 gauge metal studs at 24"
Quantity: 21 lin. on center
ft. per 1,000 sq.
ft.
5/8" Type X drywall, one layer each side full height
from floor slab to underside of floor structure at
12'-O", tape partition smooth to receive paint or
wall covering, light orange peel texture.
3" batten insulation
B. Interior Partitions 2 1/2", 25 gauge metal studs at 24"
Quantity: 100 lin. on center
ft. per 1,000 sq. ft.
5/8" drywall, one layer each side, floor to ceiling
minimum height extended above 9'-O", tape
partition smooth to receive paint or wall covering,
light orange peel texture, include cladding at all
column faces and inside curtain wall at spandrel
glass above and below window mullion.
2. CORRIDOR DOOR ASSEMBLY
(To match building shell door and hardware)
A. Doors 1-3/4" solid core, ash, W.I.C.
Quantity: 1 per custom grade, 3'-0" x 8' x O", 20
2,000 sq. ft. minute rated
One coat Frazee Stain #M601, one coat sealer and
one coat lacquer (match architect's sample)
B. Hardware Lever-Schlage L-9000 series, 03
Butts-McKinney TA 2714, full mortise ball bearing
butt hinges 4-1/2" x 4"
Entrylock-Schlage Lockset #L9050
Door stop-Rockwood 406
Smoke seals-Reese F797
</TABLE>
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<PAGE> 38
<TABLE>
<S> <C> <C>
Silencers-Rockwood 608
Closer-Reading Model 7600
Finish on all hardware is bright chrome
C. Frames Timely prefinished powder coat to match Frazee
#5434D Abstract, 20 minute rating
3. INTERIOR DOOR ASSEMBLY
A. Doors 1-3/4" solid core, ash, W.I.C.
Quantity: 3 doors custom grade, 20 minute rating
per 1,000 sq.ft. 3'-0" x 8'-O"
One coat Frazee Stain #M601, one coat sealer and
two coats varnish (match building shell and corridor
doors)
B. Hardware Lever-Schlage, Olympiad D-Series
Butts-McKinney TA 2714, hinges 4-1/2" x 4"
Latchset-Schlage Passage 06A
Door stop-Rockwood 406
Finish on all hardware is bright chrome
C. Frames Timely prefinished powder coat to match Frazee
#5434D Abstract
4. FLOOR COVERING
(Color to be specified on tenant finish plan)
A. Carpet Mohawk - 100% Zeftron Nylon 32 oz.
Quantity: 60% cut face weight, cut pile -
pile; 40% loop pattern "Barrister"; loop
construction construction - pattern "Associate"
Install cut pile over pad, install loop as glue down
B. Pad 5/8" synthetic felt
C. Vinyl Composition Armstrong Excelon Tile, Imperial
Tile Texture, 1/8" gauge
D. Base Roppe 4" rubber base
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C> <C>
5. PAINT Frazee Interior Latex Lo-Glow, apply 2 coats
minimum
6. WALLCOVERING
Quantity: 30% of Vicrtex patterns Laurelton,
wall quantity
Southport, Harvard Square or
provided under Ribarrow, 54" wide, Type 11,
Item 1 flame spread 15
7. WINDOW TREATMENT Louver Drape #1081 Warm Grey, 1" horizontal mini
blinds
8. ACOUSTICAl CEILING
A. Ceiling Tile Conwed #323 pattern 2'O" x 2'O" Natural fissured
lay in system, color-white
B. Suspension System Donn DX exposed grid system or equal, color-matte
white pre-painted steel
System shall be designed for lateral forces
((GP=0.2% wp (minimum) = 4 psf)) (Table 23).
The grid systems main tees and crossties shall be
able to withstand lateral forces and 100 pounds in
compression and tension. Hanger wires shall be
#12 gauge wire
9. MECHANICAL
Quantity: average Watersource heat pumps as
of 1 thermostatically manufactured by California Heat
controlled zone per Pump
1,000 sq. ft.
(minimum of 2 zones Low pressure distribution ductwork
per lease space)
Supply air register and return air grilles - metal
construction with perforated face, lay-in style
Thermostats on wall
Building "pre-zoned" in base building, allow for
engineering and drawing plans
Tenant space to connect to central fresh air system
</TABLE>
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<PAGE> 40
<TABLE>
<S> <C> <C>
Tenant temperature control system to be integrated
with building central control system
Tenant system shall have a manual override
and be capable of tabulating the hours that it is in use
separate from normal building hours
10. ELECTRICAL
A. Service 1-1 50 KVA transformer will be installed every third
floor
Each floor has a sub-panel with 277/480 and one
with 120/208
B. Lighting Lithonia 2GT440 2 x 4, fluorescent
Quantity: 12 per light fixture acrylic prismatic
1,000 sq. ft.
lens, hinged door, conduit and hook-ups, includes deluxe cool white lamps
C. Light Switch 20 amp specification grade, quiet
Assembly type switches, rated 120 and 277
Quantity: 4 per volts AC, ivory
1,000 sq. ft.
3-way and 4-way switches shall be same manufacturer
as single pole
Plates-ivory, smooth plastic, specification grade,
equal to Sierra P-Line
D. Electrical Wall 15 amp, 2 pole, 3 wire grounding
Outlet type, specification grade, rate
Quantity 9 per 125 volts, duplex, mounted
1,000 sq. ft. vertically
Ivory, smooth plastic, specification grade, equal to
Sierra P-line
Outlet height at 12" A.F.F. to bottom of rough-in
box
E. Telephone Wall Outlet 2" x 4" minimum box with single
Quantity: 5 per gang plaster ring and pull string,
1,000 sq. ft. cover plate with 3/8" bush hole
</TABLE>
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<PAGE> 41
<TABLE>
<S> <C> <C>
Ivory, smooth plastic, specification grade, equal to
Sierra P-line
F. Life Safety Speakers Simplex #2902 - 9734 flushmount,
install per code
11. FIRE SPRINKLERS
Quantity: 8.5 heads Sprinkler head shall be UL listed
per 1,000 sq. ft. and Factory Mutual approved,
manufactured by Viking or equal
Type shall be satin finish chrome plated pendant
semi-recessed heads on concealed piping in hung
ceiling areas
UPGRADES
FLOOR COVERINGS Carpet: Mohawk - 42 oz. Summation cut pile,
colors to match building standard.
CEILING INSULATION 6" sound attenuation batts, lay-over ceiling
</TABLE>
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<PAGE> 42
PARK PLAZA BUILDING
EXHIBIT D
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside or inside of the
Building without the prior written consent of Landlord. Landlord
shall have the right to remove, at Tenant's expense and without notice
any sign installed or displayed in violation of this rule. All
approved signs or lettering on doors and walls shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person
chosen by Landlord, using materials of Landlord's choice and in a
style and format approved by Landlord.
2. Tenant must use Landlord's blinds in all exterior and atrium window
offices. No awning or other projection shall be permitted on any part
of the Premises. Tenant shall not place anything against or near
glass partitions or doors or windows which may appear unsightly from
outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits,
entrances, elevators or stairways of the Building. The halls,
passages, exits, entrances, elevators and stairways are not for the
general public, and Landlord shall in all cases retain the right to
control and prevent access thereto of all persons whose presence in
the judgment of Landlord would be prejudicial to the safety,
character, reputation and interests of the Building and its tenants;
provided that nothing herein contained shall be construed to prevent
such access to persons with whom any tenant normally deals in the
ordinary course of its business, unless such persons are engaged in
illegal activities. No tenant and no employee or invitee of any
tenant shall go up on the roof of the Building.
4. The directory of the Building will be provided exclusively for the
display of the name and location of Tenants only, and Landlord
reserves the right to exclude any other names therefrom.
5. All cleaning and janitorial services for the Building and the Premises
shall be provided exclusively through Landlord, and except with the
written consent of Landlord, no person or persons other than those
approved by Landlord shall be employed by Tenant or permitted to enter
the Building for the purpose of cleaning the same. Tenant shall not
cause any unnecessary labor by carelessness or indifference to the
good order and cleanliness of the Premises. Landlord shall not in any
way be responsible to any Tenant for any loss of property on the
Premises, however occurring, or for any damage to any Tenant's
property by the janitor or any other employee or any other person.
6. Landlord will furnish Tenant, free of charge, with one key to each
door lock in the Premises. Landlord may make a reasonable charge for
any additional keys. Tenant shall not make or have made additional
keys, and Tenant shall not alter any lock or install a new additional
lock or bolt on any door of its Premises. Tenant, upon the
termination of its tenancy, shall deliver to Landlord the keys of all
doors which have been furnished to Tenant, and in the event of loss of
any keys so furnished, shall pay Landlord therefor.
7. Access to the Building at times other than during Normal Business
Hours will require use of a security access card, one of which will be
issued by Landlord for each employee of Tenant for which Tenant
requests such a security access card. Landlord shall impose for each
such card a separate charge in the form of a refundable deposit, to be
refunded by Landlord to Tenant upon Tenant's return of said card(s) to
Landlord.
8. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's
instructions in their installation.
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<PAGE> 43
9. Any freight elevator shall be available for use by all tenants in the
Building, subject to such reasonable scheduling as Landlord in its
reasonable discretion shall deem appropriate. No equipment,
materials, furniture, packages, supplies, merchandise or other
property will be received in the Building or carried in the elevators
except between such hours and in such elevators as may be designated
by Landlord. Moving into and out of the Building shall occur on
weekends only and shall be scheduled with the Building Manager.
10. Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to
carry and which is allowed by law. Landlord shall have the right to
prescribe the weight, size and position of all equipment, materials,
furniture or other property brought into the Building. Heavy objects,
if such objects are considered necessary by Tenant, as determined by
Landlord, shall stand on such platforms as determined by Landlord to
be necessary to properly distribute the weight. Business machines and
mechanical equipment belonging to Tenant, which cause noise or
vibration that may be transmitted to the structure of the Building or
to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building, shall be placed and
maintained by Tenant, at Tenant's expense, on vibration eliminators or
other devices sufficient to eliminate noise or vibration. The persons
employed to move such equipment in or out of the Building must be
acceptable to Landlord. Landlord will not be responsible for loss of,
or damage to, any such equipment or other property from any cause, and
all damage done to the Building by maintaining or moving such
equipment or other property shall be repaired at the expense of
Tenant.
11. Tenant shall not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of office
equipment. Tenant shall not use or permit to be used in the Premises
any foul or noxious gas or substance, or permit or allow the Premises
to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors
or vibrations, nor shall Tenant bring into or keep in or about the
Premises any birds or animals.
12. Tenant shall not use any method of heating or air-conditioning other
than that supplied by Landlord.
13. Tenant shall not waste electricity, water or air-conditioning and
agrees to cooperate fully with Landlord to assure the most effective
operation of the Building's heating and air-conditioning and to
comply with any governmental energy-saving rules, laws or regulations
of which Tenant has actual notice, and shall refrain from attempting
to adjust controls other than room thermostats installed for Tenant's
use. Tenant shall keep corridor doors closed, and shall close window
coverings at the end of each business day.
14. Landlord reserves the right to exclude from the Building between the
hours of 6 p.m. and 7 a.m. the following day, or such other hours as
may be established from time to time by Landlord, and on Sundays and
legal holidays, any person unless that person is known to the person
or employee in charge of the Building and has a pass or is properly
identified. Tenant shall be responsible for all persons for whom it
requests passes and shall be liable to Landlord for all acts of such
person. Landlord shall not be liable for damages for any error with
regard to the admission to or exclusion from the Building of any
person. Landlord reserves the right to prevent access to the Building
in case of invasion, mob, riot, public excitement or other commotion
by closing the doors or by other appropriate action.
15. Tenant shall close and lock the doors of its Premises and entirely
shut off all water faucets or other water apparatus, and electricity,
gas or air outlets before Tenant and its employees leave the Premises.
Tenant shall be responsible for any damage or injuries sustained by
other tenants or occupants of the Building or by Landlord for
noncompliance with this rule.
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<PAGE> 44
16. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be
thrown herein. The expense of any breakage, stoppage or damage
resulting from the violation of this rule shall be borne by the tenant
who, or whose employees or invitees, shall have caused it.
17. Tenant shall not sell, or permit the sale at retail, of newspapers,
magazines, periodicals, theater tickets or any other goods or
merchandise to the general public in or on the Premises. Tenant shall
not make any room-to-room solicitation of business from other tenants
in the Building. Tenant shall not use the Premises for any business
or activity other than that specifically provided for in Tenant's
Lease.
18. Tenant shall not install any radio or television antenna, loudspeaker
or other device on the roof or exterior walls of the Building. Tenant
shall not interfere with radio or television broadcasting or reception
from or in the Building or elsewhere.
19. Tenant shall not mark, drive nails, screw or drill into the
partitions, woodwork or plaster or in any way deface the Premises or
any part thereof, except to install normal wall hangings. Landlord
reserves the right to direct electricians as to where and how
telephone and telegraph wires are to be introduced to the Premises.
Tenant shall not cut or bore holes for wires. Tenant shall not affix
any floor covering to the floor of the Premises in any manner except
as approved by Landlord. Tenant shall repair any damage resulting
from noncompliance with this rule.
20. Canvassing, soliciting and distribution of handbills or any other
written material, and peddling in the Building are prohibited, and
each tenant shall cooperate to prevent same.
21. Landlord reserves the right to exclude or expel from the Building any
person who, in Landlord's judgment, is intoxicated or under the
influence of liquor or drugs or who is in violation of any of the
Rules and Regulations of the Building.
22. Tenant shall store all its trash and garbage within its Premises.
Tenant shall not place in any trash box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of
trash and garbage disposal. All garbage and refuse disposal shall be
made in accordance with directions issued from time to time by
Landlord.
23. The Premises shall not be used for the storage of merchandise held for
sale to the general public, or for lodging or for manufacturing of any
kind, nor shall the Premises be used for any improper, immoral or
objectionable purpose. No cooking shall be done or permitted by any
tenant on the Premises, except that use by Tenant of Underwriters'
Laboratory-approved equipment for brewing coffee, tea, hot chocolate
and similar beverages shall be permitted, and the use of a microwave
shall be permitted, provided that such equipment and use is in
accordance with all applicable federal, state, county and city laws,
codes, ordinances, rules and regulations.
24. Tenant shall not use in any space or in the public halls of the
Building any hand trucks except those equipped with rubber tires and
side guards or such other material-handling equipment as Landlord may
approve. Tenant shall not bring any other vehicles of any kind into
the Building.
25. Without the written consent of Landlord, Tenant shall not use the name
of the Building in connection with or in promoting or advertising the
business of Tenant except as Tenant's address.
26. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency.
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<PAGE> 45
27. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed.
28. The requirements of Tenant will be attended to only upon appropriate
application to the office of the Building by an authorized individual.
Employees of Landlord shall not perform any work or do anything
outside of their regular duties unless under special instructions from
Landlord, and no employee of Landlord will admit any person (Tenant or
otherwise) to any office without specific instructions from Landlord.
29. Tenant shall not park its vehicles in any parking areas designated by
Landlord as areas for parking by visitors to the Building. Tenant
shall not leave vehicles in the Building parking areas overnight nor
park any vehicles in the Building parking areas other than
automobiles, motorcycles, motor driven or non-motor driven bicycles or
four-wheeled trucks. Landlord may, in its sole discretion, designate
separate areas for bicycles and motorcycles.
30. Landlord may waive any one or more of these Rules and Regulations for
the benefit of Tenant or any other tenant, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations
in favor of Tenant or any other tenant, nor prevent Landlord from
thereafter enforcing any such Rules and Regulations against any or all
of the tenants of the Building.
31. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the
terms, covenants, agreements and conditions of any lease of premises
in the Building.
32. Landlord reserves the right to make such other and reasonable Rules
and Regulations as, in its judgment, may from time to time be needed
for safety and security, for care and cleanliness of the Building and
for the preservation of good order therein. Tenant agrees to abide by
all such Rules and Regulations hereinabove stated and any additional
rules and regulations which are adopted.
33. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and
guests.
-4-
<PAGE> 46
COUNTY OF SAN DIEGO For Office Use Only
DEPARTMENT OF HEALTH SERVICES
HAZARDOUS MATERIALS MANAGEMENT DIVISION (619) 330-2222
BUILDING DEPARTMENT
QUESTIONNAIRE
Businesses which handle, store, or dispose of hazardous substances will be
required to provide a chemical inventory and a basic emergency response plan
before a certificate of occupancy can be issued. This plan called a "Business
Plan" will become a valuable tool aiding you, your employees, and emergency
responders should an emergency occur at your business.
Certain hazardous substances called "Acutely Hazardous Materials" may require a
more detailed emergency response plan known as a "Risk Management and Prevention
Plan" (RMPP). If your business handles Acutely Hazardous Materials and will be
located within 1,000 feet of the outer boundary of a school (K thru 12) you may
be required to prepare an RHPP before a building permit can be issued.
A definition of hazardous substances and a list of Acutely Hazardous Materials
are available at the Hazardous Materials Management Division (HMMD) or your
local building department. To determine if your business needs to submit an
emergency plan, please complete this questionnaire.
Business Name (DBA) Contact Person Telephone
Mailing Address city State Zip
Site Address City zip
YES NO
1. ( ) ( ) Is your business type listed on the reverse side of
this form?
2. ( ) ( ) Will your business dispose of Hazardous Substances or
Medical Wastes in any amount?
3. ( ) ( ) Will your business store, or handle Hazardous
Substances in quantities equal to or greater than 55
gallons, 500 pounds or 200 cubic feet of compressed
gas?
4. ( ) ( ) Will your business use an existing, or install an
underground storage tank?
5. ( ) ( ) Will your business store, use or handle carcinogens,
reproductive toxins, or Acutely Hazardous Materials?
6. ( ) ( ) Will your business be located within 1,000 feet from
the outer boundary, of a school and handle Acutely
Hazardous Materials?
If the answer to any of the above questions are YES, your business will need to
prepare on emergency plan. Submit this questionnaire along with an application
fee of $100.00 made payable to "COUNTY OF SAN DIEGO" to:
In person - 1255 Imperial Ave., 3rd floor, San Diego.
CA 92101.
By mail - P.O. Box 85261, San Diego, CA 92138-5261
Attention: Business Plan Review
(Questionnaires will not be accepted
without an application fee.)
If all of the above questions are NO, return this questionnaire to your local
building department.
________________________________________________________________________________
Briefly Describe the Nature of the Business Activity or Process
________________________________________________________________________________
Printed Name of Owner or Authorized Agent Title
________________________________________________________________________________
I declare under penalty of perjury that to the Signature of Owner or BUILDING
best of my knowledge and belief the responses Authorized Agent INSPECTION
made herein are true and correct. DEPT.
PLAN FILE
NUMBER
Date ________ ______Init.______
________________________________________________________________________________
____________________________________________________
HMMD Use only: STATUS:
EXEMPT FROM HMMD HMMD APPROVED FOR BUILDING HMMD REQUIREMENTS HAVE
PERMIT REQUIREMENTS PERMIT OUT NOT FOR OCCUPANCY BEEN MET FOR OCCUPANCY
CONFIRMING STAMP CONFIRMING STAMP CONFIRMING STAMP
THESE STAMPS INDICATE ACCEPTANCE BY HAZARDOUS MATERIALS MANAGEMENT DIVISION
(HMMD) AND DO NOT DESIGNATE APPROVAL BY ANY OTHER AGENCY.
EXHIBIT F
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 23, 1996, in the Registration Statement (Form
S-1) and related Prospectus of Cypress Bioscience, Inc. for the registration of
shares of its common stock.
/s/ Ernst & Young LLP
-------------------------------
ERNST & YOUNG LLP
Seattle, Washington
July 10, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
registering 100,000 shares of common stock of our report dated March 15, 1994,
on our audit of the consolidated statements of operations, stockholders' equity
and cash flows of Cypress Bioscience, Inc. (formerly IMRE Corporation) for the
year ended December 31, 1993. We also consent to the reference to our firm
under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
July 15, 1996
