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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File No. 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact name of registrant as specified in its charter)
_______________
DELAWARE 22-2389839
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 452-2323
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $.02 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
UNITS CONSISTING OF TWO (2) SHARES OF
COMMON STOCK AND ONE (1) COMMON STOCK PURCHASE WARRANT
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 1, 1999 was $61,941,239.*
The number of shares outstanding of the Registrant's Common Stock as of March 1,
1999 was 41,552,750.
DOCUMENTS INCORPORATED BY REFERENCE: None
______________________
* Calculated based on 20,222,409 shares of Common Stock held as of March 1, 1999
by nonaffiliates and a per share market price of $3.063. Excludes 21,330,341
shares of Common Stock held by directors and executive officers and stockholders
whose ownership exceeds five percent of the Common Stock outstanding at March 1,
1999. Exclusion of such shares should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.
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CYPRESS BIOSCIENCE, INC.
FORM 10-K
INDEX
PART I
Page
----
ITEM 1 Business.......................................................... 1
ITEM 2 Properties........................................................ 15
ITEM 3 Legal Proceedings................................................. 15
ITEM 4 Submission Of Matters To a Vote of Security Holders............... 15
PART II
ITEM 5 Market For The Company's Common Stock And Related Security Holder
Matters........................................................... 16
ITEM 6 Selected Consolidated Financial Data.............................. 17
ITEM 7 Management's Discussion And Analysis Of Financial Condition
And Results Of Operations......................................... 18
ITEM 7A Quantitative and Qualitative Disclosure About Market Risk......... 23
ITEM 8 Financial Statements And Supplementary Data....................... 23
ITEM 9 Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure.......................................... 23
PART III
ITEM 10 Directors And Executive Officers Of The Company................... 24
ITEM 11 Executive Compensation............................................ 27
ITEM 12 Security Ownership Of Certain Beneficial Owners And Management.... 33
ITEM 13 Certain Relationships And Related Transactions.................... 34
PART IV
ITEM 14 Exhibits, Financial Statement Schedules And Reports on Form 8-K... 36
Signatures........................................................ 40
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PART I
Item 1. BUSINESS
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K contain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including, in particular, statements in this Annual Report about
the Company's plans, strategies and prospects. These statements, which may
include words such as "may," "will," "expect," "believe," "intend," "plan,"
"anticipate," "estimate," or similar words, are based on the Company's current
beliefs, expectations and assumptions and are subject to a number of risks and
uncertainties. Although the Company believes that its beliefs, expectations and
assumptions reflected in these statements are reasonable, the Company's actual
results and financial performance may prove to be very different from what the
Company might have predicted on the date of this Annual Report. Some of the
risks and uncertainties that might cause such differences are discussed below
and others are discussed in the Company's Annual Report on Form 10-K under the
heading "Risk Factors" beginning on page 13 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 22.
COMPANY OVERVIEW AND RECENT DEVELOPMENTS
Cypress Bioscience, Inc. (the "Company") researches, develops, manufactures
and markets medical devices and therapeutics for the treatment of certain types
of immune system disorders and is engaged in the development of novel
therapeutic agents for the treatment of blood platelet disorders. 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 received marketing approval from the U.S. Food and Drug
Administration ("FDA") in December 1987 to distribute the Prosorba column for
the treatment of idiopathic thrombocytopenic purpura ("ITP"), an immune-mediated
bleeding disorder. On March 16, 1999 the Company received marketing approval
from the FDA to distribute the Prosorba column for the treatment of moderate to
severe rheumatoid arthritis ("RA").
In 1996, the Company initiated a Phase IV marketing study for the use of
the Prosorba column in the treatment of ITP. However, the Company determined
that continued investment in the ITP market was not the best use of its
resources and terminated its ITP trial during the fourth quarter of 1997. The
Company's current clinical efforts to expand the approved indications for the
Prosorba column have been focused primarily on RA. In June 1996, the Company
commenced a prospective, randomized, multi-center, double blind, controlled
Phase III pivotal trial designed to confirm the findings of an earlier pilot
study evaluating the use of the Prosorba column in the treatment of RA. In
January 1998, the Company's Phase III clinical trial was stopped early due to
the achievement of favorable safety and statistically significant efficacy
results. Based on such results, the Company filed a Pre-Market Approval ("PMA")
application for the Prosorba column for the treatment of RA with the FDA in July
1998.
The Company appeared at a hearing before the FDA's Gastroenterology and
Urology Device Advisory Panel (the "FDA Panel") on October 29, 1998. The FDA
Panel recommended on that day to the FDA that the Prosorba column be approved
for the treatment of moderate to severe RA, subject to certain requirements. On
March 16, 1999, the Company received marketing approval for the Prosorba column
subject to the requirement that the Company conduct a post-marketing trial for
the treatment of RA with a combination of the Prosorba column and a disease
modifying anti-rheumatic drug ("DMARD"). The Company's anticipated commercial
launch in the United States for the Prosorba column for the RA indication is
April 5, 1999.
On March 26, 1999, the Company entered into a partnership with Fresenius
Aktiengesellschaft ("Fresenius AG"), a provider of blood processing products,
and Fresenius Hemotechnology, Inc. ("FHI"), a wholly-owned subsidiary of
Fresenius AG (collectively, the "Fresenius Parties"), for the co-marketing and
distribution of the Prosorba column in the United States and for the
registration and distribution of the Prosorba column in Europe, Mexico, the
Caribbean, Central America and South America. Subject to certain diligence
obligations, Japan, Thailand, China, New Zealand, Hong Kong, South Korea, India
and Canada also will be included in the territory. The partnership is based upon
a sharing of responsibilities for the Prosorba column related activities and a
sharing of profits from the sale of the Prosorba column in the U.S. territory
and separately in the non-U.S. territory. Pursuant to the Asset Purchase Option
Agreement, FHI also received an option, until the end of the year 2000, to
purchase the Company's manufacturing facilities in Redmond, Washington (the
"Option"). In connection with the Option, Fresenius AG agreed to extend a
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revolving line of credit to the Company in an amount equal to the purchase price
of the leasehold interest and non-inventory assets, the fair market value of
inventory on hand and as built and the cost of approved capital expenditures for
the manufacturing facility which is located in Redmond, Washington (the "Redmond
Facility"). The outstanding line of credit is evidenced by a promissory note and
the balance under the promissory note becomes payable on the earlier of (i) the
date on which FHI exercises the Option or (ii) the expiration of the Option (in
which event the promissory note is payable through the issuance of a new three-
year interest-bearing amortizing note). The total amount due under the
promissory note may be offset against the purchase price of the assets which
includes, among other items, the aggregate amount advanced by Fresenius AG under
the line of credit for capital expenditures at the Redmond facilities. On March
26, 1999, the Company entered into a promissory note and received approximately
$4.1 million in proceeds.
In addition, on March 26, 1999 Fresenius AG purchased 297,530 shares of
the Company's common stock for approximately $1.0 million or $3.361 per share
and purchased for $500,000 a three-year warrant to purchase 342,466 shares of
common stock for $7.50 per share. The Company also has called for redemption on
March 18, 1999 warrants to purchase approximately 2.7 million shares of common
stock at a price of $2.00 per share. The Company expects to receive net proceeds
of approximately $5.4 million from the exercise of the warrants.
The Company is also developing Cyplex(TM), a platelet alternative,
previously known as Infusible Platelet Membranes ("IPM") as an alternative to
traditional platelet transfusions. The Company initiated a double-blinded Phase
II controlled clinical trial of Cyplex(TM) as an alternative to traditional
platelet transfusions in March 1998 which the Company terminated in September
1998.
The Prosorba(R) Column
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The Company's Prosorba 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 the Prosorba column
therapy, blood is drawn from one arm of the patient, plasma and blood cells are
separated, the plasma is filtered through the Prosorba column to remove unwanted
CICs and IgG, then combined with the red blood cells and returned to the
patient's other arm. The Prosorba column therapy is usually administered on an
outpatient basis. The Company received marketing approval from the FDA in
December 1987 to distribute the Prosorba column for the treatment of ITP, an
immune-mediated bleeding disorder and in March 1999 to distribute the Prosorba
column for the treatment of moderate to severe RA.
The Prosorba 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 column treats a dysfunctional immune system response rather
than treating the disease itself. The Company is providing financial support
for an extramural program with leading academic laboratories to study the
mechanisms of action of the Prosorba column.
The Prosorba 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 preference for CICs. The FDA considers the
Prosorba column to be a medical device. A patient is treated with the Prosorba
column once a week for 12 weeks. The treatment process is similar to dialysis.
The patients blood is slowly removed, the plasma is separated and treated with
the Prosorba column. The treated plasma and blood is then retransfused into the
body.
The Company believes that key factors in its commercial performance will be
its ability to commercially launch the Prosorba column in the RA market and
achieve significant market penetration, and reimbursement coverage from private
and public insurance plans.
Rheumatoid Arthritis
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RA is a potentially crippling autoimmune disease that in 1997 was estimated
to affect approximately 2.5 million people in the United States and
approximately 3.5 million people in Europe and Japan. In RA, 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
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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 column for therapy in RA. 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
treatment with the Prosorba column. The Company believes that these findings
confirm the potential utility of the Prosorba column in treating RA reported by
an earlier independent study published in the JOURNAL OF RHEUMATOLOGY in May
1994.
In 1996, the Company began providing financial support to several leading
research facilities in the form of grants and contractual support to further
efforts in studying the mechanism of action of the Prosorba column in the
treatment of RA. For the years ended December 31, 1998 and 1997, the amounts of
financial support provided by the Company were approximately $152,000 and
$148,000, respectively.
In June 1996, the Company commenced a prospective, randomized, multi-
center, double blind, sham controlled Phase III pivotal trial designed to
confirm the findings of the pilot study in a larger group of patients. The
patients were randomly entered into two treatment groups with approximately half
of the patients treated with the Prosorba column and the other half of the
patients with a placebo treatment.
In January 1998, the Company announced that an independent Data Safety and
Monitoring Board ("DSMB") recommended the early cessation of the Company's Phase
III clinical trial evaluating the use of the Prosorba column in the treatment of
RA. The recommendation to end enrollment in the Phase III trial was based on the
achievement of favorable safety and statistically significant efficacy results.
In July 1998, the Company filed a PMA application for submission to the FDA
requesting new labeling for the Prosorba column to incorporate the RA
indication. The Company appeared at a hearing before the FDA's Panel on October
29, 1998. The FDA Panel recommended on that day to the FDA that the Prosorba
column be approved for the treatment of moderate to severe RA, subject to
certain requirements. On March 16, 1999, the Company received marketing approval
for the Prosorba Column for use in the treatment of moderate to severe RA. A
condition of approval of the Prosorba column by the FDA was that Cypress agree
to conduct a Phase IV study of the Prosorba column used with concomitant
methotrexate therapy. Phase IV trials are post-marketing studies in order to
gather additional data concerning the product's performance after commercial
sales begin. In this case, Cypress will study the safety and effectiveness of
the Prosorba column in patients who continue to take a common rheumatoid
arthritis medication, methotrexate.
Cyplex(TM) (Infusible Platelet Membranes), A Platelet Alternative
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The Company's strategy is to produce therapeutic agents that enhance,
inhibit, modify or replace the natural activity of platelets that have been
depleted or damaged by disease or therapy. In November 1996, the Company
acquired PRP, Inc ("PRP"). PRP's primary product, Cyplex(TM) (Infusible
Platelet Membranes), a platelet alternative, which is still in the clinical
research phase, is being developed as a potential substitute for traditional
platelet transfusions. Currently, the Company is focusing most of its efforts
related to PRP on the development of Cyplex(TM), a freeze-dried (lyophilized)
powder prepared from either fresh or outdated human platelets. A proprietary
production process removes interior platelet components, resulting in a product
consisting primarily of platelet membrane fragments. Cyplex(TM) is heat-treated
during processing to inactivate, below any detection levels, viruses (HIV,
hepatitis, etc.) that may be present. Preclinical and clinical trials conducted
to date have shown that Cyplex(TM) is not thrombogenic or immunogenic, and no
dose limiting toxicity has been noted in humans or animals. The lead indication
for Cyplex(TM) is as an alternative to platelet transfusions to restore control
of bleeding due to platelet deficiency in refractory patients.
Treatment of Thrombocytopenia
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If blood platelet levels become too low (severe thrombocytopenia), the
hemostasis system begins to deteriorate. Left untreated, thrombocytopenia can
lead to spontaneous bruising and bleeding and may progress to shock, circulatory
collapse, and death. Thrombocytopenia is a common side effect of the chemo- and
radiation
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therapies used to treat cancer and can also be caused by liver disease or by
major blood loss from traumatic injuries. Platelet dysfunction that is similar
in consequence to thrombocytopenia is caused by prolonged exposure to some
medical devices, such as heart-lung bypass machines used in open-heart surgery.
Thrombocytopenia is currently treated with transfusion of human platelets.
In 1992, sales of platelets to hospitals for this purpose were about $1.3
billion worldwide, including approximately $550 million in the U.S. The Company
estimates that associated costs with platelet transfusions, including filters,
HLA cross matching and donor recruitment add another approximately $200 million
in the U.S. Platelet usage in the U.S. grew at an average annual rate of about
5% to 7% since 1987, and the Company expects this growth to continue for at
least the next several years. Cyplex(TM) has the potential to replace a major
fraction of platelet transfusions for thrombocytopenia.
Platelet transfusion is generally an effective therapy, but it has a number
of significant drawbacks. Cyplex(TM)'s characteristics allow it to overcome a
majority of the disadvantages of platelet transfusion, as summarized in the
table below:
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Human Platelets Cyplex(TM) Benefits Cyplex(TM) Economic Impact
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Can transmit viruses Viral Inactivation Increased safety, reduced
liability and testing
costs
Patients frequently Does not induce Reduced hospitalization,
become alloimmunized* alloimmunization no platelet typing,
improved outcomes
Platelets do not Cyplex(TM) controls Reduced morbidity and
control bleeding bleeding in many mortality
in some patients of these patients
Shelf life of Shelf life greater Reduced loss from out-
3 to 5 days than one year dating, emergency
availability, improved
logistics and reduced
infrastructure
Must be agitated Vial in refrigerator Reduced storage costs
constantly
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*Alloimmunization is the process whereby the body develops antibodies to
platelets that cause later transfusions to be ineffective.
In addition to safety and toxicity testing in animals and humans, the
Company recently concluded a trial designed to study efficacy in patients with
low platelet counts during active bleeding episodes. The Phase II trial, which
began in early 1996, showed that Cyplex(TM) controlled or halted bleeding in 17
of 26 patients, a 65% response rate. Of the 26 patients, 12 had previously not
responded to platelet transfusions, the traditional therapy for uncontrolled
bleeding. In this subgroup of refractory non-responders, Cyplex(TM) was
effective in controlling or halting bleeding in 7 out of 12 patients, or 58% of
the time.
In February 1998, the Company entered into a collaborative agreement with a
leading Dutch manufacturer and supplier of blood derivatives, as well as having
a strong tradition of research. The collaboration is on process development and
scale-up of Cyplex(TM). The collaborative work is intended to accelerate
commercialization of Cyplex(TM) and to broaden its potential market beyond
patients who are resistant to platelet transfusions.
Potential Follow-on Indications
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The Company believes that Cyplex(TM) may also be useful as an adjunct to
cardiac surgery or angioplasty. Of the nearly 800,000 patients who currently
undergo angioplasty to open blocked arteries worldwide each year, approximately
30% to 45% will suffer postangioplasty restenosis. A key factor in the
development of restenosis is exposure of smooth muscle proliferation in the
artery walls to platelet derived growth factor ("PDGF") causing smooth muscle
proliferation. This happens when the patient's platelets adhere to injuries in
the artery walls that are always produced as a side effect of the angioplasty
procedure. After adhesion, the platelets become activated, release their
interior components, including PDGF and various coagulation-inducing factors.
If platelets can be prevented from adhering to these injured areas, they will
not become activated and thus not release PDGF, and, therefore, will not
contribute to restenosis. Both animal and in-vitro work at the Company have
shown that Cyplex(TM) binds to arterial lesions and thereby reduces platelet
adhesion. Work at the Company and elsewhere has shown that Cyplex(TM) can also
carry anti-platelet agents to the lesions and, in principle, concentrate
activity of those agents to further reduce platelet adhesion.
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Other areas of potential interest include the use of Cyplex(TM) during open
heart surgery to prevent peri-operative bleeding and other complications, the
use of Cyplex(TM) to prevent or control bleeding that can result from the use of
anti-platelet agents, (in particular anti-GP IIb/IIIa agents), and the use of
Cyplex(TM) in disseminated intravascular coagulation.
Cyplex(TM) may also be studied in general surgical and emergency room
indications such as trauma. Efficacy in preventing or improving bleeding in
these indications could have great benefits in situations where the storage of
human platelets presents logistical difficulties, such as in military use and in
rural areas, and in situations in which there are potential imbalances between
supply and demand (e.g., in liver transplants which require hundreds of units of
platelets).
MARKETING AND SALES
Prior to 1994, the Prosorba column was sold by the Company's internal sales
force to physicians in the fields of immunology, hematology and oncology. In
April 1994, Baxter assumed sales and marketing responsibilities under a 10-year
exclusive distribution agreement, granting distribution rights of the Prosorba
column in the United States and Canada for the treatment of ITP. Effective May
1, 1996, the Company and Baxter terminated the exclusive distribution agreement,
and the Company regained marketing rights. In August 1996, the Company
established an internal sales and marketing program. The program included hiring
a domestic sales force of approximately six representatives as well as
initiating marketing efforts including medical education, direct mail, trade
show participation and limited journal advertising.
In the latter part of 1996, the Company launched a controlled clinical
study evaluating the efficacy of the Prosorba column in ITP. This was the first
prospective and controlled study of the device in its approved indication and
was designed to confirm observations from 10 years of historical use. Increased
competition for patients from other ITP studies caused enrollment to be below
expectations. The increased competition and low enrollment caused the Company
to re-evaluate its ability to complete the study in a timely and cost effective
manner. In light of more promising opportunities in the RA market, the Company
determined that continued investment in the ITP market was not the best use of
its resources.
As of March 26, 1999, the Company will market the Prosorba column in both
RA and ITP indications with the Fresenius Parties. The Company and the Fresenius
Parties will have the joint responsibility to co-market the Prosorba column in
the U.S. The Company will take the lead in marketing the Prosorba column to
rheumatologists who will prescribe the Prosorba column for RA treatment (the
Company's present marketing strategy) and the Fresenius Parties will be
responsible for introducing the Prosorba column to providers such as renal
dialysis centers and other apheresis providers that can perform the treatment
using the Prosorba column (a marketing strategy that the Company has not yet
employed). Effective January 4, 1999, the Company increased its direct sales
force from 3 to 17 and the Company anticipates that it may have to increase its
direct sales staff as sales grow. The Fresenius Parties have exclusive
distribution rights and responsibility for clinical trial and regulatory
registration outside the United States. The agreement includes a 50/50 profit
split in the territories other than the U.S. The profit sharing is 50/50 in the
U.S. until the Prosorba column revenue reaches a pre-determined sales threshold
within a contract year, after which time the Company will receive 60% of the
profits for such contract year and the Fresenius Parties will receive 40%. In
addition, the Company is entitled to receive up to $54 million in license
payments upon the achievement of certain cumulative net sales of the Prosorba
column (subject to conditions relating to the timing of such payments). In the
United States, the license payments are payable in some cases in cash and in
others in equity investments by Fresenius at market prices, and in the non-U.S.
territory, the license payments are payable in cash.
The agreement defines profits as net sales of the Prosorba column (and in
the United States only, net sales of Fresenius disposables) less the following
deductions in order (i) cost of goods sold (as defined in the agreement without
any markup for corporate allocations of overhead and without any profit margin),
(ii) royalties payable to third parties, (iii) the cost of clinical trials and
research and development approved by the steering committee (which will include
the costs of the mandatory Phase IV trial in the U.S.) and (iv) sales and
marketing expense of up to 20% of net sales for the applicable period (with 15%
allocated to the Company in the U.S. and 5% to the FHI and 20% allocated to
Fresenius in the non-U.S. territories). The U.S. and the non-U.S. territories
are each separate profit
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sharing centers. During the first two years of the partnership, the Company
expects to spend up to $9 million in sales and marketing expenses in excess of
the 15% of net sales allocated to the Company due to the product launch costs.
If net sales during the first two years are higher than expected, the Company
may be able to recover all or a portion of its unreimbursed sales and marketing
expenses pursuant to the agreement. The Company also is responsible for paying
for any operating losses of the manufacturing facility that are incurred during
calendar year 1999, prior to Fresenius' exercise of the option.
Generally, in the United States the cost of treatment for ITP using the
Prosorba column has been reimbursed by third-party payors. The Company
anticipates that the cost of treatment for RA using the Prosorba column will be
reimbursed by third-party payors, although the process for obtaining
reimbursement from government and private payors may take a year or more. Under
the partnership with the Fresenius Parties, the Company has the lead
responsibility in the United States for arranging for third-party reimbursement.
No customer represented more than 10% of the Company's annual sales during
the years ended December 31, 1997 and 1996, respectively. For the years ended
December 31, 1995 and 1994, sales to Baxter represented approximately 91% and
70%, respectively, of the Company's sales.
Sale of the Prosorba column is not subject to seasonal fluctuation.
PATENTS, TRADEMARKS 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 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 Prosorba Column
- -------------------
The Company presently owns ten issued U.S. patents and two international
patents (excluding patents relating to the area of platelet therapeutics) which
expire during 2004 to 2015. The process used in manufacturing the Prosorba
column is covered by several of these patents. Pursuant to the License and
Distribution Agreement, the Company has granted to the Fresenius Parties an
exclusive license under certain patents related to the Prosorba column to
manufacture, use and distribute the Prosorba column in the territory for use in
the treatment of ITP, RA and any other indications that are approved by the FDA.
See "-- Company Overview" and "-- Marketing and Sales". Certain patents cover
the use of the Prosorba column in the treatment of ITP and RA. U.S. and
international applications are pending.
The Company also owns the registered trademark Prosorba(R) in the United
States and other jurisdictions. The Company expects that the value of its
trademark will increase with sales of the Prosorba column for RA. The Company
intends to enforce its trademarks and brand names.
Cyplex(TM) (Infusible Platelet Membranes), A Platelet Alternative
- -----------------------------------------------------------------
The Company presently owns seven issued U.S. patents and three pending U.S.
patent applications relating to the area of platelet therapeutics. Certain
international patent applications corresponding to the issued U.S. patents have
been filed. To date, four foreign patents have been issued while others are
still pending in countries or jurisdictions outside the U.S. These patents and
those that might be issued on the pending patent applications are scheduled to
expire during 2010 to 2015.
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General
- -------
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.
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.
The Company has nonexclusive licenses to certain third-party patents
relating to the Prosorba column for which the Company pays royalties based upon
the Prosorba column sales. These licenses have been sublicensed to the
Fresenius parties.
GOVERNMENT REGULATION
The Company's research and development activities and the future
manufacturing and marketing of products by the Company are subject to regulation
for safety and efficacy by numerous governmental authorities in the United
States and other countries. In the United States, both biologics and medical
devices are subject to rigorous FDA regulation. The Federal Food, Drug and
Cosmetic Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products. In addition to the FDA regulations, the
Company is also subject to other federal and state regulations such as the
Occupational Safety and Health Act and the Environmental Protection Act.
Product development and approval within this regulatory framework takes a number
of years and involves the expenditure of substantial resources. In addition,
there can be no assurance that this regulatory framework will not change or that
additional regulation will not arise at any stage of the Company's product
development which may affect approval or delay of an application or require
additional expenditures by the Company.
The Company's regulatory strategy is to pursue clinical development and
marketing approval of its products worldwide. The Company intends to seek input
from the FDA at each stage of the clinical process to facilitate appropriate and
timely clinical development, focusing on issues such as trial design and
clinical endpoints. Where appropriate, the Company intends to pursue available
opportunities, to the extent available, for accelerated approval of products. A
corporate partner may be helpful to accelerate international development.
The time required for completing such testing and obtaining such approvals
is uncertain and approval itself may not be obtained. In addition, delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each submitted New Drug
Application ("NDA") or Product License Application ("PLA"). Similar delays may
also be encountered in foreign countries. There can be no assurance that even
after such time and expenditures, regulatory approval will be obtained for any
products developed by the Company. Moreover, if regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
the product may be marketed. Further, even if such regulatory approval is
obtained, a marketed product, its manufacturer and the facilities in which the
product is manufactured are subject to continual review and periodic
inspections. Late discovery of previously unknown problems with the product,
manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.
Whether regulated by the FDA as a medical device or biologic, or otherwise
by any state or foreign authorities, the approval process for any of the
Company's products is expensive and time consuming and no assurance can be given
that any regulatory agency will grant its approval. There is no assurance that
the Company will have sufficient resources to complete the required testing and
regulatory review processes. Furthermore, the Company is unable to predict the
extent of adverse governmental regulation, which might arise from future United
States, or foreign legislative or administrative action.
7.
<PAGE>
The Prosorba Column
- -------------------
The Prosorba column is regulated by the FDA as a Class III medical device.
The regulatory approval of a Class III medical device in the United States
intended for therapeutic use in humans involves many steps including pre-
clinical and clinical testing. Pre-clinical 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. Pre-clinical and clinical
evaluation of the Prosorba 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 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
pre-clinical safety and effectiveness studies, and (iv) a design of the study
and protocol.
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 may be reviewed by an advisory panel of medical experts who are not
part of the FDA. The applicant is required to answer questions posed by this
panel. Based upon 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 FDA approval process is
lengthy and expensive and there can be no assurance that FDA approval will be
received for any particular product on a timely basis, if at all. 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 Good
Manufacturing Practices ("GMP") regulations. Failure to comply with the GMP
regulations or with other applicable legal requirements can lead to federal
seizure of violating 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 and RA with the Prosorba 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, or that it will be economically feasible to
commercialize the Prosorba 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. As a condition to the
approval of the PMA for the treatment of moderate to severe RA, the Company has
agreed to perform a post-market approval Phase IV clinical trial to determine
the safety and effectiveness of a combination treatment of RA with the Prosorba
column and methotrexate, a DMARD.
In addition to the mandatory Phase IV clinical trial, the Company, subject
to Steering Committee approval, may elect to conduct additional trials on the
use of the Prosorba column following the failure of other RA drugs or treatments
in order to enhance marketability of the Prosorba column. While the Company
expects that the clinical trial data will enhance marketability of the Prosorba
column, the results of clinical trials are unpredictable and could adversely
affect FDA approval of the Prosorba column, product labeling, potential sales of
the Prosorba column and/or withdrawal of FDA approval and thereby adversely
affect the financial results, financial condition and prospects of the Company.
Product marketing approvals may be withdrawn for noncompliance with
regulatory standards or the occurrence of unforeseen problems following initial
marketing.
The Prosorba column is commercially distributed for use in the treatment of
ITP under a PMA that was approved by the FDA in 1987 and for the treatment of
moderate to severe RA under a PMA that was approved by the FDA in March 1999.
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 completed and received approval for a supplement to the PMA in
connection with the treatment of ITP with the FDA for the consolidation of its
8.
<PAGE>
manufacturing facilities into one site in April 1997. There can be no assurance
that any future supplements will be approved by the FDA.
Fresenius AG will be responsible for obtaining CE approval for the Prosorba
column in Europe and obtaining any other registrations or regulatory approvals
in the territory outside the United States. The Company expects that
Fresenius AG will obtain the European CE approval within the next one to two
years.
Cyplex(TM) (Infusible Platelet Membranes), A Platelet Alternative
- -----------------------------------------------------------------
Cyplex(TM) is regulated by the FDA as a biologic. The steps required before
a biologic may be marketed in the United States include (i) preclinical
laboratory and animal tests, (ii) the submission to the FDA of an application
for an Investigational New Drug Application ("IND"), which must become effective
before human clinical trials may commence in the United States, (iii) adequate
and well-controlled human clinical trials to establish the safety and efficacy
of the biologic, (iv) the submission of a PLA to the FDA and (v) the FDA
approval of the PLA prior to any commercial sale or shipment of the biologic. In
addition to obtaining FDA approval for each product, each domestic biologic
manufacturing establishment must be registered with, and approved by, the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the biologic to healthy
volunteers, or to patients identified as ones with the condition for which the
biologic is being tested, under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety,
and the efficacy criteria to be evaluated. Each protocol is submitted to the
FDA as part of the IND. Each clinical study is conducted under the auspices of
an independent Institutional Review Board ("IRB") at the institution at which
the study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the biologic into
healthy human subjects, the product is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and clinical pharmacology.
Phase II involves studies in a limited patient population to (i) determine the
efficacy of the drug for specific targeted indications, (ii) determine dosage
tolerance and optimal dosage and (iii) identify possible adverse side effects
and safety risks. When a compound is found to be effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further evaluate clinical efficacy and to test further for safety
within an expanded patient population at multiple clinical study sites. The FDA
reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a NDA or PLA for marketing approval. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The approval process is affected by a number of factors, including the severity
of the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review period and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials may be necessary to gain approval for the use of the product for
additional indications. The FDA mandates that adverse effects be reported to
the FDA and may also require post-marketing testing to monitor for adverse
effects, which can involve significant expense.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing facilities are
subject to biennial FDA inspections and foreign manufacturing facilities are
subject to periodic FDA inspections or inspections by the foreign regulatory
authorities with reciprocal inspection agreements with the FDA.
9.
<PAGE>
The Prescription Drug Act of 1992 requires companies engaged in
pharmaceutical development, such as the Company, to pay user fees in the amount
of at least $100,000 upon submission of a PLA. The Company does not believe
that this requirement will have a material adverse effect on the Company's
business.
For marketing outside the United States, the Company also is subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country.
COMPETITION
The Prosorba Column
- -------------------
The Prosorba 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 medical companies and research
institutions, including a recombinant protein based drug that is believed to
block tumor necrosis factor and relieve inflammation associated with RA that was
recently approved by the FDA. Many of the Company's current and potential
competitors have significantly greater resources than the Company. The Prosorba
column, represents a different approach to the treatment of immune-related
diseases inasmuch as they focus on the removal of CIC's that are suppressive to
the body's immune system. 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 both ITP and RA.
The Company believes that its success will depend primarily on, among other
things, the market acceptance of its therapeutic approach, its scientific
expertise, the Prosorba column's performance measured against competing
products, adequate funding, the outcome of Phase IV clinical trials, and on its
ability to develop, protect, and market products in the future. The Company's
competitive success will also depend on 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.
Cyplex(TM) (Infusible Platelet Membranes), A Platelet Alternative
- -----------------------------------------------------------------
When and if the Company receives FDA approval for Cyplex(TM), it will
initially be launched for the control of bleeding in patients who are non-
responsive to platelet transfusions. There are currently no competing therapies
for such platelet-refractory patients. With respect to the remaining platelet
market, Cyplex(TM)'s advantages over traditional platelet therapy support its
usage. Cyplex(TM) also has several advantages over its closest competition, CMV-
free leukodepleted single-donor platelets. Products in development to filter or
virally deactivate platelets will only address one of the five advantages of
Cyplex(TM). The most important clinical advantage of Cyplex(TM) is its
nonimmunogeinicity, which, the Company believes, no other competitive product in
development currently addresses. There can be no assurance, however, that other
parties will not develop competing therapies.
MANUFACTURING AND SUPPLY
The Company believes that raw materials and other components are available
in sufficient quantities to meet production requirements for the Prosorba
column. The Company's principal manufacturing operations for its Prosorba column
are based in Redmond, Washington at the Redmond Facility. The Company recently
added an additional 21,000 square feet to its Redmond Facility in anticipation
of scaling up its production of the Prosorba column to meet the expected
increase in Prosorba column sales. The Company expects to make substantial
capital investments in connection with the scale-up, including the replacement
of existing equipment and other process improvements. The Company has granted to
FHI a two-year option to purchase the leasehold title and other manufacturing
assets of the Redmond Facility. If FHI exercises its option, the Company will no
longer have a facility to manufacture the Prosorba column. However, the
Fresenius Parties have agreed to supply the Company
10.
<PAGE>
with the Prosorba column for its clinical trial needs and for sales outside the
territory for as long as the Company requires and will do so on favorable terms
to the Company.
The Company has retained all rights to Cyplex(TM) and its Cyplex(TM)-
related manufacturing and research and development equipment. If FHI acquires
the Redmond Facility, the Company will not have a facility in which to produce
Cyplex(TM). The Company believes it currently has adequate supplies of
Cyplex(TM) to conduct ongoing clinical trials and does not anticipate having to
replace the Cyplex(TM) manufacturing capability during the next 12 months.
However, the Company may have to rely on contract manufacturing or purchase or
build a new manufacturing facility in the future to meet its Cyplex(TM) supply
needs.
Upon termination of the Fresenius partnership for any reason other than the
Company's breach, the Fresenius Parties have a continuing obligation to supply
the Prosorba column to the Company, subject to a termination right that requires
36 prior months prior notice and the payment of substantial amounts to enable
the Company to resume manufacturing the Prosorba column.
The Company has single sources of supply for certain components but
believes it could obtain alternate sources of supplies if its current suppliers
were unable to provide the Company with adequate quantities of such components.
There can be no assurance that the Company will resume the production of
Cyplex(TM) on a timely basis, or that it will have an adequate supply of
Cyplex(TM) to complete its Phase II clinical trial. Further, there is no
assurance that if FHI acquires the Redmond Facility, the Company would be able
to resume manufacturing the Prosorba column in a timely manner.
EMPLOYEES
As of March 1, 1999, the Company employed approximately 56 full-time
employees, including 21 employed in sales and marketing, 20 employed in
manufacturing, 6 employed in research and development, and 9 employed as
administrative and support staff. None of the Company's employees is covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
11.
<PAGE>
RISK FACTORS
Commercial Launch of the Prosorba Column for the Rheumatoid Arthritis Indication
- --------------------------------------------------------------------------------
Since we have recently received FDA approval for the use of the Prosorba
column for the treatment of moderate to severe RA, we are planning the
commercial launch of the Prosorba column in the RA market. We have spent
considerable time and expense in obtaining FDA approval for the RA indication.
Pursuant to our agreement with the Fresenius Parties, we must incur significant
additional expense and assume most of the risk associated with the market launch
and ongoing sales and marketing of the Prosorba column in the United States and
we must share any profits (as defined in our agreement). The success of our
product launch will depend upon, among other things, acceptance of the product
by leading physicians and medical groups, availability and convenience of
treatment centers, availability of insurance reimbursement, effectiveness of our
and the Fresenius Parties' marketing strategy and competition. We cannot assure
you that the commercial launch of the Prosorba column will be successful and
achieve sales levels that enable us to become a profitable company in the
future.
Insurance Reimbursement
- -----------------------
Successful commercialization of a new medical product, such as the Prosorba
column for the RA indication or Cyplex(TM), platelet alternative, depends on
reimbursement by public and private health insurers to health care providers for
use of such products. Such reimbursement may not be available due to a variety
of factors, many of which could affect us as we commercialize use of the
Prosorba column for RA and continue the development and commercialization of
Cyplex(TM), platelet alternative. We have generally been successful in assisting
health care providers in arranging reimbursement for the use of the Prosorba
column in the treatment of ITP. We cannot assure you, however, that public and
private insurers will agree to reimbursement of the use of the Prosorba column
for RA indications or the Prosorba treatment on a basis that bundles the column
and treatment costs of dialysis and other apheresis centers. We expect that it
may take several years to gain favorable reimbursement status from managed care
and other private third-party payors. The ability to obtain reimbursement may
also depend on the data from the Phase IV clinical trials or in the treatment of
any other disease indications approved by the FDA. In addition, we do not know
whether health care providers will reimburse us for the use of Cyplex(TM),
platelet alternative.
Our Sales Force
- ---------------
We recently hired thirteen new sales representatives for the commercial
launch of the Prosorba column for the treatment of RA. To date, our sales force
has made commercial sales of the Prosorba column only for use in the treatment
of ITP. Our sales force, including our recent new hires for the commercial
launch, have had no experience in marketing the Prosorba column for use in the
treatment of disease indications other than ITP, and there can be no assurance
that, the Company's sales force will be successful in marketing the Prosorba
column for RA or any other such use. The Company's marketing strategy depends in
part on gaining medical association support and the support of leading opinion
leaders in the rheumatology community. There is no assurance that our sales
force will succeed in gaining this acceptance. Any such failure to successfully
market the Prosorba column for RA, or any other disease indications other than
ITP could have a material adverse effect on our business.
In addition, there can be no assurance that our sales force will be
successful in marketing Cyplex(TM) or any other products we may develop, if and
when we receive FDA approval for and we are able to commercialize for sale any
such products. Any such failure to receive FDA approvals or otherwise
successfully market our products could have a material adverse effect on our
business.
Competitive Environment; Technological Change; Effectiveness of Products
- ------------------------------------------------------------------------
The health care field in general and the particular areas in which we
market our products are extremely competitive. In developing and marketing
medical devices to treat immune-mediated diseases, we compete with other
products, therapeutic techniques and treatments offered by national and
international healthcare and pharmaceutical companies, many of which have
greater marketing, human and financial resources than we do. In
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<PAGE>
addition, we expect to compete with new products and therapeutic techniques and
treatments that are in various stages of clinical development, some of which are
expected to ultimately receive FDA approval.
The immunological therapy market is characterized by rapid technological
change and potential introductions of new products or therapies. To respond to
these changes, we may be required to develop or purchase new products to protect
our technology from obsolescence. We may not be able to develop or obtain such
products. Even if we develop or obtain new products, such products may not be
commercially viable. In addition, we cannot assure you that our Prosorba column
will prove effective in the treatment of RA or that Cyplex(TM), platelet
alternative, if approved for sale by the FDA, will be an effective alternative
to traditional platelet therapy. If the Prosorba column fails to be effective
in the treatment of RA or if Cyplex(TM), platelet alternative, fails to be an
effective alternative to traditional platelet therapy, our entire business will
be materially adversely affected.
Need for Additional Capital
- ---------------------------
As part of the Fresenius transaction, we recently received gross proceeds
of $1.0 million from the sale of our common stock, $500,000 from the issuance of
a warrant to purchase 342,466 shares at an exercise price of $7.50 per share,
and approximately $4.1 million under a revolving line of credit. We expect to
receive approximately $5.4 million in net proceeds from the exercise of
approximately 2.7 million in outstanding warrants assuming all holders exercise
their warrants. The outstanding publicly traded warrants priced at $2.00 per
share will be redeemed on April 19, 1999 for all holders who fail to exercise
their warrants on or prior to 5:00 p.m. (New York time) on April 12, 1999. As a
result of these fundraising activities, we believe we have adequate working
capital to fund the commercial launch of the Prosorba column for the RA
indication, and to develop new and complete existing research. However,
depending upon product sales volumes and other factors during the next 12
months, we may need to raise additional capital to complete the Prosorba column
launch and the expenses not being covered through the Fresenius partnership. In
addition, if we decide to continue the development of products other than the
Prosorba column and Cyplex(TM), platelet alternative, we will be required to
raise additional capital. The amount of capital we will require is difficult to
predict, and we cannot assure you that we will be able to raise any additional
capital from any source. If we are unable to obtain additional financing, we may
have to scale back our marketing expenses on the Prosorba column for the RA
indication and delay, scale back or eliminate some or all of our research and
development activities. In addition, we may be required to license to third
parties technologies that we would otherwise seek to develop ourselves, to seek
financing at potentially higher costs to us or to seek additional methods of
financing. These results may have a detrimental effect on our financial
condition and could prevent us from realizing our long-term goals.
History of Operating Losses
- ---------------------------
We are operating at a loss and have been operating at a loss since our
formation in October 1981. As of December 31, 1998, we had an accumulated
deficit of approximately $80.0 million. Our ability to become profitable
depends upon our ability to launch the Prosorba column in the United States for
the treatment of RA and the ability of the Fresenius Parties to market the
Prosorba column in the United States and outside the United States to apheresis
providers. Under the profit sharing arrangement with Fresenius AG, we expect to
have to invest a substantial amount of additional working capital during the
first two years and do not expect to be profitable unless we succeed in
achieving expected Prosorba sales volumes and rates of sales growth we will not
become profitable.
FDA Approval and Regulations
- ----------------------------
As a condition to the FDA's approval of our PMA for the Prosorba column for
the treatment of RA, we are obligated to conduct a Phase IV clinical trail on
the use of the Prosorba column in combination with a DMARD. We are in the
process of finalizing the protocol for the Phase IV trial which we expect will
require a significant number of clinical trail patients and take approximately 2
to 4 years to complete (depending upon the number of patients and enrollment
rates). The Phase IV trials costs are shared with the Freeness Parties through
the profit sharing mechanism but will reduce profits. In addition, outcome of
the Phase IV trials could adversely affect our FDA approval of the Prosorba
column for the RA indication, including changes to our product labeling,
potential sales of the Prosorba column and/or withdrawal of FDA approval.
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 for, our product. We believe that
government and private efforts to contain or reduce health care costs are likely
13.
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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.
Uncertainty of Patent Protection and Claims to Technology
- ---------------------------------------------------------
As a policy, we seek to protect our proprietary technology and inventions
which are used in the Prosorba column and Cyplex(TM), platelet alternative,
through patents, trade secret law and other legal protections. We may, however,
incur significant expense in protecting our intellectual property and defending
or assessing claims with respect to intellectual property owned by others. Any
patent or other infringement litigation by or against us could result in
significant expense to us and diversion of our management resources, which in
turn could have an adverse effect on our financial performance. The process used
in manufacturing the Prosorba column is covered by one of various patents that
we hold; however, we cannot assure you that this patent will afford significant
protection of our proprietary technology. We also could be forced to modify or
abandon the Prosorba column or Cyplex(TM), platelet alternative, based upon our
assessment of intellectual property risks or actual or threatened claims by
others. Since the Prosorba column is our only FDA approved product, our entire
business will be materially adversely affected if we are unable to sell that
product.
Others have filed applications for, or have been issued, patents and may
obtain additional patents and other proprietary rights competing with our
products or processes. Although we do not presently know the scope and validity
of these patents, if existing or future patents are upheld as valid by courts,
we may be required to obtain licenses to use technology covered by these
patents.
Product Liability
- -----------------
The use of the Prosorba column and, if approved for use by the FDA,
Cyplex(TM), platelet alternative, may result in adverse side effects to the end-
users that could expose us to product liability claims. We currently hold
product liability insurance of $15 million, which we believe is adequate in
light of our business. However, we cannot predict all the possible harms or side
effects that may result from treatment of patients with our products and
therefore, we cannot assure you that the amount of coverage we currently hold
will be adequate to protect us. We also cannot assure you that we will have
sufficient resources to pay any liability resulting from such a claim beyond our
insurance coverage.
Hazardous Material
- ------------------
Our 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 we believe that our 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, we
could be held liable for any damages that result, and any such liability could
exceed our resources.
Limitation of Net Operating Loss Carryforwards
- ----------------------------------------------
Our sales of common stock in September 1991 and October 1997 caused the
limitation of Section 382 of the Internal Revenue Code of 1986, as amended, to
be applicable. This limitation will allow us to use only a portion of the net
operating loss carryforwards to offset future taxable income, if any, for
federal income tax purposes. Based upon the limitations of Section 382, we may
be allowed to use no more than a prescribed amount of such losses each year to
reduce taxable income, if any. To the extent not utilized by us, 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 1999 to 2012.
14.
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Item 2. PROPERTIES
The Company currently occupies approximately 8,000 square feet of leased
office space in San Diego, California. The San Diego facility houses the
Company's executive and administrative offices.
The Company recently entered into a sublease in February 1999 for 21,000
square feet for a manufacturing facility in Redmond under a lease expiring in
May 2005. The Company entered into such lease in order to expand its
manufacturing operations.
The Company leases an additional 6,916 square feet for its manufacturing
facility in Redmond under a lease expiring in 2004. The facility has
historically been used to produce commercial quantities of both protein A and
the chemically coated silica matrix used in the manufacture of the Prosorba
column. The Redmond Facility received FDA GMP approval in April 1997 and
recently passed a subsequent GMP inspection in March 1998.
The Fresenius Parties were granted a two-year option to purchase the
leasehold title to both of the Company's manufacturing facilities in Redmond,
Washington and all related assets. See "Business-Company Overview and Recent
Developments."
The Company believes that its property and equipment are generally well
maintained and in good operating condition. The Company believes that the
manufacturing facility, with its new expanded space, is adequate in size to meet
the commercial production needs for the Prosorba column. The Company expects
that it or the Fresenius Parties, if the Fresenius Parties exercises its
purchase option, will incur significant capital expenditures in connection with
scaling up the facility for higher production volumes. The Company believes,
based upon discussions with the Fresenius Parties, that the Fresenius Parties
will elect to purchase the facility during the next 12 months. The Company's
existing facilities are in compliance with appropriate regulatory standards.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this Item 4 was published in the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1998 and is
incorporated herein by reference.
15.
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PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the over-the-counter market on the
NASDAQ SmallCap Market under the symbol "CYPB". Prior to May 21, 1996 the
Company's common stock was traded on the NASDAQ SmallCap Market under the symbol
"IMRE". Set forth below are the high and low sales prices for the Company's
common stock for the first quarter of 1999 (through March 1, 1999) and each
quarter of 1998 and 1997 as reported by the NASDAQ Stock Market, Inc.
Price Range of Common Stock
--------------------------------
High LOW
---- ---
YEAR ENDED DECEMBER 31, 1999:
First Quarter (through March 1, 1999).... $3.97 $2.31
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................ $3.81 $1.28
Second Quarter........................... 3.69 2.56
Third Quarter............................ 3.00 1.44
Fourth Quarter........................... 3.25 2.19
YEAR ENDED DECEMBER 31, 1997
First Quarter............................ $2.06 $1.50
Second Quarter........................... 2.56 1.18
Third Quarter............................ 2.63 1.50
Fourth Quarter........................... 1.97 1.15
The above quotations are interdealer prices, without retail mark-up, mark-
down or commission and may not necessarily represent actual transactions. As of
March 1, 1999, there were approximately 943 holders of record of the Common
Stock of the Company. The Company has never paid cash dividends on its common
stock and does not anticipate any being paid in the foreseeable future.
Recent Sales of Unregistered Securities
- ---------------------------------------
In September 1998, the Company completed a private placement of 3,063,561
shares of the Company's Series A convertible preferred stock (the "Preferred
Shares") at a price of $1.50 per share for an aggregate offering price of
approximately $4.6 million. Net proceeds (after deducting placement fees of
approximately $113,000, and other related expenses of approximately $152,000) to
the Company were approximately $4.3 million. Each of the purchasers of the
Preferred Shares was an "accredited investor" within the meaning of rule 501(a)
promulgated under the Securities Act. The Company relied on the exemption
provided by Section 4(2) under the Act.
16.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this report and the consolidated financial statements
and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Results of Operations:
Product sales $ 2,374,970 $ 2,970,342 $ 1,967,976 $ 1,104,224 $ 4,918,126
Grant income 308,470 325,316 - - -
Revenue under distribution
agreement - - - 3,000,000 -
------------ ----------- ------------ ----------- -----------
2,683,440 3,295,658 1,967,976 4,104,224 4,918,126
Costs and expenses:
Production costs 2,113,781 1,772,681 1,482,563 2,041,422 2,571,168
Sales and marketing 2,378,443 1,292,942 794,356 819,907 3,550,037
Research and development 4,290,727 6,707,557 4,002,968 3,219,324 2,107,694
General and administrative 3,345,241 2,803,079 4,649,298 2,626,817 2,694,489
Acquired in-process research
and development (1) - - 5,146,943 625,000 -
Restructuring expense - - 493,712 644,656 -
Debt conversion expense - - 276,688 1,124,386 -
------------ ----------- ------------ ----------- -----------
12,128,192 12,576,259 16,846,528 11,101,512 10,923,388
Other income (expense):
Interest income 341,755 425,935 458,070 118,994 71,986
Interest expense (41,953) (31,737) (1,119,726) (261,958) (218,036)
------------ ----------- ------------ ----------- -----------
299,802 394,198 (661,656) (142,964) (146,050)
------------ ----------- ------------ ----------- -----------
Net loss before imputed dividend on
preferred stock (9,144,950) (8,886,403) (15,540,208) (7,140,252) (6,151,312)
Undeclared, imputed dividend on
preferred stock (2,078,431) - - - -
------------ ----------- ------------ ----------- -----------
Net loss applicable to common
stockholders $(11,223,381) $(8,886,403) $(15,540,208) $(7,140,252) $(6,151,312)
============ =========== ============ =========== ===========
Net loss per share applicable to common
stockholders - basic and diluted $ (0.29) $ (0.25) $ (0.53) $ (0.41) $ (0.40)
============ =========== ============ =========== ===========
Weighted average number of
shares outstanding - basic and diluted 39,234,741 35,236,579 29,206,470 17,598,735 15,243,860
============ =========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-
term investments $ 5,619,568 $ 8,515,653 $ 10,935,668 $ 1,009,878 $ 3,670,616
Total assets $ 9,316,035 $11,788,766 $ 14,961,076 $ 4,563,709 $ 7,721,013
Long term debt (net of current portion) $ 566,300 $ 407,735 $ 412,020 $ 1,539,722 $ 4,247,759
Total stockholders' equity (deficit) $ 6,844,571 $ 9,525,992 $ 12,134,565 $ (524,762) $ 1,980,719
Working capital (deficit) $ 5,567,938 $ 7,916,228 $ 10,161,170 $ (688,771) $ 4,360,749
</TABLE>
(1) Reflects the acquisition of in-process research and development associated
with the acquisition by the Company of PRP, Inc. in 1996 and the
acquisition of the minority interest in one of the Company's subsidiaries
in 1995.
17.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
- --------
Revenues associated with product shipments were $2.4 million, $3.0 million
and $2.0 million in 1998, 1997 and 1996, respectively. The decrease in sales in
1998 from 1997 is a result of the Company's sales force focusing its efforts on
pre-market launch activities in anticipation of FDA approval for the Prosorba
column to be used for the treatment of RA in addition to ITP, the current FDA
approval indication. The significant increase in sales in 1997 from 1996 is a
result of the Company regaining the distribution rights to the Prosorba column
in May 1996 and initiating direct sales and marketing efforts as mentioned
below.
On May 1, 1996, the Company terminated an exclusive distribution agreement
with Baxter Healthcare Corporation, whereby the Company regained the right to
sell its Prosorba column directly to customers who had previously purchased the
Prosorba column through Baxter as well as to any other potential customers who
wish to purchase the Prosorba column. Although the Company's direct sales and
marketing efforts have proven more effective than those under the Baxter
distribution agreement, ITP remains a small market. The Company has entered
into agreement with the Fresenius Parties for the co-marketing of the Prosorba
column. See "Business--Company Overview and Recent Developments."
In 1996, the Company initiated a Phase IV marketing study for use of the
Prosorba column in the treatment of ITP in an effort to generate more rigorous
clinical data than has been available to date. The Company believes that such
data is a prerequisite for increasing the usage of the Prosorba column in the
treatment of ITP. However, due to increased competition for patients from other
ITP studies, below expected enrollment in the Company's study and the increased
opportunities in the RA market, the Company terminated its ITP trial during the
fourth quarter of 1997. The Company plans to launch the new RA indication on
April 5, 1999, which is expected to have an impact on sales volume in 1999.
In connection with the Company's acquisition of PRP in November 1996, the
Company acquired an NIH Small Business Innovation Research (SBIR) Phase II
grant. For the year ended December 31, 1998, the Company recorded approximately
$308,000 in grant income. Revenues from the grant are recognized as grant
expenditures are incurred. Expenses related to the grant are classified as
research and development expenses. The Company does not expect grant revenue to
become a significant contribution to its operations. The NIH grant expired on
December 31, 1998 and all available funds were exhausted.
18.
<PAGE>
Operating Expenses
- ------------------
Consolidated operating expenses for the years ended December 31, 1998,
1997, and 1996 were approximately $12.1 million, $12.6 million and $16.8
million, respectively. The decrease of approximately $500,000 in 1998 from 1997
reflects significant savings in research and development expenses offset by
increased sales and marketing and general and administrative expenses. The
decrease of $4.2 million in 1997 from 1996 reflects certain non-recurring, and
primarily non-cash, charges in 1996 related to the acquisition of PRP and the
Company's restructuring and recapitalization totaling $5.9 million, which were
partially offset by a significant expansion in the Company's research and
development activities.
Production costs were approximately $2.1 million, $1.8 million and $1.5
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
increase of approximately $300,000 in 1998 from 1997 was due to increased
production of the Prosorba column in anticipation of FDA approval in 1999.
During the first half of 1996, production was impacted by both the termination
of the Baxter agreement and the consolidation of facilities undertaken in
connection with the restructuring. There were very few Prosorba columns shipped
during the first four months of 1996 as the Company did not resume direct
shipments to domestic customers until May 1996. In anticipation of a temporary
cessation of manufacturing during the remodeling and subsequent FDA re-approval
process of the Redmond, Washington facility, the Company increased production
during the second and third quarters to build its inventories. As a result,
production costs for the year reflect this unusual activity. However, the
increase in production costs in 1997 from 1996 also reflected an increase in
columns manufactured to accommodate increases in sales and columns used in the
RA trial. The Company expects that its production costs will increase in 1999
as it expands production of the Prosorba columns for RA sales but expects its
per unit costs to decline with increasing volumes. Under the Fresenius
partnership, the Company is responsible for incurring any other losses relating
to production during 1999 even if Fresenius exercises its option and purchases
the Redmond Facility.
Sales and marketing costs were approximately $2.4 million, $1.3 million and
$794,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The increase of approximately $1.1 million in 1998 from 1997 is a result of the
Company hiring three management level marketing personal, recruiting efforts to
hire additional sales personnel and pre-market launch efforts. The Company
recently hired 13 new sales representatives and expects to incur substantially
higher sales marketing expenses in 1999 due to the commercial launch of the
Prosorba column for RA.
Research and development expenses were approximately $4.3 million, $6.7
million and $4.0 million in 1998, 1997 and 1996, respectively. The decrease of
approximately $2.4 million in 1998 from 1997 was due to the cessation of the
Phase III pivotal trial. In addition, the Company closed its Boston facility in
June 1998 which helped to reduce costs further. Research and development
expenses typically increase with each phase of a product's development as such
product advances to FDA approval. The Company records research and development
costs as incurred, including the costs associated with its clinical trials. The
Company enrolls patients in various clinical trial sites and records the related
cost as the work is performed by the respective research entities. The Company
accrues costs related to clinical trials until such costs are actually paid by
the Company. The significant increase in research and development expenses of
$2.7 million in 1997 from 1996 is attributable to the Company's efforts to
establish a stronger scientific base for its products by continuing to expend
funds on clinical trials and increasing efforts in studying the mechanism of
action of the Prosorba column. Approximately $1.7 million of the increase in
research and development expenses from 1996 to 1997 was directly related to
amounts expended on the further development of Cyplex(TM) in connection with the
Company's acquisition of PRP in November 1996. The remaining increase of
approximately $1.0 million in research and development expenses from 1996 to
1997 was primarily due to increased spending on the Company's controlled
clinical trial for use of the Prosorba column in the treatment of RA. The
company expects to incur significant ongoing research and development expenses
in connection with the mandatory Phase IV trial for treatment of RA
using the Prosorba column in combination with methotrexate, a DMARD.
General and administrative expenses were approximately $3.3 million, $2.8
million, and $4.6 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase of approximately $500,000 in 1998 from 1997 is the
result of business development efforts such as hiring a Director of Business
Development and increased travel for management. The decrease of approximately
$1.8 million in 1997 from 1996 was a result of the
19.
<PAGE>
Company's efforts to control costs and nonrecurring expenses in 1996 associated
with the hiring of the Company's Chief Executive Officer and its former
President and Chief Operating Officer, both of whom joined the Company in
December 1995, and severance payments paid to the Company's former Chief
Scientific Officer in connection with his resignation in March 1996. The
decrease was partially offset by non-recurring bonuses paid in the third quarter
of 1997 to the Company's Chief Executive Officer and President and Chief
Operating Officer in connection with the Company's achieving certain milestones.
The Company recorded a non-cash expense of approximately $277,000 for debt
conversion expense in the year ended December 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 offering to holders of the Company's 7%
Convertible Debentures.
In January 1996, the Company terminated 20 employees from various
departments, nearly half of its work force, as part of its cost restructuring.
In March 1996, the Company entered into a termination agreement with its former
Chief Scientific Officer. Costs related to these terminations were
approximately $494,000 and were recorded as a restructuring expense in 1996. In
addition, the Company incurred 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 were recorded as general and
administrative expenses in 1996.
Acquisition of PRP
- ------------------
On November 1, 1996, the Company acquired PRP. As a result of the
acquisition, the Company assumed all of the assets and liabilities of PRP. The
transaction has been accounted for as a purchase and the Company recorded a non-
recurring expense of approximately $5.1 million as acquired in-process research
and development in the fourth quarter of 1996.
In connection with the acquisition, the Company issued to certain holders
of outstanding debt of PRP, in full satisfaction and settlement of such
indebtedness, Units (with each Unit being comprised of two shares of the
Company's common stock and one common stock purchase warrant) with an
approximate total value of $4.5 million (based upon a price of $4.00 per Unit).
The holders of PRP equity securities (including holders of options and
warrants of PRP) (the "Equity Holders") will also be entitled to receive earn-
out payments, if any, on a pro rata basis, on net sales of products developed
using PRP's technology acquired by the Company in the acquisition. The earn-out
payments if earned will be treated as compensation expense because most of such
earn-out payments will be made to former stockholders of PRP. The Company's
obligation to make earn-out payments commence on the date of the first
commercial sale of Cyplex(TM) for the treatment of thrombocytopenia to any third
party. In addition, in conjunction with obtaining approval from the FDA of the
use of Cyplex(TM) for the treatment of thrombocytopenia, the Company shall make
a payment of $5 million to the Equity Holders, with such payment being in the
form of, at the Company's discretion, cash, Company common stock, or a
combination of the two. The milestone payments, if earned, will either be
expensed as acquired research and development or capitalized as purchased
technology, depending upon the evaluation of the technology to be made by the
Company at such future date.
In consideration of certain investment banking advisory services provided
by EGS Securities Corp. ("EGS') to PRP in connection with the acquisition of
PRP, the Company issued to EGS Units with a total value of approximately
$120,000. In addition, the Company is obligated to pay EGS an amount in cash
equal to two and one-half percent (2 1/2%) of a certain milestone payment and
each earn-out payment made to the Equity Holders, at the time any such payments
are made.
20.
<PAGE>
Interest Expense
- ----------------
Interest expense was approximately $42,000, $32,000, and $1.1 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The increase of
approximately $10,000 in 1998 from 1997 is due to the Company's line of credit
established in March 1998. The decrease in 1997 from 1996 is due to
approximately $1.1 million of interest expense in 1996 related to Senior
Convertible Debentures which were issued with a discounted conversion feature.
Net Loss
- --------
Net loss applicable to common stockholders was approximately $11.2 million,
$8.9 million and $15.5 million for the years ended December 31, 1998, 1997 and
1996, respectively. The increase of approximately $2.3 million in 1998 from 1997
is the result of a one time, non-recurring and undeclared imputed dividend
charge which amounted to approximately $2.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents
and short-term investments. The Company's cash, cash equivalents and short-term
investments totaled $5.6 million and $8.5 million at December 31, 1998 and 1997,
respectively. The decrease in cash, cash equivalents and short-term investments
of approximately $2.9 million was primarily due to cash used in operations of
approximately $8.5 million for the year ended December 31, 1998, which was
partially offset by net proceeds of approximately $4.3 million received by the
Company in the private placement of Series A convertible preferred stock
completed in September 1998 and by net proceeds received from exercises of stock
options and warrants of approximately $1.5 million during 1998. Working capital
at December 31, 1998 was approximately $5.6 million.
Although the Company is not obligated under any third party agreements,
capital expenditures during 1999 are expected to be approximately $2.0 million
and will be used to support continued product commercialization and research and
development activities.
In September 1998, the Company completed a private placement of 3,063,561
shares of the Company's Series A convertible preferred stock (the "Preferred
Shares") at a price of $1.50 per share. Net proceeds to the Company were
approximately $4.3 million. As part of the Fresenius transaction in March 1999,
the Company recently received gross proceeds of $1.0 million from the sale of
297,530 shares of our common stock, $500,000 for the issuance of a warrant to
purchase 342,466 shares at an exercise price of $7.50 per share, and a revolving
line of credit, of which the Company received approximately $4.1 million. The
Company expects to receive approximately $5.4 million in net proceeds from the
exercise of approximately 2.7 million outstanding publicly traded warrants
priced at $2.00 per share that will be redeemed on April 19, 1999 if not
exercised on or prior to 5:00 p.m. (New York time) on April 12, 1999.
21.
<PAGE>
The Company believes its cash balance on December 31, 1998, together with
the proceeds received from the Fresenius transactions, are sufficient to fund
operations for at least the next twelve months. The Company is seeking
opportunities to raise additional capital to fund the development of new
research, additional clinical trials for the Prosorba column for other
indications, and the further development and marketing of Cyplex(TM). To the
extent the Company decides to develop products other than the Prosorba column
and Cyplex(TM), it will be required to raise additional capital. The amount of
capital required by the Company is dependent upon many factors, including the
following: the Company's ability to successfully market the Prosorba column in
the RA market, results of clinical trials, results of current research and
development efforts, the FDA regulatory process, costs of commercialization of
products and potential competitive and technological advances and levels of
product sales. Because the Company is unable to predict the outcome of the
foregoing factors, some of which are beyond the Company's control, the Company
is unable to estimate with certainty its mid-to long-term capital needs.
Although the Company may seek to raise additional capital through a combination
of additional equity sources, there can be no assurance the Company will be able
to raise additional capital through such sources or the funds raised thereby
will allow the Company to maintain its current and planned operations. If the
Company is unable to obtain additional capital, it may be required to delay,
scale back or eliminate some or all of its research and development and
marketing 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.
Impact of Year 2000
- -------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or a miscalculation causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. The Company
has completed all phases related to its internal operations in San Diego and is
engaged in the testing and implementation phase in Redmond. As of December 31,
1998, the total cost of the internal Year 2000 Issue project was less than
$50,000. The Company expects to complete all phases related to its internal
operations by mid-1999. The external Year 2000 Issue project, which involves
the Company's significant suppliers, financial institutions and others with whom
the Company does business with, is expected to be completed by mid-1999. Total
costs expected to be incurred, based upon management's estimates, is
approximately $50,000. The Company believes it has mitigated the Year 2000 Issue
so that the Company's operations or business will not be materially adversely
affected. However, there can be no assurance that the systems of other companies
on which the Company's systems rely will be timely converted and will not have
an adverse effect on the Company's systems.
The Company currently has no contingency plan in place in the event it has
omitted systems which are susceptible to the Year 2000 Issue. The Company plans
to evaluate the status of internal changes in mid 1999 and determine whether
such a plan is necessary.
The discussion above contains certain forward-looking statements. The cost
of the Year 2000 Issue project and the date on which the Company believes it has
completed the Year 2000 internal modifications are based on management's best
estimates, which were derived utilizing numerous assumptions. However, there is
no guarantee that these predictions and estimates are or will be achieved and
actual results could differ materially from those
22.
<PAGE>
anticipated. Specific factors that might cause such material differences
include, but are not limited to the success of the Company in identifying
systems that are not Year 2000 compliant, the success of the Company's completed
conversion efforts, the success of the Year 2000 conversion efforts of others
and similar uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company invests its excess cash in interest-bearing investment-grade
securities that it holds for the duration of the term of the respective
instrument. The Company does not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, the Company
believes that, while the investment-grade securities it holds are subject to
changes in the financial standing of the issuer of such securities, the Company
is not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-1 of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company, the positions held by
them and their ages as of March 4, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ---------- ---------------------------------------------------------------
<S> <C> <C>
Jay D. Kranzler, M.D., Ph.D. (1)(2) 41 Chief Executive Officer, Chief Financial Officer and Chairman
of the Board of Directors
Carl F. Bobkoski 46 President, Chief Operating Officer and Corporate Secretary
R. Michael Gendreau, M.D., Ph.D. 43 Executive Vice President, Research & Development, Chief Medical
Officer and Chief Scientific Officer
Richard M. Crooks, Jr. (4)(5) 59 Director
Philip J. O'Reilly (3)(4)(5) 60 Director
Jack H. Vaughn (3)(5) 78 Director
Samuel D. Anderson 68 Director
David W. Golde, M.D. 58 Director
</TABLE>
________
(1) Member of the 401(k) Plan Committee
(2) Member of the Non-Executive Officer Stock Option Committee
(3) Member of Audit Committee
(4) Member of Stock Option Committee
JAY D. KRANZLER, M.D., PH.D., was appointed Chief Executive Officer and
Vice-Chairman of the Company in December 1995. In April 1996, Dr. Kranzler also
assumed the position of Chief Scientific Officer of the Company, and in November
1997, also assumed the position of Chief Financial Officer. In April 1998, Dr.
Kranzler was appointed as Chairman of the Board. 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, from 1985 to January 1989 as a consultant
specializing in the pharmaceutical industry.
CARL F. BOBKOSKI, was appointed President and Chief Operating Officer in
March 1999. Prior to joining the Company, from May 1995 to February 1999, Mr.
Bobkoski served as Executive Vice President of Signal Pharmaceuticals, Inc., a
biopharmaceutical company. From 1990 to 1995, Mr. Bobkoski was Executive Vice
President and a director at Gensia, Inc ("Gensia"), a biopharmaceutical company,
where he was responsible for directing all commercialization activities for
proprietary products, overseeing the operations of Gensia Laboratories, Ltd., a
wholly-owned subsidiary of Gensia, and supervising product development, finance,
management information systems and corporate development.
MICHAEL GENDREAU, M.D., PH.D., was appointed Vice President of Research and
Development and Chief Medical Officer of the Company in December 1996 and was
promoted to Executive Vice President of Research and Development and Chief
Scientific Officer in February 1999. Dr. Gendreau joined the Company in 1994
and held various positions from 1994 through 1996, including Executive Director
of Scientific Affairs. From 1991 to 1994, Dr. Gendreau was Vice President of
Research and Development and Chief Medical Officer for MicroProbe Corporation, a
developer and manufacturer of DNA probe-based diagnostic equipment.
RICHARD M. CROOKS, JR., has been a director of the Company since 1991. He
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
24.
<PAGE>
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.
PHILIP J. O'REILLY, has been a director of the Company since 1994. He is a
partner in the law firm of O'Reilly, Marsh, Kearney & Corteselli P.C., in Garden
City, New York. He has been in private practice for more than twenty years. Mr.
O'Reilly also serves as a director of Excalibur Technologies Corporation.
JACK H. VAUGHN, has served as a director of the Company since 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. Prior to that, Mr. Vaughn had been 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.
SAMUEL D. ANDERSON, was elected by the Board to serve as a director of the
Company in April 1998. Currently, Mr. Anderson is an independent consultant for
various medical, pharmaceutical and biotechnology companies. He has held Board
of Director positions at Hycor Biomedical, Inc. since 1986 and Sera Care Inc.
since 1996. He was named Chairman of the Board of Directors at Hycor in 1998.
From 1990 to 1991, he was the President and Chief Executive Officer of Trancel
Corporation, a biotechnology company. From 1984 to 1989 Mr. Anderson was the
Chief Executive Officer of Alpha Therapeutics Corporation, a blood plasma
fractionator, and between 1989 and 1990 served as its Chairman of the Board.
DAVID W. GOLDE, M.D., was elected by the Board to serve as a director of
the Company in April 1998. Dr. Golde has been the Physician-in-Chief of
Memorial Sloan-Kettering Cancer Center since 1991. He has been a Professor of
Medicine at Cornell University Medical College since 1991 and at UCLA School of
Medicine since 1979. Dr. Golde is also a director of Eron, Inc. Dr. Golde is a
consultant to numerous medical and research institutions.
Each officer serves at the discretion of the Board of Directors. 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. Pursuant to the Fresenius agreement, the Company has agreed, if
Fresenius AG so requests, to increase the number of directors authorized from
six to seven and to appoint a Fresenius designee to the new seat. 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 auditors' 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
executives 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.
25.
<PAGE>
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 employee by the Non-
Executive Officer Stock Option Committee is limited to 200,000 each period
between Board meetings. The Non-Executive Officer Stock Option Committee is
comprised of one director: Dr. Kranzler.
SCIENTIFIC ADVISORY BOARDS
The Company has established four 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, hematology, and platelet therapy.
The Immunology Advisory Board (the "IAB") is currently composed of Gerald
T. Nepom (appointed July 1996), M.D., Ph.D., Scientific Director of the Virginia
Mason Research Center in Seattle, Washington; Eng Tan (appointed June 1996),
M.D., Director, W.M. Keck Autoimmune Disease Center, The Scripps Clinic and
Research Institute, San Diego, California. The focus of the IAB 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 David Felson
(appointed June 1996), M.D., M.P.H. Professor of Medicine and Public Health,
Director, Boston University Arthritis Health Services Center; Richard Panush
(appointed June 1996), M.D., Professor and Chairman, Department of Medicine, St.
Barnabas Medical Center, Livingston, New Jersey; George Ehrlich (appointed June
1996), M.D., University of Pennsylvania Medical School, Member, Expert Advisory
Panel on Chronic Degenerative Disease, World Health Organization. The RAB will
oversee and guide the Company's programs in RA. The RAB members are all serving
as advisors to the FDA in the Drug Division which reviews New Drug Applications
for rheumatology pharmaceutical product.
The Hematology Advisory Board (the "HAB") is composed of James B. Bussel
(appointed May 1996), M.D., Associate Professor of Pediatrics, Director of ITP
Program, Division of Pediatrics Hematology/Oncology, Cornell Medical Center;
John Harlan (appointed May 1996), M.D., Professor of Medicine, Division Head,
Hematology, Massachusetts General Hospital; and David J. Kuter (appointed June
1996), M.D., D.Phil., Chairman, Department of Hematology, Massachusetts General
Hospital. The HAB will oversee and guide the Company's programs in ITP.
The Platelet Advisory Board (the "PAB") is composed of Richard H. Aster
(appointed November 1996), M.D., former President, Blood Center of Southeast
Wisconsin; Ernest Beutler (appointed June 1997), M.D., Chairman, Department of
Molecular and Experimental Medicine, The Scripps Clinic and Research Foundation,
San Diego, California; Leon W. Hoyer (appointed November 1996), M.D., Director,
Holland Laboratories, Vice President, Research and Development, American Red
Cross; John Lawler (appointed November 1996), Ph.D., Associate Professor,
Department of Pathology, Harvard Medical School, Brigham and Women's Hospital;
Ernest R. Simon (appointed June 1997), M.D., Retired Executive Vice President,
Medical Affairs, Blood Systems, Inc.; Scott N. Swisher (appointed November
1997), M.D., Chairman, FDA Blood Products Advisory Committee; Professor of
Medicine (emeritus), University of Michigan; Paul C. Zamecnik (appointed
November 1996), M.D., Professor of Medicine (emeritus) Harvard Medical School,
Principal Scientist, Hybridon; Sherrill Slichter (appointed October 1997), M.D.,
Puget Sound Blood Center. The PAB will oversee the Company's programs as they
relate to platelet therapy.
There are no material consulting or other agreements between the Company
and any member of the Company's various scientific advisory boards.
26.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Each non-employee director of the Company is entitled to receive between
$12,000 and $24,000 per year for such person's service as a director. Messrs.
O'Reilly and Vaughn each received $12,000 in cash compensation for service as a
director during fiscal year 1998. Messrs. Golde and Anderson each received
$18,000 in cash compensation for service as director during fiscal year 1998.
In addition, each non-employee director is entitled to receive an option to
purchase 10,000 shares of common stock of the Company upon such non-employee
director's initial election to the Board and an option to purchase an additional
10,000 shares of common stock of the Company upon each annual meeting of such
non-employee director to the Board, however, Messrs. Anderson and Golde received
an option to purchase 100,000 shares of common stock of the Company upon their
initial election to the Board and are not entitled to receive additional option
grants upon any annual meeting. Each of Messrs. Crooks, O'Reilly and Vaughn
received an option to purchase 10,000 shares of common stock for service as a
director during fiscal year 1998. Directors who are employees of the Company do
not receive any fee for their service as directors. None of the Company's
directors receive any fees for their service on any committee of the Board. 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.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation awarded or paid to and
earned by, the Chief Executive Officer of the Company during the fiscal years
ended December 31, 1998, 1997 and 1996 as well as those executive officers whose
salary and bonus were in excess of $100,000 for services rendered to the Company
during the fiscal year ended December 31, 1998 and one former executive officer
who departed from the Company in March 1999 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION (1)
--------------------- ----------------
SHARES ALL OTHER
FISCAL BASE UNDERLYING COMPENSATION
Name and Principal Position YEAR SALARY($) BONUS($) OPTIONS(#) ($)
- --------------------------- ------ --------- -------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Jay D. Kranzler, M.D., Ph.D., 1998 $277,000 $ - - $ 11,300(2)
Chief Executive Officer, Chief 1997 245,000 125,000 277,440 10,800(3)
Financial Officer and Chairman of 1996 240,000 135,000 3,025,327 10,700(4)
the Board
Debby Jo Blank, M.D.(5), 1998 244,000 - - 52,000(6)
President, Chief Operating Officer 1997 215,500 101,500 101,415 9,500(7)
and Director 1996 210,000 135,000 1,134,497 164,236(8)
R. Michael Gendreau, M.D. 1998 167,400 - 150,000 10,000(9)
Executive Vice President, Research 1997 149,000 262 - 4,472(10)
and Development, Chief Medical 1996 145,000 25,000 125,000 57,805(11)
Officer; and Chief Scientific
Officer
</TABLE>
____________________
(1) The Company's 1996 Equity Incentive Plan (the "1996 Plan"), Incentive Stock
Option and Appreciation Plan and the 1988 Non-Qualified Stock Option Plan
(collectively, the "Plans") are intended to further the interests of the
Company by providing for the grant of stock awards to directors, officers
and employees of and consultants to the Company.
(2) Includes $1,300 paid by the Company on behalf of Dr. Kranzler for life
insurance premiums during 1998, and $10,000 of contributions made by the
Company under its 401(k) plan.
27.
<PAGE>
(3) Includes $1,300 paid by the Company on behalf of Dr. Kranzler for life
insurance premiums during 1997, and $9,500 of contributions made by the
Company under its 401(k) plan.
(4) Includes $1,200 paid by the Company on behalf of Dr. Kranzler for life
insurance premium during 1996, and $9,500 of contributions made by the
Company under its 401(k) plan.
(5) Dr. Blank resigned from the Company effective March 1999.
(6) Includes $42,000 paid to Dr. Blank for relocation costs associated with Dr.
Blank's relocation to San Diego, California upon joining the Company. Also
includes $10,000 of contributions made by the Company under its 401(k)
plan.
(7) Represents $9,500 in contributions made by the Company under its 401(k)
plan.
(8) Includes $154,736 paid to Dr. Blank for relocation costs and related tax
gross-ups associated with Dr. Blank's relocation to San Diego, California
upon joining the Company. Also includes $9,500 of contributions made by
the Company under its 401(k) plan.
(9) Represents $10,000 in contributions made by the Company under its 401(k)
plan.
(10) Represents $4,472 in contributions made by the Company under its 401(k)
plan.
(11) Includes $52,583 paid to Dr. Gendreau for relocation costs associated with
Dr. Gendreau's relocation to San Diego, California. Also includes $5,222
of contributions made by the Company under its 401(k) plan.
STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1998 to the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
SHARES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION TERM($)(2)
OPTIONS EMPLOYEES IN FISCAL PRICE PER EXPIRATION ---------------------
NAME GRANTED (#) YEAR(%)(1) SHARE($) DATE 5% 10%
---- ----------- ------------------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
R. Michael Gendreau, M.D., Ph.D. 50,000 (3) 3.9% $1.43750 12/31/07 45,202 114,500
100,000 (3) 7.8% $2.34375 8/9/08 73,699 186,767
</TABLE>
____________________
(1) Based upon options to purchase a total of 1,311,625 shares of common stock
of the Company granted during the fiscal year 1998.
(2) The potential realizable value is based upon the assumption that the fair
market value of the common stock appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the option
term. Actual realizable value, if any, on stock option exercises is
dependent on the future performance of the common stock and overall market
conditions, as well as the option holder's continued employment through the
vesting period.
(3) Such options vest 25% on the one-year anniversary of the date of grant with
the remainder vesting ratably and daily over the following three-year
period.
28.
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information as of December 31, 1998,
regarding options held by the Named Executive Officers. None of such
individuals exercised any options during the fiscal year ended December 31,
1998. There were no stock appreciation rights outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options In-The-Money Options
Shares Acquired Value at FY-End (#) as of FY-End ($)(2)
Name Upon Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jay Kranzler, M.D., Ph.D. 199,998 $174,998 2,653,144 449,625 $3,962,341 $657,133
Debby Jo Blank, M.D. 199,998 $174,998 868,614 167,300 $1,296,570 $244,625
R. Michael Gendreau, M.D. - - 224,235 191,765 $ 245,070 $193,080
</TABLE>
____________________
(1) Calculations based upon $2.375, the closing sales price, of common stock as
reported on the Nasdaq SmallCap Market on August 6, 1998 (the exercise
date), less exercise price.
(2) Calculation based upon $3.00, the closing sales price of the underlying
shares of common stock as reported on the Nasdaq SmallCap Market on
December 31, 1998, less exercise price.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
Jay D. Kranzler, MD., Ph.D., the Company's Chief Executive Officer, Chief
Financial Officer and Chief Scientific Officer had a base salary in 1998 of
$277,000, and was entitled to 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 to his base salary and bonus, under his employment agreement,
Dr. Kranzler was 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 (25%) immediately upon
grant and thereafter ratably and daily over a four (4) year period. Dr.
Kranzler's options shall fully vest upon the occurrence of any merger,
consolidation, corporate reorganization or transfer of all or substantially all
of the assets of the Company and upon the termination without cause of Dr.
Kranzler's employment with the Company. In August 1997, Dr. Kranzler was
granted an option to purchase 277,440 shares of the Company's common stock at an
exercise price of $1.625 per share. As of March 1, 1999, options to purchase
2,998,772 shares of common stock had vested.
In April 1996, the Company entered into an employment agreement with Dr. R.
Michael Gendreau, the Company's Executive Vice President, Research and
Development, Chief Scientific Officer and Chief Medical Officer, whereby Dr.
Gendreau annual compensation consists of base salary of $167,400. The Company
also granted Dr. Gendreau options to purchase up to 125,000 shares of the
Company's common stock at an exercise price of $2.019 per share. On January 1,
1998, Dr. Gendreau was granted an option to purchase 50,000 shares of common
stock of the Company at an exercise price of $1.4375 per share and On August 10,
1998 he was granted an additional option to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.3438. As of March 1, 1999,
options to purchase a total of 309,846 shares of common stock had vested. In the
event that Dr. Gendreau's employment with the Company is terminated by the
29.
<PAGE>
Company without cause due to a corporate merger or acquisition, Dr. Gendreau
will receive severance pay equal to $72,500.
In February 18, 1999, the Company entered into an employment agreement with
Carl F. Bobkoski, the Company's President, Chief Operating Officer and Corporate
Secretary, whereby Mr. Bobkoski's annual compensation consists of base salary of
$215,000 and he is eligible at the sole discretion of the Board for an annual
bonus equal to 25% of his base salary. The Company also granted Mr. Bobkoski
options to purchase up to 500,000 shares of the Company's common stock at an
exercise price of $2.75 per share. In the event that Mr. Bobkoski's employment
with the Company is terminated by the Company without cause due to a corporate
merger or acquisition, Mr. Bobkoski's options shall become fully exercisable.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of directors who
are not employees of the Company. The Committee is responsible for establishing
and administering the Company's executive compensation arrangements.
The Company believes that a competitive, goal-oriented compensation policy
is critically important to the creation of value for stockholders. To that end,
the Company has created an incentive compensation program intended to reward
outstanding individual performance.
Under the Omnibus Budget Reconciliation Act of 1993, beginning in 1994, the
federal income tax deduction for certain types of compensation paid to the Chief
Executive Officer and four other most highly compensated officers of publicly
held companies is limited to $1,000,000 per officer per fiscal year unless such
compensation meets certain requirements. The Committee is aware of this
limitation and believes that the deductibility of compensation payable in 1997
will not be affected by this limitation.
Compensation Philosophy
- -----------------------
The Company's compensation program is intended to implement the following
principles:
. Compensation should be related to the value created for
stockholders.
. Compensation programs should support the short-term and long-term
strategic goals and objectives of the Company.
. Compensation programs should reflect and promote the Company's
values and reward individuals for outstanding contributions to
the Company's success.
. Short-term and long-term compensation programs play a critical role
in attracting and retaining well-qualified executives.
. While compensation opportunities should be based in part upon
individual contribution, the actual amounts earned by executives
in variable compensation programs should also be based upon how
the Company performs.
The Company's executive compensation for the Chief Executive Officer and
all other executives is based upon three components, each of which is intended
to serve the Company's compensation principles:
Base Salary
- -----------
Base salary is targeted at the competitive median for similar companies in
the biotechnology industry. For the purpose of establishing these levels, the
Committee compares the Company's compensation structure from time to time with
the companies covered in a compensation survey of the biotechnology industry
entitled, Biotechnology Compensation and Benefits Survey, which is prepared by
Radford Associates and sponsored by the Biotechnology Industry Organization.
Many of the Companies covered in that survey are also included in the published
industry line-of-business index included in the Company's Stock Price
Performance Graph, included elsewhere in this document.
30.
<PAGE>
Based upon its reviews of industry data, the Compensation Committee
determined that the base salaries of the Chief Executive Officer and all other
executive officers were appropriate and necessary to attract individuals of such
high caliber within the biotechnology industry.
The Committee reviews the salaries of the Chief Executive Officer and other
executive officers each year and such salaries may be increased based upon (i)
the individual's performance and contribution to the Company and (ii) increases
in median competitive pay levels.
Annual Incentives
- -----------------
The Company has a cash bonus program whereby bonus amounts are determined
based upon the achievement of corporate goals and individual performance. Any
bonus is based, in part, upon Company performance and in part on individual
performance. The Committee believes bonus amounts are similar to those paid by
other companies in the biotechnology industry.
Based upon the Committee's review of the financial performance of the
Company, no annual incentive bonuses were awarded to any members of senior
management for 1998.
Long-Term Incentives
- --------------------
Long-term incentive compensation is provided through grants of options to
purchase shares of the Company's common stock to the Chief Executive Officer and
other executive officers. The stock options are intended to retain and motivate
all employees to improve long-term performance of the Company. It is common in
the biotechnology industry to grant stock options to all employees. As of the
beginning of 1997, stock options had been granted to all full-time employees of
the Company. The Committee believes the amount and value of such grants are
based upon levels similar to other companies in the biotechnology industry.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Company appointed Jay D. Kranzler, M.D., Ph.D. as its new Chief
Executive Officer on December 28, 1995. Accordingly, his compensation was
determined based upon prevailing compensation packages in the biotechnology
industry, since a compensation package consistent with the biotechnology
industry was believed necessary to attract an individual of Dr. Kranzler's
caliber. His annual compensation consists of base salary of $277,000 and cash
bonuses of up to twenty-five percent (25%) of his annual base salary. In
addition, under his employment agreement, Dr. Kranzler was granted options to
purchase 3,025,327 shares of the Company's Common Stock at an exercise price of
$1.50 per share. During 1998, Dr. Kranzler was not paid any cash bonuses
determined as a percentage of his base salary and his base compensation was not
increased.
Generally, stock options are granted with an exercise price equal to
prevailing market value. The stock options generally vest in increments over a
period of years and an employee must be employed by the Company at the time of
vesting in order to exercise his or her options.
Compensation Committee
Richard M. Crooks, Jr.
Philip J. O'Reilly
Jack H. Vaughn
31.
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
Comparison of Cumulative Return on Investment
The following Stock Price Performance Graph compares the Company's
cumulative total stockholder return on the Company's common stock for the
periods indicated with the cumulative total return of the NASDAQ OTC Index and
the NASDAQ Pharmaceuticals Stock Index. The Company has not declared any
dividends since its inception. The Board and the Committee recognize that the
market price of the Company's common stock is influenced by many factors, only
one of which is Company performance. The historical stock price performance
shown on the Stock Price Performance Graph is not necessarily indicative of
future stock price performance.
The above comparison assumes $100 was invested in the Company's common
stock and each index on December 31, 1993.
[GRAPH APPEARS HERE]
Nasdaq OTC Cypress Bioscience Nasdaq Pharmaceutical Index
(black diamond) (black square) (white triangle)
--------------- ------------------ ---------------------------
1993 100.0 100.0 100.0
1994 97.8 56.7 75.3
1995 138.3 70.8 138.0
1996 170.0 49.1 138.5
1997 208.6 35.8 143.0
1998 293.2 74.8 183.0
32.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 1999 with respect
to (i) each stockholder known to the Company to be the beneficial owner of more
than five percent (5%) of the outstanding common stock or Series A Preferred
Stock of the Company, (ii) each director, (iii) each Named Executive Officer and
(iv) all directors and Named Executive Officers of the Company as a group.
Except as set forth below, each of the named persons and members of the group
has sole voting and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF PERCENT OF CLASS OF
BENEFICIAL OWNER OF COMMON STOCK (1) COMMON STOCK (2) COMMON STOCK (2)
- ------------------------------------ ----------------------- -------------------
<S> <C> <C>
Allen & Company Incorporated............................. 7,328,307 (3) 17.6%
711 Fifth Avenue
New York, New York 10022
Paramount Capital Asset Management, Inc.................. 9,450,635 (4) 22.7%
787 Seventh Avenue, 44th Floor
New York, NY 10019
Jay D. Kranzler.......................................... 3,477,277 (5) 7.8%
Debby Jo Blank........................................... 1,465,966 (6) 3.4%
R. Michael Gendreau...................................... 322,414 (7) *
Richard M. Crooks, Jr.................................... 1,131,897 (8) 2.7%
Jack H. Vaughn........................................... 66,000 (9) *
Philip J. O'Reilly....................................... 66,050 (10) *
Samuel D. Anderson...................................... 128,558 (11) *
David Golde............................................. 27,052 (12) *
All Directors and Named Executive Officers as a
Group (8 persons)....................................... 6,685,214 14.5%
----------
</TABLE>
________________________
*Less than one percent
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedule 13Ds filed with the Securities and
Exchange Commission (the "Commission"). 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.
(2) Except as otherwise indicated in the footnotes of this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options or
warrants exercisable within 60 days of March 1, 1999 are deemed outstanding
for computing the percentage of the person or entity holding such options
or warrants but are not deemed outstanding for computing the percentage of
any other person. Percentage of beneficial ownership is based upon
41,552,750 shares of the Company's Common Stock outstanding as of March 1,
1999.
(3) This information was derived from information provided to the Company by
Allen & Company Incorporated. Includes warrants to purchase 478,000 shares
of Common Stock exercisable within 60 days of March 1, 1999 (125,000 of the
warrants are held in the name of Susan Allen). Also includes 250,000 shares
of Common Stock held in the name of Susan Allen.
(4) Dr. Lindsay A. Rosenwald is the sole shareholder of Paramount Capital Asset
Management, Inc. ("Paramount Capital"). Paramount Capital is the general
partner of Aries Domestic Fund, L.P., a limited partnership incorporated in
Delaware ("Aries Domestic") and the investment manager of The Aries Master
Fund, a Cayman Islands trust ("The Aries Master Fund"). Includes warrants
to purchase 37,500 shares of Common Stock held by Aries Domestic and
warrants to purchase 87,500 shares of Common Stock held by The Aries Master
Fund, in each case such warrants being exercisable within 60 days of March
1, 1999. Of the 9,325,635 shares of Common Stock (excluding warrants)
indicated as beneficially held, Paramount Capital shares voting and
dispositive power with the following persons or entities: Dr. Rosenwald
with respect to 666,667 of the shares; Aries Domestic with respect to
2,522,667 of the shares; and The Aries Master Fund with respect to
6,011,301 of the shares.
33.
<PAGE>
(5) Includes 3,007,343 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 1, 1999. Also includes 264,936 shares
of Common Stock held by the Company's 401(k) plan for which Dr. Kranzler,
as co-trustee of the 401(k) plan, has voting rights to such shares and
5,000 shares of Common Stock held by the Kranzler Children's Trust dated
1991. Mr. Kranzler disclaims beneficial ownership of the shares held by the
Kranzler Children's Trust.
(6) Includes 1,001,032 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 1, 1999. Also includes 264,936 shares
of Common Stock held by the Company's 401(k) plan for which Dr. Blank, as
co-trustee of the 401(k) plan, has voting rights to such shares.
(7) Includes 322,414 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 1, 1999.
(8) Includes 50,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 1, 1999. Also includes 692,829 shares
of Common Stock and presently exercisable warrants to purchase 6,667 shares
of Common Stock held by Allen & Company Incorporated, in which Mr. Crooks
has a pecuniary interest pursuant to an arrangement with Allen & Company
Incorporated.
(9) Includes 65,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 1, 1999.
(10) Includes 50,000 shares of Common Stock issuable pursuant to options or
other rights exercisable within 60 days of March 1, 1998.
(11) Includes 100,000 shares of Common Stock held by Samuel D. and Mary Ann H.
Anderson as trustees of the Samuel and Mary Ann Anderson trust dated March
22, 1979. Also includes 28,558 shares of Common Stock issuable pursuant to
options exercisable within 60 days of March 1, 1999.
(12) Includes 27,052 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 1, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF CLASS OF
BENEFICIAL OWNERSHIP OF SERIES A PREFERRED
BENEFICIAL OWNER OF SERIES A PREFERRED STOCK SERIES A PREFERRED STOCK (1) STOCK
- -------------------------------------------- ---------------------------- -------------------
<S> <C> <C>
Paramount Capital................................... 666,667(2) 63.2%
Paradigm Group, LLC................................. 161,333 15.3%
</TABLE>
________________________
(1) Percentage of beneficial ownership is based upon 1,054,832 shares of the
Company's Series A Convertible Preferred Stock outstanding as of March 1,
1999.
(2) Dr. Lindsay A. Rosenwald is the sole shareholder of Paramount Capital Asset
Management, Inc. ("Paramount Capital"). Paramount Capital is the general
partner of Aries Domestic Fund, L.P., a limited partnership incorporated in
Delaware ("Aries Domestic") and the investment manager of The Aries Master
Fund, a Cayman Islands trust ("The Aries Master Fund"). Of the shares of
Series A Convertible Preferred Stock indicated as beneficially held,
Paramount Capital shares voting and dispositive power with the following
persons or entities: Aries Domestic with respect to 173,333 of the shares;
and The Aries Master Fund with respect to 493,334 of the shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1998, the Company completed a private placement of 3,063,561
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Shares") with certain accredited investors at a purchase price of $1.50 per
share. Net proceeds (after deducting placement fees of approximately $113,000,
and other related issuing costs of approximately $152,000) to the Company were
approximately $4.3 million. Merrill Weber & Company, Joseph Stevens & Co., Inc.,
Evolution Capital and The May Davis Group acted as non-exclusive placement
agents for the Company and received $2,250, $16,260, $67,500 and $27,000,
respectively, in placement agency fees. Samuel D. Anderson, a director of the
Company, and James A Holland, Mr. Anderson's brother-in-law, both participated
in the private placement. Mr. Anderson purchased 100,000 shares of the Preferred
Shares in the name of Samuel D. Anderson and Mary Ann H. Anderson, Trustees of
the Samuel and Mary Ann Anderson Trust dated March 22, 1979.
34.
<PAGE>
Mr. Richard Crooks, Jr., a director of the Company, is a director of and
consultant to, Allen & Company Incorporated, a principal stockholder of the
Company. As of March 1, 1999, Mr. Crooks beneficially held approximately 2.7%
of the Company's common stock.
The Company has also entered into an employment agreement with its three
executive officers, as described under the caption "Management--Employment
Agreements." The Company has granted stock options to certain directors and
executive officers of the Company. See "Management--Executive Compensation."
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision, the Company
has entered into indemnity agreements with each of its directors and officers
and currently maintains directors and officers insurance coverage.
35.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements of the Company are included herein as
required under Item 8 of this Annual Report on Form 10-K. See Index
on page F-1.
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise
included.
(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description INCORPORATED BY REFERENCE TO
- ----------- ----------- ----------------------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Exhibit 3.1 to Form 10-Q for the quarter ended
Incorporation March 30, 1996
3.2 By-Laws, as amended Exhibit 3.2 to 1995 Form 10-K
4.1 Form of Stock Certificate Exhibit 4.1 to Form S-1 Registration Statement
No. 33-41225
4.2 Warrant Certificate Exhibit 4.2 to Form 8-K filed November 1, 1996
10.1 Form of Common Stock Purchase Warrant Exhibit 3.1 to Form S-1 Registration Statement
No. 33-41225
10.2 Form of Employee Stock Warrant Exhibit 10.13 of Form S-1 Registration Statement
No. 33-41225
10.3 Agreement and Plan of Merger and Exhibit 2.1 to Form 10-Q for quarter ended
Reorganization dated October 10, 1996, September 30, 1996
by and among Registrant, Cypress
Acquisition Sub, Inc. and PRP, Inc.
10.4 Warrant Agreement dated September 18, Exhibit 4.1 to Form 10-Q for quarter ended
1996, between Registrant and American September 30, 1996
Stock Transfer & Trust Company
10.5 Exchange of Bridge Debt and Warrant Exhibit 4.2 to Form 10-Q for quarter ended
Termination Agreement between Registrant September 30, 1996
and certain holders of indebtedness of
PRP, Inc.
10.6 Incentive Stock Option Exhibit 28.2 to Form S-8 Registration Statement
No. 33-20188
10.7 Form of Nonqualified Stock Option Exhibit 4.5 to Form 10-K for the year ended
December 31, 1993
10.8 Form of 7% Convertible Debentures Exhibit 10.1 to Form 10-Q for the quarter ended
March 31, 1994
10.9 Warrant Agreement dated as of April 22, Exhibit 10.3 to Form 10-Q for the quarter ended
1994 between IMRE Corporation and Allen March 31, 1994
& Company Incorporated
</TABLE>
36.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.10 Form 7% Convertible Debenture Purchase Exhibit 10.4 to Form 10-Q for the quarter ended
Agreement March 31, 1994
10.11 Form of Senior Convertible Debenture Exhibit 4.10 to 1995 From 10-K
10.12 Form of Senior Convertible Debenture Exhibit 4.11 to 1995 Form 10-K
Purchase Agreement
10.13 Form of Stock Purchase Agreement for Exhibit 4.12 to 1995 Form 10-K
January 1996 Private Placement
10.14 Form of Warrant to Purchase Common Stock Exhibit 99.1 to Form S-8 Registration Statement
No. 333-19465
10.15 1996 Equity Incentive Plan (the "1996 Exhibit 99.1 to Form S-8 Registration Statement
Plan") No. 333-06771
10.16 Sub-Lease Agreement dated April 15, Exhibit 3.1 to Form 10-Q for the quarter ended
1996, between the Company and March 30, 1996
Bristol-Myers Squibb Company
10.17 Common Stock Purchase Warrant dated June Exhibit 99.1 to Form S-8 Registration Statement
10, 1991 No. 333-06765
10.18 Warrant Agreement dated as of August 29, Exhibit 99.1 to Form S-3 Post Effective
1991 between IMRE Corporation and Amendment to Registration Statement No. 33-71278
Manufacturers of Hanover Trust Company
of California (now know as Chemical
Trust Company of California)
10.19 Successor Warrant Agent Agreement date Exhibit 99.2 to Form S-3 Post Effective
July 23, 1996 between the Registrant and Amendment to Registration Statement No. 33-71278
American Stock Transfer & Trust Company
10.20 Form of Incentive Stock Option Agreement Exhibit 3.1 to Form 10-Q for the quarter ended
under the 1996 Plan March 30, 1996
10.21 1996 Equity Incentive Plan Form of Exhibit 3.1 to Form 10-Q for the quarter ended
Non-Statutory Stock Option Agreement March 30, 1996
10.22 Incentive Stock Option and Appreciation Exhibit 99.4 to Form S-8 Registration Statement
Plan, as amended June 29, 1992 No. 333-06771
10.23 Form of Incentive Stock Option Agreement Exhibit 99.5 to Form S-8 Registration Statement
under the ISO Plan No. 333-06771
10.24 Amended and Restated 1988 Nonqualified Exhibit 99.6 to Form S-8 Registration Statement
Stock Option Plan No. 333-06771
10.25 Form of Nonqualified Stock Option Exhibit 99.7 to Form S-8 Registration Statement
Agreement under the 1988 Plan No. 333-06771
10.26 Form of Stock Option Agreement for Exhibit 99.8 to Form S-8 Registration Statement
issuance's of all non-plan options No. 333-06771
10.27 Form of Nonstatutory Stock Option Exhibit 99.3 to Form S-8 Registration Statement
Agreement under the 1996 Plan No. 333-06771
10.28 Stock Option and Stock Appreciation Plan Exhibit 28.1 to Form S-8 Registration Statement
No. 333-06771
</TABLE>
37.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.29 Warrant Agreement dated September 19, Exhibit 10.1 to Form S-3 Registration Statement
1996 between the Registrant and American No. 333-15483
Stock Transfer & Trust company
10.30 1988 Nonqualified Stock Option Plan Exhibit 28.3 to Form S-8 Registration Statement
No. 333-06771
10.31 Sub-lease Agreement dated October 11, Exhibit 10.3 to 1993 Form 10-K
1991
10.32 Lease Agreement dated April 26, 1994 Exhibit 10.4 to 1994 Form 10-K
10.33 Warrant Agreement dated as of August 29, Exhibit 99.1 to Form S-3 Registration Statement
1991 between IMRE Corporation and No. 33-71278
Manufacturers Hanover Trust Company of
California (now known as Chemical Trust
Company of California)
10.34 Form of Exchange of Bridge Debt and Exhibit 10.1 to Form S-3 Registration Statement
Warrant Termination Agreement No. 333-15483
10.35 Employment Agreement with Jay D. Kranzler Exhibit 10.8 to 1995 Form 10-K
10.36 Employment Agreement with Debby Jo Blank Exhibit 10.9 to 1995 Form 10-K
10.37 Spear, Leeds & Kellogg Stock Purchase Exhibit 10.37 to Form S-1 Registration Statement
Agreement No. 333-45705
10.38 Employment Offer Letter dated as of
February 18, 1999 between the Registrant
and Carl F. Bobkoski
10.39 Separation Agreement dated March 15,
1999 between the Registrant and Debby Jo
Blank
10.41 Sublease dated February 1, 1999 between
the Company and Cardia Pacemakers, Inc.
and related lease dated August 1991
between Michael R. Mastro and Redmond
East Associates and Incontrol, Inc.
and Amendments One through Ten.
23.1 Consent of Ernst & Young LLP,
Independent Auditors
24.1 Power of Attorney Reference is made to page [37]
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
38.
<PAGE>
(c) EXHIBITS
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) set forth above.
39.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYPRESS BIOSCIENCE, INC.
By: /s/ JAY D. KRANZLER
---------------------
Jay D. Kranzler, M.D., Ph. D.
Chief Executive Officer, and
Chief Financial Officer
Date: March 30, 1999
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., as his true
and lawful attorney-in-fact and agent, 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 to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, and 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 intents and purposes as he might or could do in person,
hereby ratifying and confirming that all said attorney-in-fact and agent, or any
of them or their or his substitute or resubstitute, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ JAY D. KRANZLER Chief Executive Officer, Chief Financial Officer and March 30, 1999
- ----------------------------------------- Chairman of the Board (Principal Executive Officer
Jay D. Kranzler, M.D., Ph.D. and Principal Financial and Accounting Officer)
/s/ RICHARD M. CROOKS, JR. Director March 30, 1999
- -----------------------------------------
Richard M. Crooks, Jr.
/s/ PHILIP J. O'REILLY Director March 30, 1999
- -----------------------------------------
Philip J. O'Reilly
/s/ JACK H. VAUGHN Director March 30, 1999
- -----------------------------------------
Jack H. Vaughn
/s/ SAMUEL D. ANDERSON Director March 30, 1999
- -----------------------------------------
Samuel D. Anderson
/s/ DAVID GOLDE Director March 30, 1999
- -----------------------------------------
David Golde, M.D.
</TABLE>
40.
<PAGE>
CYPRESS BIOSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997........................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996............. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............. F-6
Notes to Consolidated Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cypress Bioscience, Inc.
We have audited the accompanying consolidated balance sheets of Cypress
Bioscience, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based upon 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 principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cypress
Bioscience, Inc. as of December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
January 21, 1999,
except for Note 11, as to which the date is
March 26, 1999
F-2
<PAGE>
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,619,568 $ 7,541,320
Short-term investments - 974,333
Accounts receivable:
Trade, net of allowance for doubtful accounts of $32,645 in 1998
and $178,719 in 1997 408,902 372,741
Other 175,298 140,487
Inventories 1,014,443 628,004
Prepaid expenses 254,891 114,382
------------ ------------
Total current assets 7,473,102 9,771,267
Property and equipment, net 1,789,976 1,991,777
Restricted cash 35,000 -
Convertible debenture issuance costs, net 17,957 25,722
------------ ------------
Total assets $ 9,316,035 $ 11,788,766
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 778,061 $ 530,132
Accrued compensation 164,832 175,929
Accrued liabilities 952,448 1,144,692
Current portion of capital leases 9,823 4,286
------------ ------------
Total current liabilities 1,905,164 1,855,039
Convertible debentures 400,000 400,000
Capital leases, net of current portion 21,496 7,735
Note payable 144,804 -
Commitments and contingencies (Note 6)
Stockholders' equity:
Series A convertible preferred stock, $.02 par value; authorized
3,333,333 shares; issued and outstanding, 1,156,832 shares at
December 31, 1998; liquidation preference of $1,735,248 at
December 31, 1998 23,136 -
Common stock, $.02 par value; authorized 60,000,000 shares;
issued and outstanding, 41,402,045 and 38,545,808 shares at
December 31, 1998 and 1997, respectively 828,041 770,916
Additional paid-in capital 86,238,466 78,041,636
Deferred compensation (239,446) (504,315)
Accumulated deficit (80,005,626) (68,782,245)
------------ ------------
Total stockholders' equity 6,844,571 9,525,992
------------ ------------
Total liabilities and stockholders' equity $ 9,316,035 $ 11,788,766
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Product sales $ 2,374,970 $ 2,970,342 $ 1,967,976
Grant income 308,470 325,316 -
------------ ----------- ------------
2,683,440 3,295,658 1,967,976
Costs and expenses:
Production costs 2,113,781 1,772,681 1,482,563
Sales and marketing 2,378,443 1,292,942 794,356
Research and development 4,290,727 6,707,557 4,002,968
General and administrative 3,345,241 2,803,079 4,649,298
Acquired in-process research and
development - - 5,146,943
Restructuring expense - - 493,712
Debt conversion expense - - 276,688
------------ ----------- ------------
12,128,192 12,576,259 16,846,528
Other income (expense):
Interest income 341,755 425,935 458,070
Interest expense (41,953) (31,737) (1,119,726)
------------ ----------- ------------
299,802 394,198 (661,656)
Net loss before imputed dividend on
Series A convertible preferred stock (9,144,950) (8,886,403) (15,540,208)
Undeclared, imputed dividend on
Series A convertible preferred stock (2,078,431) - -
------------ ----------- ------------
Net loss applicable to common
stockholders $(11,223,381) $(8,886,403) $(15,540,208)
============ =========== ============
Net loss per share applicable to common
stockholders - basic and diluted $ (0.29) $ (0.25) $ (0.53)
============ =========== ============
Shares used in computing net loss
per share applicable to common
stockholders - basic and diluted 39,234,741 35,236,579 29,206,470
============ =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------------- ---------------------- Paid-in Deferred
Shares Par Value Shares Par Value Capital Compensation
---------- -------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 - $ - 18,693,595 $373,872 $43,457,000 $ -
Stock options exercised - - 47,500 950 84,050 -
Stock issued for services - - 31,765 635 54,365 -
Stock issued for debenture interest - - 12,005 240 28,963 -
Stock issued for debt conversion - - 1,435,955 28,719 2,495,713 -
Debt discount related to Senior Convertible
Debentures - - - - 1,063,000 -
Stock issued to match 401(k) contributions - - 50,791 1,016 100,910 -
Stock issued in 1996 private placements - - 12,008,702 240,174 17,951,611 -
Stock issued in conjunction with the acquisition
of PRP, Inc. - - 2,292,798 45,856 4,539,740 -
Deferred compensation related to stock options - - - - 1,756,949 (1,756,949)
Compensation related to stock options - - - - 822,382 -
Amortization of deferred compensation - - - - - 741,211
Net loss - - - - - -
---------- -------- ---------- -------- ----------- -----------
Balance December 31, 1996 - - 34,573,111 691,462 72,354,683 (1,015,738)
Stock options exercised - - 20,000 400 37,100 -
Deferred compensation related to stock options - - - - (10,284) 10,284
Stock issued to match 401(k) contributions - - 101,668 2,033 163,623 -
Stock issued in October 1997 private placement - - 3,851,029 77,021 5,496,514 -
Amortization of deferred compensation - - - - - 501,139
Net loss - - - - - -
---------- -------- ---------- -------- ----------- -----------
Balance December 31, 1997 - - 38,545,808 770,916 78,041,636 (504,315)
Stock options and warrants exercised - - 876,681 17,534 1,448,435 -
Deferred compensation related to stock options
and warrants - - - - 194,870 (194,870)
Stock issued to match 401(k) contributions - - 72,827 1,456 205,898 -
Series A convertible preferred stock issued in
September 1998 private placement 3,063,561 61,271 - - 4,269,196 -
Imputed dividend on Series A convertible
preferred stock - - - - 2,078,431 -
Preferred stock conversions (1,906,729) (38,135) 1,906,729 38,135 - -
Amortization of deferred compensation - - - - - 459,739
Net loss - - - - - -
---------- -------- ---------- -------- ----------- -----------
Balance December 31, 1998 1,156,832 $ 23,136 41,402,045 $828,041 $86,238,466 $ (239,446)
========== ======== ========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------- -------------------
<S> <C> <C>
Balance December 31, 1995 $(44,355,634) $ (524,762)
Stock options exercised - 85,000
Stock issued for services - 55,000
Stock issued for debenture interest - 29,203
Stock issued for debt conversion - 2,524,432
Debt discount related to Senior Convertible
Debentures - 1,063,000
Stock issued to match 401(k) contributions - 101,926
Stock issued in 1996 private placements - 18,191,785
Stock issued in conjunction with the acquisition
of PRP, Inc. - 4,585,596
Deferred compensation related to stock options - -
Compensation related to stock options - 822,382
Amortization of deferred compensation - 741,211
Net loss (15,540,208) (15,540,208)
------------ ------------
Balance December 31, 1996 (59,895,842) 12,134,565
Stock options exercised - 37,500
Deferred compensation related to stock options - -
Stock issued to match 401(k) contributions - 165,656
Stock issued in October 1997 private placement - 5,573,535
Amortization of deferred compensation - 501,139
Net loss (8,886,403) (8,886,403)
------------ ------------
Balance December 31, 1997 (68,782,245) 9,525,992
Stock options and warrants exercised - 1,465,969
Deferred compensation related to stock options
and warrants - -
Stock issued to match 401(k) contributions - 207,354
Series A convertible preferred stock issued in
September 1998 private placement - 4,330,467
Imputed dividend on Series A convertible
preferred stock (2,078,431) -
Preferred stock conversions - -
Amortization of deferred compensation - 459,739
Net loss (9,144,950) (9,144,950)
------------ ------------
Balance December 31, 1998 $(80,005,626) $ 6,844,571
============ ============
</TABLE>
See accompanying notes.
- ----------------------
F-5
<PAGE>
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(9,144,950) $(8,886,403) $(15,540,208)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 549,953 481,567 182,845
Acquired in-process research and development - - 5,146,943
Amortization of deferred compensation 459,739 501,139 741,211
Compensation related to stock options - - 822,382
Common stock issued for services and expenses 207,354 165,656 186,129
Debt conversion expense - - 276,688
Gain on disposal of property and equipment (6,610) (3,298) (11,110)
Debt discount related to Senior Convertible Debentures - - 1,063,000
Changes in operating assets and liabilities, net of
effects from acquisition of PRP, Inc.:
Accounts receivable, net (36,161) (28,700) (320,191)
Other receivables (34,811) 10,467 (111,020)
Inventories (386,439) 345,763 174,739
Prepaid expenses (140,509) 56,849 39,655
Accounts payable and other accrued liabilities 44,588 (536,530) (94,678)
----------- ----------- ------------
Net cash used in operating activities (8,487,846) (7,893,490) (7,443,615)
INVESTING ACTIVITIES
Purchase of property and equipment (345,636) (118,038) (997,602)
Proceeds from sale of property and equipment 11,859 7,685 36,735
Purchase of short-term investments (1,000,900) (2,006,773) (2,890,160)
Sale of short-term investments 1,975,233 3,922,600 -
Restricted cash (35,000) - -
Acquisition of PRP, Inc., net of $83,399 cash acquired - - (361,029)
----------- ----------- ------------
Net cash provided by (used in) investing activities 605,556 1,805,474 (4,212,056)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 5,573,535 18,276,785
Net proceeds from issuance of preferred stock 4,330,467 - -
Net proceeds from exercises of stock options and
warrants 1,465,969 37,500 -
Proceeds from issuance of convertible debentures - - 500,000
Proceeds (payment) of capital lease obligation 19,298 (27,207) (13,565)
Note payable 144,804 - -
Debt issuance and conversion costs - - (71,919)
----------- ----------- ------------
Net cash provided by financing activities 5,960,538 5,583,828 18,691,301
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,921,752) (504,188) 7,035,630
Cash and cash equivalents at beginning of the year 7,541,320 8,045,508 1,009,878
----------- ----------- ------------
Cash and cash equivalents at end of the year $ 5,619,568 $ 7,541,320 $ 8,045,508
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 40,873 $ 31,661 $ 14,681
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Stock issued for debt conversion $ - $ - $ 2,524,432
=========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Cypress Bioscience, Inc. (the "Company") researches, develops, manufactures
and markets medical devices and therapeutics for the treatment of certain types
of immune system disorders and is engaged in the development of novel
therapeutic agents for the treatment of blood platelet disorders. The Company's
first product, the Prosorba column, a medical device, treats a patient's
defective immune system so that it can more effectively respond to certain
diseases. The Company received marketing approval from the U.S. Food and Drug
Administration ("FDA") in December 1987 to distribute the Prosorba column for
the treatment of idiopathic thrombocytopenic purpura ("ITP"), an immune-mediated
bleeding disorder. The Company's sales are primarily derived from within the
United States. The Company is also developing Cyplex(TM), a platelet
alternative, previously known as Infusible Platelet Membranes ("IPM"), as an
alternative to traditional platelet transfusions.
The Company's current clinical efforts to expand the approved indications
for the Prosorba column are focused primarily on rheumatoid arthritis ("RA").
In January 1998, the Company's Phase III clinical trial evaluating the use of
the Prosorba column in the treatment of RA was stopped early due to the
achievement of favorable safety and statistically significant results. In
October 1998, a U.S. Food and Drug Administration ("FDA") Gastroenterology and
Urology Device Advisory Panel recommended for approval the Prosorba column for
the treatment of moderate to severe RA.
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 intercompany accounts and
transactions have been eliminated in consolidation.
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.
Cash, Cash Equivalents and Short-term Investments
- -------------------------------------------------
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents. Management determines the
appropriate classification of its cash equivalents and investment securities at
the time of purchase and reevaluates such determination as of each balance sheet
date. Management has classified the Company's cash equivalents and investment
securities as available-for-sale securities in the accompanying financial
statements. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported in a separate component of stockholders'
equity. The cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion, as well as interest and dividends, are included
in interest income. Realized gains and losses are also included in interest
income. The cost of securities sold is based on the specific identification
method.
The Company invests its excess cash in U.S. Government agency securities,
and money market funds with strong credit ratings. The Company has established
guidelines regarding diversification of its investments and their maturities,
which should maintain safety and liquidity.
Inventories
- -----------
Inventories are stated at the lower of cost (using the weighted average
method based on the first-in, first-out method) or market.
F-7
<PAGE>
Property and Equipment
- ----------------------
Property and equipment, including assets acquired under capital leases, are
recorded at cost and depreciated or amortized over the estimated useful lives of
the assets (three to five years) or the lease term using the straight-line
method. The Company does not depreciate assets classified as construction in
progress assets until the assets are placed in operations.
Accrued Clinical Trial Costs
- ----------------------------
The Company enrolls patients in various clinical trial sites which are
conducted in the United States. The Company records the cost of such studies as
the clinical work is performed by the respective research entities. The Company
accrues costs related to clinical trials in the period incurred.
Convertible Debenture Issuance Costs
- ------------------------------------
Convertible debenture issuance costs are being amortized over the life of
the related debentures.
Stock and Stock Warrants Issued for Services
- --------------------------------------------
Common stock and common stock warrants issued for services rendered to the
Company are 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.
Revenue Recognition
- -------------------
Revenue from product sales is recognized when products are shipped.
Revenues from government grants are recognized based on performance requirements
of the grant or as the grant expenditures are incurred. Research and
development expenses are recognized as incurred.
Net Loss Per Share
- ------------------
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings per Share, the computation of net loss per share is based upon the
weighted average number of shares of common stock issued and outstanding for
each period. Common stock equivalents related to options, warrants and
convertible debentures are excluded from the computation, as their effect is
antidilutive.
Long-Lived Assets
- -----------------
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of ("SFAS 121"), impairment losses are recorded on long-lived assets
used in operations when indicators of impairment are present and the estimated
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. To date, the Company has not identified any
indicators of impairment or recorded any impairments of long-lived assets.
Recently Issued Accounting Standards
- ------------------------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, Segment Information ("SFAS 131"). SFAS 130
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period from the
transactions and other events and circumstances from non-owner sources.
Comprehensive net loss is the same as the net loss in all years presented.
SFAS 131 redefines segments and requires companies to report financial and
descriptive information about their operating segments. The Company has
determined that it operates in one business segment and therefore the adoption
of SFAS 131 had no effect on the Company's financial statements.
F-8
<PAGE>
3. FINANCIAL STATEMENT DETAILS
Short-term Investments and Cash Equivalents
- -------------------------------------------
A summary of the estimated fair value of cash equivalents and short-term
investments is shown below as of December 31:
1998 1997
----------- -----------
Money market funds $ 4,611,162 $ 996,075
U.S. government agency securities - 6,947,133
----------- -----------
Total securities 4,611,162 7,943,208
Less amounts classified as cash equivalents (4,611,162) (6,968,875)
----------- -----------
Total short-term investment securities $ - $ 974,333
=========== ===========
The estimated fair value of each cash equivalent and short-term investment
security approximates cost and no unrealized gains or losses were reported as of
December 31, 1998 or 1997. Realized gains or losses on sales of available-for-
sale securities in 1998 and 1997 were not significant.
Inventories
- -----------
Inventories are comprised of the following as of December 31:
1998 1997
---------- --------
Raw materials and components $ 536,513 $166,714
Work in progress 288,930 354,010
Finished goods 189,000 107,280
---------- --------
$1,014,443 $628,004
========== ========
Property and Equipment
- ----------------------
Property and equipment are comprised of the following as of December 31:
1998 1997
----------- -----------
Laboratory and production equipment $ 2,551,468 $ 2,610,417
Office equipment 628,928 456,343
Vehicles 20,924 20,924
Leasehold improvements 73,407 51,753
----------- -----------
3,274,727 3,139,437
Accumulated depreciation and amortization (1,484,751) (1,147,660)
----------- -----------
$ 1,789,976 $ 1,991,777
=========== ===========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $542,188, $473,802 and $171,015, respectively. The cost and accumulated
depreciation for assets acquired under capital leases totaled $120,387 and
$51,414, respectively, at December 31, 1998 and $98,495 and $34,658,
respectively, at December 31, 1997.
Accrued Liabilities
- -------------------
Accrued liabilities are comprised of the following as of December 31:
1998 1997
-------- ----------
Accrued clinical trial costs $576,690 $ 834,815
Other 375,758 309,877
-------- ----------
$952,448 $1,144,692
======== ==========
F-9
<PAGE>
4. ACQUISITIONS
PRP, Inc.
- ---------
On November 1, 1996, the Company acquired all of the assets and assumed the
liabilities of PRP, Inc. ("PRP") in a transaction accounted for as a purchase.
The Company recorded a non-recurring charge of approximately $5.1 million in the
fourth quarter of 1996 as acquired in-process research and development as the
feasibility of the acquired technology had not been established nor had
alternative future uses been identified at the time of the purchase.
In connection with the acquisition, the Company issued to certain holders
of outstanding debt of PRP, in full satisfaction and settlement of such
indebtedness, Units with an approximate total fair value of $4.5 million, based
upon a price of $4.00 per Unit, which was the price identical units were sold
for in a private placement in October 1996 (see Note 9). Each Unit was
comprised of two shares of the Company's common stock and one common stock
purchase warrant.
The holders of PRP equity securities (including holders of options and
warrants of PRP) (the "Equity Holders") will also be entitled to receive earn-
out payments, if any, on a pro rata basis, on net sales of products developed
using PRP's technology acquired by the Company in the acquisition. In addition,
in conjunction with obtaining approval from the FDA of the use of Cyplex(TM), a
platelet alternative for the treatment of thrombocytopenia, the Company shall
make a payment of $5.0 million (the "Milestone Payment") to the Equity Holders,
with such payment being in the form of, at the Company's discretion, cash,
Company common stock, or a combination of the two. The earn-out payments, if
earned, will be treated as compensation expense because most of such earn-out
payments will be made to former stockholders of PRP and the milestone payments,
if earned will either be expensed as acquired in-process research and
development or capitalized as purchased technology, depending upon the
evaluation of the technology to be made by the Company at such future date.
In consideration of certain investment banking advisory services provided
by EGS Securities Corp. ("EGS") to PRP in connection with the acquisition, the
Company issued to EGS Units with a total value of approximately $120,000. In
addition, the Company is obligated to pay EGS an amount in cash equal to two and
one-half percent (2 1/2%) of a certain milestone payment and each earn-out
payment made to the Equity Holders, at the time any such payments are made.
Subject to limited exceptions, the Company is obligated to spend $4.0
million to commercialize Cyplex(TM). The only circumstances under which the
Company may decrease or cease commercialization of Cyplex(TM) prior to expending
$4.0 million would be if the Company encounters critical problems with the
commercialization of Cyplex(TM), including problems related to efficacy or
economic viability, such as would render Cyplex(TM), on a stand-alone basis,
unsafe, ineffective or incapable of generating a reasonable, positive cash flow.
As of December 31, 1998, the Company has spent approximately $4.2 million in its
effort to commercialize Cyplex(TM).
The following unaudited pro forma data reflects the combined results of
operations of the Company and PRP for the year ended December 31, 1996 as though
the acquisition had occurred on January 1, 1995, and assumes the charge of
$5,147,000 for acquired in-process research and development was recorded on that
date.
PRO FORMA RESULTS OF OPERATIONS
December 31, 1996
-----------------
Revenues $ 2,029,773
Net loss $(12,111,248)
Net loss per share - basic and diluted $ (0.39)
5. RESTRUCTURING EXPENSE
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 entered into a
termination agreement with its former Chief Scientific Officer which included
the issuance of non-qualified stock options to
F-10
<PAGE>
purchase 705,000 shares of common stock (see Note 6). Costs related to these
terminations were approximately $494,000 and were recorded as a restructuring
expense in 1996. In addition, the Company incurred 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 were recorded
as general and administrative expenses in 1996.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
The Company currently occupies approximately 8,000 square feet of leased
office space in San Diego, California. The San Diego facility houses the
Company's executive and administrative offices. The five-year lease for this
facility expires in 2001. In accordance with the San Diego facility lease, the
Company has maintained a $35,000 certificate of deposit which is classified as
restricted cash on the December 31, 1998 balance sheet.
The Company leases 6,916 square feet for its manufacturing facility in
Redmond under a lease expiring in 2004. The facility has historically been used
to produce commercial quantities of both protein A and the chemically coated
silica matrix used in the manufacture of the Prosorba column. Assembly of the
Prosorba column had historically been performed in the Company's Seattle
facility. The Redmond facility, however, has been renovated so that both raw
material production and assembly of the Prosorba column can be performed in a
single facility. In June 1998, the Company signed a new lease for 3,400 square
feet in Redmond to house the Company's research and medical personnel. In
August 1998, the Company leased a 4,000 square foot single family residence
which is used by the Company's executives, medical employees, and consultants
while traveling to Redmond.
The table below indicates future minimum lease obligations under the
operating leases as of December 31, 1998:
1999 $235,504
2000 217,552
2001 174,990
2002 113,184
2003 113,184
Thereafter through 2004 113,184
--------
$967,598
========
Total rent expense was approximately $367,000, $501,000, and $494,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Sublease income
was approximately $117,000 and $149,000 for the years ended December 31, 1997
and 1996, respectively. No sublease income was received in 1998.
Severance Agreement
- -------------------
The Company entered into a severance agreement as of March 29, 1996 with
its former Chief Scientific Officer, the terms of which correlate to the
employment agreement renegotiated with the former officer as of December 28,
1995. Such terms include the payment of $244,000 in 1996 and the issuance of
non-qualified stock options to purchase 705,000 shares of common stock at $2.25
per share. These options replaced an equal number of options and warrants
outstanding at the date of termination. During the year ended December 31,
1996, the Company valued these options using the Black Scholes model and
recorded compensation expense totaling approximately $822,000.
Employment Agreements
- ---------------------
The Company entered into employment agreements in December 1995 with a new
Chief Executive Officer and a new President, Chief Operating Officer each for a
term of five years. The agreements provide for specified compensation which
include salary, bonuses and a lump sum payment in the event of a termination of
employment, without cause, as defined. Bonuses of $270,000 and $225,000 were
earned and included in general and administrative expenses in the years ended
1997 and 1996, respectively.
F-11
<PAGE>
The agreements provided for the granting of an aggregate of 4,159,824
options to purchase the Company's common stock. On the date the options were
granted, the closing bid price of the Company's stock was $1.875 per share. The
exercise price of the options was $1.50 per share, reflecting the price per
share of stock sold in the private placement of approximately 8,500,000 shares
on the same date (see Note 9). The Company recorded $1,559,934 of deferred
compensation expense on such date, reflecting the difference between the closing
bid price of the Company's common stock on the date of issuance and the option
exercise price. Options to purchase 25% of the total amount granted vested
immediately with the remainder to vest over a four year period. The deferred
compensation balance is being amortized 25% immediately with the remainder over
the four year vesting period. Such options will vest immediately upon a merger
of the Company or in the event of a termination of employment without cause, as
defined.
7. LONG-TERM OBLIGATIONS
7% Convertible Debentures
- -------------------------
In April 1994, the Company completed a private placement of $4,245,000
principal amount of 7% convertible debentures due March 2001 ("7% Convertible
Debentures"). Interest is payable in cash or shares of common stock at the
option of the 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 at the
time the fair market value of the Company's common stock was $3.81. Of the
original $4,245,000 outstanding principal amount, $2,200,000 of the 7%
Convertible Debentures was converted. In the fourth quarter of 1995 and the
first quarter of 1996, an additional $700,000 and $100,000, respectively, of 7%
Convertible Debentures was converted into common stock at the original
conversion price of $2.88 per share.
In March 1996, the Company completed a second exchange offering made to
holders of its outstanding 7% Convertible Debentures at the time the fair market
value of the Company's common stock was $2.25. The Company offered to exchange
the 7% Convertible Debentures for common stock of the Company at a price of
$2.25 per share. Of the $1,245,000 outstanding principal amount, $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% Convertible Debentures),
pursuant to the exchange offering. At December 31, 1996, there was outstanding
principal of $400,000 of the 7% Convertible Debentures. The Company recorded a
non-cash expense of $183,688 in 1995, which represents the fair market value of
the increased number of shares issued under the terms of the offering memorandum
compared to the original conversion terms. In 1996, the Company charged an
additional $93,000 to debt conversion expense for the unamortized deferred debt
issuance costs related to the debentures converted in 1996.
Note Payable
- ------------
In March 1998, the Company received a loan totaling $440,000 to finance the
purchase of fixed assets of which $144,804 is outstanding at December 31, 1998.
In accordance with the terms, the line matures in March 2002 and interest is
accrued at the banks prime rate plus 0.5% (7.75% at December 31, 1998). The loan
is fully collateralized by the fixed assets financed with the line of credit
with a net book value of approximately $126,000 at December 31, 1998.
8. SENIOR CONVERTIBLE DEBENTURES
In December 1995, the Company completed a private placement of $1,500,000
principal amount of Senior Convertible Debentures due in July 1996 to a group of
investors, including $500,000 issued to Allen & Company. The Company received
$1.0 million in cash on 1995 and the remaining $500,000 during the first week of
January 1996. The debt was convertible into common stock at the price of the
Company's next equity financing round.
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 simultaneously with the closing of a private
placement of common stock (see Note 9). The Company recorded approximately $1.1
million of interest expense in January 1996 for the difference between the fair
market value of the Company's common stock on the conversion date and the
conversion price of $1.50.
F-12
<PAGE>
9. STOCKHOLDERS' EQUITY
Authorized Shares
- -----------------
The Company is authorized to issue up to 15,000,000 shares of preferred
stock.
Private Placements
- ------------------
In January 1996, the Company sold approximately 8,500,000 shares of common
stock for $1.50 per share in a private placement, resulting in net proceeds to
the Company of approximately $12,000,000. As a result of this private placement,
the Senior Convertible Debentures automatically converted into 1,000,000 shares
of common stock (see Note 8). In addition, upon closing of the private
placement, the Company issued stock options to the new Chief Executive Officer
and President aggregating 4,159,824 shares at an exercise price of $1.50 per
share.
In October 1996, the Company completed a private placement of units with
each unit consisting of two shares of common stock and one common stock purchase
warrant (the "1996 Warrants") collectively priced at $4.00 per unit. Holders of
each warrant are entitled to purchase one share of the Company's common stock at
an exercise price of $2.00 per share over a five-year period. A total of
1,734,000 units were sold resulting in net proceeds to the Company of
approximately $6.3 million.
In October 1997, the Company sold approximately 3,851,000 shares of common
stock for $1.50 per share in a private placement. The net proceeds to the
Company were approximately $5.6 million.
In September 1998, the Company completed a private placement of 3,063,561
shares of the Company's Series A convertible preferred stock at a price of $1.50
per share for an aggregate offering price of approximately $4.6 million. Net
proceeds to the Company were approximately $4.3 million. The Company recorded a
non-cash imputed dividend of approximately $2.1 million related to the sales of
Series A convertible preferred stock.
Preferred Stock
- ---------------
The Series A preferred stock is senior to the common stock with respect to
dividend rights and liquidation preferences. In the event the Board of Directors
declares any cash dividends on common stock, the Board must also declare a cash
dividend on the Series A preferred stock in an amount equal to the common
equivalent per share dividend declared on the common stock. As of December 31,
1998, no dividends have been declared. In the event of any liquidation or
winding up of the Company, the holders of the Series A preferred shares are
entitled to receive, prior and in preference to the holders of common stock , a
liquidation preference of $1.50 per share.
Shareholders have the right to convert at any time the Series A preferred
shares into shares of common stock of the Company initially on a one-for-one
basis. The Series A preferred stock will automatically convert into common
stock upon the first to occur of the following events: (i) completion by the
Company of a public offering of equity securities raising gross proceeds of $15
million or more at a price that equals or exceeds $3.00; (ii) if the average
closing sales price of the common stock as quoted on the Nasdaq SmallCap Market
equals or exceeds $3.00 per share for any twenty trading days within a period of
thirty consecutive trading days; or (iii) upon the written consent of the
holders of a majority of the Preferred shares then outstanding.
As of December 31,1998, the Company has reserved 1,156,832 shares of common
stock for issuance upon the conversion of the authorized Series A preferred
stock.
Warrants
- --------
In 1991, the Company granted warrants to purchase 749,900 shares of common
stock to certain officers, directors and employees, which are exercisable
through June 2001 at $1.875 per share. In April 1994, 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 7% Convertible Debentures
(see Note 8). In conjunction with the private placement completed in October
1996, as well as in conjunction with the PRP, Inc. acquisition, the Company
granted warrants to purchase 2,880,399 shares of common stock. The warrants
entitle the holder to purchase a share of common stock for $2.00 per share. The
warrants expire in October 2001 and are redeemable, in certain circumstances,
for
F-13
<PAGE>
$0.10 per warrant, beginning in September 1997. In 1998, the Company granted
warrants to purchase 250,800 shares of common stock to consultants which are
exercisable through November 2001 at prices ranging from $1.88 to $2.40.
Stock Options
- -------------
1996 EQUITY INCENTIVE PLAN. In April 1996, the Company adopted the 1996
Equity Incentive Plan authorizing the issuance of both incentive and non-
qualified options to purchase the Company's Common Stock, as well as the
granting of stock appreciation rights, stock bonuses and rights to purchase
restricted stock. Under the plan, 10,000,000 shares of the Company's Common
Stock are reserved for issuance to directors, officers and key employees of, and
consultants and certain advisors to, the Company.
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 previously granted under
the plan remain outstanding according to their respective terms and conditions.
NON-QUALIFIED STOCK OPTIONS. The Company has reserved 572,000 shares of
common stock for issuance under its 1988 Non-qualified Stock Option Plan, as
amended in 1992 and 1995 (the "1988 Plan"). The plan expired February 10, 1998.
Under the 1988 Plan, directors, officers, employees and consultants may be
granted non-qualified stock options at exercise prices and terms determined by
the Board of Directors.
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.
Options granted pursuant to each of the plans above have a term of up to
ten years and generally vest over four years.
The following table summarizes the activity of the Company's stock options
and warrants:
<TABLE>
<CAPTION>
NUMBER OF WARRANTS / OPTIONS
-------------------------------------------------------------------------------------
1996 INCENTIVE
EQUITY INCENTIVE STOCK NON-QUALIFIED Other
WARRANTS PLAN OPTIONS OPTIONS STOCK OPTIONS Options
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 2,819,800 - 268,600 1,522,500 675,835
Granted 2,880,399 5,607,157 - 30,000 929,000
Exercised - - - (47,500) -
Canceled (335,000) (20,000) (207,600) (533,000) (454,000)
Expired - - - (500,000) -
-------------------------------------------------------------------------------------
Balance December 31, 1996 5,365,199 5,587,157 61,000 472,000 1,150,835
Granted - 789,522 - 30,000 -
Exercised - (20,000) - - -
Canceled (180,800) (322,479) (33,250) (32,000) (6,000)
Expired (1,850,000) - (1,500) - (192,730)
-------------------------------------------------------------------------------------
Balance December 31, 1997 3,334,399 6,034,200 26,250 470,000 952,105
Granted 250,800 1,311,625 - - -
Exercised (125,250) (664,650) - (10,000) (118,000)
Canceled - (260,346) - - -
Expired (6,800) (17,951) - - (33,105)
-------------------------------------------------------------------------------------
Balance December 31, 1998 3,453,149 6,402,878 26,250 460,000 801,000
=====================================================================================
</TABLE>
All warrants are exercisable at December 31, 1998 at exercise prices
ranging from $1.88 to $2.88, and 3,453,149 shares of common stock were reserved
for future issuance.
F-14
<PAGE>
With respect to stock options, at December 31, 1998, 2,912,472 options were
available for future grant and 10,602,600 shares of common stock were reserved
for future issuance.
Following is a further breakdown of the options outstanding as of December
31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE EXERCISE PRICE OF
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS OPTIONS
EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISABLE
--------------- ----------- ------------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.50 4,238,495 7.2 $1.50 3,548,170 $1.50
$1.51 - $2.25 2,475,447 5.7 $1.98 1,957,287 $2.02
$2.26 - $3.25 890,186 8.7 $2.57 208,871 $2.69
$3.26 - $4.00 86,000 5.5 $3.61 46,000 $3.77
--------- ---------
7,690,128 5,760,328
========= =========
</TABLE>
The weighted average exercise prices and fair values for options granted in
1998 are as follows:
WEIGHTED AVERAGE
-------------------
Exercise Price on FAIR EXERCISE
DATE OF GRANT VALUE PRICE
------------------------------ ----- --------
Equal to market price of stock $2.14 $2.66
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Employees" ("APB 25") and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss (in thousands) $(13,079) $(11,302) $(18,452)
Pro forma net loss per share basic and diluted $ (0.33) $ (0.32) $ (0.63)
</TABLE>
The proforma results above for 1998, 1997 and 1996 are not likely to be
representative of the effects of applying FAS 123 on reported net income or loss
for future years as these amounts reflect the expense for less than four years
of vesting.
Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1998: a risk-free interest rate of 4.8%; a dividend yield of 0%; a volatility
factor of 92.5%; and an option life of 7 years; for 1997: a risk-free interest
rate of 6.49%; a dividend yield of 0%; a volatility factor of 93.9%; and an
option life of 7 years; for 1996: a risk-free interest rate of 6.49%; a dividend
yield of 0%; a volatility factor of 65%; and an option life of 7 years.
F-15
<PAGE>
The weighted average exercise prices for stock option activity are as
follows:
<TABLE>
<CAPTION>
NUMBER OF STOCK OPTIONS WEIGHTED AVERAGE
UNDER ALL PLANS EXERCISE PRICES
------------------------ ----------------
<S> <C> <C>
Balance December 31, 1995 2,466,935 $2.34
Granted 6,566,157 $1.69
Exercised (47,500) $1.79
Canceled (1,214,600) $2.46
Expired (500,000) $2.19
----------
Balance December 31, 1996 7,270,992 $1.74
Granted 819,522 $1.72
Exercised (20,000) $1.88
Canceled (393,729) $2.08
Expired (194,230) $2.26
----------
Balance December 31, 1997 7,482,555 $1.71
Granted 1,311,625 $2.36
Exercised (792,650) $1.68
Canceled (260,346) $2.26
Expired (51,056) $2.73
----------
Balance December 31, 1998 7,690,128 $1.80
==========
</TABLE>
Defined Contribution Plan
- -------------------------
The Company sponsors a defined contribution 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 $207,000, $166,000, and
$102,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
based upon the market value of the Company's common stock on the date of the
contribution.
10. INCOME TAXES
Significant components of the Company's deferred income tax assets as of
December 31 are as follows:
1998 1997
------------ ------------
Net operating loss carryforwards $ 21,416,000 $ 18,686,000
Capitalized research & development 5,563,000 4,756,000
Other 1,418,000 1,829,000
------------ ------------
28,397,000 25,271,000
Valuation allowance (28,397,000) (25,271,000)
------------ ------------
$ - $ -
============ ============
As of December 31, 1998, the Company has accumulated Federal and California
net operating loss carryforwards of approximately $62,540,000 and $2,541,000,
respectively. The federal tax loss carryforwards will continue to expire in
1999. The California tax loss carryforward will begin to expire in 2001 unless
previously utilized. Additionally, the Company has Federal and California
research and development tax credit carryforwards of approximately $965,000 and
$34,000, respectively, which will begin expiring in 2004 unless previously
utilized.
F-16
<PAGE>
In accordance with certain provision of the Internal Revenue Code ("IRC"),
a change in ownership of greater than 50% within a three-year period will place
an annual limitation on the Company's ability to utilize its existing net
operating loss and tax credit carryforwards.
As a result of the Company's sales of common stock, ownership changes
occurred in September 1991 and October 1997. Accordingly, the utilization of
net operating loss carryforwards which had accumulated as of September 1991 and
October 1997 will be limited to a prescribed amount in each successive year.
However, the Company believes that this limitation will not have a material
effect on the financial statements.
11. SUBSEQUENT EVENTS
In February 1999, the Company entered into a sublease to occupy 21,000
additional square feet of manufacturing space in Redmond, Washington, which
expires in 2005. Future minimum lease obligations under this operating lease is
as follows: $243,250 in 1999; $357,000 in 2000; $369,250 in 2001; $378,000 in
2002; $388,500 in 2003, and $565,250 thereafter.
In February 1999, the Company entered into an employment agreement to hire
a president, chief operating officer and corporate secretary, whereby the
compensation consists of a base salary of $215,000 and the eligibility, at the
sole discretion of the Board of Directors, for an annual bonus equal to 25% of
the base salary. The Company also granted options to purchase up to 500,000
shares of the Company's common stock at an exercise price of $2.75 per share,
the fair market value on the date of grant. The options vest 25% in February
2000 and monthly thereafter. In the event the employment is terminated by the
Company without cause due to a corporate merger or acquisition, the options will
vest and become fully exercisable.
The Company entered into a license and distribution agreement with
Fresenius AG, a German company, and its U.S. subsidiary, Fresenius
Hemotechnology, Inc. ("Fresenius") on March 26, 1999, whereby the Company
granted to Fresenius the exclusive right to manufacture, sell and distribute the
Prosorba column in the United States, Europe and Latin America, and subject to
certain conditions, Japan, Thailand, China, New Zealand, Hong Kong, Korea, India
and China. The agreement also provides for the equal sharing of profits
attributable to the marketing of the Prosorba column and related products. As
part of this agreement, the Company received approximately $1.0 million from the
sale of 297,530 shares of the Company's common stock at $3.361 per share,
$500,000 from the issuance of a warrant to purchase 342,466 shares of the
Company's common stock at $7.50 per share, and approximately $4.1 million under
a line of credit agreement due upon the earlier of (i) the date on which
Fresenius exercises its option to purchase the Company's manufacturing facility
in Redmond, Washington or (ii) December 31, 2000. Management believes that these
funds, along with the existing cash balances, are adequate to fund operations
through December 31, 1999.
In March 1999, the Company demanded redemption of warrants to purchase
approximately 2.7 million shares of common stock with an exercise price of $2.00
per share. The warrants will be redeemed on April 19, 1999 if not exercised
prior to or on April 12, 1999.
In March 1999, the closing sales price of the Company's common stock was
equal to or greater than $3.00 per share for a period of 20 out of 30 trading
days. Therefore, the 1,156,832 shares of outstanding preferred stock at December
31, 1998 will be automatically converted into common stock in 1999.
F-17
<PAGE>
LETTERHEAD OF CYPRESS
EXHIBIT 10.38
February 18, 1999
Carl F. Bobkoski
P.O. Box 964
16846 Circa del Norte
Rancho Santa Fe, California 92067
RE: EMPLOYMENT TERMS
Dear Carl:
CYPRESS BIOSCIENCE, INC. (the "Company") is pleased to offer you the position
of President, Chief Operating Officer and Corporate Secretary, on the
following terms.
You will be responsible for such duties as are normally associated with the
positions of President, Chief Operating Officer and Corporate Secretary,
including, but not limited to, responsibility in the areas of finance, sales,
marketing, MANUFACTURING, business development, risk management and planning for
the Company. You will report to me and will work in our facility located in San
Diego, California. Normal working hours are from 8:00 a.m. to 5:00 p.m., Monday
through Friday. As an exempt salaried employee, you will be expected to work
additional hours as required by the nature of your work assignments. Of course,
the Company may change your duties and work location from time to time as it
deems necessary.
Your initial base salary will be Two Hundred and Fifteen Thousand Dollars
($215,000) per year, less standard payroll deductions and all required
withholdings payable on the Company's regular payroll dates. You will be
eligible for all standard benefits provided to employees of the Company,
according to standard Company policy and as may be adopted by the Company from
time to time. Details about these benefits are available for your review. In
addition, the Company agrees that it will reimburse you for (i) the cost of your
current long term disability policy during the period of your employment in the
amount of FIVE HUNDRED TWENTY-FIVE DOLLARS ($525.00) per month, and (ii) does
not cover your son due to a pre-existing condition for up to Five Hundred
Dollars ($500.00) per month for up to six (6) months. You will also be eligible
at the sole discretion of the Board of Directors ("Board"), for an annual bonus
equal to up to twenty-five percent (25%) of your base salary. The Company
reserves the right to modify your compensation and benefits from time to time as
it deems necessary.
<PAGE>
Carl F. Bobkoski
February 18, 1999
Page 2
Upon commencement of employment with the Company pursuant to this letter, and
subject to the approval of the Company's Board, you will be entitled to receive
an incentive stock option grant, under the terms of the Company's 1996 Equity
Incentive Plan, as amended April 24, 1997 (the "Plan") in the amount of 500,000
shares of the Company's Common Stock on the date of the grant. The option will
be subject to vesting over four (4) years, so long as you continue to be
employed with the Company, such that the Option will vest as to one-forth (1/4)
the shares subject to the Option following twelve (12) continuous months of
service with the Company beginning on the day of grant with the remainder of the
Option vesting monthly thereafter. The Option shall have a term of ten (10)
years. Other terms of the Option shall be consistent with the Company's Plan and
with the terms set forth in the Company's standard form of stock option grant.
Based upon performance satisfactory to the Board in its sole discretion, you
will be awarded an option grant, following your first year of employment, of an
amount equivalent to your initial Option.
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company. Likewise, the Company may
terminate your employment at any time and for any reason whatsoever, with or
without cause or advance notice. This at-will employment relationship cannot be
changed except in writing signed by the Chief Executive Officer. Notwithstanding
this at-will employment relationship, if the Company terminates your employment
without "cause" after June 30, 1999, then upon your furnishing to the Company an
executed Release and Waiver of Claims (a form of which is attached hereto as
Exhibit A), you shall be entitled to receive severance payments in the form of
continuation of your base salary in effect at the time or your termination,
subject to standard payroll deductions and withholdings, for a period of six (6)
months; provided, that such salary continuation will increase by one (1) month
for every full year of continuous service with the Company. However if you
resign or your employment is terminated for "cause", all compensation and
benefits will cease immediately, and you will receive no severance benefits
other than your current accrued base salary through the date of termination. For
purposes of this letter agreement, "cause" shall mean: (i) conviction of any
felony or a crime involving moral turpitude or dishonesty; (ii) participation in
a fraud or act of dishonesty against the Company; (iii) willful breach of the
Company's policies; (iv) intentional damage to, or misappropriation of, the
Company's property; (v) material breach of any term of this Agreement or the
Proprietary Information and Inventions Agreement (attached as Exhibit B); or
(vi) conduct by you that, in good faith and reasonable determination of the
Board, demonstrates gross unfitness to serve.
In the event of a "change in control", then the vesting of your Option shall be
immediately accelerated such that the Option shall become immediately
exercisable. For purposes of this letter agreement, "change in control", shall
mean (i) a dissolution or liquidation of the Company; (ii) a sale of all or
substantially all of the assets of the Company; (iii) a merger or consolidation
in which the Company is not the surviving corporation and in which beneficial
ownership of securities of the Company representing at least fifty percent (50%)
of the combined voting power entitled to vote in the election of directors has
changed; (iv) a reverse merger in which the Company is the surviving corporation
but the shares of Common Stock outstanding immediately preceding the merger are
<PAGE>
Carl F. Bobkoski
February 18, 1999
Page 3
converted by virtue of the merger into other property, whether in the form
of securities, cash or otherwise, and in which beneficial ownership of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors has changed;
(v) an acquisition by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any comparable successor provisions (excluding any employee benefit
plan, or related trust, sponsored or maintained by the Company or subsidiary of
the Company or other entity controlled by the Company) of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act,
or comparable successor rule) of securities of the Company representing at least
fifty percent (50%) of the combined voting power entitled to vote in the
election of directors; or (vi) in the event that the individuals who, as of the
date of the adoption of this provision, are members of the Company's Board (the
"Incumbent Board"), cease for any reason to constitute at least fifty percent
(50%) of the Board. (If the election, or nomination for election by the
Company's stockholders, of any new director is approved by a vote of at least
fifty percent (50%) of the Incumbent Board, such new director shall be
considered as a member of the Incumbent Board).
As a Company employee, you will be expected to abide by Company rules and
regulations. As a condition of your employment, you will be required to sign and
comply with a Proprietary Information and Inventions Agreement, a copy of which
is attached hereto as Exhibit B, which, among other things, prohibits
unauthorized use or disclosure of Company proprietary information. In your work
for the Company, you will be expected not to use or disclose any confidential
information, including trade secrets, of any former employer or other person to
whom you have an obligation of confidentiality.
You agree that you will not bring onto Company premises any unpublished
documents or property belonging to any former employer or other person to whom
you have an obligation of confidentiality. In the performance of your duties for
the Company, you will be expected to use only that information which is
generally known and used by persons with training and experience comparable to
your own, which is common knowledge in the industry or otherwise legally in the
public domain, or which is otherwise provided or developed by the Company.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement regarding the subject matter set forth herein between
you and the Company. This letter agreement may not be amended or modified except
in a written agreement signed by you and the Chief Executive Officer of the
Company. As required by law, this offer is subject to satisfactory proof of your
right to work in the United States.
If you choose to accept our offer as described above, please sign and date this
letter below, and return it to me on or before February 25, 1999.
We are enthusiastic about the prospect of your joining the Company. We look
forward to a productive and enjoyable work relationship.
<PAGE>
Carl F. Bobkoski
February 18, 1999
Page 4
Sincerely,
CYPRESS BIOSCIENCE, INC.
/s/ JAY D. KRANZLER
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
AGREED AND ACCEPTED:
/s/ CARL F. BOBKOSKI
- --------------------
Carl F. Bobkoski
2/18/99
- --------------------
Date
Attachments:
Exhibit A - Release and Waiver of Claims
Exhibit B - Proprietary Information and Inventions Agreement
<PAGE>
EXHIBIT 10.39
SEPARATION AGREEMENT
This SEPARATION AGREEMENT ("Agreement") is made and entered into by and
between DEBBY Jo BLANK ("Employee") and CYPRESS BIOSCIENCE, INC. (the
"Company"), as of the Effective Date provided for in paragraph 13 herein.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Employee has tendered her resignation as President, Chief
Operating Officer and Director and all other positions she may hold with the
Company and its subsidiaries; and
WHEREAS, the Company has accepted Employee's resignation as President,
Chief Operating Officer and Director and all other positions she may hold with
the Company and its subsidiaries pursuant to the terms and conditions set forth
below.
Now, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is agreed by and between the parties hereto as follows:
1. RESIGNATION. Employee has tendered and the Company has accepted her
resignation as President, Chief Operating Officer and Director and all other
positions she may hold with the Company and its subsidiaries, effective
March 15, 1999 (the "Separation Date"). Employee agrees that she will execute
the Resignation Letter attached hereto as Exhibit A concurrent with the
execution of this Agreement.
2. ACCRUED SALARY AND VACATION. The Company will pay Employee all accrued
salary, and all accrued and unused vacation benefits earned prior to the
Separation Date, subject to standard payroll deductions, withholdings and
advances of any kind. Employee is entitled to this payment regardless of whether
she signs this Agreement.
3. EXPENSE REIMBURSEMENT. As soon as reasonably practical after Employee's
execution of this Agreement, Employee agrees that she will submit her final
documented expense reimbursement statement (the "Statement") reflecting all
business expenses she incurred through the Separation Date, if any, for which
she seeks reimbursement; provided, that Employee shall submit the Statement
within sixty (60) days of the Separation Agreement. The Company shall reimburse
Employee's expenses pursuant to Company policy and regular business practice.
4. STOCK OPTIONS.
(a) The parties agree that Employee (i) currently owns 199,998 shares
of common stock of Company (the "Owned Stock") and (ii) as of the Separation
Date will hold vested options to purchase an additional 998,630 shares of common
stock of Company (the "Stock Options"), pursuant to various stock option plans
(the "Option Plans") adopted by the Company, the terms of any stock option
agreements entered into pursuant to the option Plans (the "Option Agreements")
and the terms of the Employment Agreement dated December 28, 1995 between
Company and Employee (the "Employment Agreement").
1.
<PAGE>
(b) Employee shall not sell or otherwise transfer or dispose of any
shares of the Owned Stock and Stock Options for a period equal to the lesser of
(1) completion of Company's next private placement of securities of five million
dollars or more (a "Private Placement") or (2) one hundred eighty (180) days
from the Separation Date (the "Lock-Up Period"). As used in this paragraph 4(b),
a Private Placement by the Company excludes any financing received by the
Company as a result of (i) the Warrant Redemption by the Company which expires
on April 19, 1999, and (ii) any agreement entered into with Fresenius AG and
Fresenius Hemotechnology, Inc. Notwithstanding any terms of the Option Plans,
Option Agreements or Employment Agreement, the exercise period of Employee's
Stock Options shall be and is hereby extended such that such Stock Options may
be exercised for a period of two (2) years after the Lock-Up Period (the
"Exercise Period"); provided, that as requested by the Company or any
representative of an underwriter of the Company, Employee agrees not to sell or
otherwise transfer or dispose of any shares of Owned Stock or any Stock Options
of the Company during such periods of time as the Company or such underwriters
may request in order to facilitate any private or public offerings of securities
by the Company during the Exercise Period. To the extent Employee is subject to
any further lock-up periods during the two (2) year Exercise Period, the two (2)
year Exercise Period shall be extended by the same number of days that Employee
was subject to additional lock-ups, if any. Upon written request by Employee, a
Company shall from time to time confirm in writing the commencement and
expiration dates of any lock-up periods and the expiration date of the Exercise
Period.
(c) Employee's registration rights (as set forth in the Employment
Agreement and, if applicable, in the Option Plans and Option Agreements) in
connection with her Owned Stock and any additional stock purchased pursuant to
the Stock Options shall be preserved.
(d) Employee expressly acknowledges that, by virtue of the extension
of the exercise period, any of her Stock Options originally granted as incentive
stock options will no longer be treated as such, but instead will be treated for
tax purposes as if they were non-qualified stock options. Employee also
acknowledges that an extension of time to exercise may be considered a
"purchase" under Section 16 of the Securities Exchange Act of 1934, as amended.
(e) Except as provided herein, Employee understands and agrees that
all vesting under any stock compensation award (e.g., incentive stock option,
non-qualified stock option, stock purchase agreement, or restricted stock bonus
agreement) from the Company shall cease upon the separation Date.
(f) Company agrees to cooperate with Employee from time to time in
effectuating cashless exercises of her Stock Options pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board, to the
extent permitted by law and to the extent Company cooperates with its then
current employees in effectuating similar transactions.
5. HEALTH INSURANCE. To the extent provided by the federal COBRA law or, if
applicable, state insurance laws, and by the Company's current group health
insurance policies, Employee will be eligible to continue her health insurance
benefits at her own expense. Employee will be provided with a separate notice of
her COBRA rights.
2.
<PAGE>
6. OTHER COMPENSATION AND BENEFITS. Except as expressly provided herein,
Employee acknowledges that she will not receive (nor is she entitled to) any
additional compensation, severance, stock options, stock or benefits (including,
but not limited to, life insurance and disability insurance) from the Company,
notwithstanding any prior agreements to the contrary.
7. NONSOLICITATION. Employee agrees that for one (1) year after the
Separation Date, she will not, either directly or through others, solicit or
attempt to solicit any person (including any entity) who is then an employee,
consultant or independent contractor of the Company to terminate his, her or its
relationship with the Company in order to become an employee, consultant or
independent contractor to or for any other person or entity.
8. PROPRIETARY INFORMATION OBLIGATIONS. Employee hereby acknowledges her
continuing obligations under Article 8 of her Employment Agreement dated
December 28, 1995, not to use or disclose any confidential or proprietary
information of the Company, among other things. A copy of Employee's Employment
Agreement is attached hereto as Exhibit B.
9. COMPANY PROPERTY. Employee agrees to return to the Company, within ten
(10) days of the execution of this Agreement, all Company documents (and all
copies thereof) and other Company property in her possession, or her control,
including, but not limited to, Company files, notes, drawings, records, business
plans and forecasts, financial information, specifications, computer-recorded
information, tangible property, credit cards, entry cards, identification
badges, keys and the laptop computer, and, any materials of any kind which
contain or embody any proprietary or confidential material of the Company (and
all reproductions thereof); provided, however, that if Employee discovers any
such documents or property in her possession after the expiration of such ten
(10) day period, Employee agrees to return such property to the Company as soon
as practicable following discovery.
10. NONDISPARAGEMENT. Employee agrees that she will not at any time
intentionally disparage the Company in any manner likely to be harmful to the
Company, its business reputation, or the personal or business reputation of its
directors, stockholders or employees, and the Company agrees that neither it nor
its executive officers and directors will at any time intentionally disparage
Employee or her personal or business reputation, provided that each party shall
respond accurately and fully to any question, inquiry or request for information
when required by legal process.
11. CONFIDENTIALITY AND PUBLICITY. The provisions of this Agreement shall
be held in strictest confidence by Employee and the Company and shall not be
publicized or disclosed in any manner whatsoever other than pursuant to the
press release issued by the Company on the Separation Date, a copy of which is
attached hereto as Exhibit C. Notwithstanding the prohibition in the preceding
sentence: (a) the parties may disclose this Agreement in confidence to their
respective attorneys, accountants, auditors, tax preparers, and financial
advisors (and, in the case of Employee, to members of her family); (b) the
Company may disclose this Agreement as necessary to fulfill standard or legally
required corporate reporting or disclosure requirements; and (c) the parties may
disclose this Agreement insofar as such disclosure may be necessary to enforce
its terms or as otherwise required by law.
3.
<PAGE>
12. RELEASE OF CLAIMS BY EMPLOYEE. Except as otherwise set forth in this
Agreement, Employee hereby releases, acquits and forever discharges the Company,
its officers, directors, agents, attorneys, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages and
obligations of every kind and nature, in law, equity, or otherwise, known and
unknown, suspected and unsuspected, disclosed and undisclosed, arising out of or
in any way related to agreements, events, acts or conduct at any time prior to
and including the execution date hereof, including but not limited to: any and
all such claims and demands directly or indirectly arising out of or in any way
connected with Employee's employment with the Company or the termination of that
employment; claims or demands related to salary, bonuses, commissions, stock,
stock options, or any other ownership interests in the Company (other than the
Owned Stock and Stock Options), vacation pay, fringe benefits, expense
reimbursements, sabbatical benefits, severance benefits, or any other 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 federal Age Discrimination in Employment Act of 1967, as amended
(the "ADEA"); the federal Americans with Disabilities Act of 1990; the
California Fair Employment and Housing Act, as amended; tort law; contract law;
wrongful discharge; discrimination; fraud; defamation; emotional distress; and
breach of the implied covenant of good faith and fair dealing. Notwithstanding
the above, Employee does not release any claims Employee may have (i) under this
Agreement, (ii) for indemnification pursuant to and in accordance with
applicable statutes and the applicable terms of the charters, articles of
incorporation or bylaws of Company or its affiliates or under any
indemnification agreements, and any insurance coverage for such claims, (iii)
vested pension or retirement benefits under the terms of qualified employee
pension benefit plans, (iv) for accrued benefits under the terms of applicable
employee benefit plans, or (v) with respect to the Owned Stock or Stock Options.
13. ADEA WAIVER. Employee acknowledges that she is knowingly and
voluntarily waiving and releasing any rights she may have under the ADEA. She
also acknowledges that the consideration given for the waiver in paragraph 4
herein is in addition to anything of value to which she was already entitled.
She further acknowledges that she has been advised by this writing that: (a)
this waiver and release does not apply to any claims that may arise after she
signs this Agreement; (b) she has the right to consult with an attorney prior to
executing this Agreement; (c) she has twenty-one (21) days within which to
consider this Agreement (although she may choose to voluntarily execute this
Agreement earlier); (d) she has seven (7) days following the execution of this
Agreement to revoke the Agreement; (e) this Agreement shall not be effective
until the date upon which the revocation period has expired, which shall be the
eighth day after this Agreement is executed by Employee, (the "Effective Date").
14. SECTION 1542 WAIVER. Employee acknowledges that she has read and
understands 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 HER FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HER
SETTLEMENT WITH THE DEBTOR.
4.
<PAGE>
Employee hereby expressly waives and relinquishes all fights and benefits under
that section and any law or legal principle of similar effect in any
jurisdiction with respect to the release granted in this Agreement.
15. RELEASE OF CLAIMS BY THE COMPANY. The Company hereby releases, acquits
and forever discharges Employee and her agents, successors, assigns and
affiliates from any and all claims, liabilities, demands, causes of action,
costs, expenses, attorneys' fees, damages, indemnities and obligations of every
kind in nature, in law, equity or otherwise arising out of or in any way related
to agreements, events, acts or conduct at any time prior to and including the
date the Company executes this Agreement, relating to any act or omission by
Employee within the authorized course and scope of her employment with the
Company, with the exception of any claim arising out of her obligations under
this Agreement, or Article 8 of her Employment Agreement or any other
obligations relating to the proprietary information of the Company.
16. NO ADMISSIONS. It is understood and agreed by Employee and the Company
that this Agreement represents a compromise settlement of various matters, and
that the promises and payments in consideration of this Agreement shall not be
construed to be an admission of any liability or obligation by either party to
the other party or to any other person.
17. NOTICES. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (a) by registered or certified
mail, return receipt requested, postage prepaid, or (b) via a reputable express
courier service, in each case to the address set forth below. Any such notice,
instruction or communication shall be deemed to have been delivered three
business days after it is mailed, by certified mail, postage prepaid, return
receipt requested, or one business day after it is sent via a reputable
nationwide overnight courier service,
If to the Company: Cypress Bioscience, Inc.
4350 Executive Drive, Suite 325
San Diego, California 92121
Attn: Chief Executive Officer
If to Employee: Debby Jo Blank
318 Colima Court
La Jolla, California 92037
Any party may give any notice, instruction or communication in connection with
this Agreement using any other means (including personal delivery, telecopy or
ordinary mail), but no such notice, instruction or communication shall be deemed
to have been delivered unless and until it is actually received by the party to
whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered by giving the other party to
this Agreement notice thereof in the manner set forth in this paragraph 17.
18. ENTIRE AGREEMENT. This Agreement, including the Exhibits hereto,
constitutes the complete, final and exclusive embodiment of the entire agreement
between Employee and the Company with regard to the subject matter hereof, and
except as provided herein, supercedes that certain Employment Agreement dated
December 28, 1995, and any amendments thereto,
5.
<PAGE>
between Employee and the Company. It is entered into without reliance on any
promise or representation, written or oral, other than those expressly contained
herein. It may not be modified except in a writing signed by Employee and a duly
authorized officer of the Company. Each party has carefully read this Agreement,
has been afforded the opportunity to be advised of its meaning and consequences
by her or its respective attorneys, and signed the same of her or its own free
will.
19. SUCCESSORS AND ASSIGNS. This Agreement shall bind the heirs, personal
representatives, successors, assigns, executors, and administrators of each
party, and inure to the benefit of each party, its heirs, successors and
assigns. However, because of the unique duties under this Agreement, Employee
agrees not to delegate the performance of such duties under this Agreement.
20. APPLICABLE LAW. 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 applied to contracts made and to be performed entirely
within California.
21. SEVERABILITY. 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' intention with respect to the invalid or
unenforceable term or provision.
22. ARBITRATION. To ensure rapid and economical resolution of any disputes
which may arise under this Agreement, Employee and the Company agree that any
and all disputes or controversies of any nature whatsoever, arising from or
regarding the interpretation, performance, enforcement or breach of this
Agreement shall be resolved by confidential, final and binding arbitration
(rather than trial by jury or court or resolution in some other forum) to the
fullest extent permitted by law. Any arbitration proceeding pursuant to this
Agreement shall be conducted by the American Arbitration Association ("AAA") in
San Diego under the then existing AAA arbitration rules. The prevailing part in
such arbitration proceeding shall be entitled to recover from the other party
reasonable attorneys' fees, arbitration expenses and other recoverable costs
incurred in connection with such arbitration proceeding. If for any reason all
or part of this arbitration provision is held to be invalid, illegal, or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not effect
any other portion of this arbitration provision or any other jurisdiction, but
this provision will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable part or parts of this provision had
never been contained herein, consistent with the general intent of the parties
insofar as possible.
23. SECTION HEADINGS. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
24. COUNTERPARTS. This Agreement may be executed in two counterparts, each
of which shall be deemed an original, all of which together shall constitute one
and the same instrument.
6.
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HAVE DULY AUTHORIZED AND CAUSED THIS
AGREEMENT TO BE EXECUTED AS FOLLOWS:
DEBBY JO BLANK, CYPRESS BIOSCIENCE, INC.
an individual.
/s/ DEBBY JO BLANK /s/ JAY KRANZLER
- ----------------------- --------------------------------
Debby Jo Blank Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
Dated: 3/12/99 Dated: 3/24/99
- ----------------------- --------------------------------
7.
<PAGE>
EXHIBIT A
RESIGNATION LETTER
March 12, 1999
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
Cypress Bioscience, Inc.
4350 Executive Drive, Suite 325
San Diego, CA 92121
Dear Jay:
I hereby resign as President, Chief Operating Officer and Director and all other
positions I hold with Cypress Bioscience, Inc. or any of its subsidiaries, such
resignation to be effective as of March 15, 1999.
Sincerely,
DEBBY JO BLANK
-------------------
Debby Jo Blank, M.D.
<PAGE>
EXHIBIT B
EMPLOYMENT AGREEMENT
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of this 28th day of December 1995, by and
between IMRE Corporation, a Delaware corporation having its principal office at
401 Queen Anne Avenue North, Seattle, Washington 98109 (the "Company") and Debby
Jo Blank, M.D. (the "Employee").
WHEREAS, the Company desires to employ the Employee in an executive
capacity as President and Chief Operating Officer on the terms and conditions
set forth herein; and the Employee is willing to accept and undertake such
employment.
NOW, THEREFORE in consideration of the premises and the mutual
covenants herein set forth, the Company and the Employee agree as follows:
ARTICLE 1
EMPLOYMENT; TERM; DUTIES
1.1 Employment. Upon the terms and conditions hereinafter set forth,
----------
the Company hereby employs the Employee, and the Employee hereby accepts
employment, as President and Chief Operating Officer of the Company. Also it is
the intention of the Company to cause Employee to be included in the management
slate of directors for election to the Board of Directors, and to be elected as
such, during the first year of the initial Term (as defined in Section 1.2).
1.2 Term. Unless sooner terminated as provided in Article 5 hereof,
----
the Employee's employment hereunder shall be for a term commencing on January 8,
1996 and ending on December 31, 2000. The actual term of employment hereunder,
giving effect to any early termination of employment under Article 5 hereof, is
referred to as the "Term".
1.3 Duties. During the Term, the Employee shall perform such executive
------
duties for the Company and for its subsidiaries, consistent with her position
hereunder, and as typically associated with the duties of a President and Chief
Operating Officer of a publicly-held corporation, as reasonably may he assigned
to her from time to time by the Chief Executive Officer of the Company. Employee
shall report directly to the Chief Executive Officer of the Company. Except as
contemplated by Section 1.5, the Employee shall devote her entire business time,
attention and energies to the performance of her duties hereunder.
1.4 Exclusive Agreement. The Employee represents and warrants to the
-------------------
Company that she is not a party to any agreement or arrangement, whether written
or oral, in effect which would
<PAGE>
prevent the Employee from rendering the services contemplated hereunder to the
Company during the Term.
1.5 Other Activity. Notwithstanding the foregoing, but subject to her
--------------
fiduciary duties to the Company under applicable law, the Company acknowledges
and understands that Employee may serve as a director or consultant to other
companies and may work on committees of professional or civic associations or
educational institutions not in competition with the Company in the field of
research, development, manufacture or sales of Protein A Immunoadsorbtion
Columns; provided, however, that the performance of such services shall not
restrict or limit in any manner the Employee's ability to perform her duties
hereunder.
1.6 Insurance. The Company shall obtain, and shall use its
---------
commercially reasonable best efforts to maintain during the Term, Director's and
Officer's Insurance and Product Liability Insurance policies, with full defense
coverage, of at least $3,000,000 and $16,000,000, respectively, with regard to
all actions undertaken by the Employee in her capacity as an officer, director
and employee of the Company. In addition, the Company shall research and use its
commercially reasonable best efforts to obtain and maintain during the Term
additional Director's and Officer's Insurance coverage for the Employee in the
amount of $2,000,000.
ARTICLE 2
COMPENSATION
2.1 Base Salary. For all services rendered by the Employee hereunder
-----------
and in consideration of all covenants and conditions undertaken by her pursuant
to this Agreement, the Company shall pay the Employee an annual base salary
("Base Salary") of $210,000 per year in equal semi-monthly installments. Each
year during the Term, the Board of Directors of the Company shall review the
Base Salary with a view to determining whether it would be appropriate to
increase such Base Salary. The annual base salary payable to the Employee
hereunder, as it may be so increased, thereafter shall constitute the Base
Salary.
If the first or last month of the Term is not a full calendar month,
then any calculation of Base Salary for such period shall-be prorated for the
number of days in such months during which the Employee was employed.
2.2 Bonuses.
-------
(a) In addition to the Base Salary, the Company may pay the
Employee a cash bonus (the "Bonus Amount") equal to an amount up to 25% of the
Base Salary with respect to a fiscal year within 90 days after the end of such
fiscal year. The Bonus Amount, if any, shall be based on the performance of the
Employee
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<PAGE>
during a fiscal year, as evaluated by the Board of Directors, in its sole
discretion. It is acknowledged and agreed that, while no such Bonus Amount shall
be withheld unreasonably, the determination and the payment of the Bonus Amount
to the employee shall be at the sole discretion of the Board of Directors of the
Company which may consider, among other matters, the financial condition of the
Company at the time. In exercising its discretion pursuant to this subsection,
the Board of Directors shall act in a manner at least as favorable to the
Employee as governs the award of bonuses to other executive officers and key
employees of the Company.
(b) In addition to the Bonus Amount, if any, the Company shall pay
the employee a one-time sign-on bonus payable as follows:
(i) $50,000 on the closing of an approximately $1 million
bridge financing, currently scheduled to occur in December 1995;
(ii) $50,000 on the closing of an anticipated equity
financing (the .Equity Financing"), scheduled to occur in the first fiscal
quarter of 1996 and expected to raise gross proceeds of approximately $6 million
(the "Equity Financing Bonus"); and
(iii) $85,000 on December 31, 1996 (the "1996 Signing Bonus").
(c) In the event of a sale by the Company of all, or substantially
all, of its assets prior to the conversion or redemption of any classes of
outstanding preferred stock of the Company issued in connection with any equity
financing after the date hereof, and provided that the Employee prior to such
time has exercised any and all stock options provided under Section 4.1(a)
hereof exercisable by such Employee, the Company shall pay Employee on the
consummation of such sale, a bonus in an amount equal to 3% of the net proceeds
payable to the holders of the preferred stock of the Company of such sale.
2.3 Stock Options. The Company shall issue to the Employee options to
-------------
purchase shares of the Company's common stock (the "Common Stock") as provided
in Article 4 of this Agreement.
2.4 Deductions. The Company shall deduct from the compensation
----------
described in Sections 2.1 and 2.2 any Federal, state or city withholding taxes,
social security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any Federal, state or city laws,
rules or regulations.
-3-
<PAGE>
2.5 Disability Adjustments. Any compensation otherwise payable to the
----------------------
Employee pursuant to Section 2.1 in respect of any period during which the
Employee is disabled (as contemplated in Section 5.1) shall be reduced by any
amounts paid to the Employee for loss of earnings or the like under any
disability insurance plan or policy the premiums for which are paid for in their
entirety by the Company.
ARTICLE 3
BENEFITS EXPENSES
3.1 Benefits. During the Term, the employee shall be entitled to
--------
participate in such compensation and incentive plans and group life, health,
accident, disability and hospitalization insurance plans, pension plans and
retirement plans as the Company may make available to its other executive
officers, including, specifically, a $1 million term life insurance policy, to
be paid for by the Company, provided that the Employee is insurable at
reasonable rates for a person of her age, with the Employee's family as the
designated beneficiaries thereof. In addition, the Employee shall be entitled to
include her family in the Company's life, health and hospitalization plans under
term applicable to families of its other executive officers.
3.2 Expenses. The Company agrees that the Employee is authorized to
--------
incur reasonable and customary expenses in the performance of her duties
hereunder, including travel and entertainment costs, and upon presentation of
appropriate documentation thereof, the Company promptly shall pay or reimburse
the Employee for such reasonable expenses. It is understood and agreed that
Company shall relocate Employee's primary residence (the "Relocation") from
Seattle, Washington to the San Diego, California area prior to or as soon as
practicable after the Company relocates its corporate headquarters to the San
Diego, California area. Employee shall be reimbursed for reasonable and
documented relocation expenses involved in moving to San Diego from Seattle,
including airfares and other usual expenses incurred in connection with up to
two house-hunting trips for Employee and her husband and packing and moving
expenses. In addition, the Company shall reimburse Employee for reasonable,
usual and documented closing costs on the sale of her Seattle home, including
real estate commissions and other usual closing costs, as well as the
reasonable, usual and documented closing costs on the purchase of a home in the
San Diego area within two years after the date of sale of her Seattle house. The
Company shall pay for up to three months of temporary housing in San Diego or
Seattle if required for Employee or her spouse. The Company shall also pay
Employee an additional $5,000 (net after tax) for miscellaneous relocation
expenses. In the event that any reimbursement by the Company of expenses of the
Employee hereunder is deducted by the Company, and results in additional taxes
due and payable by the Employee, the Company shall pay to
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<PAGE>
the Employee an additional sum equal to the amount of such additional tax
liability of the Employee.
3.3 Vacations. During each full year of the Term, the Employee shall
---------
be entitled to four (4) weeks of paid vacation to be taken at times determined
by the Employee which do not unreasonably interfere with the performance of her
duties hereunder.
3.4 Consulting Services. For consulting services provided by Employee
-------------------
prior to the effective date of this Agreement, the Company agrees to pay the
Employee for 20 days of consulting at the rate of $1,000 per day, plus
reasonable and documented travel expenses.
ARTICLE 4
STOCK OPTIONS
4.1 STOCK OPTIONS.
-------------
(a) Subject to Section 4.1(f) hereof, the Company shall grant to the
Employee, pursuant to an Incentive Stock Option Plan to be adopted by the
Company, ten year incentive stock options (qualified to the extent permitted by
law) to purchase 3% of the Company's Common Stock outstanding on the date
hereof, on a fully diluted basis (after allocation of new options to management,
employees, directors and consultants, and including issued and to-be-issued
warrants) at an exercise price equal to $1.50 per share (the "Options"). The
Options shall contain anti-dilution provisions that prevent dilution of the
percentage of the Company's Common Stock which may be purchased by the Employee
on exercise of the Options as a result of issuance of the Company's securities
subsequent to the occurrence of the Equity Financing by the Company, and all
additional options granted pursuant to such anti-dilution provisions shall
be at the same exercise price as the original Options. Except as provided in
clauses (b) and (c) hereof, 25% of the Options shall vest immediately upon the
granting thereof by the Company and the remainder shall vest ratably and daily
over four (4) years from the date of grant.
(b) In the event of a termination (as described in Article 5), and
except as otherwise provided in Section 4.1(c) and 4.1(d) hereof, all Options
which have not vested as of the Termination Date shall cease vesting and shall
be cancelled as of the Termination Date. Ail vested Options shall be cancelled
ninety (90) days after the Termination Date except that, in the event of a
termination pursuant to Section 5.2(b) or 5.4 hereof, the exercise period for
the Options shall be extended at the election of the Employee in her sole
discretion, for five (5) years following the Termination Date.
-5-
<PAGE>
(c) Upon the Employee's death-or Disability (as defined in Section 5.1
below) all Options shall vest immediately and all Option rights provided for
under this Agreement shall transfer to the Employee's designated beneficiary.
All options shall be cancelled ninety (90) days after the Employee's death or
disability except that, at the election of the Employee's designated beneficiary
in his or her sole discretion, the exercise period for the Options shall be
extended for five (5) years following the Employee's death or Disability.
(d) Notwithstanding anything to the contrary in the foregoing, in the
event of a termination of this Agreement in any of the cases identified in
Section 5.2(b) or 5.4 hereof, all Options shall vest immediately upon such
Termination Date. In addition, all Options shall vest immediately upon the
consummation of any merger, consolidation, corporate reorganization, or transfer
of all or substantially all the assets of the Company, whether or not the
Employee continues as President and Chief Operating Officer of the surviving
entity.
(e) The Company may grant Employee options to Purchase the Company's
Common Stock in addition to the Options at such times and on such terms as may
be decided from time to time by the Board of Directors, in its sole discretion.
(f) Notwithstanding anything herein to the contrary, it is understood
and agreed that any grant of Options pursuant to this Article 4 is wholly
contingent on the Company's obtaining shareholder approval subsequent to the
date hereof for the adoption of such Incentive Stock Option Plan and to increase
the number of shares of currently authorized Common Stock of the Company to such
number so as to allow for the grant of the Options (the "Shareholder Consent").
The Company shall use its best efforts to create such Incentive Stock Option
Plan within thirty (30) days of the date hereof, and to obtain the adoption and
approval of the Board of Directors therefor as soon as practicable thereafter,
and the Company shall grant the options to the Employee simultaneously with the
closing of the Equity Financing; provided, however, that if the Equity Financing
has not closed by February 15, 1996, the Options shall be granted promptly upon
the written request of the Employee. The Company shall use its best efforts to
obtain the Shareholder Consent at the 1996 annual meeting of shareholders. In
the event the Company is unable to obtain the Shareholder Consent, the Company
shall use its best efforts to obtain the Shareholder Consent at the next
succeeding annual meeting of shareholders.
ARTICLE 5
DEATH; DISABILITY; TERMINATION
5.1 Death: Disability. The Employee's employment hereunder shall
-----------------
terminate upon her death or, at the election of
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<PAGE>
the Company, by written notice to the Employee if the Employee becomes Disabled
(as such term is hereinafter defined). In the event of a termination of the
Employee's employment for death or Disability, the Company shall pay the
Employee (or her legal representatives, as the case may be) an amount equal to
Employee's Base Salary for one year, reduced (but not to a negative number) by
any amounts paid or to be paid to the Employee (or her legal representatives, as
the case may be) by insurance provided by the Company pursuant to Section 3.1
hereof.
For the purposes of this Agreement, the Employee shall be deemed to be
"Disabled" or have a "Disability" if as a result of the occurrence of mental or
physical disability during the Term she has been unable to perform her duties
hereunder for six (6) consecutive months or one hundred eighty (180) days in any
twelve (12) consecutive month period, as determined in good faith by the Board
of Directors of the Company; provided, however, that if Employee develops a
mental or physical disability during the Term, and it is determined, in the
reasonable professional judgment of an independent, objective and qualified
medical expert in the field of such disability, that the Employee will be unable
to perform her duties hereunder and that such disability will continue for six
(6) consecutive months or one hundred eighty (180) days in any twelve (12)
consecutive month period, then the Company shall be permitted to terminate the
Employee's employment immediately, subject to payment by the Company of the
Employee's Base Salary for the full six (6) months or one hundred eighty (180)
days of such Disability in addition to the termination payment by the Company in
an amount equal to Employee's Base Salary for one year as provided above.
In the event that the employment of the Employee hereunder is
terminated by the Company upon the Employee's death or Disability, the
Employee's family, for a period of two (2) years from the Termination Date,
shall be entitled to maintain coverage under the Company's health and
hospitalization insurance plans on the same terms as existed prior to such
Termination Date, subject to the payment of applicable costs therefor by the
Employee's representatives, and further subject to the policies and provisions
of such insurance carriers and applicable law.
The Employee acknowledges that the payments referred to in this
Section 5.1 constitute the only payments to which the Employee (or her legal
representatives, as the case may be) shall be entitled to receive from the
Company under this Agreement in the event of a termination of her employment for
death or Disability, and that except for such payments and subject to Section
4.1(c) hereof, the Company shall have no further liability or obligation to her
(or her legal representatives, as the case may be) under this Agreement.
-7-
<PAGE>
The date of any termination of employment under this Section 5.1 or
Sections 5.2, 5.3 or 5.4 is referred to herein as the "Termination Date".
5.2 Termination of Employment by Employee.
-------------------------------------
(a) Notwithstanding any provision to the contrary herein, unless
otherwise provided herein or unless otherwise provided by law, the Employee at
any time upon thirty (30) days' written notice to the Company, may terminate her
employment by the Company hereunder. Except as otherwise provided in Section
5.2(b) below, the Company shall not be liable to Employee for the payment of any
amount on such termination.
(b) In the event that the Employee terminates her employment
following (i) an uncured material breach of this Agreement by the Company,
(ii) the consummation of a merger, consolidation, corporate reorganization or
acquisition of all or substantially all the assets of the Company which does
not provide for the Employee to assume the duties of President and Chief
Operating Officer of the surviving entity, (iii) the filing by the company under
any state or Federal bankruptcy or insolvency laws, (iv) the failure by the
Company to relocate its corporate headquarters to the San Diego, California
metropolitan area within one (1) year from the date hereof (v) the failure of
the Company to consummate the Equity Financing prior to August 1996, (v) any
action by the Company, Board of Directors or shareholders which would constitute
a demotion of the Employee, whether formal or de facto (e.g., reduction of her
authority or incidents of office), the failure of necessary action to be taken
to elect the Employee as President and Chief Operating Officer of the Company,
or any action being taken to remove her from either or both such positions, or
(vii) the failure of the Company to institute and adopt an Incentive Stock
Option Plan and award the Options to Employee as provided in Article 4 hereof,
or the failure of the Company to obtain the Shareholder Consent as provided in
Section 4.1(f) hereof within thirty (30) days after the date of the 1997 annual
meeting of shareholders established by the By-laws of the Company, then such
termination by the Employee shall be deemed for all purposes including for
purposes of severance payments and benefits provided under Section 5.4 hereof,
to be a termination by the Company of the employment of the Employee-hereunder
without cause pursuant to Section 5.4. The Company shall have thirty (30) days
following receipt of written notice by the Employee to the Company of the
material breach described in item (i) above, setting forth in reasonable detail
the matters constituting such breach, to cure such breach.
5.3 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to it at law, in equity or as set forth in this Agreement,
the Company shall have the right; upon written notice to the Employee, to
immediately terminate her
-8-
<PAGE>
employment hereunder if the Employee (a) breaches evidences a pattern of willful
breach in any material respect any material provision of this Agreement or a
pattern of willful violation of any reasonable policies or orders of the Board
of Directors and such pattern of willful breach or violation does not cease
within thirty (30) days after the Employee's receipt of written notice thereof
from the Board of Directors of the Company setting forth in reasonable detail
the matters constituting such pattern; or (b) has been convicted of a felony.
5.4 Termination of Employment Without Cause.
---------------------------------------
(a) Notwithstanding any provision to the contrary herein and
unless otherwise provided by law, the Company at any time upon thirty (30) days'
written notice to the Employee, in its sole and absolute discretion and for any
or no reason, may terminate the employment of the Employee hereunder without
cause. In such event, the Company shall pay the Employee, within ten (10) days
following the Termination Date, an amount equal to the Employee's Base Salary
less (i) $50,000, if the Equity Financing Bonus has been paid prior to the
Termination Date and (ii) $85,000, if the 1996 Signing Bonus has been paid prior
to the Termination Date.
(b) In the event that the employment of the Employee hereunder is
terminated by the Company without cause, all Options shall vest immediately upon
the Termination Date as provided in Section 4.1(d) hereof. If the Options have
not been granted to the Employee as of the Termination Date, the Company shall
pay to the Employee, within ten (10) days following the Termination, an
additional payment equal; to the Employee's Base Salary, i.e., in addition to
the payment described in Section 5.4(a).
(c) In the event that the employment of the Employee hereunder is
terminated by the Company without cause, the Company, at no cost to the
Employee; and for a period of two (2) years from the Termination Date shall
continue to provide the Employee with at least the same group life, health,
accident, disability and hospitalization insurance plans as were in effect with
respect to the Employee on the date of such termination, an shall continue to
provide coverage for the Employee's family on the same terms as existed prior to
such Termination Date.
(d) The Employee acknowledges that the payments referred to in Section
5.2 and this Section 5.4 constitute the only payments which the Employee shall
be entitled to receive from the Company under this Agreement in the event of any
termination pursuant to Section 5.2, 5.3 and this Section 5.4, and that except
for such payments and such other obligations as are expressly provided herein
the Company shall have no further liability or obligation to her under this
Agreement.
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<PAGE>
(e) The Employee shall have no duty to mitigate damages in order to
receive any severance payments and benefits provided in this Section 5.4.
ARTICLE 6 TAG-ALONG RIGHTS
6.1 Tag-Along Rights. The Company shall grant the Employee such
----------------
rights to participate in sales by principal stockholders or the Company of the
Common Stock, as shall be set forth in that certain Tag-Along Rights Agreement
being executed concurrently herewith.
ARTICLE 7
REGISTRATION RIGHTS
7.1 Registration of Employee Stock.
-------------------------------
(a) As soon as practicable after consummation of the Equity
Financing, but in no event later than September 30, 1996, the Company, upon the
Employee's written request, shall use all reasonable efforts to prepare and file
with the Securities and Exchange Commission a registration statement and such
other documents, if then required, as may be necessary to permit a public
offering and sale of shares of the Common Stock acquired by the Employee prior
to the date hereof or granted to the Employee pursuant to the terms hereof or
granted to the Employee in connection with the Options (the "Registrable Stock")
in compliance with the provisions of the Securities Act of 1933, as amended (the
"Securities Act"). If the Employee does not sell the Registrable Stock within a
reasonable period of time after such registration, the Company need not maintain
the effectiveness of such registration; provided, however, if the Company fails
to maintain the effectiveness of such registration, the Employee thereafter may
re-exercise her rights under this subsection, without limitation, but she may
not do so earlier than ninety (90) days after the applicable registration
statement has become ineffective. If the Employee is no longer employed by the
Company at the time of her request for registration hereunder, the Employee must
provide written notice to the Company that she intends to sell the Registrable
Stock within a reasonable period of time after such registration.
(b) The Company shall have the right to include in any registration
statement filed pursuant to this Section 7.1 other securities of the Company
then proposed to be distributed.
7.2 Piggyback Registration.
-----------------------
(a) If the Company proposes to register shares of Common Stock or
securities convertible into or exercisable for Common Stock under the Securities
Act (other than pursuant to a
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<PAGE>
registration statement on Form S-4 or S-8 or any successor form, or filed in
connection with an exchange offer or an offering of securities solely to the
existing shareholders or employees of the Company), solely where such sale will
be both for the Company's account and for the account of a selling shareholder,
then the Company shall give written notice of such proposed filing to the
Employee at least ten (10) days before the anticipated filing date, and such
notice shall offer the Employee the opportunity to register such number of
shares of Registrable Stock as the Employee may request. The Employee shall
notify the Company in writing specifying whether or not it elects to include any
Registrable Stock in such registration statement within five (5) days after
delivery of the Company's notice to the Employee. The Company shall use its best
efforts to cause the managing underwriter or underwriters of a proposed
underwritten offering to permit the Employee to include such securities in such
offering on the same terms and conditions as any similar securities of the
Company included therein; provided, however, that if the managing underwriter or
underwriters of such offering determines that the total amount or kind of
securities which it or the Company, and any other persons or entities, intend to
include in such offering is such as to materially and adversely affect the
success of such offering, then the amount of Registrable Stock requested to be
offered for the account of the Employee shall be reduced or limited on a pro
rata basis with the securities of all persons and entities other than the
Company participating in the offering, to the extent required by such managing
underwriter. Notwithstanding the foregoing, if, at any time after giving written
notice of its intention to register Common Stock or other securities convertible
into or exercisable for Common Stock and prior to the effectiveness of the
registration statement filed in connection with such registration, the Company
determines for any reason either not to effect such registration or to delay
such registration, the Company, at its election, by delivery or written notice
to the Employee, (i) in the case of a determination not to effect registration,
may relieve itself of its obligations to register any Registrable Stock in
connection with such registration, or (ii) in the case of determination to delay
the registration, may delay the registration of such Registrable Stock for the
same period as the delay in the registration of such other shares of Common
Stock or other securities convertible into or exercisable for Common Stock.
(b) Notwithstanding anything to the contrary herein, if the
Company registers shares of Common Stock or securities convertible into or
exercisable for Common Stock under the Securities Act in an underwritten public
offering and
(i) the Employee owns unregistered Registrable Stock at the
time such underwritten public offering is registered under the Securities Act,
the Employee shall agree
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<PAGE>
to refrain from exercising the registration rights granted in this Section 7
with respect to such Registrable Stock for such period of time as the managing
underwriter of such underwritten public offering deems reasonable; or
(ii) the Employee owns Registrable Stock which has been
registered under the Securities Act pursuant to Section 7.1 or this 9.2 hereof
prior to the time such underwritten public offering is registered under the
Securities Act, the Employee shall agree that it will not sell, distribute,
offer to sell, contract to sell, agree to sell, grant any option to purchase, or
agree to offer, sell or otherwise transfer or dispose of (nor announce any
offer, sale, grant of an option to purchase or otherwise dispose of), directly
or indirectly, any such registered Registrable Stock for such period of time as
the managing underwriter of such underwritten public offering deems reasonable.
(c) Notwithstanding anything to the contrary herein, the Company shall
have the right to grant registration rights to other parties subsequent to the
date hereof. In such event and in connection with the grant of piggyback
registration rights to other parties, the parties hereto acknowledge and agree
that such other parties shall have the right to participate on a pro rata basis
with the parties hereto in any registration to which such piggyback registration
rights apply.
(d) Furnish Information. The Employee shall furnish to the Company
-------------------
such reasonable information regarding the Employee, the Registrable Stock, and
the intended method of disposition of such securities as are required to effect
the registration of Registrable Stock as to which the Employee has requested
registration.
(e) Expenses of Registration. Ail expenses incident to the Company's
------------------------
performance of or compliance with this Article 7 including, without limitation,
all registration and filing fees, fees and expenses of complying with state
securities or blue sky laws, printing expenses and fees and disbursements of
counsel for the Company and of independent public accountants (including the
expense of any special audit), but excluding underwriting commissions and
discounts and the fees and disbursements of counsel for the Employee, shall be
borne by the Company. The-Employee shall bear her own pro rata share (calculated
according to the number of her shares as a fraction of the total number of
shares covered by such registration statement) of all underwriting commissions
and discounts incurred in connection with any offering of Registrable Stock with
respect to a registration pursuant to this Article 7, as well as her expenses if
she has counsel separate from counsel for the Company. The fees and expenses of
complying with state blue sky laws shall be borne by the sellers of securities
included in such
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<PAGE>
registration if and to the extent that the appropriate administrative official
of such state requires that such sellers (rather than the Company) pay such fees
and expenses.
(f) Indemnification and Contribution. In the event any shares of
--------------------------------
Registrable Stock are included in a registration statement under this Article 7:
(i) To the extent permitted by law, the Company shall indemnify,
defend and hold harmless the Employee, any underwriter (as defined in the
Securities Act), any other person or entity selling securities in such
registration statement, and each director and officer of, and person, if any,
who controls such underwriter or such other person or entity within the meaning
of the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"); any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; provided, however, that the indemnity agreement
contained in this subsection (i) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability, or action if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability, or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by, or which results from the bad faith or gross negligence of, the
Employee, or any underwriter for the Employee.
(ii) To the extent permitted by law, the Employee will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the registration statement, each person, if any, who controls the
Company within the meaning of the Securities Act, any underwriter, any other
person or entity selling securities in such registration statement, and each
director and officer of, and person, if any, who controls such underwriter or
such other person or entity, against any losses, claims, damages or liabilities
(joint or several) to which the Company or any such director, officer,
controlling person, or underwriter or
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<PAGE>
controlling person, or such other person or entity or director, officer or
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs as a result of written information furnished by the Employee in
her capacity as a shareholder of the Company (as distinguished from information
provided by the Employee in her capacity as an officer or director of the
Company) expressly for use in connection with such registration or results from
the bad faith or gross negligence of the Employee, provided, however, that
Employee's indemnification obligation hereunder shall be limited to an amount
equal to the net proceeds received by Employee pursuant to the registration of
Registrable Securities hereunder, and, further provided, that the indemnity
agreement contained in this subsection shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Employee, which consent shall
not be unreasonably withheld.
(iii) Promptly after receipt by an indemnified party under this
Section 7.2(e) of notice of the commencement of any action (including any
governmental action), such indemnified party shall deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to the parties.
An indemnified party shall have the right to retain its own counsel, however,
but the fees and expenses of such counsel shall be at the expense of the
indemnified party, unless (x) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, (y) the
indemnifying party has failed timely to assume the defense and employ counsel,
or (z) the named parties to any such action (including any impleaded parties)
include both the indemnified party and the indemnifying party, and the
indemnified party shall have been advised by such counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of such
indemnified party, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for all indemnified
parties). The failure to deliver written notice to the indemnifying party within
a reasonable time of the commencement of any such action,
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<PAGE>
if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
7.2(e), but the omission so to deliver written notice to the indemnifying party
shall not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 7.2(e).
(iv) If the indemnification provided for in subsection (i) and
(ii) of this Section 7.2(e) is unavailable or insufficient to hold harmless an
indemnified party under such subsection in respect of any losses, claims,
damages or liabilities or action in respect thereof or referred to therein, then
each indemnifying party in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or actions in such proportion as is
appropriate to reflect the relative fault of the Company, on the one hand, and
the Employee on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or actions as well as any
other relevant equitable considerations, including the failure to give the
notice required under such subsections. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact relates to information supplied by the Company on
the one hand, or the Employee, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Employee agree that it would not
be just and equitable if contribution pursuant to this Section 7.2(e) (iv) were
determined by pro rata allocation or by any other method of allocation which did
not take account of the equitable considerations referred to above in this
subsection. No person guilty of fraudulent misrepresentations (within the
meaning of Section 11(f) of the Securities Act), shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation.
(v) The obligations of the Company and the Employee under this
Section 7.2(e) shall survive the completion of any offering of Registrable Stock
in a registration statement under this Article 7.
ARTICLE 8
INVENTIONS; NON-DISCLOSURE,
8.1 Inventions. Subject to the provisions of Section 2870 of the
----------
California Labor Code, all processes, technologies and inventions (collectively,
"Inventions"), including new contributions, improvements, discoveries,
trademarks and trade names, conceived, developed, invented, made or found by the
Employee, alone or with others, during the Term of her employment by the
Company, whether or not patentable and whether or not
-15-
<PAGE>
conceived, developed, invented, made or found on the Company's time or with the
use of the Company's facilities or materials and which relate to the business of
the Company, shall be the property of the Company and shall be promptly and
fully disclosed by the Employee to the Company. The Employee shall perform all
necessary acts (including, without limitation, executing and delivering any
confirmatory assignments, documents or instruments requested by the Company) to
vest title to any such Invention in the Company and to enable the Company, at
its expense, to secure and maintain domestic and/or foreign patents or any other
rights for such Inventions.
8.2 Non-Disclosure. The Employee, at any time during the Term and
--------------
thereafter, shall not directly or indirectly, use, disclose or furnish to any
other person, firm or corporation except in the course of the proper performance
of her duties hereunder (a) any information of a confidential nature relating to
any process, technique or procedure of the Company; or (b) any information of a
confidential nature obtained as a result of her current or future relationship
with the Company, which information is not specifically a matter of public
record; or (c) any other trade secrets of the Company; except that the Employee
shall not be liable under the terms of this Section 8.2 for using, disclosing or
furnishing any of the foregoing which: (1) are or become generally available to
the public other than as a result of a disclosure in violation of this
Agreement; or (2) are generally known in any industry in which the Company is or
may become involved; or (3) are required to be disclosed by the Employee
pursuant to law or the order of a court of competent jurisdiction, or other
legal process or authority, it being understood, however, that the Employee
shall provide the Company with prompt notice of the requirement for such
disclosure as soon as practical after the Employee is notified thereof and prior
to its disclosure thereof so as to enable the Company to challenge the order
compelling such disclosure if the Company so desires. Promptly upon the
expiration or termination of the Employee's employment hereunder for any reason,
the Employee shall surrender to the Company all documents, drawings, work
papers, lists, memoranda, records and other data (including all copies)
constituting or disclosing any of the foregoing information.
8.3 Breach of Non-Disclosure Provision. In the event that the Employee
----------------------------------
shall breach Section 8.2 hereof, or in the event that any such breach is
threatened by the Employee, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court having the capacity to
grant such relief, to restrain any such breach or threatened breach and to
enforce the provisions of Section 8.2. The Employee acknowledges and agrees that
there is no adequate remedy at law for any such breach or threatened breach and,
in the event that any action or proceeding is brought seeking
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<PAGE>
injunctive relief, the Employee shall not use as a defense thereto that there is
an adequate remedy at law.
8.4 Reasonable Restrictions. The parties acknowledge that (a) the
-----------------------
agreements in this Article 8 are essential to protect the business and goodwill
of the Company, and (b) the foregoing restrictions are under all of the
circumstances reasonable and necessary for the protection of the Company and its
business.
ARTICLE 9 MISCELLANEOUS
9.1 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties hereto and their respective legal representatives,
heirs, distributees and successors; provided, that the obligations of the
Employee under this Agreement shall not be delegable by her.
9.2 Notices. Ail notices and other communications hereunder and all
-------
legal process in regard hereto shall be validly given, made or served if in
writing, when delivered personally (by courier service or otherwise), or when
actually received when mailed by first-class certified or registered United
States mail, postage-prepaid and return receipt requested, to the address of the
party to receive such notice or other communication set forth below, or at such
other address as any party hereto may from time to time advise the other party
in writing:
If to the Company:
IMRE Corporation
401 Queen Anne Avenue North
Seattle, Washington 98109
Attention: Chairman of the Board of Directors
If to the Employee:
Dr. Debby Jo Blank
186 34th Avenue East
Seattle, Washington 98112
9.3 Severability. If any provision of this Agreement, or portion
------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable
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<PAGE>
provision or portion thereof shall be deemed, without further action on the part
of the parties hereto, modified, amended or limited to the extent necessary to
render the same valid and enforceable.
9.4 Waiver. No waiver by a party hereto of a breach or default
------
hereunder by the other party shall be considered valid, unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
9.5 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements between the Company and the Employee, whether
written or oral, relating to any or all matters covered by and contained or
otherwise dealt with in this Agreement. No representation, warranty, undertaking
or covenant is made by either party hereto except as provided herein and any
representations, warranties undertakings or covenants not set forth herein are
specifically disclaimed. This Agreement does not constitute a commitment of the
Company with regard to the Employee's employment, express or implied, other than
to the extent expressly provided for herein.
9.6 Amendment. No modification, change or amendment of this Agreement
---------
or any of its provisions shall be valid, unless in writing and signed by the
party against whom such claimed modification, change or amendment is sought to
be enforced.
9.7 Authority. The parties each represent and warrant that they have
---------
the power, authority and right to enter into this Agreement and to carry out and
perform the terms, covenants and conditions hereof.
9.8 Titles. The titles of the Articles and Sections of this Agreement
------
are inserted merely for convenience and ease of reference and shall not affect
or modify the meaning of any of the terms, covenants or conditions of this
Agreement.
9.9 Applicable Law. This Agreement, and all of the rights and
--------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
internal laws of the State of California without giving effect to principals
relating to conflicts of law.
9.10 Attorneys' Fees. The cost of Employee's reasonable attorneys'
---------------
fees incurred in the negotiation of this Agreement in an amount not to exceed
$5,500 shall be borne by the Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
IMRE CORPORATION
/s/ FRANK R. JONES
----------------------------
Name: Frank R. Jones
Title: Chairman of the Board
----------------------------
Dr. Debby Jo Blank
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
IMRE CORPORATION
By:
----------------------------
Name: Frank R. Jones
Title: Chairman of the Board
/s/ DR. DEBBY JO BLANK
----------------------
Dr. Debby Jo Blank
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<PAGE>
EXHIBIT C
PRESS RELEASE
FOR IMMEDIATE RELEASE
CONTACT: Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
Manda Hall
Investor Relations Administrator
Cypress Bioscience, Inc.
(619) 452-2323
Manda Hall
Investor Relations Administrator
Investor/Media Contacts:
James Ankner (Investor Relations) or Lena Kim (Media Relations)
Robinson Lerer & Montgomery
(212) 484-7697 or (212) 484-6706
CYPRESS BIOSCIENCE ANNOUNCES ORGANIZATIONAL CHANGES
BOBKOSKI NAMED PRESIDENT AND COO; GENDREAU PROMOTED TO EXECUTIVE VICE PRESIDENT
AND CHIEF SCIENTIFIC OFFICER
February 16, 1999 - San Diego, CA - Cypress Bioscience, Inc. (NASDAQ: CYPB)
announced today the appointment of Carl Bobkoski, formerly Executive Vice
President of Signal Pharmaceuticals, as President and Chief Operating Officer.
He replaces Debby Jo Blank, M.D., who is leaving to pursue other opportunities.
R. Michael Gendreau, Ph.D., Vice President of Research and Development, and
Chief Medical Officer, has been promoted to Executive Vice President of Research
& Development and adds the additional title of Chief Scientific Officer.
Together with Jay D. Kranzler, M.D., Ph.D., CEO and Chairman of Cypress
Bioscience, Inc., Bobkoski and Gendreau form an "Office of the CEO" responsible
for formulating the overall strategy and managing operations of the Company.
In his career, Mr. Bobkoski has directed commercialization for proprietary
products including Cardizem and Carafate, obtained product approvals, negotiated
corporate partnerships as well as directed clinical research. His earlier roles
include Executive Vice President and Board Member of Gensia Sicor, Inc.
(NASDAQ:GNSA); President, CEO and Board member of GalenPharma, which he also co-
founded; and President and General Manager of Nordic Laboratories, a subsidiary
of Hoechst Marion Roussel At Cypress Bioscience, Mr. Bobkoski will assume
C-1
<PAGE>
immediate responsibility for manufacturing, sales and marketing, finance, and
business development.
"Mr. Bobkoski has more than 20 years of general management experience in the
biotech and pharmaceutical industries," said Dr. Kranzler. "Of particular
importance to us as we prepare to launch the PROSORBA(R) column for use in
treating rheumatoid arthritis is his success in commercializing products." In
October of last year, the Company received a recommendation for approval from
the FDA Advisory Panel. Cypress Bioscience is currently working with the FDA to
resolve questions related to documentation from the Company's pivotal trial
prior to receiving final approval.
Dr. Gendreau, who joined Cypress Bioscience in 1994, was previously Vice
President of Research and Development and Chief Medical Officer at MicroProbe
Corporation. For three years before that, he held the title of Vice President of
Research and Development at Source Scientific Corporation. At Cypress
Bioscience, Dr. Gendreau was responsible for designing and implementing the
successful pivotal trial of the PROSORBA column in RA.
"I'm looking forward to overseeing the launch of the PROSORBA column and to
working with Jay and Mike to facilitate a successful transition of the Company
to the commercial stage," said Mr. Bobkoski.
Cypress Bioscience, Inc. develops, manufactures and markets medical devices and
therapeutics for the treatment of certain types of immune disorders and is
engaged in the development of novel therapeutic agents for the treatment of
blood platelet disorders. In addition to Cypress's lead product, the PROSORBA
column, the Company acquired Cyplex(TM) (Infusible Platelet Membranes), which is
positioned to become an alternative for traditional platelet infusions.
Except for historical information contained herein, this news release
contains forward-looking statements that involve risks and uncertainties,
including, but not limited to, risks associated with the integration of new
senior management personnel; the risk of delay in the formal FDA approval and
product launch of the PROSORB.4 column; the Company's ability to market
successfully the PROSORB.4 column for use as a treatment for Rheumatoid
Arthritis; whether the Company will be successful in finalizing a relationship
and collaborating with a marketing partner; the Company's ability to receive
regulatory approval for Cyplex on a timely basis, if at all; and whether Cyplex
will become a substitute for traditional platelet infusions, as well as other
risks detailed from time to time in the Company's SEC reports, including its
report on Form lO-K for the year ended December 31, 1997.
C-2
<PAGE>
EXHIBIT 10.41
SUBLEASE
1. Parties.
-----------
Cardiac Pacemakers, Inc. a Minnesota corporation ("Sublandlord"), and Cypress
Bioscience, Inc. ("Subtenant").
2. Master Lease.
----------------
Sublandlord is the assignee under a lease dated August 19, 1991, wherein Carr
Redmond Corporation, a Washington corporation, successor-in-interest to Redmond
East Associates and Michael R. Mastros ("Master Landlord") leased to Sublandlord
certain premises located in the office complex known as Redmond East (the
"Building") in the office building situated at 6675 185th Avenue NE, Redmond, WA
98052 ("Master Premises"). The original lease as amended by Amendments 1 through
10 (collectively, the "Master Lease") described the subject Master Premises in
its entirety. The original lease is attached hereto as Attachment A.
3. Premises.
------------
Sublandlord hereby subleases to Subtenant on the terms and conditions set forth
in this Sublease a portion of the Master Premises described herein which the
parties stipulate and agree contains approximately 21,000 rentable square feet
as more particularly shown on the floor plans included in Attachment A, (the
"Premises").
4. Warranty by Sublandlord; Subtenant's Quiet Enjoyment.
--------------------------------------------------------
Sublandlord warrants and represents to Subtenant that to the best of its
knowledge the Master Lease has not been amended or modified except as expressed
set forth herein; that Sublandlord has not previously assigned its interest
under the Master Lease and has not subleased any portion of the Premises to
others under subleases now in effect; that Sublandlord has received no notice of
any claim by Master Landlord that Sublandlord is in default or breach of any of
the provisions of the Master Lease; and that, to Sublandlord's best knowledge,
neither Sublandlord nor the Master Landlord is in default under the Master
Lease; that Sublandlord has full power and authority to execute, deliver and
perform its obligations under this Sublease and there are no consents or
approvals that are required for Sublandlord to execute, deliver and perform
hereunder which have not been obtained. Approval of the Sublease by Master
Landlord is evidenced by Attachment B.
Provided Subtenant performs all of the obligations of Subtenant hereunder,
Subtenant shall have the right of quiet enjoyment of the Premises without
interference by Master Landlord, Sublandlord or anyone claiming by, through or
under Master Landlord or Sublandlord subject to the provisions hereof and of the
Master Lease.
5. Term.
--------
The term ("Term") of this Sublease shall commence (the "Commencement Date") on
February 1, 1999 and end on May 31, 2005 (the "Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this Sublease.
In the event the Term commences on a date
<PAGE>
other the date set forth above, Sublandlord and Subtenant shall execute a
memorandum setting forth the actual date of commencement of the Term.
Notwithstanding the foregoing, if Sublandlord has not delivered the Premises to
Subtenant in the condition required under this Sublease on or before February 1,
1999, Subtenant shall have the right thereafter, until such possession is
delivered to Subtenant to terminate this Sublease, whereupon Sublandlord shall
promptly refund to Subtenant all monies and deposits made by Subtenant to
Sublandlord under this Sublease. Subtenant shall not be obligated to pay rent or
otherwise be liable to Sublandlord until possession of the Premises is tendered
to Subtenant in the condition required hereunder. Notwithstanding the foregoing,
both parties acknowledge that separation of the first floor premises from the
second floor premises subsequent to full execution of this document.
6. Base Rent.
-------------
Subtenant shall pay to Sublandlord as monthly base rent, without deduction,
setoff, notice, or demand (except as provided herein) at the address set forth
below, or at such other place as Sublandlord shall designate from time to time
by notice to Subtenant, the sum of $15,750 per month for months 1 - 6, the sum
of $29,750 per month for months 7-28, the sum of $31,500 per month for months 29
- - 53, and the sum of $33,250 per month for months 54 - 76 in advance, on the
first day of each month of the Term. Subtenant shall begin paying rent on
February 1, 1999 and continue throughout the term of the sublease. The first
---------
month's rent shall be due and payable upon the execution of this document.
- -------------------------------------------------------------------------
Notwithstanding the foregoing, if any rental period does not constitute a full
calendar month, then rent for that month shall be prorated on a daily basis
based upon the number of days in such calendar month. In the event of any
damage, casualty, or condemnation affecting the Premises, rent payable by
Subtenant shall be abated hereunder to the extent that rent under the Master
Lease is abated.
7. Operating Costs.
-------------------
The Master Lease requires Sublandlord to pay to Master Landlord all or a portion
of the expenses of operating the building of which the Premises is a part as
such term is defined in the Master Lease as "Additional Rent. Subtenant shall be
responsible for payment of its pro-rata share of Additional Rent as defined in
the Master Lease in addition to the payment of Base Rent in accordance with
Section 6 of this sublease, which pro-rata share of Additional Rent shall be
49.5% of the Additional Rent payable by Sublandlord for the portion of the
Master Premises located in Building 13 (based upon Subtenant's occupancy of
21,000 square feet of the 42,422 square feet of Building 13 leased by
Sublandlord.) To the extent that Sublandlord notifies Subtenant that any items
constituting Additional Rent are due and payable under the Master Lease on a
monthly basis, such Additional Rent shall be paid by Subtenant to Sublandlord as
and when base rent is paid. To the extent that such items consisting Additional
Rent are billed from time to time to Sublandlord by Master Landlord, such
Additional Rent shall be paid by Subtenant to Sublandlord upon receipt of
Sublandlord's invoice accompanied with a copy of such billing and any and all
additional supporting documentation of such amounts due as Additional Rent
forwarded by Master Landlord to Sublandlord, and Sublandlord shall thereupon
promptly remit such Additional Rent to Master Landlord.
(2)
<PAGE>
8. Security Deposit.
--------------------
Upon the execution hereof, Subtenant agrees to pay Sublandlord an amount equal
to $33,250 which shall be deemed the Security Deposit hereunder. All such
amounts held as a Security Deposit shall bear no interest. Upon the occurrence
of any default hereunder by Subtenant, Sublandlord may use said Security Deposit
to the extent necessary to cure such default, whether rent or otherwise. Any
remaining balance of said Security Deposit shall to returned to Subtenant upon
compliance with the terms hereof and acceptance of the vacated Premises by
Sublandlord. Subtenant understands that its potential liability under this
Sublease Agreement is not limited to the amount of the Security Deposit. Use of
such Security Deposit by the Sublandlord shall not constitute a waiver, but is
in addition to other remedies available to Sublandlord under this Sublease
Agreement and under law. Upon the use of all or part of the Security Deposit to
cure any default of Subtenant, Subtenant shall forthwith deposit with
Sublandlord the amount of Security Deposit so used.
9. Letter of Credit.
--------------------
On the date of execution of this Sublease Agreement by Subtenant, Subtenant at
its sole cost and expense shall deliver to Sublandlord, from a financial
institution acceptable to Sublandlord, an irrevocable, unconditional standby
letter of credit in the amount of $220,000.00, in substantially the form as set
forth in the Exhibit A attached hereto and incorporated herein by reference,
with any revisions thereof to be approved, in advance, by Sublandlord (such
letter of credit, together with any other renewal or replacement letters of
credit delivered or to be delivered by Subtenant hereunder shall be referred
collectively as the "Letter of Credit"). The Letter of Credit shall be
maintained until the expiration of the Term. Subtenant may periodically renew
the Letter of Credit to assure that it is maintained throughout the entirety of
said period; provided, any such periodic Letter of Credit must be extended,
renewed and/or replaced with a new Letter of Credit at least sixty (60) days
prior to the maturity date of the preceding periodic Letter of Credit.
Within ten (10) days after the expiration of the Term, provided no draw is
pending or has been made with the issuer of said Letter of Credit by the
Sublandlord, and the Subtenant is not in default (nor are there any conditions
which, but for the passage of time where the giving of notice would constitute a
default), then Subtenant shall be entitled to a full release of the Letter of
Credit and Sublandlord shall return the Letter of Credit to Subtenant.
Notwithstanding any other provisions to the contrary contained within this
Sublease, upon the occurrence of a default by Subtenant in the payment of rent
(whether denoted as Base, Additional or otherwise) or of any other default by
Tenant pursuant to the terms of this Sublease Agreement beyond the expiration of
any applicable cure period, Sublandlord may, upon five (5) days prior written
notice to Subtenant, draw upon the Letter of Credit. The amount of such draw
shall be in the amount of the default plus reasonable attorneys fees incurred by
Landlord. In the event of a draw upon the Letter of Credit, Subtenant shall
restore or replace the Letter of Credit to the full amount as existed prior to
the draw (a "Replenishment Event"). Notwithstanding any provision contained
hereto to the contrary, in the event of either: (a) Subtenant does not extend,
renew and/or replace a maturing periodic Letter of Credit with a substitute
Letter of Credit at least sixty (60) days prior to the stated expiration date of
said Letter of Credit, or (b) if Subtenant shall fail to restore or replace the
Letter of Credit to the full amount as existed prior to the draw within the
earlier of: (a) 30 days of the Replenishment Event, or (b) Sublandlord's
issuance of a writ of
(3)
<PAGE>
restitution for the premises due to Subtenant's default, then Sublandlord may
upon five (5) days prior written notice to Subtenant, and provided Subtenant
does not provide such a substitute Letter of Credit within said five (5) day
period, draw upon the entire amount of said Letter of Credit and such proceeds
of such Letter of Credit shall then deemed a Security Deposit and treated as set
forth in Section 8 above. No draw by Landlord under the Letter of Credit or the
use of the proceeds thereof, shall be deemed a waiver of any default by
Subtenant under any provisions of the Sublease, except to the extent Sublandlord
actually applies proceeds toward the cure of a default.
10. Use of the Premises.
------------------------
The Premises shall be used and occupied only for laboratory, biotech
manufacturing, general office and related ancillary uses, and for no other use
or purpose. In no event shall the Premises be used in a manner that violate the
terms of the Master Lease.
11. Assignment and Subletting.
------------------------------
Subtenant shall not hypothecate its interest in or assign this Sublease, or
further sublet all or any part of the Premises without (i) the prior written
consent of Sublandlord, which consent shall not be unreasonably withheld or
delayed, provided that Subtenant complies with the Master Lease and (ii) the
prior written consent of Master Landlord in accordance with the terms and
provisions of the Master Lease.
12. Other Provisions of Sublease.
---------------------------------
Except as otherwise provided herein, all applicable terms and conditions of the
Master Lease are incorporated into and made a part of this Sublease as if
Sublandlord were the landlord thereunder, Subtenant the tenant thereunder, and
the Premises the Master Premises, but incorporating such provisions herein shall
not obligate Sublandlord or be construed as causing Sublandlord to assume or
agree to provide utilities, insurance, maintenance, repairs or other services in
connection with the operation of the Premises or perform any obligations assumed
by the Master Landlord or be responsible for any representations or warranties
of Master Landlord under the Master Lease. Sublandlord shall have no liability
to Subtenant for a Master Landlord breach of the Master Lease. Notwithstanding
the foregoing, the following provisions of the Master Lease are not incorporated
herein: Sections 1, 4, 5, 7, 8, 10, 27, 32, 38, 39 (o) and 39 (p) and Exhibit B;
First Addendum to Lease Sections 1, 2, 12 and 13; Second Amendment to Lease;
Third Amendment to Lease; Fourth Amendment to Lease; Fifth Amendment to Lease;
Sixth Amendment to Lease; Seventh Amendment to Lease; Eighth Amendment to Lease;
Ninth Amendment to Lease; Tenth Amendment to Lease.
Subtenant agrees to comply with each of the obligations and provisions of the
Master Lease during the term to the extent that such obligations and provisions
are applicable to the Premises, except that the obligation to pay rent to Master
Landlord under the Master Lease shall be considered performed by Subtenant to
the extent and in the amount rent is paid to Sublandlord in accordance with
Section 6 of this Sublease. Subtenant shall not commit or permit any act or
omission that will violate any of the provisions of the Master Lease. If the
Master Lease gives Sublandlord any right to terminate the Master Lease in the
event of partial or total damage, destruction, condemnation of the Master
Premises or the Building, or otherwise by reason of any breach or default by
Master Landlord under the Master Lease. Sublandlord shall not exercise
(4)
<PAGE>
any such right without Subtenant's prior consent. Furthermore, Sublandlord shall
not enter into any amendment or modification of the Master Lease without the
prior written consent of Subtenant. Notwithstanding the foregoing, nothing
contained herein shall preclude Sublandlord from negotiating a release or
assignment of the Master Lease with the Landlord.
13. Attorney's Fees.
--------------------
If Sublandord or Subtenant shall commence an action against the other arising
out of or in connection with this Sublease, the prevailing party shall be
entitled to recover its costs of suit and reasonable attorney's fees.
14. Notices.
------------
Any notice by either party to the other shall be valid only if in writing and
shall be deemed to be duly given only if delivered personally or sent by
certified mail addressed
If to Sublandlord:
Guidant Corporation/CPI
Attn: Mr. Dave Reimer
4100 Hamline Avenue North
St. Paul, MN 55112-5798
If to Subtenant:
Cypress Bioscience
Attn: Mr. Duane Morris
6675 185th Ave
Redmond, WA 98052
or at such other address for either party as that party may designate by notice
to the other. No notices shall be deemed received until actually delivered to
(or deliberately refused by) the addressee.
15. Time Periods for Performance.
---------------------------------
The time limits contained in the Master Lease for the giving of notices, making
of demands or performing of any act, condition or convenant on the part of
Tenant under the Master Lease, or for the exercise by the tenant thereunder of
any right, remedy or option incorporated herein are changed for the purpose of
incorporation herein by reference by shortening the same, in each instance, by
three (3) days, so that, in each instance, Subtenant shall have three (3) days
less time to observe or perform hereunder than Sublandlord has as Tenant under
the Master Lease. If the Master Lease, as incorporated herein, only allows three
(3) days or less for Subtenant to perform any act or to correct any failure
relating to the Premises or this Sublease, then, except in the event of an
emergency, Subtenant shall nevertheless be allowed two (2) business days to
perform any such act or correct any such failure. Time periods set forth in this
Sublease are subject to principals of force majeure.
(5)
<PAGE>
16. Performance by Sublandlord.
-------------------------------
Sublandlord covenants and agrees that it will fully and punctually pay all rent
and other charges due and payable under the Master Lease as and when the same
shall become due and payable and shall timely and fully comply with all terms,
conditions and provisions of the Master Lease applicable to Sublandlord. In the
event of any default hereunder by Subtenant, a default under the Master Lease
caused by or arising from such default shall not constitute a default by
Sublandlord hereunder.
17. Enforcement of Rights.
--------------------------
If Master Landlord defaults in any of its obligations under the Master Lease,
Subtenant shall be entitled to participate with Sublandlord in any action
undertaken by Sublandlord in the enforcement of Sublandlord's rights against
Master Landlord. If Sublandlord elects not to take action, whether legal action
or otherwise, for the enforcement of Sublandlord's rights against Master
Landlord, Subtenant shall have the right to take such action in its own name
and, for that purpose and only to such extent, all the rights of Sublandlord
under the Master Lease with respect to the Premises shall be and are hereby
conferred upon and assigned to Subtenant, and Subtenant shall be subrogated to
such rights to the extent they apply to the premises. Subtenant shall defend
indemnify and hold Sublandlord harmless from all claims, costs and liabilities,
including attorneys' fees and costs, arising out of or in connection with any
such action by Subtenant.
18. Delivery of Possession.
---------------------------
The Premises shall be delivered in its "as is" condition, broom clean, as of the
Commencement Date, together with keys to all locking doors and the furnishings
which Sublandlord has agreed to deliver with the premises. Subtenant
acknowledges that it has inspected the Premises and found them to be in
acceptable condition.
19. Insurance.
--------------
Subtenant shall comply with all of the insurance requirements and obligations of
Sublandlord, as tenant under the Master Lease, with respect to the Premises, and
shall, whether required by the Master Lease or not, name Master Landlord and
Sublandlord as additional insureds, as their interests may appear, on all
policies of insurance required to be carried by Subtenant hereunder or
thereunder. The parties mutually agree that (insofar as and to the extent that
such agreement may be effective without invalidating or making it possible to
secure insurance coverage from responsible insurance companies doing business in
the State of Washington), with respect to any property loss which is covered by
insurance then being carried by Sublandlord or Subtenant, respectively, the
party carrying such insurance and suffering such loss releases the other of and
from any and all claims with respect to such loss; and the parties further
mutually agree that their respective insurance companies shall have no right of
subrogation against the other on account thereof, even though extra premium may
result therefrom. If and to the extent such waiver can be obtained only upon
payment of an additional charge, the party benefiting from the waiver shall pay
such charge, upon demand, or shall be deemed to have agreed that the party
obtaining the insurance coverage in question shall be free of further
obligations under the provisions hereof relating to such waiver.
(6)
<PAGE>
20. Subtenant's Indemnity; Sublandlord's Indemnity.
---------------------------------------------------
Subtenant shall defend, indemnify and hold harmless Sublandlord, its partners,
employees, and agents, and Master Landlord, from and against any and all claims,
liabilities, suits, judgments, awards, damages, losses, fines, penalties, costs
and expenses, including reasonable attorney's fees, that Sublandlord, its
partners, employees and agents, and Master Landlord may suffer, incur or be
liable for by reason of or arising out of or related to the breach by Subtenant
of any of the duties, obligations, liabilities or covenants applicable to
Subtenant hereunder, any alterations, additions or modifications made to the
Premises by Subtenant without all required consents or Subtenant's negligence or
willful misconduct. Likewise, Sublandlord shall defend, indemnify and hold
harmless Subtenant, its partners, employees, and agents, from and against any
and all claims, liabilities, suits, judgments, awards, damages, losses, fines,
penalties, costs and expenses, including reasonable attorney's fees, that
Subtenant, its employees and agents, may suffer, incur or be liable for by
reason of or arising out of or related to the breach by Sublandlord of (1) any
of the duties, obligations, liabilities or covenants applicable to Sublandlord
under this Sublease, (2) any of Sublandlord's duties, obligations, liabilities
or covenants under the Master Lease, (3) Sublandlord's gross negligence of
willful misconduct, and (4) any liabilities or causes of action arising prior to
the Commencement Date provided that the breach is not a result of Subtenant's
failure to perform and/or satisfy its obligations under the Sublease. The
foregoing indemnification shall survive termination of this Sublease.
21. Alterations.
----------------
Notwithstanding anything in the Master Lease as incorporated herein to the
contrary, before proceeding with any alteration, additions or improvement to the
Premises (collectively, "Alteration"), Subtenant shall obtain the prior written
consent of Sublandlord and Master Landlord and submit to Sublandlord and Master
Landlord plans and specifications for the work to be done prepared by a licensed
architect for Sublandlord's and Master Landlord's prior written consent.
Subtenant shall reimburse Sublandlord, on written demand, for all of
Sublandlord's reasonable costs incurred in connection with the review of
Subtenant's plans for any Alterations. Subtenant shall deliver to Sublandlord,
within five (5) days of request, a copy of Master Landlord's approval of
Subtenant's plans for any Alteration and, upon receipt of such approval,
Sublandlord shall not unreasonably withhold or delay consent to such Alteration.
Subtenant acknowledges and agrees that, notwithstanding anything herein to the
contrary, with respect to any of Subtenant's Alterations, Sublandlord shall have
no responsibility whatsoever for the installation of, cost of correcting or
removal upon Sublease termination of any of Subtenant's Alterations or any
compliance requirements of the Master Lease, and Subtenant shall bear the entire
responsibility and liability therefore.
22. Limitations on Sublandlord.
-------------------------------
(i) Subtenant acknowledges that Sublandlord has made no representations or
warranties with respect to the Building or the Premises except as
expressly provided in this Sublease.
(ii) If Sublandlord assigns its leasehold estate in the Master Premises to
Master Landlord, Sublandlord shall have no obligation to Subtenant arising
thereafter. Subtenant shall then recognize Sublandlord's assignee as
sublessor under this Sublease, and such assignee shall assume in writing
Sublandlord's obligations to Subtenant under this
(7)
<PAGE>
Sublease. Sublandlord agrees not to assign its rights or obligations
herein to any third party other than the Master Landlord.
(iii) Sublandlord shall not be required to perform any of the covenants and
obligations of Master Landlord under the Master Lease and, insofar as any
of the obligations of the Sublandlord hereunder are required to be
performed under the Master Lease by Master Landlord, Subtenant shall rely
on and look solely to Master Landlord for the performance thereof.
23. Subtenant's Obligations upon Termination of this Sublease.
--------------------------------------------------------------
Subtenant shall keep the Premises in good order and condition, subject to
reasonable wear and tear, and at the expiration or sooner termination of this
Sublease, shall surrender and deliver upon the same, "broom clean" and in
substantially the condition in which the same are delivered to Subtenant,
ordinary wear and tear excepted. Subtenant shall repair any damage to the
Premises or the Building caused by Subtenant's move into the Premises, the
removal from the Premises of any property by or on behalf of Subtenant, and any
damage otherwise caused by Subtenant, Subtenant shall not be responsible to
remove any alterations or improvements to the Premises made by Sublandlord or
its predecessors under the Master Lease.
24. Subordination to the Master Lease.
--------------------------------------
This Sublease is expressly subject and subordinate to the Master Lease, and, if
the Master Lease terminates, this Sublease shall terminate. Subtenant
acknowledges that it has received a copy, and has reviewed the terms of the
Master Lease. In addition to Subtenant's obligations under this Sublease and to
the extent not consistent with this Sublease, Subtenant shall observe and
perform as obligations under this Sublease only all of the terms, covenants and
conditions of the Master Lease which Sublandlord, as tenant under the Master
Lease, is obligated to observe and perform with respect to the Premises, except
for the payment of rent thereunder, as such terms, covenants and conditions of
the Master Lease are incorporated herein pursuant to Section 12 of this
Sublease, but notwithstanding any other provision hereof, incorporating such
provisions herein shall not obligate Sublandlord or be construed as causing
Sublandlord to assume or agree to perform any obligations of Master Landlord
under the Master Lease. If the Master Lease is terminated by the Master Landlord
prior to its expiration date as a result of an event of default (uncured after
notice, if any, as may be provided in the Master Lease) of Subtenant and not as
a result of any action or omission of Sublandlord, subtenant shall, and hereby
does, indemnify and hold Sublandlord harmless from and against any and all
claims, suits, liabilities, costs and expenses, including reasonable attorneys'
fees and costs resulting therefrom. Similarly, if this Sublease is terminated by
the Master Landlord prior to its expiration date as a result of an event of
default (uncured after notice, if any, as may be provided in the Master Lease)
of Sublandlord and not as a result of any action or omission of Subtenant,
Sublandlord shall and hereby does, indemnify and hold Subtenant harmless from
and against any and all claims, suits, liabilities, costs and expenses,
including without limitation reasonable attorneys' fees and costs and any rental
costs in excess of those provided for in this Sublease, incurred by Subtenant in
a move to comparable space necessitated by any such termination of this Sublease
caused by Sublandlord's default. If any of the express provisions of this
Sublease shall conflict with any of the provisions incorporated by reference,
such conflict shall be resolved in favor of the express provisions of this
Sublease.
(8)
<PAGE>
25. Interest on Unpaid Rent.
----------------------------
All installments of monthly rent, and any other charges which are not paid by
Subtenant when due shall bear interest from the date due (after expiration of
the grace period granted by the Sublease) until paid, at a rate equal to the
applicable rate set forth in the Master Lease, in no Event to exceed the
maximum legal rate (the "Interest Rate").
26. Consent or Approval of Master Landlord.
-------------------------------------------
If the consent or approval of Master Landlord is required under the Master Lease
with respect to any matter relating to the Premises or this Sublease, it shall
also be required hereunder.
27. Holdover.
-------------
If Subtenant holds possession of the Premises after the expiration or sooner
termination of this Sublease, Subtenant shall become a tenant at sufferance on a
day-to-day basis upon the terms specified herein at two hundred percent (200%)
of the then existing monthly base rent and other charges payable hereunder. In
addition, Subtenant shall be responsible for any and all damages suffered by
Sublandlord, including, without limitation, holdover rent payable under the
Master Lease and direct damages or costs resulting from actions initiated by
third parties (including Master Landlord) as a result of such holding over. Such
tenancy shall not constitute a renewal of this Sublease.
28. Liability.
--------------
Notwithstanding any other provision contained herein to the contrary, Subtenant
and Sublandlord shall look only to the assets of the other for the satisfaction
of any liability under the Sublease, it being expressly understood and agreed
that any partner, officer, director, employee or agent of Sublandlord or
Subtenant, as the case may be, as an individual shall not be held personally
liable for such obligations and neither party shall pursue satisfaction of any
judgment against the assets of any individual partner, officer, director, or,
employee or agent of the other party.
29. Right to Cure Defaults.
---------------------------
If Subtenant shall at any time fail to make any payment or perform any other
obligation of Subtenant hereunder prior to the expiration of any cure period
granted herein, then Sublandlord shall have the right, but not the obligation,
after the lesser of a five (5) business day notice to Subtenant or the time
within which Master Landlord may act on Sublandlord's behalf under the Master
Lease, or such notice, if any, as is reasonable in the case of any emergency,
and without waiving or releasing Subtenant from any obligations of Subtenant
hereunder, to make such payment or perform such other obligation of Subtenant in
such manner and to such extent as Sublandlord shall reasonably deem necessary
and in exercising any such right, to pay any incidental costs and expenses,
employ attorneys and other professionals and incur and pay attorneys' fees and
other costs reasonably required in connection therewith. Subtenant shall pay to
Sublandlord upon demand all sums so paid by Sublandlord and all incidental costs
and expenses of Sublandlord in connection therewith, together with interest
thereon at the Interest Rate.
If Sublandlord shall at any time fail to make payment or perform any other
obligation of Sublandlord under the Master Lease, then subtenant shall have the
right, but not the obligation, after the lesser of a five (5) business day
notice to Sublandlord or the time within which Master
(9)
<PAGE>
Landlord may act on Sublandlord's behalf under the Master Lease, or with such
notice, if any, as is reasonable in case of any emergency, and without waiving
or releasing Sublandlord from any obligations of Sublandlord hereunder, to make
such payment or perform such other obligation of Sublandlord in such manner and
to such extent as Subtenant shall reasonably deem necessary, and in exercising
any such right, to pay any incidental costs and expenses, employ attorneys and
other professionals, and incur and pay attorneys' fees and other costs
reasonably required in connection therewith. Sublandlord shall pay to Subtenant
upon demand all sums so paid by Subtenant and all incidental costs and expenses
of Sublandlord in connection therewith, together with interest thereon at the
Interest Rate.
30. Survival.
-------------
Except as otherwise set forth in this Sublease, any obligations of Subtenant
(including, without elimination, rental and other monetary obligations, repair
obligations and obligations to indemnify Sublandlord), shall survive the
expiration or sooner termination of this Sublease and Subtenant shall
immediately reimburse Sublandlord for any expense incurred by Sublandlord in
curing Subtenant's failure to satisfy any such obligation (notwithstanding the
fact that such cure might be effected by Sublandlord following the expiration or
earlier termination of this Sublease). The rights granted in this Paragraph on
behalf of Sublandlord shall apply reciprocally on behalf of Subtenant to the
extent applicable. Except as otherwise set forth in this Sublease, any
obligations of Sublandlord shall survive the expiration or sooner termination of
this Sublease, and Sublandlord shall immediately reimburse Subtenant for any
expenses incurred by Subtenant incurring Sublandlord's failure to satisfy any
such obligation (notwithstanding the fact that such cure might be effected by
Subtenant following the expiration or earlier termination of this Sublease).
31. Brokers.
------------
Sublandlord and Subtenant warrant and represent that they have had no dealings
with any real estate broker or agent in connection with the negotiation of this
Sublease, except for United Properties and Kidder Mathews & Segner on behalf of
Sublandlord, CB Richard Ellis, on behalf of Subtenant, and that neither knows of
any other real estate broker or agent who is or might be entitled to a
commission in connection with this Sublease. Sublandlord agrees that it shall be
responsible for any commission which may be owed to United Properties and Fults
in connection with this Sublease pursuant to a separate agreement. In addition,
Sublandlord agrees that it shall be responsible for any commission which may be
payable to CB Richard Ellis and subject to a separate agreement to be entered
into between Sublandlord and CB Richard Ellis, Sublandlord and Subtenant each
agree to indemnify, defend and hold the other party and Master Landlord harmless
from and against any and all liabilities or expenses, including attorneys' fees
and costs, arising out of or in connection with a breach by such indemnifying
party of the representations and covenants contained in this Section.
32. Furniture and Equipment.
----------------------------
Sublandlord shall allow Subtenant the use of furniture identified on the
attached Exhibit B (collectively, the "Furniture") that is located in the
Premises leased by Subtenant. Upon full and complete fulfillment of the terms
and conditions of this agreement Sublandlord shall deliver, upon request of
Subtenant, a bill of sale for the Furniture and Subtenant shall become the fee
(10)
<PAGE>
owner of, said Furniture and responsible for its relocation and/or disposal at
the termination of the Sublease Agreement.
33. Direct Lease.
-----------------
Subtenant shall undertake reasonable, affirmative good faith efforts to secure a
direct lease of the subject Premises with Master Landlord. Sublandlord desires
to terminate its obligations under the Master Lease and Subtenant is willing to
permit such termination if (but only if) Master Landlord enters into a direct
lease of the Master Premises with Subtenant on the same terms as this Sublease
and on such other terms as may be acceptable to Subtenant in its sole and
absolute discretion. Subtenant shall have no liability to Sublandlord in the
event it does not effect or execute a direct lease with the Master Landlord and
any such termination of the Master Lease shall be expressly conditioned on the
execution of a direct lease between Subtenant and Master Landlord.
34. Consent by Master Landlord.
-------------------------------
Notwithstanding the foregoing, and without intending to modify or alter the
terms of the Master Lease, unless this Sublease and Subtenant's alteration plans
are consented to in writing by Master Landlord and, if required under the terms
of the Master Lease, Master Landlord's lender, within ten (10) days after
execution hereof: (i) this Sublease shall be of no force or effect and the Term
shall not commence; (ii) Sublandlord shall have no obligation to deliver
possession of the Premises; and (iii) Subtenant shall have no right to access to
the Premises. In obtaining such consent from the Master Landlord, Sublandlord
agrees to use good faith efforts also to obtain an agreement under which the
Master Landlord agrees to provide Subtenant with written notice of any default
by Sublandlord or Subtenant under the Master Lease, such notice to be delivered
simultaneously with any such notice provided by the Master Landlord to the
Sublandlord. This Sublease has been executed on the day and year first written
above.
35. Sublandlord Representations.
--------------------------------
Sublandlord hereby represents and warrants to Subtenant that (i) the Master
Lease attached hereto as Attachment A has been executed and delivered by Master
Landlord and Sublandlord, is in full force and effect and has not been
terminated, and constitutes the entire agreement of the parties thereto relating
to the lease of the Premises (ii) no default or breach by Sublandlord or, to the
best of Sublandlord's knowledge, by Master Landlord, exists under the Master
Lease, (iii) no event has occurred that, with the passage of time, the giving of
notice, or both, would constitute a default or breach by Sublandlord or, to the
best of Sublandlord's knowledge, by Master Landlord under the Master Lease, and
(iv) subject to receipt of Master Landlord's written consent hereto, Sublandlord
has the right and power to execute and deliver this Sublease and to perform its
obligations hereunder.
SUBLANDLORD: SUBTENANT:
GUIDANT CORPORATION/CPI CYPRESS BIOSCIENCE
By: By: Duane A. Morris
------------------------ -----------------------------
Signature: /s/[ILLEGIBLE] Signature: /s/Duane A. Morris
------------------------ -----------------------------
Title: VP Finance Title: Vice President, Operations
------------------------ -----------------------------
(11)
<PAGE>
<TABLE>
<CAPTION>
Item Floor Location Qty
- ---------------------- ----- -------- ---
<S> <C> <C> <C>
Cages & Shelving Units 1 Shipping
Rolling Cages 1 Shipping 2
Heavy Duty Shelving 1 Shipping
Lab Hood Serial #60 1 ME Lab 1
Metal Lockers 1 ME Lab 2
Biological Safety Hood 1 Microbiology Lab 2
Rolling Cages 1 Microbiology Lab 1
Furniture 1 TMR
Open Window Refrigerator 1 Cafeteria 1
Blue Fume Hood 1 Clean Room 1
Rolling Cart/Garbage Cans 1 Clean Room
Conference Table 1 LA Room
Oak Trim Benches 1 Calibration Lab 7
Heavy Duty Shelving 1 Receiving/lnspection
Water Filtration System 1 Off of Clean Room 1
Plastic Pallets 1 Receiving Dock
Racking 1 Receiving Dock
Pallet Jack 1 Receiving Dock
</TABLE>
<TABLE>
<CAPTION>
Item Floor Name Enclosure Qty
- ----------------------------- ------ ---- ------------ ---
<S> <C> <C> <C> <C>
2-drawer lateral file cabinet First Freestanding 2
3-drawer lateral file First Freestanding 2
3-shelf bookcase First Freestanding 1
4-drawer lateral file cabinet First Freestanding 17
4-shelf bookcase First Freestanding 1
Cubicles & Workstations First Freestanding 33
1 meeting table First Meeting 1
10 chairs First Meeting 10
13 chairs First Meeting 13
large triangular table First Meeting 1
1 Workstation First Office 1
2-drawer lateral file cabinet First Office 1
Total First Floor
</TABLE>
Cardiac Pacemakers Inc. makes no representation as to the condition or the
current availability of the above items.
[STAMP]
<PAGE>
CONSENT OF LANDLORD TO SUBLEASE
-------------------------------
WHEREAS Carr Redmond Corporation, a Washington corporation ("Landlord"),
and Cardiac Pacemakers, Inc., a Minnesota corporation ("Tenant"), are parties to
a certain Lease Agreement dated August 19, 1991 (the "Lease") covering the
building known as InControl, located at 6675 185th Avenue NE, Redmond,
Washington (except as otherwise provided herein, all terms with initial capital
letters have the same meaning ascribed to them in the Lease);
WHEREAS, Tenant desires to enter into a certain Sublease (the "Sublease")
with Cypress Bioscience, a Delaware corporation ("Subtenant"), whereby Subtenant
will sublease all of Tenant's space in InControl (the "Subleased Premises"); and
WHEREAS, as required by the Lease, Tenant has requested that Landlord
consent to the Sublease.
NOW THEREFORE, Landlord hereby consents to the Sublease subject to the
following terms and conditions:
1. The Sublease shall in no way release Tenant, or otherwise alter or
amend the obligations and liabilities of Tenant under the Lease
between Landlord and Tenant. Without limiting the generality of the
immediately preceding sentence, Tenant remains fully and personally
liable for the payment of all Rent and other sums due under the Lease
(including all amounts in excess of the Rent if any, which are paid by
Subtenant under Sublease).
2. Landlord's consent shall not constitute Subtenant as Tenant under the
Lease. Landlord's consent shall not constitute Landlord as a party to
the Sublease and Landlord shall not be bound by any terms of the
Sublease.
3. Subtenant shall not be permitted to assign the Sublease, or sublease
the Subleased Premises, without Landlord's prior written consent.
4. Landlord's consent to the Sublease shall not relieve Tenant of its
obligation to obtain the prior written consent of Landlord to any
subsequent assignment of the Lease or subletting of the Premises.
5. Landlord's consent to the Sublease shall not relieve Tenant of its
obligation, pursuant to the Lease, to obtain Landlord's prior written
consent to all alterations of the Premises to be performed by or on
behalf of Tenant or Subtenant.
6. Landlord's consent to the Sublease shall not relieve Tenant from its
obligation fully to observe and perform the terms, covenants and
conditions of the Lease, nor shall Landlord's consent be deemed a
consent to any terms in the Sublease which are inconsistent with the
Lease.
<PAGE>
Landlord's consent be deemed a consent to any terms in the Sublease
which are inconsistent with the Lease.
7. A copy of the fully executed Sublease will be delivered to Landlord
prior to Subtenant's occupancy of the Subleased Premises.
LANDLORD
--------
Carr Redmond Corporation,
a Washington corporation
Date: 2/5/99, 1999 By: /s/ [ILLEGIBLE]
------------------------------
Printed Name: [ILLEGIBLE]
--------------------
Title: [ILLEGIBLE]
---------------------------
SUBLANDLORD SUBTENANT
- ----------- ---------
[INITIALED]
Cardiac Pacemakers, Inc. Cypress Bioscience, Inc.
a Minnesota corporation a Delaware corporation
By: /s/ [ILLEGIBLE] By: /s/ Duane A. Morris
------------------------------ ------------------------------
Printed Name: Printed Name: Duane A. Morris
-------------------- --------------------
Title: VP Finance Title: Vice President, Operations
--------------------------- ---------------------------
<PAGE>
STATE OF WA )
)
COUNTY OF King )
On this day personally appeared before me Duane Morris to me known to be
the VP Operations of Cypress Bioscience the corporation that executed the within
and foregoing instrument, and acknowledged the instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that he/she was duly authorized to execute said
instrument on behalf of the corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 27th day of
January, 1999.
[SEAL] /s/ Steve Bordner
-------------------------------------------
NOTARY PUBLIC in and for the State of WA
residing at Redmond
-------------------------------------------
My commission expires: 5/5/99
-------------------------------------------
STATE OF Minnesota )
)
COUNTY OF Ramsey )
On this day personally appeared before me Richard Vogel, to me known to be
the V.P. of Finance, the corporation that executed the within and
foregoing instrument, and acknowledged the instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that he/she was duly authorized to execute said
instrument on behalf of the corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 10 day of
February 1999.
/s/ Brenda S. Venjohn
[SEAL] -----------------------------------------------
Notary Public in and for the State of Minnesota
---------
Residing at St. Paul
------------------------------------
My commission expires: 1-31-2000
-------------------------
District of Columbia )
)
)
On this day personally appeared before me Philip L. Hawkins to me known to
be the Chief Operating Officer of Carr America Realty Corp. the corporation that
executed the within and foregoing instrument and acknowledges the instrument to
be the free and voluntary act and deed of said corporation for the uses and
purposes therein mentioned, and on oath stated that he/she was duly authorized
to execute said instrument on behalf of the corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 5th day of
February, 1999.
/s/ [ILLEGIBLE]
-----------------------------------------------------------
NOTARY PUBLIC In and for the District of Columbia
------------------
residing at Washington, DC
------------------------------------------------
My commission expires: My Commission Expires April 30, 2003
------------------------------------
<PAGE>
TENTH AMENDMENT TO LEASE
Addition and Deletion of Square Footage
That certain Lease dated August 19, 1991, as amended by the First Addendum
---------------
to Lease dated August 19, 1991, the Second Amendment to Lease dated June 1,
1992, the Third Amendment to Lease dated October 15, 1992, the Fourth Amendment
of Lease dated August 24, 1993, the Fifth Amendment to Lease dated September 9,
1994, the Sixth Amendment to Lease dated May 31, 1995, the Seventh Amendment to
Lease dated March 29, 1996, the Eight Amendment to Lease dated April 29, 1996
and the Ninth Amendment to the Lease dated January 31, 1997 (collectively the
"Lease"), by and between Carr Redmond Corporation a Washington corporation,
-------------------------------------------------
successor in interest to Redmond East, L.L.C. ("Lessor") and InControl, Inc., a
- --------------------------------------------- ---------------
Delaware corporation ("Lessee"), for the Premises located at 6675 185th Avenue
-----------------
NE and 6645 185th Avenue NE, Redmond, Washington 98052 is amended this 1st day
- ------------------------------------------------------
of May, 1997 solely as hereinafter described.
Effective the 1st day of May, 1997, Landlord and Tenant desire to amend the
--- --- ----
Lease to, among other things, provide for further expansion space on the second
floor of Building 14 and at the same time remove the warehouse portion of the
Premises from the leased area which was never occupied. The portions of the
Lease as numbered below are amended to read as follows:
1. Paragraph 1. Premises.
Building 13 - 42,422 rentable square footage has not changed (inadvertently
--------------------------------------------
identified as 42,444 square feet in Paragraph C of the Ninth Amendment to
Lease).
Building 14 - 26,521 rentable square feet calculated as follows: Current
-----------------------------------------
square footage of 22,206 rentable square feet (inadvertently identified as
22,260 square feet in Paragraph C of the Ninth Amendment), plus the balance
of the second floor office space of 4,315 rentable square feet added by
this amendment. The total square footage in Building 14 is 35,091 rentable
square feet.
Building 14 - Future expansion area. The future expansion area identified
-----------------------------------
in Paragraph 3 of the Ninth Amendment as the Office Expansion Space of
9,500 square feet has been changed. The Office Expansion Space which shall
become part of the Premises no later than June 1, 1999 in accordance with
the Ninth Amendment, is the remaining first floor office space of 4,270
rentable square feet and warehouse space of 4,300 rentable square feet
("Warehouse Expansion Space").
2. Paragraph 6. Additional Rental.
Effective May 1, 1997, the Tenant share of expenses in Building 14 shall be
amended to 75.58%; Building 13 is unchanged at 100%. When Tenant expands
into the Office Expansion Space and Warehouse Expansion Space, the Tenant's
share of expenses in Building 14 shall become 100%.
3. Paragraph 10. Construction.
Lessor agrees that it shall provide Lessee a $5.00 per square foot tenant
allowance for the Office Expansion Space in accordance with the terms of
Paragraph 3 of the Ninth Amendment to Lease. No tenant improvement
allowance will be provided for the Warehouse Expansion Space, it will be
delivered broom clean and in "AS IS" condition.
<PAGE>
4. Paragraph 5. Rental.
<TABLE>
<CAPTION>
Building 14 - 6645 185th Avenue NE, Redmond, WA 98052
Effective Monthly Rent New Monthly
Date Base Rent Escalation Base Rent
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1997 $16,562.50
(office space of 15,000 s.f. at $13.25 s.f.)
May 1, 1997 $16,562.50 $4,764.48 $21,326.98
(new office space of 4,315 s.f. at $13.25 s.f.)
June 1, 1997 $21,326.98 $7,956.63 $29,283.61
(end of free rent period for Sixth Expansion Premises of 7,206 s.f., (inadvertently identified as 7,260 s.f. in Paragraph 5 of the
Ninth Lease Amendment.))
June 1, 1999 (not later than) $29,283.61 $8,310.42(1) $37,594.03
June 1, 1999 $37,594.03 $4,972.68(2) $42,566.71
(1)(addition of Office Expansion Space of 4,270 s.f. at $15.50 s.f. and Warehouse Expansion Space of 4,300 s.f. at $7.80 s.f.)
(2)(rent increase to $15.50 s.f. for office area of 26,521 s.f.)
June 1, 2002 $42,566.71 $5,521.02 $48,085.54
(rent increase to $17.50 for office area of 30,791 s.f. and to $8.88 per s.f. for warehouse area of 4,300 s.f.
<CAPTION>
Building 13 - 6675 185th Avenue NE, Redmond, WA 98052
Effective Monthly Rent New Monthly
Date Base Rent Escalation Base Rent
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1997 $49,492.33
June 1, 1999 $49,492.33 $5,302.75 $54,795.08
June 1,2002 $54,795.08 $7,070.33 $61,865.41
</TABLE>
All other terms and conditions of the above-described Lease shall remain in full
force and effect.
Lessor: Carr Redmond Corporation Lessee: InControl, Inc.
a Washington corporation a Delaware corporation
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- -----------------------
Its: Managing Director Its: VP Finance
---------------------------- -----------------------
Date: 5/1/99 Date: 29 April 1997
---------------------------- -----------------------
<PAGE>
DISTRICT OF COLUMBIA )
)ss.
)
On this 2nd day of May 1997, before me, the undersigned, a Notary Public in
and for the District of Columbia, duly commissioned and sworn as such,
personally appeared Philip L. Hawkins, to me known to be the Managing Director
of CARR REDMOND CORPORATION the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument,
and that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
/s/ Olivia M. Kerr
Printed Name: O1ivia M. Kerr
-----------------------
NOTARY PUBLIC in and for the District
of Columbia, residing at
8915 Cullum Dr. ^^, Va. 22079
-------------------------------------
My commission expires: 11/30/01
---------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 29th day of April, 1997, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn as such,
personally appeared Donald F. Seaton III to me known to be the VP, Finance of
InControl, Inc., the corporation that executed the within and foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation for the uses and purposes therein mentioned,
and on oath stated that he/she was authorized to execute said instrument, and
that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
[SEAL] Printed Name: /s/ K. Kay Hannah
------------------------------
K. Kay Hannah
NOTARY PUBLIC in and for the State of
Washington, residing at
Redmond, Wa
-------------------------------------------
My commission expires: 2/14/00
---------------------
<PAGE>
[FIRST FLOOR PLAN]
<PAGE>
[SECOND FLOOR PLAN]
<PAGE>
NINTH AMENDMENT TO LEASE
THIS NINTH AMENDMENT TO LEASE (this "Amendment") is entered into this 31st
day of January, 1997 by and between CARR REDMOND CORPORATION, a Washington
corporation, successor in interest to Redmond East, L.L.C. ("Lessor") and
INCONTROL, INC., a Washington corporation ("Lessee"), with respect to the
following facts:
RECITALS
--------
A. Lessor and Lessee are parties to that certain Redmond East Lease, dated
August 19,1991, as amended by the First Addendum to Lease dated August 19, 1991,
the Amendment to Lease dated March 5, 1991, the Second Amendment to Lease dated
June 1, 1992, the Third Amendment to Lease dated October 15, 1992, the Fourth
Amendment to Lease dated August 24, 1993, the Fifth Amendment to Lease dated
September 9, 1994, the Sixth Amendment to Lease dated May 31, 1995, the Seventh
Amendment to Lease dated March 29, 1996 and the Eighth Amendment to Lease dated
April 29, 1996 (collectively the "Lease"). Capitalized terms used herein if not
defined herein have the meaning given them in the Lease.
B. Lessor and Lessee are also parties to that certain Agreement dated
August 19, 1991, as amended by the First Amended Agreement dated June 1, 1992,
the Second Amended Agreement dated October 15, 1992 and the Third Amended
Agreement dated August 24, 1993 (the "Agreement") and that certain Agreement
dated May 31, 1995 (the "1995 Agreement").
C. Pursuant to the terms of the Lease, Lessee currently leases from Lessor
42,444 square feet in Building 13 and approximately 22,260 square feet of
Building 14, which area includes the Sixth Expansion Premises consisting of
approximately 7,206 square feet on the second floor all as more fully described
in the Lease and Sixth Amendment to Lease.
D. Landlord and Tenant desire to amend, modify and supplement the Lease and
the 1995 Agreement to, among other things, provide for further expansion space
for Lessee, amend the term of the Lease, adjust the Basic Rental, and modify
the terms of payment by Lessor of certain tenant improvement allowances, all as
hereinafter set forth.
NOW, THEREFORE, Lessor and Lessee hereby agree as follows:
AMENDMENTS AND AGREEMENTS
-------------------------
1. Lessee hereby acknowledges and agrees that as of the date hereof, Lessee
has taken possession of the Sixth Expansion Premises
1
<PAGE>
pursuant to the terms of the Lease and that the Sixth Expansion Premises
constitutes a part of the Building 14 Premises. Lessor acknowledges Lessee's
payment of the January 1997 Basic Rental and Additional Rental.
2. From and after April 1, 1997, Section 1 of the Lease is amended to
include within the definition of Building 14 Premises the approximately 4,000
square feet of warehouse space ("Warehouse Space") and the approximately 9,500
square feet of office space on the first and second floor (the "Office Expansion
Space") of Building 14 identified on Exhibit A attached hereto. From and after
April 1, 1997, the term Premises is amended to include the Warehouse Space and
Lessee shall have been deemed to have taken possession of the Warehouse Space as
of April 1, 1997. Lessee hereby acknowledges and agrees that the Warehouse Space
has been delivered by Lessor and Lessee accepts the Warehouse Space in its
current "AS IS" condition.
3. Effective not later than June 2, 1999, the Office Expansion Space shall
become part of the Premises and Lessor shall deliver and Lessee shall accept
possession of the Office Expansion Space. At the time Lessor delivers possession
of the Office Expansion Space to Lessee, the floor area of the Premises shall be
increased by 9,500 square feet in accordance with this section and the Basic
Rental shall be increased as set forth in paragraph 5 below. Lessor agrees that
it shall provide Lessee a $5.00 per square foot tenant allowance for the Office
Expansion Space payable upon invoice and verification of completion of tenant
improvements approved by Lessor and otherwise constructed in accordance with the
terms of the Lease and this Amendment. Except for the tenant allowance provided
for herein, Lessee shall accept the Office Expansion Space in its then "AS IS"
condition. Notwithstanding the foregoing, in the event that Lessor is unable to
deliver possession of the Office Expansion Space to Lessee for the construction
of tenant improvements on or before April 1, 1999, the effective date of
Lessee's lease of the Office Expansion Space shall be adjusted by mutual
agreement of the parties for any such delay.
4. Lessor and Lessee hereby agree to amend Section 4 of the Lease to the
extent necessary to extend the term of the Lease eight years and five months,
from January 1, 1997 to May 31, 2005, on which date the Lease shall terminate.
5. Lessor and Lessee hereby agree to amend the Lease as necessary to
provide that from and after January 1, 1997, the Basic Rental for the Premises
shall be as follows:
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Building 13 Premises
- --------------------
1/1/97 - 5/31/99 $14.00 per sq. ft. annually ($1.16/mo.)
6/1/99 - 5/31/02 $15.50 per sq. ft. annually ($1.29/mo.)
6/1/02 - 5/31/05 $17.50 per sq. ft. annually ($1.45/mo.)
Building 14 Premises
- --------------------
1/1/97 -5/31/99
Office Space $13.25 per sq. ft. annually ($1.10/mo.)
Warehouse Space $6.60 per sq. ft. annually ($0.55/mo.)
6/1/99 - 5/31/02
Office Space $15.50 per sq. ft. annually ($1.29/mo.)
Warehouse Space $7.80 per sq. ft. annually ($0.65/mo.)
6/1/02 - 5/31/05
Office Space $17.50 per sq. ft. annually ($1.45/mo.)
Warehouse Space $8.88 per sq. ft. annually ($0.74/mo.)
</TABLE>
Lessor hereby agrees that between and including January 1, 1997 and May 31,
1997, Lessee shall have a free rent period and not have to pay Basic Rental for
the area of the Premises in Building 14 referred to as the Sixth Expansion
Premises (7,260 sq. ft. on the second floor); provided, however, Lessee shall be
responsible for and pay any and all Additional Rent and other charges under the
Lease for the Sixth Expansion Premises. Lessor shall credit Lessee for January's
Basic Rental payment for the Sixth Expansion Premises referenced in Paragraph
1 above.
6. Lessor and Lessee hereby agree to amend the Lease and the 1995 Agreement
as necessary to provide that Landlord shall provide Lessee with a tenant
improvement allowance (the "Tenant Allowance") in the total amount of $144,000
for the build out of the Sixth Expansion Premises. In addition, Lessor shall
provide the Sixth Expansion Premises the "shell HVAC" consisting of a roof top
unit and ducting to the Sixth Expansion Premises distribution box, and for the
purchase and installation of an elevator servicing the second floor space, at
Lessor's sole cost and expense. Lessor shall complete such work on or before
April 1, 1997. Lessor shall pay Lessee the Tenant Allowance upon satisfaction of
the following conditions by Lessee: (i) Lessor shall approve plans and
specifications, which approval shall not be unreasonably withheld; (ii)
presentment of invoice for the Tenant Allowance to Lessor; (iii) verification by
Lessor that the tenant improvements are completed in accordance with plans and
specifications approved by Lessor; (iv) lien releases or waivers satisfactory to
Lessor from any contractors and subcontractors; and (v) Lessee shall
3
<PAGE>
not be in default under the Lease (subject to applicable cure periods).
7. Lessor and Lessee hereby agree to amend the Lease to provide that Lessor
shall provide Lessee up to a maximum of 3 parking spaces per 1000 sq. ft. of
Premises (excluding Warehouse Space of 4,000 sq. ft.). Lessor shall make
available and designate such parking spaces in accordance with the terms of the
Lease.
8. Provided that (i) the Lease is full force and effect, (ii) Lessee is in
possession of the Premises, and (iii) Lessee is not in Default under the Lease,
Lessee shall have One (1) five year option to extend the term of the Lease (the
"Extension Option"). At least one year prior to the expiration of the Lease,
Lessor shall request of Lessee a notification of whether or not Lessee intends
to exercise option to renew. Lessee shall give Lessor written notice of its
election to exercise the Extension Option at least nine (9) months (but not
earlier than One (1) year) prior to the expiration of the term of the Lease.
Time is of the essence with respect to Lessee's notice of exercise of the
Extension Option. Lessee's Extension Option shall be subject to the following
terms and conditions:
a. All terms and conditions of the Lease shall remain in full force and
effect during the extension term, except for Basic Rental for the Premises which
shall be determined in accordance with the terms of this paragraph. Basic Rental
during the option term shall be the then fair market base rent for comparable
vacant space on the Property, taking into account the commencement date of the
option term, the terms and conditions of the lease form that Lessor is then
using in the Building, but in no event shall the Basic Rental be less than the
Basic Rental payable during the last month of the term preceding the option
term. The term fair market base rent shall mean the base rent for that space
which would be paid by a willing tenant to a willing landlord, neither of whom
is compelled to rent, for a term of five years, disregarding "tenant
concessions," if any, then being offered on comparable vacant space only to
prospective new tenants in the Building. The term "tenant concessions" shall
include, without limitation, such inducements as free rent, free parking, over
standard tenant improvements, or other similar inducements. The fair market base
rent shall not reflect the value of any improvements to the Premises made by
Lessee which Lessee has the right to remove at the end of the Lease.
b. Lessor and Lessee shall conduct good faith negotiations to establish and
agree on the Basic Rental for the Premises during the option term within 120
days of the date of Lessee's notice of exercise of the Extension Option to
Lessor. In the event that the parties are
4
<PAGE>
unable to agree on the Basic Rental for the option term, the parties hereby
agree to submit the issue to binding arbitration in accordance with the
following procedure. Upon the expiration of the negotiation period, each party
shall select one (1) qualified real estate appraiser or professional within 15
days. In the event that one party refuses to select an arbitrator, after notice
to the breaching party, the non-breaching parties arbitrator shall select the
breaching party's arbitrator. The arbitrators shall select a third arbitrator
within ten days. Each party shall submit to the arbitrators its opinion of Basic
Rental based on fair market base rent as defined above. The arbitrators shall be
required to select one or the other party's Basic Rental number, by at least two
of the three arbitrators. The non-prevailing party in the arbitration shall pay
all costs and expenses of the arbitration. The parties shall submit all written
material to the arbitrators within 30 days of the date the third arbitrator has
been selected and the arbitrators shall render a decision within 30 days of the
receipt of the parties written submissions. In the event either party defaults
or refuses to perform its obligations under this paragraph, such defaulting
party shall be deemed to have accepted the non-defaulting party's opinion of
Basic Rental.
c. The Extension Option shall be personal to Lessee and may not be
exercised or be assigned, voluntarily or involuntarily, by or to any person or
entity other than Lessee, nor shall the Extension Option be assignable separate
and apart from the Lease.
d. The Extension Option shall be terminated during any period in which
Lessee is in default under any provisions of the Lease until said default has
been cured. Time is of the essence. If Lessee fails to exercise its Extension
Option prior to the expiration of the applicable time period for the exercise of
such right, Lessee's rights under the extension option shall thereafter be
terminated, deemed null and void and of no further force or effect. The period
of time within which the Extension option may be exercised shall not be extended
or enlarged by reason of Lessee's inability to exercise such rights because of
the foregoing provisions. All rights of Lessee under the Extension Option shall
terminate and be of no further force or effect even after Lessee's due and
timely exercise thereof, if, after the exercise, but prior to the commencement
date of the option term: (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee's in accordance with the terms of the Lease; (ii) Lessee fails to cure
a material non-monetary default in accordance with the terms of the Lease; or
(iii) Lessor gives to Lessee three (3) or more notices of default, whether or
not such defaults are ultimately cured. Lessor's waiver of its right to
terminate the Lease due to Lessee's default in any instance shall not be deemed
a waiver of the foregoing conditions
5
<PAGE>
precedent and conditions subsequent to the exercise of the Extension Option.
9. Any and all conditions or terms under the Lease to be performed by the
Lessor have been satisfied (including without limitation, the terms of the
Agreement); all non-monetary conditions under the Lease to be performed by the
Lessor have been satisfied; there are no existing claims, defenses or offsets
which the Lessee has against Lessor or the enforcement of the Lease by Lessor.
Lessee hereby acknowledges that the foregoing representation and warranty by
Lessee is a material consideration to Lessor in entering into this Amendment and
that Lessor is specifically relying on the statements of Lessee contained
herein.
10. Except as expressly amended by this Amendment, the terms and
conditions, of the Lease, as previously amended, remain in full force and effect
and are hereby ratified and affirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment as of
the date first above written.
LESSOR: CARR REDMOND CORPORATION
By: /s/ Philip L. Hawkins
----------------------------------
It's: Managing Director
--------------------------------
LESSEE: INCONTROL, INC.
By: /s/ Donald F. Seaton
----------------------------------
It's: VP Finance
--------------------------------
6
<PAGE>
DISTRICT OF COLUMBIA )
) ss.
)
I certify that I know or have satisfactory evidence that Philip L. Hawkins
is the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the Managing Director of CARR REDMOND
CORPORATION to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
DATED this 3rd day of March, 1997.
/s/ Olivia M. Kerr
----------------------------------------
Notary Public in and for the
District of Columbia, residing at
District of Columbia
--------------------
My Commission Expires: November 30, 2001
-----------------
Olivia M. Kerr
----------------------------------------
(print name)
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Donald F. Seaton
III is the person who appeared before me, and said person acknowledged that
he/she signed this instrument, on oath stated that he/she was authorized to
execute the instrument and acknowledged it as the Chief Financial Officer of
INCONTROL, INC. to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
DATED this 31st day of January, 1997.
/s/ K. Kay Hannah
----------------------------------------
Notary Public in and for the State of
Washington, residing at Redmond, WA
------------
My Commission Expires: 2/14/00
----------
K. Kay Hannah
----------------------------------------
(print name)
[SEAL]
7
<PAGE>
EXHIBIT "A-1"
[FLOOR PLAN]
FIRST FLOOR
<PAGE>
EXHIBIT "A-2"
[FLOOR PLAN]
SECOND FLOOR
<PAGE>
EIGHTH AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee", as amended by that certain FIRST ADDENDUM
TO LEASE dated August 19, 1991, by that certain SECOND AMENDMENT TO LEASE dated
June 1, 1992, by that certain THIRD AMENDMENT TO LEASE dated October 15, 1992,
by that certain FOURTH AMENDMENT OF LEASE dated August 24, 1993, by that certain
FIFTH AMENDMENT OF LEASE dated September 9, 1994, by that certain SIXTH
AMENDMENT TO LEASE dated May 31, 1995 and by that certain SEVENTH AMENDMENT TO
LEASE dated March 29, 1996, is further amended as set out below. Lessor's
interest in the Lease has been assigned to Redmond East, L.L.C. Capitalized
terms used herein if not defined herein have the meaning given them in the
Lease, as previously amended.
1. Lessee has had Freiheit & Ho prepare construction drawings dated March
27, 1996 for Project 96114 applicable to the Building 13 Premises. Lessor
approves said plans and the building modifications contemplated therein.
2. Lessee agrees to pay the sum of $10,000.00 upon termination of the
Lease, if the Lease is terminated earlier than March 31, 2006.
3. Lessee's obligation under Section 2 hereof shall be abated if, at the
date of termination of the Lease, the Building 13 Premises includes restrooms in
the portion of the building 13 Premises previously occupied by Cadman, Inc. Said
restrooms shall contain no less than the following: a male restroom containing
two sinks, two urinals and one disabled accessible commode and a female restroom
with two sinks, two commodes and one disabled accessible commode, all
constructed to building standards. The cost of said restrooms, if any, shall be
borne solely by Lessee.
4. All conditions under this Lease to be performed by the Lessor have been
satisfied; all conditions under this Lease to be performed by the Lessor have
been satisfied; there are no existing claims, defenses or offsets which the
Lessee has against the enforcement of this Lease by Lessor.
5. Except as expressly amended by this agreement, the terms and conditions
of the Lease remain in full force and effect and are hereby affirmed and
ratified.
6. This amendment shall become effective on the date hereof.
///
///
///
1
<PAGE>
DATED this 29 day of April, 1996.
LESSOR:
REDMOND EAST, L.L.C.
By: Red Ace, Inc., its Managing Member
By /s/ Michael R. Mastro
-----------------------------------
Name: Michael R. Mastro
Title: President
LESSEE:
INCONTROL, INC.
By /s/ Donald F. Seaton
-----------------------------------
Name: Donald F. Seaton
Title: VP Finance
2
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 14 day of May, 1996, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known, and said person acknowledged that he
signed this instrument as President of Red Ace, Inc., a Washington corporation,
which corporation is the managing member of Redmond East, L.L.C., a Washington
limited liability company, and on oath stated that he was authorized to execute
the instrument, and acknowledged it, as the President of Red Ace, Inc., and on
behalf of Red Ace, Inc., as managing member of Redmond East, L.L.C. for the uses
and purposes mentioned in the instrument.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my official seal,
the day and year first above written.
/s/ Donna J. Reid
--------------------------------------
[SEAL] NOTARY PUBLIC in and for the State of
Washington, residing at Auburn
-------
My commission expires 2/17/98
-------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 29 day of April, 1996 before me, the undersigned, a Notary Public
---- -------------
in and for the State of Washington, duly commissioned and sworn, personally
appeared Donald F. Seaton III, to me known to be the V.P. Finance of INCONTROL,
-------------------- ------------
INC., a Washington corporation, the corporation that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument
and that the seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my official seal,
the day and year first above written.
/s/ K. Kay Hannah
--------------------------------------
Notary Public in and for the State of
Washington, residing at Redmond, WA
-------------
My Commission Expires: 2/14/00
----------
3
<PAGE>
SEVENTH AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee", as amended by that certain FIRST ADDENDUM
TO LEASE dated August 19, 1991, by that certain SECOND AMENDMENT TO LEASE dated
June 1, 1992, by that certain THIRD AMENDMENT TO LEASE dated October 15, 1992,
by that certain FOURTH AMENDMENT OF LEASE dated August 24, 1993, by that certain
FIFTH AMENDMENT OF LEASE dated September 9, 1994, by that certain SIXTH
AMENDMENT TO LEASE dated May 31, 1995, is further amended as set out below.
Lessor's interest in the Lease has been assigned to Redmond East, L.L.C.
Capitalized terms used herein if not defined herein have the meaning given them
in the Lease, as previously amended.
1. Section 9 of the FIFTH AMENDMENT TO LEASE is hereby deleted, its terms
have been fulfilled by this amendment.
2. From and after April 1, 1996, the portion of the Premises located at
6675 185th Avenue N.E., Redmond WA (the "Building 13 Premises") shall be
enlarged by 6,876 rentable square feet (the "Cadman Area") and shall thereafter
include the entirety of Building 13, a total area of 42,422 rentable square
feet. The entire Premises area shall thereafter comprise 57,422 rentable square
feet.
In summary, on and after April 1, 1996, the Premises shall comprise a total
of 57,422 rentable square feet and shall include the Building 13 Premises,
comprised of a total of 42,422 rentable square feet and the Building 14
Premises, comprised of a total of 15,000 rentable square feet (the Building 14
Premises are located at 6645 185th Avenue N.E., Suite 100, Redmond WA and are a
portion of the property legally described in Exhibit A hereto.)
Notwithstanding the foregoing, the provision of the Lease to further expand
the Building 14 Premises in accordance with Section 3 of the SIXTH AMENDMENT OF
LEASE is specifically reaffirmed.
3. From and after June 1, 1996, the Basic Rental for the Premises shall
increase by the amount of $6,876.00 monthly for a total Basic Rental amount of
$64,557.33, not including the triple net charges imposed as Additional Rental in
Section 6 of the Lease.
In summary, on and after June 1, 1996, Basic Rental for the Premises shall
total $64,557.33, not including the triple net charges imposed as Additional
Rental in Section 6 of the Lease, and shall include the Basic Rental for the
Building 13 Premises, $49,107.33 monthly, and the Basic Rental for the Building
14 Premises, $15,450.00 monthly.
Notwithstanding the foregoing, increases in the Basic Rental prescribed in
Sections 3 and 4 of the SIXTH AMENDMENT TO LEASE are specifically reaffirmed. In
addition to such increases, the Basic Rental for the Premises and the Building
13 Premises shall increase by $343.80 from and after December 1, 1996 and by a
further $343.80 from and after December 1, 1998.
4. The Cadman Area is accepted by Lessee in its "as is" condition. Lessor
shall not be obligated to pay for any improvements thereto.
5. All conditions under this Lease to be performed by the Lessor have been
satisfied; all conditions under this Lease to be performed by the Lessor have
been satisfied; there are no existing claims, defenses or offsets which the
Lessee has against the enforcement of this Lease by Lessor.
6. Except as expressly amended by this agreement, the terms and conditions
of the Lease remain in full force and effect and are hereby affirmed and
ratified.
7. This amendment shall become effective on the date hereof.
DATED this 29th day of March, 1996.
------
1
<PAGE>
LESSOR:
REDMOND EAST, L.L.C.
By: Red Ace, Inc., its Managing Member
By /s/ Michael R. Mastro
-----------------------------------
Name: Michael R. Mastro
Title: President
LESSEE:
INCONTROL, INC.
By /s/ Donald F. Seaton
-----------------------------------
Name: Donald F. Seaton
Title: V.P. Finance
2
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 8 day of April, 1996, before me, the undersigned, a Notary Public
---- --------------
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known, and said person acknowledged that he
signed this instrument as President of Red Ace, Inc., a Washington corporation,
which corporation is the managing member of Redmond East, L.L.C., a Washington
limited liability company, and on oath stated that he was authorized to execute
the instrument, and acknowledged it, as the President of Red Ace, Inc., and on
behalf of Red Ace, Inc., as managing member of Redmond East, L.L.C., and as such
managing member, the free and voluntary act of Redmond East, L.L.C. for the uses
and purposes mentioned in the instrument.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my official seal,
the day and year first above written.
/s/ Donna J. Reid
--------------------------------------
[SEAL] NOTARY PUBLIC in and for the State of
Washington, residing at Auburn
--------
My commission expires 2/17/98
--------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 29th day of March, 1996 before me, the undersigned, a Notary Public
---- ------------
in and for the State of Washington, duly commissioned and sworn, personally
appeared Donald F. Seaton III, to me known to be the Vice President, Finance of
--------------------- ------------------------
INCONTROL, INC., a Washington corporation, the corporation that executed the
within and foregoing instrument, and acknowledged said instrument to be the free
and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my official
seal, the day and year first above written.
/s/ K. Kay Hannah
--------------------------------------
Notary Public in and for the State of
Washington, residing at Redmond, WA
------------
My Commission Expires: 2/14/00
--------------
[SEAL]
3
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE BUILDING 14 PREMISES
Lot 2, City of Redmond Lot Line Revision No. LLR 89-7, as filed under File No.
9207069007, Records of King County, Washington.
4
<PAGE>
SIXTH AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee", as amended by that certain FIRST ADDENDUM
TO LEASE dated August 19, 1991, by that certain SECOND AMENDMENT TO LEASE dated
June 1, 1992, by that certain THIRD AMENDMENT TO LEASE dated October 15, 1992,
by that certain FOURTH AMENDMENT OF LEASE dated August 24, 1993, by that certain
FIFTH AMENDMENT OF LEASE dated September 9, 1994, amended as set out below.
Capitalized terms used herein if not defined herein have the meaning given them
in the Lease, as previously amended.
1. As of May 31, 1995, the Building 2 Premises shall be excluded from the
Premises. Lessee, by virtue of an oral agreement, has previously tendered
possession of the Building 2 Premises to Lessor and hereby does so in writing.
Lessee shall remain responsible to pay all rental on the Building 2 Premises, as
though in actual possession, through May 31, 1995. As of June 1, 1995, Sections
2, 3 and 6 shall be deleted from the Fifth Amendment to Lease. As of June 1,
1995, the Basic Rental shall be reduced by the sum of $13,551.11 monthly and the
floor area of the Premises decreased by 14,503 square feet by virtue of this
Section.
2. From and after June 1, 1995, Section 1 of the Lease is amended to define
the Building 14 Premises which are shall be the area delineated on Exhibit A
hereto. From and after June 1, 1995, the Premises shall include the first floor
area of the Building 14 Premises, an area of approximately 10,758 square feet,
and that portion of the second floor not included in the Sixth Expansion
Premises (defined in Section 3 hereof), an area of approximately 4,242 square
feet. From and after June 1, 1995, the Basic Rental shall be increased by the
sum of $15,450.00 monthly and the floor area of the Premises increased by 15,000
square feet by virtue of this Section.
3. The second floor area of the Building 14 Premises consists of
approximately 11,448 square feet. Of that floor area, the Premises added
pursuant to Section 2 hereof comprises approximately 4,242 square feet. The
remaining 7,206 square feet shall comprise the Sixth Expansion Premises. Lessee
has not planned the tenant improvements for the second floor area. At the time
Lessee does so, and no later than the date Lessee first makes use of the new,
second floor tenant improvements, Lessee shall identify the portion of the
second floor which shall be the Sixth Expansion Premises and shall notify Lessor
of such designation. The Sixth Expansion Premises shall become part of the
Premises as of January 1, 1997, or sooner in accordance with the following
paragraph. As of January 1, 1997, or sooner in accordance with the following
paragraph, the Basic Rental shall be increased by the sum of $7,422.18 monthly
and the floor area of the Premises increased by 7,206 square feet by virtue of
this Section.
If Lessee shall occupy any portion of the Sixth Expansion Premises prior to
January 1, 1997, the area so used (based upon a room by room basis) shall become
part of the Premises and rental at the same rate as charged on the portion of
the Building 14 Premises included in the Premises shall apply thereafter. A
"room by room basis" shall mean that if any part of a room is used, no matter
what portion, the entire room and circulation areas required for its use shall
be deemed for these purposes to be in use.
Thirty days following occupancy of all or a portion of the Sixth Expansion
Premises or February 1, 1997, whichever is sooner, Lessor shall pay to Lessee
$20.00 per square foot of Sixth Expansion Premises so occupied, as a tenant
improvement allowance.
4. In addition to all other changes to the Basic Rental, Basic Rental shall
increase by $1,110.30 monthly from and after January 1, 1997.
5. The effect of Sections 1 - 4 above on the floor area of the Premises and
on the Basic Rental is summarized in Table A attached hereto and incorporated
herein.
1
<PAGE>
6. Lessee shall accept the Building 14 Premises "as is". Notwithstanding
the generality of the foregoing, Lessee does not accept any condition existing
as of the date hereof with respect to the improper use, storage or disposal of
any hazardous or toxic material by the prior occupant of the Building 14
Premises. Lessee's indemnity of Lessor set out in Section 3 of the Lease shall
not apply to conditions now present in the Building 14 Premises and arising
during such prior occupancy.
7. The term of the Lease is hereby extended to May 31, 2000.
8. All conditions under this Lease to be performed by the Lessor have been
satisfied; all non-monetary conditions under this Lease to be performed by the
Lessor have been satisfied; there are no existing claims, defenses or offsets
which the Lessee has against the enforcement of this Lease by Lessor.
9. Except as expressly amended by this agreement, the terms and conditions
of the Lease, as previously amended, remain in full force and effect and are
hereby affirmed and ratified.
10. The Effective Date of this amendment shall be the date hereof.
DATED this 31st day of May, 1995.
LESSOR:
/s/ Michael R. Mastro
------------------------------
Name: Michael R. Mastro
REDMOND EAST ASSOCIATES
By /s/ Michael R. Mastro
------------------------------
Name: Michael R. Mastro
Title: General Partner
LESSEE:
INCONTROL, INC.
By /s/ Donald F. Seaton
------------------------------
Name: Donald F. Seaton III
Title: V.P. Finance
2
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 20 day of June, 1995, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known, and acknowledged to me that he signed
and sealed the foregoing instrument as his free and voluntary act and deed, for
the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James Clark
---------------------------------------
[SEAL] NOTARY PUBLIC in and for the State of
Washington, residing at Issaquah.
My commission expires ________.
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 20 day of June, 1995, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known to be a General Partner of REDMOND EAST
ASSOCIATES, and on behalf of such general partnership, acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed of said general partnership, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James Clark
--------------------------------------
[SEAL] NOTARY PUBLIC in and for the State of
Washington, residing at Issaquah.
My commission expires ________.
3
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 31 day of May, 1995 before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared Donald F. Seaton III, to me known to be the V.P. Finance/CFO of
INCONTROL, INC., a Washington corporation, the corporation that executed the
within and foregoing instrument, and acknowledged said instrument to be the
free and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my official
seal, the day and year first above written.
/s/ K. Kay Hannah
--------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Redmond, WA
My Commission Expires: 2/14/96
[SEAL]
4
<PAGE>
TABLE A
TO SIXTH AMENDMENT TO LEASE
<TABLE>
<CAPTION>
BASIC
NATURE OF AMENDMENT FLOOR AREA REVISED RENTAL REVISED
DATE CHANGE SECTION BUILDING CHANGE FLOOR AREA CHANGE BASIC RENTAL
- ---- ------ ------- -------- ------ ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
15-May-95 Vacate Bldg 2 1 2 (14,503) 35,546 0.00 55,785.44
Premises
31-May-95 Delete Bldg 2 1 2 0 35,546 (13,554.11) 42,231.33
Premises
01-Jun-95 Add Bldg 14 2 14 15,000 50,546 15,450.00 57,681.33
Premises
01-Jan-97* Add 6th 3 14 7,206 57,752 7,422.18 65,103.51
Expansion Area
01-Jan-97 Rental rate 4 14 0 57,752 1,110.30 66,213.81
Increase
*or earlier per Section 3 01-May-95
</TABLE>
<PAGE>
BUILDING 14
[FLOOR PLAN]
FIRST FLOOR
<PAGE>
BUILDING 14
[FLOOR PLAN]
SECOND FLOOR
<PAGE>
FIFTH AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee" as amended by That certain FIRST ADDENDUM
TO LEASE dated August 19, 1991, by that certain SECOND AMENDMENT TO LEASE dated
June 1, 1992, by that certain THIRD AMENDMENT TO LEASE dated October 15, 1992
and by that certain FOURTH AMENDMENT OF LEASE dated August 24, 1993 is amended
as set out below. Capitalized terms used herein if not defined herein have the
meaning given them in the Lease, as previously amended.
1. As of August 15, 1994, Section 1 of the Lease is amended to provide that
certain newly constructed second floor premises in Building 13 comprising an
area of approximately 1,775 square feet is added to the Premises, bringing the
total rentable area of the Premises to 35,546 square feet.
2. As of October 1, 1994, Section 1 of the Lease is amended to provide that
the premises now occupied by Cascade Controls, Inc. and Express Business
Systems, Inc., an area of approximately 14,503 square feet is added to the
Premises (the "Building 2 Premises"), bringing the total rentable area of the
Premises to 50,049 square feet. The Building 2 Premises is delineated on the
drawing attached hereto as Exhibit "A".
3. Lessee shall accept the Building 2 Premises "as is"; Lessor shall not be
obligated to expend any sums for Tenant Improvements in connection with the
Building 2 Premises. Lessor consents to Lessee's construction of a second floor
area in the portion at the premises now occupied by Express Business Systems so
long as City of Redmond requirements are fully met by Lessee and the cost
thereof is borne by Lessee. Such area, if built, shall be referred to as the
"Fifth Expansion Premises".
4. From and after August 15, 1994, the Basic Rental for the Premises, shall
increase by the amount of $692.25 for a total Basic Rental amount of $42,231.33.
>From and after October 1, 1994, the Basic Rental for the Premises, shall
increase by the further amount of $13,554.11 for a total Basic Rental amount of
$55,785.44.
5. The term of the Lease is hereby extended to December 31, 1999.
6. If the Fifth Expansion Premises is built, the area of that portion of
the Premises shall be added to the Lease by further amendment and Basic Rental
shall be charged thereon at the rate of $0.39 per square foot per month.
7. All conditions under this Lease to be performed by the Lessor have been
satisfied; all non-monetary conditions under this Lease to be performed by the
Lessor have been satisfied; there are no existing claims, defenses or offsets
which the Lessee has against the enforcement of this Lease by Lessor.
8. Except as expressly amended by this agreement, the terms and conditions
of the Lease, as previously amended, remain in full force and effect and are
hereby affirmed and ratified.
9. Lessor grants Lessee a first right of refusal to lease the space in
Building 13 now occupied by Cadman Gravel on the following alternate terms:
(a) Upon receipt of a bona fide offer to lease said premises, Lessor
shall notify Lessee of such offer. For a period of five days thereafter,
Lessee shall have the right to lease said premises from Lessor. If Lessee
has not notified Lessor of its election to so lease said premises within
the five day period, Lessee's rights to the Cadman premises shall expire.
(b) If Lessor has not received notice of the receipt of a bona fide
offer to lease per subsection 9a) above by November 25, 1996, Lessee shall
have five days thereafter to exercise its right of first
1
<PAGE>
refusal. If Lessee has not notified Lessor of its election to so lease said
premises within the five day period, Lessee's rights to the Cadman premises
shall expire.
In either instance, if Lessee elects to lease said premises, the Lease
shall be amended adding said premises with the following terms:
(a) The Basic Rental shall be upon the following schedule: $1.00
PSFNNN for the period prior to December, 1996, $1.05 PSFNNN for the period
of December, 1996 - November, 1998 and $1.10 PSFNNN thereafter. "PSFNNN"
shall mean per rentable square foot of the Premises each month, not
including the triple net charges imposed as Additional Rental in Section 6.
Rental shall be abated for the first two months following Lease
Commencement.
(b) Lease Commencement shall be December 1, 1996 or such earlier date
as Cadman shall vacate the premises.
(c) Lessee shall accept the Cadman premises in its then `as is'
condition.
10. The Effective Date of this amendment shall be the date hereof.
2
<PAGE>
DATED this 9th day of September, 1994.
LESSOR:
/s/ Michael R. Mastro
------------------------------
Michael R. Mastro
REDMOND EAST ASSOCIATES
By /s/ Michael R. Mastro
----------------------------
Name: Michael R. Mastro
Title: General Partner
LESSEE:
INCONTROL, INC.
By /s/ [ILLEGIBLE]
----------------------------
Name: [ILLEGIBLE]
-------------------------
Title: VP Finance
------------------------
3
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this, 20 day of September, 1994 before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known, and acknowledged to me that
he signed and sealed the foregoing instrument as his free and voluntary act and
deed, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ Donna J. Reid
DONNA J. REID -------------------------------------------------
COMMISSION EXPIRES NOTARY PUBLIC in and for the State of Washington,
NOTARY residing at
PUBLIC AUBURN
2/17/98 -------------------------------------
STATE OF WASHINGTON My commission expires 2/17/98
----------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this day 20 day of September, 1994 before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known to be a General Partner of
REDMOND EAST ASSOCIATES, and on behalf of such general partnership, acknowledged
to me that he signed and sealed the foregoing instrument as the free and
voluntary act and deed of said general partnership, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ Donna J. Reid
DONNA J. REID -------------------------------------------------
COMMISSION EXPIRES NOTARY PUBLIC in and for the State of Washington,
NOTARY residing at
PUBLIC AUBURN
2/17/98 -------------------------------------------------
STATE OF WASHINGTON My commission expires 2/17/98
----------------------------
4
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 23 day of Sept, 1994 before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared DONALD SEATON, to me known to be the VP FINANCE of INCONTROL, INC., a
Washington corporation, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute said instrument and that the
seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
NOTARY PUBLIC
STATE OF WASHINGTON
JAMES CLARK
My Appointment Expires on JUN 15, 1995
/s/ James Clark
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Issaquah
-------------------------------------------------
My commission expires 6-15-96
-------------------------
5
<PAGE>
FOURTH AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee", as amended by that certain FIRST ADDENDUM
TO LEASE dated August 19, 1991 by that certain SECOND AMENDMENT TO LEASE dated
June 1, 1992 and by that certain THIRD AMENDMENT TO LEASE dated October 15,
1992, is amended as set out below. Capitalized terms used herein if not defined
herein have the meaning given them in the Lease, as previously amended.
1. As of the Effective Date of this Amendment, Section 1 of the Lease is
amended to provide that a portion of the area previously occupied by Cook
Newhouse & Associates, Inc., an area of approximately 8,173 square feet and, on
the drawing attached hereto as Exhibit "A", described as "CNA", is added to the
Premises (the "Fourth Expansion Premises"), bringing the total rentable area of
the Premises to 33,771 square feet.
2. Lessee shall accept the Fourth Expansion Premises "as is"; Lessor shall
not be obligated to expend any sums for Tenant improvements in connection with
the Fourth Expansion Premises.
3. On the Effective Date, Lessee shall pay Lessor a one time payment as
consideration for this Amendment in the amount of $13,000.00.
4. From and after the Effective Date of this Amendment, the Basic Rental
for the Premises, in its entirety, shall be $41,539.08 per month.
5. Lessee shall also make a further cash security deposit in accordance
with Section 7 of the Lease in the total sum of $9,000 on the Effective Date of
this Amendment; thereupon the total security deposit held by Lessor shall be
$30,500.
6. Lessor and Lessee agree that Section 12 of the Lease, as amended, shall
be interpreted so as to require Lessee to maintain the heating, ventilation and
air conditioning systems of the Premises.
7. The HVAC equipment serving the Building lobby, a common area of the
Building, also serves First and Second Expansion Premises. Lessee agrees to
maintain such system and to pay utilities required therefor. Annually, Lessee
shall invoice Lessor for 33% of any out of pocket costs therefor and Lessor
shall pay such sum, subject to review of the accuracy of such invoice by Lessor.
Such expenses paid by Lessor shall nevertheless be Operating Expenses to be
shared by all Building tenants, including Lessee.
8. All conditions under this Lease to be performed by the Lessor and Lessee
have been satisfied; there are no existing claims, defenses or offsets which the
Lessee has against the enforcement of this Lease by Lessor.
9. Except as expressly amended by this agreement, the terms and conditions
of the Lease, as previously amended, remain in full force and effect and are
hereby affirmed and ratified.
10. The Effective Date shall be the date identified as such in a written
notice to be delivered to Lessee by Cook Newhouse & Associates, Inc. If the
Effective Date has not occurred on or before December 31, 1993, this Amendment
shall be void. If this amendment has not been fully executed by September 3,
1993, it shall be void.
1
<PAGE>
DATED this 24th day of August, 1993.
LESSOR:
/s/ Michael R. Mastro
----------------------
Michael R. Mastro
REDMOND EAST ASSOCIATES
By /s/ Michael R. Mastro
-------------------------
Name: Michael R. Mastro
Title: General Partner
LESSEE:
INCONTROL, INC.
By /s/ John Adams
----------------------
Name: John Adams
Title: Vice President
2
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 25 day of August, 1993, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known, and acknowledged to me that he signed
and sealed the foregoing instrument as his free and voluntary act and deed, for
the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
/s/ Donna J. Reid
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Auburn
-----------------------------------------------------
My commission expires 2/17/94
NOTARY
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 25 day of August, 1993, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known to be a General Partner of REDMOND EAST
ASSOCIATES, and on behalf of such general partnership, acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed of said general partnership, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
/s/ Donna J. Reid
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Auburn
-----------------------------------------------------
My commission expires 2/17/94
3
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 24 day of Aug, 1993, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared John Adams, to me known to be the VP of INCONTROL, INC., a Washington
corporation, the corporation that executed the within and foregoing instrument,
and acknowledged said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes therein mentioned, and on oath
stated that he was authorized to execute said instrument and that the seal
affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James [ILLEGIBLE]
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
Residing at
Bellevue
-------------------------------------------------
My commission expires 6-15-96
4
<PAGE>
THIRD AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee" as amended by that certain FIRST ADDENDUM
TO LEASE dated August 19, 1991 and by that certain SECOND AMENDMENT TO LEASE
dated June 1, 1992, is amended as set out below. Capitalized terms used herein
if not defined herein have the meaning given them in the Lease.
1. As of November 23, 1992, Section 1 of the Lease is amended to provide
that a portion of the area previously occupied by Mike Fisher Enterprises d/b/a
Proshow USA, an area of approximately 6,500 square feet and, on the drawing
attached hereto as Exhibit "A" described as "Proshow", is added to the Premises
(the "First Expansion Premises"), bringing the total rentable area of the
Premises to 22,820 square feet. As of January 1, 1993, Section 1 of the Lease is
amended to provide that the remaining portion of the area previously occupied by
Mike Fisher Enterprises d/b/a Proshow USA, an area of approximately 458 square
feet and, on the drawing attached hereto as Exhibit "A", described as "Studio",
shall be added to the Premises (the "Second Expansion Premises"), bringing the
total rentable area of the Premises to 23,278 square feet.
2. Section 12 of the First Addendum to Lease dated August 19, 1991 is
deleted.
3. Lessee shall accept the First Expansion Premises and the Second
Expansion Premises "as is"; Lessor shall not be obligated to expend any sums for
Tenant Improvements for the First Expansion Premises or the Second Expansion
Premises.
4. At its cost, Lessee shall be entitled to construct additional second
floor area to the Second Expansion Premises of approximately 1,280 square feet
(the "Third Expansion Premises"). The Third Expansion Premises shall become a
part of the Premises upon issuance of a certificate of Occupancy for that space
(the "Occupancy Date").
5. The Basic Rental for the First Expansion Premises, Second Expansion
Premises and Third Expansion Premises shall be $1.13 per square foot per month
from and after the respective date on which each of said areas become a part of
the Premises.
6. Lessor shall enter into an agreement concurrently with this Third
Amendment to Lease with Mike Fisher Enterprises which is attached hereto as
Exhibit B (the "Proshow Agreement"). If the Proshow Agreement does not become
effective by its terms, this Amendment shall not become effective. The date on
which the Proshow Agreement becomes effective shall be the Effective Date of
this Third Amendment to Lease.
7. Lessee shall pay to Lessor the one-time sum of $18,611.28 as
consideration for this Amendment on the Effective Date of this Amendment.
8. Lessee shall also make a further cash security deposit in accordance
with Section 7 of the Lease in the total sum of $6,500 on the Effective Date of
this Amendment.
9. All conditions under this Lease to be performed by the Lessor and Lessee
have been satisfied; all required contributions by Lessor to Lessee on account
of Lessor's improvements have been received; there are no existing claims,
defenses or offsets which the Lessee has against the enforcement of this Lease
by Lessor.
10. Except as expressly amended by this agreement, the terms and conditions
of the Lease remain in full force and effect and are hereby affirmed and
ratified.
1
<PAGE>
DATED this 15 day of October, 1992.
LESSOR:
REDMOND EAST ASSOCIATES
/s/ Michael R. Mastro
----------------------
Name: Michael R. Mastro
Title: General Partner
By /s/ Stavros Anastasiou
---------------------------
Name: Stavros Anastasiou
Title: General Partner
By /s/ Perry Vyzis
---------------------------
Name: Perry Vyzis
Title: General Partner
LESSEE:
INCONTROL, INC.
By /s/ Kurt C. Wheeler
---------------------------
Name: Kurt C. Wheeler
Title: CEO
2
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 15 day of Oct, 1992, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known to be a General Partner of REDMOND EAST
ASSOCIATES, and on behalf of such general partnership, acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed of said general partnership, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James [ILLEGIBLE]
------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Bellevue
------------------------------------------------
My commission expires 6-15-96
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 15 day of Oct, 1992, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared Stavros Anastasiou, to me known to be a General Partner of REDMOND EAST
ASSOCIATES, and on behalf of such general partnership, acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed of said general partnership, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James [ILLEGIBLE]
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Bellevue
-------------------------------------------------
My commission expires 6-15-96
3
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 20th day of October, 1992, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Perry Vyzis, to me known to be a General Partner of REDMOND
EAST ASSOCIATES, and on behalf of such general partnership, acknowledged to me
that he signed and sealed the foregoing instrument as the free and voluntary act
and deed of said general partnership, for the uses and purposes therein
mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ D.L. Moreau
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Lake Stevens
-------------------------------------------------
My commission expires 6-15-96
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 15 day of Oct, 1992, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared Kurt Wheeler, to me known to be the CEO of INCONTROL, INC., a
Washington corporation, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute said instrument and that the
seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James [ILLEGIBLE]
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Bellevue
-----------------------------------------------------
My commission expires 6-15-96
4
<PAGE>
EXHIBIT B
AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated Match 5, 1991, between
REDMOND EAST ASSOCIATES, as "Lessor", and MIKE FISHER ENTERPRISES, INC. and MIKE
FISHER individually, as "Lessee", is amended as set out below. Capitalized terms
used herein if not defined herein have she meaning given them in the Lease.
1. The term of the Lease as set out in Section 4 is amended to end October
31, 1991 as to the Primary Premises and December 31, 1992 as to the Studio. The
Primary Premises and Studio are identified on attached Exhibit A, attached
hereto and incorporated herein.
2. Sections 41(c) and 41(f) of the Lease are hereby deleted.
3. Lessee shall not be entitled to hold-over at the end of the respective
Lease terms.
4. The Effective Date of this Amendment to Lease shall be October 9, 1992
but shall be extended at Lessee's option by notice to Lessor, day for day until
it has executed a new lease at other premises. If this Amendment to Lease has
not become effective by November 15, 1992, this Amendment to Ease shall not
become effective.
5. Lessor shall pay to Lessee the one-time sum of $18,611.28 as
consideration for this Amendment on the Effective Date of this Amendment.
6. Lessor shall return the security deposit pursuant to Section 7 of the
Lease on the effective date if the condition of Section 7 have otherwise been
met by Lessee. The standard of measuring Lessee's performance under Section 7
shall be acceptance of the Premises by Incontrol, Inc.
7. Upon full termination of the Lease, Lessee shall remove its sign from
the Building in a manner so as to minimize any damage to the Building. Lessor
shall be responsible for touch up and restoration of the Building.
8. All conditions under this Lease to be performed by the Lessor and Lessee
have been satisfied; all required contributions by Lessor to Lessee on account
of Lessor's improvements have been received; there are no existing claims,
defenses or offsets which the lessee has against the enforcement of this Lease
by Lessor.
9. Except as expressly amended by this agreement, the terms and conditions
of the Lease remain in full force and effect and are hereby affirmed and
ratified.
1
<PAGE>
DATED this ____ day of October, 1992.
LESSOR:
REDMOND EAST ASSOCIATES
By:
---------------------------
Name: Michael R. Mastro
Title: General Partner
By
---------------------------
Name: Stavros Anastasiou
Title: General Partner
By
---------------------------
Name: Perry Vyzis
Title: General Partner
LESSEE:
MIKE FISHER ENTERPRISES, INC.
By /s/ Michael Fisher
-----------------------------
Name: Mike Fisher
Title: PRESIDENT
/s/ Mike Fisher
-----------------------------
Mike Fisher, an individual
2
<PAGE>
[GRAPHIC]
Floor Plan - Second Floor
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this ___ day of _____ 19__, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known to be a General Partner of REDMOND EAST
ASSOCIATES, and on behalf of such general partnership, acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed of said general partnership, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
-----------------------------------------------------
My commission expires
-------------------------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this ___day of _______19__, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Michael R. Mastro, to me known to be a General Partner of REDMOND EAST
ASSOCIATES, and on behalf of such general partnership, acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed of said general partnership, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
-------------------------------------------------
My commission expires
---------------------------
3
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this ___day of _________, 19__, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Perry Vyzis, to me known to be a General Partner of
REDMOND EAST ASSOCIATES, and on behalf of such general partnership, acknowledged
to me that he signed and sealed the foregoing instrument as the free and
voluntary act and deed of said general partnership, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
-------------------------------------------------
My commission expires
---------------------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this ____ day of ___________, 19__, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Mike C. Fisher, to me known to be the president of MIKE
FISHER ENTERPRISES, a Washington corporation, the corporation that executed the
within and foregoing instrument, and acknowledged said instrument to be the free
and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
/s/ Cindy Nation
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Batrell, WA
-------------------------------------------------
My commission expires 3/25/96
---------------------------
4
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this day 8 of October, 1992, before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared Mike Fisher, to me known, and acknowledged to me that he signed and
sealed the foregoing instrument as his free and voluntary act and deed, for the
uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
/s/ Cindy Nation
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Batrell, WA
-------------------------------------------------
My commission expires 3/25/96
5
<PAGE>
SECOND AMENDMENT TO LEASE
THAT CERTAIN REDMOND EAST LEASE ("Lease") dated August 19, 1991, between
MICHAEL R. MASTRO and REDMOND EAST ASSOCIATES, as "Lessor", and INCONTROL, INC.,
a Washington corporation, as "Lessee", as amended by that certain FIRST ADDENDUM
TO LEASE dated August 19, 1991, is amended as set out below. Capitalized terms
used herein if not defined herein have the meaning given them in the Lease.
1. Section 1 of the Lease is amended to provide that the rentable area of
the Premises is 16,320 square feet.
2. The Commencement Date of the Lease was December 11, 1991. The last day
of the initial Lease term is December 31, 1996.
3. The final sentence of Section 10(a) of the Lease is deleted. The
following sentence is added as the final sentence in Section 10(a) of the Lease:
"After Lessor has spent $25.00 per rentable square foot of the Premises, for
each $1.00 per rentable square foot of Tenant Improvement Allowance spent by
Lessor thereafter, the Basic Rental shall be increased by $0.0222. per rentable
square foot per month."
4. Notwithstanding anything in Section 2 of the First Addendum to Lease to
the contrary, Basic Rental and Additional Rental shall not thereafter be abated
for any portion of the Delayed Occupancy Space which has been occupied by Lessee
for the conduct of its business. As of the date hereof, the Delayed Occupancy
Space is comprised of 6,908 square feet.
5. The parties agree that the unpaid design allowance provided for in
Section 10(c) of the Lease is $1,970.80. Neither Lessor nor Lessee shall have a
claim against the other for the payment of any other sum on account of the
design allowance.
6. The cost of the tenant improvements chargeable against the Tenant
Improvement Allowance have been $349,317.00 to date. Lessor remains obligated to
provide a Tenant Improvement Allowance for the Delayed Occupancy Space of
$123,175, without any increase in the Basic Rental. Lessor remains obligated to
provide a further Tenant Improvement Allowance for the Delayed Occupancy Space
of up to but not exceeding $98,708, with an increase in the Basic Rental as set
out in Section 10(a) of the Lease.
7. The effective date of these amendments to the Lease is the Commencement
Date.
8. Except as expressly amended by this agreement, the terms and conditions
of the Lease remain in full force and effect and are hereby affirmed and
ratified.
1
<PAGE>
DATED this ____ day of June, 1992.
LESSOR:
/s/ Michael R. Mastro
----------------------
Michael R. Mastro
REDMOND EAST ASSOCIATES
By /s/ Michael R. Mastro
----------------------
Name: Michael R. Mastro
Title: General Partner
By /s/ Stavros Anastasiou
---------------------------
Name: Stavros Anastasiou
Title: General Partner
By /s/ Perry Vyzis
---------------------------
Name: Perry Vyzis
Title: General Partner
LESSEE:
INCONTROL, INC.
By /s/ Kurt C. Wheeler
---------------------------
Name: Kurt C. Wheeler
Title: C.E.O.
2
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 16 day of September, 1992, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known, and acknowledged to me that
he signed and sealed the foregoing instrument as the free and voluntary act and
deed, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
/s/ Donna J. Reid
-------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Auburn
-------------------------------------------------
My commission expires 2/17/94
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 16th day of September, 1992, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known to be a General Partner of
REDMOND EAST ASSOCIATES, and on behalf of such general partnership, acknowledged
to me that he signed and sealed the foregoing instrument as the free and
voluntary act and deed of said general partnership, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL]
/s/ Donna J. Reid
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Auburn
-----------------------------------------------------
My commission expires 2/17/94
3
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 18th day of September, 1992, before me, the undersigned, a Notary
------- ----------------
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Stavros Anastasiou, to me known to be a General Partner of
REDMOND EAST ASSOCIATES, and on behalf of such general partnership, acknowledged
to me that he signed and sealed the foregoing instrument as the free and
voluntary act and deed of said general partnership, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ Deanna L. Moreau
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Lake Stevens
-----------------------------------------------------
My commission expires 6/16/96
--------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 18th day of September, 1992, before me, the undersigned, a Notary
------ ---------------
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Perry Vyzis, to me known to be a General Partner of REDMOND
EAST ASSOCIATES, and on behalf of such general partnership, acknowledged to me
that he signed and sealed the foregoing instrument as the free and voluntary act
and deed of said general partnership, for the uses and purposes therein
mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ Deanna L. Moreau
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Lake Stevens
-----------------------------------------------------
My commission expires 6/16/96
--------
4
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 15th day of Sept., 19__, before me, the undersigned, a Notary
------ ------
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Kurt Wheeler, to me known to be the CEO of INCONTROL, INC.,
------------- -----
a Washington corporation, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute said instrument and that the
seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ James [ILLEGIBLE]
-----------------------------------------------------
NOTARY PUBLIC in and for the State of Washington,
residing at
Bellevue
-----------------------------------------------------
My commission expires 6/15/96
--------
5
<PAGE>
FIRST ADDENDUM TO LEASE
-----------------------
THIS FIRST ADDENDUM TO LEASE ("Addendum") is dated for reference purposes
as of Aug 19th, 1991, and is made between MICHAEL R. MASTRO AND REDMOND EAST
---------
ASSOCIATES (collectively called "Lessor") and INCONTROL, INC. (collectively
called "Lessee"), in the real property situated in City of Redmond, King County,
Washington, (the "Building") to be a part of that certain lease, of even date
herewith between Lessor and Lessee (herein the "Lease Form") concerning 15,582
rentable square feet (the "Premises") in the real property situated in the City
of Redmond, King County, Washington, (the Building"). Lessor and Lessee agree
that the Lease Form is hereby modified and supplemented as follows:
1. Commencement Date: Notwithstanding anything to the contrary in the Lease
-----------------
Form:
A. The Lease shall commence (the "Commencement Date") on the later of (i)
September 1, 1991 or (ii) the date by which all of the following have occurred:
(a) Lessor has substantially completed the Lessee Improvements (defined below)
in accordance with the Lease, (b) Lessor has delivered possession of the
Premises to Lessee; and (c) Lessor has obtained all approvals and permits form
the appropriate governmental authorities required for the legal occupancy of the
Premises for Lessee's intended use.
B. If the Commencement Date has not occurred for any reason whatsoever on
or before January 1, 1992, then in addition to Lessee's other rights or
remedies, (i) Lessee may terminate this Lease by written notice to Lessor,
whereupon any monies previously paid by Lessee to Lessor shall be reimbursed to
Lessee; or (ii) at Lessee's election, the date Lessee is otherwise obliged to
commence payment of rent shall be delayed by one day for each day that the
Commencement Date is delayed beyond January 2, 1992.
2. Rent Abatement for Delayed Occupancy Space: Notwithstanding anything to
------------------------------------------
the contrary in the Lease Form:
A. Basic Rental and Additional Rental shall not commence on the Delayed
Occupancy Space until the later to occur of (i) one year after the Commencement
Date or (ii) after all the conditions set forth in Paragraph 1a (ii) of this
Addendum have been satisfied as they relate to the Delayed Occupancy Space.
B. The parties acknowledge that the square footage of 7,926 square feet for
the Delayed Occupancy Space is merely an estimate of the actual square footage
of such space. Exhibit B and the actual square footage of the Delayed Occupancy
---------
Space (and the resulting rental abatement) shall be determined by Lessee in its
sole discretion, and once determined, Exhibit B and the rental abatement shall
----------
be adjusted appropriately; provided, however, in no event shall the Delayed
Occupancy Space exceed 8,352 square feet.
3. Expenses. Notwithstanding anything to the contrary in the Lease Form:
--------
A. In no event shall Lessee have any obligation to perform or to pay
directly, or to reimburse Lessor for, all or any portion of the following
repairs, maintenance, improvements, replacements, premiums, claims, losses,
fees, charges, costs and expenses (collectively, "Costs"), nor shall any portion
of the Lessee Improvement allowance be applied to such costs:
(i) Losses Caused By Others: Costs occasioned by the act, omission or
-----------------------
violation of law by Lessor, any other occupant of the Building, or their
respective agents, employees or contractors.
(ii) Capital Improvements: Costs relating to repairs, alterations,
--------------------
improvements, except equipment and tools which would properly be
capitalized under generally accepted accounting principles, expect to the
extent that the Lessee's share of such Cost during any twelve-month period
of the Lease is equitably determined based on Lessee's usage and amortized
over the useful life of the capital item in question.
1
<PAGE>
(iii) Reimbursable Expenses: Costs for which Lessor has a right of
---------------------
reimbursement from parties other that Lessee.
(iv) Construction Defects: Costs to correct construction defect in the
--------------------
Premises or the Building or to comply with any CC&R's, underwriter's
requirement or Law applicable to the Premises or the Building on the
Commencement Date.
(v) Utilities or Services: Costs (i) arising from the disproportionate
---------------------
use of any utility or service supplied by Lessor to any other occupant of
the Building, or (ii) associated with utilities and services of a type not
provided to Lessee.
(vi) Interior Improvements: The cost of any renovation, improvement,
---------------------
painting or redecorating of any portion of the Building not made available
for Lessee's use.
(vii) Leasing Expenses: Fees, commissions, attorney's fees, Costs or
----------------
other disbursement incurred in connection with marketing the Building or
negotiations or disputes with any other occupant of the Building.
(viii) Mortgages: Interest, charges and fees incurred on debt,
---------
payments on mortgages and rent under ground leases.
(ix) Concessions and Parking: costs incurred in connection with the
-----------------------
operation of any parking or commercial concession within the Building.
(x) Capital Leases: Lease payments and Costs for capital machinery and
--------------
equipment, such as air conditioners, elevators, and the like.
(xi) Art: Costs of sculptures, fountains, paintings and other art
---
objects.
(xii) Insurance: Insurance Costs for coverage not customarily paid by
---------
tenants of similar projects in the vicinity of the Premises, increases in
insurance Costs caused by the activities of another occupant of the
Building, insurance deductibles, and co-insurance payments.
(xiii) Hazardous Materials: Costs incurred to investigate the presence
-------------------
of any material which is now or hereinafter regulated by any governmental
authority or which poses a hazard to the environment or human life
("Hazardous Material"), Costs to respond to any claim of Hazardous Material
contamination or damage, Costs to remove Hazardous Material from the
Building and any judgments or other Costs incurred in connection with any
Hazardous Material exposure or releases, except to the extent caused by the
storage, use or disposal of the Hazardous Material in question by Lessee.
(xiv) Management: Any fee, profit or compensation retained by Lessor
----------
or its affiliates for management and administration of the Building in
excess of the management fee which would be charged by a professional
management service for operation of comparable projects in the vicinity.
(xv) Property Taxes: Any increase in property taxes occasioned by or
--------------
relating to a change of ownership of the real property of which the
Premises is a part.
B. Lessee's obligation to reimburse Lessor for Operating Expenses for all
items except for property taxes, janitorial and utilities (the "Controllable
Operating Expenses") shall not exceed Eleven Point Six Cents ($0.116) per square
foot per year. Notwithstanding the proceeding, the cap amount for the
Controllable Operating Expense shall increase each year according to increases
in the local CPI.
4. Acceptance of Premises: Notwithstanding anything to the contrary in the
----------------------
Lease Form:
Leesee's acceptance of the Premises shall not be deemed a waver of Lessee's
right to have defects in the Lessee Improvements or the Premises repaired at
Lessor's sole expense provided Lessee gives Lessor written notice of (i) any
patent
2
<PAGE>
defect within thirty (30) days after Lessee takes occupancy or (ii) any latent
defect within one (1) year after Lessee takes occupancy. Lessee shall give
notice to Lessor whenever any such defect becomes reasonably apparent, and
Lessor shall repair such defect as soon as practicable. Lessor also hereby
assigns to Lessee all warranties with respect to the Premises which would reduce
Lessee's maintenance obligations hereunder and shall cooperate with Lessee to
enforce all such warranties.
5. Repairs and Maintenance: Notwithstanding anything to the contrary in the
-----------------------
Lease Form:
Lessor shall perform and construct, and Lessee shall have no responsibility
to perform or construct, any repair, maintenance or improvement (i) necessitated
by the acts or omissions of Lessor or any other occupant of the Building, or
their respective agents, employees or contractors, (ii) occasioned by fire, acts
of God or other casualty or by the exercise of the power of eminent domain,
(iii) required as a consequence of any violation of law or construction defect
in the Premises or the Building as of the Commencement Date, (iv) for which
Lessor has a right of reimbursement from others, (v) which would be treated as a
"capital expenditure" under generally accepted accounting principles, (vi) to
the hearing, ventilating, air conditioning, electrical, water, sewer, and
plumbing systems serving the Premises or the Building, and (vii) to any portion
of the Building outside of the demising walls of the Premises. Lessee's
obligation, if any, to reimburse Lessor for the costs of such repairs,
maintenance and improvements shall be governed by the other provisions of this
Lease.
6. Alterations, Additions and Improvements: Notwithstanding anything to
---------------------------------------
the contrary in the Lease Form:
A. Nonstructural. Lessee may construct nonconstructural alterations,
-------------
additions and improvements ("Alterations") in the Premises without Lessor's
prior approval, if the costs of such work does not exceed Five Thousand Dollars
($5,000).
B. Removal. Upon request, Lessor shall advise Lessee in writing whether it
-------
reserves the right to require Lessee to remove any Alterations from the Premises
upon termination of the Lease.
C. Lessee's Property. All Alterations, trade fixtures and personal property
-----------------
installed in the Premises at Lessee's expense ("Lessee's Property") shall at all
times remain Lessee's property and Lessee shall be entitled to all depreciation,
amortization and other tax benefits with respect thereto. Except for Alterations
which cannot be removed without structural injury to the Premises, at any time
Lessee may remove Lessee's Property from the Premises, provided Lessee repairs
all damage caused by such removal.
D. Lien Waiver. Lessor shall have no lien or other interest whatsoever in
-----------
any item of Lessee's Property, or any portion thereof or interest therein
located in the Premises or elsewhere, and Lessor hereby waives all such liens
and interests. Within ten (10) days following Lessee's request, Lessor shall
execute documents in form reasonably acceptable to Lessee to evidence Lessor's
waiver of any right, title, lien or interest in Lessee's Property located in the
Premises.
7. Lessor's Entry of Premises: Notwithstanding anything to the contrary in
--------------------------
the Lease Form:
Lessor and Lessor's agents, except in the case of emergency, shall provide
Lessee with twenty-four (24) hours' notice prior to entry of the Premises. Such
entry by Lessor and Lessor's agents shall not impair Lessee's operations more
than reasonably necessary. During any such entry, Lessor, and Lessor's agents
shall at all times be accompanied by Lessee.
8. Lessee's Right to Terminate after Casualty. Lessor shall notify Lessee
------------------------------------------
within fifteen (15) days following any damage to or destruction of the Premises
(or the Building if such damage or destruction interferes with Lessee's use of
the Premises) the length of time Lessor reasonably estimates to be necessary for
repair or restoration. Lessee shall have the right to terminate the Lease within
fifteen (15) days following receipt of such notice if restoration or repair of
the Premises will take more than one hundred (120) days.
3
<PAGE>
9. Default and Late Charge: Notwithstanding anything to the contrary in the
-----------------------
Lease Form, (i) Lessee shall not be deemed to be in default, nor shall any late
charge or interest be imposed, on account of Lessee's failure to pay money to
the Lessor, unless Lessee's failure to pay money to the Lessor, unless Lessee's
failure to pay continues for five (5) days after Lessee's actual receipt of
written notice of the delinquency provided, however, that Lessor shall not be
required to give Lessee written notice of any monetary default or delinquency
more than once in any consecutive twelve (12) month period and in such case no
notice shall be required before Lessee shall be deemed to be in default or
subject to the imposition of interest and late charges, and (ii) Lessee shall
not be in default for failing to perform any covenant of this Lease (other than
a covenant to pay money to Lessor) unless Lessee's failure to perform such
covenant continues after Lessee's actual receipt of written notice for a period
of thirty (30) days or such longer time as may reasonably be required to cure
the default.
10. Subordination: Notwithstanding anything to the contrary in the Lease
-------------
Form:
This Lease shall not be subject to or subordinate to any ground or
underlying lease or to any lien, mortgage, deed of trust, or security interest
(collectively referred to as "Security Instruments") now or hereafter affecting
the Premises, nor shall Lessee be required to execute any documents
subordinating this Lease, unless the ground lessor, lender, or other holder of a
Security Instrument to which this Lease shall be subordinated contemporaneously
executes a recognition and nondisturbance agreement in a form customarily used
by institutional first mortgage lenders which (i) provides that this Lease shall
not be terminated so long as lessee is not in default under this Lease and (ii)
recognizes Lessee's rights under this Lease except such Lender shall not be
subject to any amendment to the Lease not consented to by such Lender, any
rental paid for more than one (1) month in advance or any other defense or right
of offset which accrued prior to such lender acquiring ownership of or
possession of the Property. Lessor shall provide Lessee with a recognition and
nondisturbance agreement as set forth above from any existing holder of a
Security Instrument within thirty (30) days of the execution of this Lease.
11. Surrender. Notwithstanding anything to the contrary in the Lease Form,
---------
Lessee obligations to surrender the Premises shall be fulfilled if Lessee
surrenders possession of the Premises in the condition existing at the
commencement of the Lease, ordinary wear and tear, acts of God, casualties,
condemnation, Hazardous Materials (other than those stored, used or disposed of
by Lessee in or about the Premises), and interior improvements which Lessor
states in writing may be surrendered at the termination of the Lease excepted.
12. Expansion Right: Notwithstanding anything to the contrary in the Lease
---------------
Form:
A. At any time prior to September 1, 1993, Lessee shall have the option, by
giving written notice to Lessor prior to the expiration of said period, to
expand the Premises by 5,000 square feet into space which shall be contiguous to
the original Premises (the "Expansion Premises").
B. Upon Lessee's exercise of the option to expand, the Expansion Premises
shall be included within the Premises and leased to Lessee pursuant to the
provisions of the Lease and at the same rate per square foot of floor space as
the Basic Rental, Additional Rental, and Lessee Improvements (including an
allowance for the Expansion Premises at the same rate as the allowance for the
original Premises) as set forth in the Lease. Lessee shall have no obligation to
begin paying Basic Rental or Additional Rental until all of the conditions set
forth in Paragraph 1(A)(ii) of this Addendum are satisfied as they relate to the
Expansion Premises.
C. Prior to commencement of the Lessee Improvements in the Expansion
Premises, Lessor and Lessee shall execute an amendment to this Lease stating the
addition of the Expansion Premises as a part of the Premises and the increased
rental therefor (the "Expansion Amendment").
D. If Lessor has not completed construction of the Lessee Improvements for
the Expansion Premises within six (6) months after Lessee has exercised its
option, Lessee may terminate the Expansion Amendment.
4
<PAGE>
13. Option to Renew: Notwithstanding anything to the contrary in the Lease
---------------
Form:
A. Rent for Option Term. Lessee and Lessor shall meet after Lessee
--------------------
exercises its Option to Renew to attempt to agree upon the rent for the option
term. If the parties are unable to agree on the rent for the option term within
ten (10) days of Lessee's exercise, rent shall be set by appraisal as set forth
below (provided in no event shall effective rent exceed $1.14 per square foot
per month).
B. Appraisal. If it becomes necessary to determine the fair market rental
---------
value ("Fair Market Rent") for the Premises by appraisal, real estate
appraiser(s), all of whom shall be members of the American Institute of Real
Estate Appraisers and who have at least five (5) years experience appraising
industrial space located in the vicinity of the Premises shall be appointed and
shall act in accordance with the following procedures:
(i) If the parties are unable to agree on the Fair Market Rent within
the allowed time, either party may demand an appraisal by giving written
notice to the other party, which demand to be effective must state the
name, address and qualifications of an appraiser selected by the party
demanding an appraisal (the "Notifying Party"). Within ten (10) days
following the Notifying Party's appraisal demand, the other party (the
"Non-Notifying Party") shall either approve the appraiser selected by the
notifying party or select a second properly qualified appraiser by giving
written notice of the name, address and qualification of said appraiser to
the Notifying Party. If the Non-Notifying Party fails to select an
appraiser within the ten (10) day period, the appraiser selected by the
Notifying Party shall be deemed selected by both parties and no other
appraiser shall be selected. If two appraisers are selected, they shall
select a third appropriately qualified appraiser. If the two appraisers
fail to select a third qualified appraiser, the third appraiser shall be
appointed by the then presiding judge of the county where the Premises are
located upon application by either party.
(ii) If only one appraiser is selected, that appraiser shall notify
the parties in a simple letter form of its determination of the Fair Market
Rent for the Premises within fifteen (15) days following his selection,
which appraisal shall be conclusively determinative and binding on the
parties as the appraised Fair Market Rent.
(iii) If multiple appraisers are selected, the appraisers shall meet
not later than ten (10) days following the selection of the last appraiser.
At such meeting the appraisers shall attempt to determine the Fair Market
Rent for the Premises as of the commencement date of the extended term by
the agreement of at least two (2) of the appraisers.
(iv) If two (2) ore more of the appraisers agree on the Fair Market
Rent for the Premises at the initial meeting, such agreement shall be
determinative and binding upon the parties hereto and the agreeing
appraisers shall, in simple letter form executed by the agreeing
appraisers, forthwith notifying both Lessor and Lessee of the amount set by
such agreement. If multiple appraisers are selected and two (2) appraisers
are unable to agree on the Fair Market Rent for the Premises, all
appraisers shall submit to Lessor and Lessee an independent appraisal of
the Fair Market Rent for the Premises in simple letter form within twenty
(20) days following appointment of the final appraiser. The parties shall
then determine the Fair Market Rent for the Premises by averaging the
appraisals; provided that any high or low appraisal, differing from the
middle appraisal by more than ten percent (10%) of the middle appraisal,
shall be disregarded in calculating the average.
(v) The appraisers' determination of Fair Market Rent shall be based
on rental of space of the same age, construction, size, and location as the
Premises with the improvements installed therein at Lessor's expense and
shall take into account Lessee's obligations to pay additional rent under
this Lease. In determining Fair Market Rent, the appraiser shall not
consider any alterations installed in the Premises at Lessee's expense.
(vi) If only one appraiser is selected, then each party shall pay
one-half of the fees and expenses of that appraiser. If three appraisers
are selected, each party shall bear the fees and expenses of the appraiser
it selects and one-half of the fees and expenses of the third appraiser.
5
<PAGE>
(vii) Notwithstanding anything to the contrary, once Fair Market Rent
is established, rent for the option term shall be ninety-five percent
(95%) of such rent (provided that in no event shall effective rent exceed
$1.14 per square foot per month).
14. Approvals: Notwithstanding anything to the contrary in the Lease Form,
---------
whenever the Lease requires an approval, consent, designation, determination or
judgment by either Lessor or Lessee, such approval, consent, designation,
determination or judgment shall not be unreasonably withheld or delayed and in
exercising any right or remedy hereunder, each party shall at all times act
reasonably and in good faith.
15. Reasonable Expenditures: Notwithstanding anything to the contrary in
-----------------------
the Lease Form, any expenditure by a party permitted or required under the
Lease, for which such party is entitled to demand and does demand reimbursement
from the other party, shall be limited to the fair market value of the goods and
services involved, shall be reasonably incurred, and shall be substantiated by
documentary evidence available for inspection and review by the other party or
its representative during normal business hours.
16. Lessor Indemnity: Lessor shall indemnify, defend with counsel
----------------
reasonably acceptable to Lessee, protect, and hold harmless Lessee, its
employees, agents, contractors, stockholders, officers, directors, successors,
subtenants, personal representatives, and assigns (collectively the "Lessee
Indemnitees") from and against all claims, actions, suits, proceedings,
judgments, losses, costs, personal injuries, damages, liabilities, deficiencies,
fines, penalties, damages, attorneys' fees, consultants' fee, investigations,
detoxifications, remediations, removals, and expenses of every type and nature
("Claims"), directly or indirectly arising out of or in connection with (i) any
act of Lessor, its agents, contractors, or employees which results in any
Hazardous Material being present at any time on or about the Premises, or the
soil, air, improvements, ground water or surface water thereof, or (ii) the
violation of any law relating to any such Hazardous Material, the Premises or
the use of the Premises by Lessor, its agents, contractors or employees.
17. Tenant Improvements: Notwithstanding anything to the contrary in the
--------------------
Lease Form, in no event shall any of the following costs be paid for by Lessee
or deducted from the Total Tenant Improvement Allowance: (i) costs incurred as a
consequence of a contractor's or subcontractor's default, the
negligent act of omission or the willful misconduct of Lessor or its
consultants, agents, employees, contractors or subcontractors or Lessor's breach
of this Lease, or any contract for construction of the Lessee Interior
Improvements; (ii) interest, principal and other charges with respect to any
construction or permanent loan for the project; (iii) costs for which Lessor may
obtain reimbursement from others; (iv) costs for which Lessor has actually
received reimbursement from others; (v) costs associated with investigation,
removal, monitoring or remediation of hazardous materials; (vi) premium time and
other costs of accelerating the work to meet the scheduled completion date
stated in the Lease, unless the acceleration amount is approved by Lessee in
writing; (vii) costs of management, design and all other services provided by
employees or affiliates of Lessor and the cost of any administration, profit and
overhead for Lessor or any of its employees and affiliates; (viii) all costs and
expenses incurred with respect to work not required by the Specifications, as
the same may be amended by change orders; (ix) the cost of bringing the Building
and surrounding property into compliance with applicable building codes,
Hazardous Materials laws, or other statutes, laws, rules or regulations; and (x)
all costs incurred in connection with casualties and Acts of God. All of the
above described costs shall be paid by Lessor at its sole costs and expense.
18. Effect of Addendum: In the event of any inconsistency between this
------------------
First Addendum and the Lease Form, the terms of this First Addendum shall
prevail. As used herein, the term "Lease" shall mean the Lease Form, this
Addendum and all riders,
6
<PAGE>
exhibits, rules, regulations, covenants, conditions and restrictions referred to
in the Lease Form or this Addendum.
LESSOR: LESSEE:
MICHAEL R. MASTRO AND
REDMOND EAST ASSOCIATES, INCONTROL, INC.
a a Delaware corporation
---------------------- ----------------------
By: /S/ MICHAEL R. MASTRO By: /s/ KURT C. WHEELER
--------------------- --------------------
Printed Printed
Name: Name: KURT C. WHEELER
----------------- -------------------
Title: Title: C.E.O.
----------------- -------------------
Date: Date:
----------------- -------------------
7
<PAGE>
REDMOND EAST BUSINESS CAMPUS
LEASE
THIS LEASE, dated as of the 19th day of August, 1991, is between MICHAEL R.
------
MASTRO AND REDMOND EAST ASSOCIATES ("collectively called Lessor") and INCONTROL,
INC. (collectively called "Lessee").
WITNESSETH:
1. Premises. Lessor hereby leases to Lessee, upon the terms and conditions
herein set forth, a portion of the real property situated in the City of
Redmond, King County, Washington, legally described on Exhibit A attached hereto
(herein called the "Building"). The portion of the Building leased to Lessee
shall be as located and outlined on the sketch attached hereto as Exhibit B,
consisting of approximately 15,852 rentable square feet (herein called the
"Premises"). The term "Building" includes land, building, and improvements. As
of the initial commencement date, Lessee shall be provided twenty two (22)
non-exclusive parking stalls at the Building. Four (4) of those stall shall be
located at the northeast entrance to the Premises and shall be marked as being
reserved for visitors. On the first anniversary of the initial commencement
date, Lessee shall be provided twenty three (23) additional non-exclusive
parking stalls at the Building.
2. Common Areas. Lessee shall have nonexclusive use of all areas of the
Building designated by Lessor as common areas for the use generally of tenants
of the Building.
3. Use of Premises. The Premises shall be used for office, storage,
research and manufacturing facilities for the operation of a business engaged in
the manufacture of small electrical equipment and components and for no other
purpose without the prior consent of Lessor. Lessee shall not allow undue noise
or vibration. Lessee shall not allow use of the Premises in a manner which would
increase insurance premiums (unless Lessee pays for increased premiums), in a
manner which would interfere with any other tenant in the Building, or for any
illegal purpose. Lessee shall comply with all governmental rules, orders,
regulations, or requirements relating to Tenant's particular use and occupancy
of the Premises. Lessee shall not use, store or dispose of any hazardous or
toxic waste or materials on the Premises or the Building at any time except in
accordance with all the requirements of every applicable law, rule, regulation,
or ordinance. Lessee agrees to hold harmless, protect, indemnify, and defend
Lessor with respect to Lessee's use, storage, or disposal of any hazardous or
toxic waste or material in the Premises or the Building.
4. Term. This Lease shall be for a term of five (5) years, commencing on
the Commencement Date (as defined in Section 1 of the attached Addendum). In the
event that the lease term commences on a day other than the first day of a
calendar month, then the lease term as specified in the preceding sentence shall
be deemed to have commenced as of the first day of the next calendar month, and
the Tenant shall be deemed to have been given early occupancy as of the date
specified in the preceding sentence, with all terms of the Lease, including
rent, and other amounts due to Lessor, applicable to the period of early
occupancy.
See Addendum, Section 1.
-----------------------
5. Rental. Lessee agrees to pay Lessor, at Lessor's address set forth in
Section 27 hereof or at such other place as Lessor may designate in writing, a
monthly rent ("Basic Rental") of $1.13 per rentable square foot of the Premises
(as determined pursuant to Section 1) each month, not including the triple net
charges imposed as Additional Rental in Section 6. Monthly rental shall be paid
by Lessee in advance on the first day of each and every month during the term
hereof. The Basic Rental and Additional Rental shall be abated for a period of
one year after commencement of the Lease on the Delayed Occupancy Space
identified in Exhibit B, an area of 7,926 square feet.
<PAGE>
See Addendum, Section 2.
-----------------------
Upon execution of this Lease, Lessee shall pay to Lessor the sum of
$8,956.38 in payment of the Basic Rental due for the first month of the Lease
term. This amount will be adjusted when the final rentable square footage of the
Premises is determined pursuant to Section 1. The obligation of Lessee to pay
Basic Rental and Additional Rental is absolute and unconditional, and shall not
at any time be subject to offset, discount, or reduction of any kind whatsoever.
6. Additional Rental. This is a "triple-net" lease. In addition to the
Basic Rental provided in Section 5 above, Lessee agrees to pay Lessor
"Additional Rental" during each Lease Year based upon Lessee's percentage share
of the total dollar amount of Operating Expenses incurred by Lessor in each
Lease Year related to the Premises and the Property. Lessee's percentage share
of such Operating Expenses shall be the ratio that the rentable square footage
of the Premises bears to the total rentable square footage of the Building.
The term "Operating Expenses" means all costs of ownership, management,
operation, and maintenance of the Building, including, without limitation, the
following: wages and salaries of employees; janitorial, cleaning, landscaping,
guard and other services; gas, electricity, water, sewer, waste disposal, and
other utilities; heating, ventilation and air-conditioning; window-washing;
materials and supplies; painting, repairs, and other maintenance; parking lot
resurfacing and restriping; maintenance, repair and service agreements of any
kind, including without limitation those for the; HVAC system, alarm systems,
elevator equipment, and other equipment; reserves for any common area
improvements; costs of independent contractors; management fees; insurance;
taxes; assessments; depreciation on personal property; and any other expense or
charge which in accordance with generally accepted accounting and management
principles would be considered a cost of ownership, management, operation, and
maintenance of the Building. The determination of Operation Expenses and their
allocation to the tenants shall be made by Lessor.
Prior to commencement of each Lease Year, or as soon thereafter as
practicable, Lessor shall give Lessee notice of its estimate of amounts payable
under this section for the ensuing Lease Year. On the first day of each month
during the ensuing Lease Year, Lessee shall pay to Lessor 1/12th of such
estimated amounts, provided, that if such notice is not given prior to the
commencement of such ensuing Lease Year, Lessee shall continue to pay on the
basis of the prior Lease Year's estimate until the month after such notice is
given. If at any time or times it appears to Lessor that the amounts payable
under this section for the current Lease Year will vary from its estimate,
Lessor may, by notice to Lessee, revise its estimate for such Lease Year, and
subsequent payments by Lessee for such Lease Year shall be based upon such
revised estimate.
Within ninety (90) days after the close of each Lease Year or as soon after
such 90-day period as practicable, Lessor shall deliver to Lessee a statement of
amounts payable under this section for such Lease Year and such statement shall
be final and binding upon Lessor and Lessee. If such statement shows an amount
owing by Lessee that is less than the estimated payments for such Lease Year
previously made by Lessee, it shall be accompanied by a refund of the excess. If
such statement shows an amount owing by Lessee that is more than the estimated
payments for such Lease Year previously made by Lessee, Lessee shall pay the
deficiency to Lessor within thirty (30) days after delivery of the statement.
Lessee shall be entitled at its expense to review at Lessor's offices the
records on which the statement of amounts payable is based.
In determining the amount of Operating Expenses, for the purpose of this
Section 6: (a) if less than one hundred percent (100%) of the Building shall
have been occupied by tenants and fully used by them at any time, Operating
Expenses shall be increased to an amount equal to the like operating expenses
which would normally be expected to be incurred had such occupancy been one
hundred (100%) and had such full utilization by tenants been made during the
entire period; and (b) if the Lessor is not furnishing any particular work or
service (the cost of which if performed by the Lessor would constitute an
Operating Expense) to a tenant who has undertaken to perform such work in lieu
of the performance thereof by the Lessor, Operating Expenses shall be deemed
for the purposes of this Section 6 to be increased by an amount equal to the
additional Operating Expense which would reasonably have been incurred during
such period by the Lessor if it had at its own expense furnished such work or
service to such tenant.
-2-
<PAGE>
Lessee shall pay as rent monthly, in addition to the Basic Rental and
Additional Rental during the term of this Lease such "Special Building Operating
Expenses" as are required and incurred as a result of Lessee's occupancy and use
of the Premises, or any part thereof, and which are in addition to normal
business office expenses, which Special Building Operating Expenses shall
include but not be limited to unusual utility costs; unusual heat, air
conditioning or water requirements; increase in insurance premiums attributable
to the Lessee's business and/or use or occupancy of the Premises; and the like.
"Lease Year" shall mean calendar year. If this Lease commences or
terminates on a day other than the first or last day of a calendar year, the
amount of additional rental payable by Lessee applicable to the Lease Year in
which such commencement or termination occurs shall be prorated on the basis of
a 365-day year.
See Addendum, Section 3.
-----------------------
7. Security Deposit. Concurrently with Lessee's execution of this Lease,
Lessee shall deliver to Lessor the sum of $15,000.00 as security for the
performance by Lessee of Lessee's obligations hereunder. When the final rentable
square footage of the Premises is determined pursuant to Section 1, this amount
will be adjusted to be equal to one month's rent. This deposit shall not bear
interest, and shall not be held in trust or any special account for Lessee; the
deposit may be commingled with other funds of Lessor. If Lessee shall default in
performance of any of Lessee's obligations hereunder, Lessor may apply the whole
or any part of such security deposit to the performance of any such obligation.
Lessee shall, within 10 days after notice of any such application, restore the
amount on deposit to its original balance. Any balance of the security deposit
shall be returned to Lessee at the expiration or sooner termination of this
Lease, after satisfaction of any and all of Lessee's obligations under this
Lease, or may be applied against the last month's Basic Rental or Additional
Rental due but unpaid under this Lease.
8. Delivery of Possession. If for any reason whatsoever Lessor does not
deliver possession of the Premises on or before September 1, 1991, rent shall
not commence until such date as possession of the Premises is tendered by
Lessor, and in all other respects this Lease shall remain in full force and
effect. In no event shall Lessor be liable for damages caused by any such delay
or failure to deliver possession of the Premises.
See Addendum, Section 1.
-----------------------
9. Quiet Enjoyment. Lessor convenants and agrees that so long as Lessee is
not in default under this Lease, Lessee shall lawfully and quietly hold, occupy,
and enjoy the Premises during the term of this Lease, subject to the other terms
and provisions of this Lease and subject to all mortgages, underlying leases,
and other underlying matters of record to which this Lease is or may become
subject and subordinate.
10. Construction; Acceptance of Premises.
(a) Lessor will construct the Tenant Improvements in accordance with the
space plan attached as Exhibit B (the "Space Plan") and the specifications
prepared with respect to such Space Plan. Lessor will provide an allowance
("Tenant Improvement Allowance") of $35.00 per rentable square foot (including
WSST and permits) for the Tenant Improvements. After Lessor has spent $25.00 per
rentable square foot of the Premises, for each $1.00 per rentable square foot of
Tenant Improvement Allowance spent by Lessor thereafter, the Basic Rental shall
be increased by $0.0222 per rentable square foot per month; provided, however,
that until the date that Basic Rental begins for the Delayed Occupancy Space,
the increase to Basic Rental will apply only to the extent that the Tenant
Improvement Allowance used for the initial Premises exceeds $250,000.
(b) Lessor will enter into a construction contract for construction of the
Tenant Improvements with a contractor or contractors who shall be from a list of
contractors approved by Lessee, which approval shall not be unreasonably
withheld, delayed or conditioned. If required by Lessee, the final plans and
specifications for the Tenant Improvements shall be submitted for bid to at
least three contractors from the approved list of contractors. Lessor shall
provide copies of the bids to Lessee and Lessee may discuss the bids with such
contractors so long as Lessee acts reasonably. Lessor will keep Lessee informed
as to the bidding and contracting process. Lessor will
-3-
<PAGE>
award the construction contract for the Tenant Improvements to the lowest bidder
unless directed otherwise by Lessee. Each construction contract shall include a
guaranteed maximum price, subject to increases only for the matters recited in
the AIA form general construction contract and change orders initiated or
approved by Lessee. If the construction cost of the Tenant Improvements, as set
out in the construction contract, including any increases resulting from change
orders initiated or approved by Lessee, exceeds the Tenant Improvement
Allowance, Lessor shall pay the excess to the contractor as and when due and
Lessee, if for the initial Premises or at occupancy of the Delayed Occupancy
Space.
(c) The Lessor will provide Lessee a design allowance for space planning
and interior design of $0.40 per rentable square foot of the Premises and the
Delayed Occupancy Space. This design allowance is in addition to, and not a part
of the Tenant Improvement Allowance. Any excess cost will be the responsibility
of Lessee, payable at the Commencement Date. Lessee may select the space
planning/design firm(s) from a selected list of space planners/designers
provided by Landlord.
(d) Lessor shall not be obligated to complete the Tenant Improvements for
the Delayed Occupancy Space with the initial Premises. The Delayed Occupancy
Space Tenant Improvements shall be completed by Lessor so as to make them
available for occupancy one year following the Commencement Date.
See Addendum, Section 17.
------------------------
(e) The taking of possession of the Premises by Lessee shall constitute
acknowledgment by Lessee that the Lessor's Work has been fully performed as
agreed, that the Premises were then in good and tenantable condition and as
represented by Lessor, and that Lessor has fully complied with all of Lessor's
obligations regarding the condition of the Premises.
See Addendum, Section 4.
-----------------------
11. Utilities and Other Services by Lessor, Lessor agrees that there will
be available at the Premises the following utilities and services:
(a) Electricity.
(b) Water for drinking, restroom and office cleaning purposes.
(c) Gas.
All utilities and services shall be paid for by Lessee either by separate
metering or billing or as Additional Rental pursuant to section 6. Lessor does
not warrant the adequacy of such utilities for Lessee's needs or that any of the
foregoing utilities and services will be free from interruption. Interruption of
utilities or services shall not be deemed an eviction or excuse performance of
any of Lessee's obligations under this Lease or Lessor. Wherever possible,
Lessee's utilities will be separately metered, and Lessee agrees to pay for all
such utilities when due. Lessee shall, at Lessee's expense, provide all other
utilities and other services to the Premises required by Lessee, and shall pay
for the same when due.
12. Maintenance by Lessor, Lessor shall maintain in good condition (normal
wear and tear excepted) the structural and exterior components of the Building.
The portions of such work which are structural in nature shall be at Lessor's
sole cost and expense, and non-structural work such as painting of exterior
walls and maintenance of the roof membrane shall be Operating Expenses covered
by Section 6. Lessor shall repair and replace, when necessary, light fixtures in
the common areas only (including replacement of light bulbs and fluorescent
tubes) and shall maintain in good condition and repair the plumbing and the
electrical system. However, Lessor shall not be obligated to repair or replace
any fixtures or equipment installed by Lessee and
-4-
<PAGE>
Lessor shall not be obligated to make any repair or replacement occasioned by
any act or omission of Lessee, its employees, agents, invitees, or licensees.
See Addendum, Section 5.
-----------------------
13. Alterations, Repairs, and Maintenance by Lessee. Lessee shall make no
changes, improvements or alterations to the Premises without the prior consent
of Lessor. All such changes, improvements, and alterations and repairs, if any,
made by Lessee shall remain on the Premises and shall become the property of
Lessor upon the expiration or sooner termination of this Lease.
See Addendum, Section 6.
-----------------------
Lessee shall keep the Premises in a neat, clean, and sanitary condition,
and shall keep the Premises and all items therein installed by Lessee in good
condition, except only for reasonable wear and tear. Lessee shall provide, at
its sole expense, janitorial services for the Premises. All maintenance of the
Premises shall be conducted by Lessee, except as provided in Section 12.
14. Taxes. Subject to Section 6, Lessor shall pay, before the same become
delinquent, all taxes and special assessments levied against the Building.
Lessee shall pay, before the same become delinquent, all taxes assessed against
Lessee's furniture, fixtures, equipment, and other property in the Premises.
Lessee shall pay to Lessor as additional rental, within 10 days after
notice of the amount thereof, any tax upon rent payable under this Lease or any
tax or fee in any form payable to Lessor because of or measured by receipts or
income of Lessor derived from this Lease. The preceding sentence shall not apply
to general income tax or business and occupation tax of Lessor, except to the
extent a rental receipt tax is imposed as a business and occupation tax.
15. Signs. Lessee will not cause or permit the display of any sign, notice,
or advertising matter in or about the Premises or the Building without Lessor's
prior written consent. Lessor shall allow Lessee building signage located on the
Premises facing 185th Avenue N.E. Said sign shall be subject to approval by
Lessor, Lessee and all applicable City of Redmond codes.
16. Lessor's Access to Premises. Lessor may inspect the Premises at all
reasonable times and enter the same for the purpose of cleaning, repairing,
altering, improving, or exhibiting the same, but nothing herein shall be
construed as imposing any obligation on Lessor to perform any such work.
See Addendum, Section 7.
-----------------------
17. Liability Insurance. Lessee shall, at Lessee's sole expense, maintain
comprehensive general liability insurance with the comprehensive general
liability broadening endorsement (or its equivalent) covering Lessee against any
and all liability in connection with the Premises and Lessee's operations
therein, insuring against any and all claims for injury to or death of persons
and loss of or damage to property occurring upon, in, or outside of the
Premises. Such insurance shall have liability limits of not less than $1,000,000
per occurrence and not less than $2,000,000 annual aggregate combined single
limits for bodily injury liability and property damage liability and $1,000,000
for personal injury liability. All such insurance shall be issued by carriers
acceptable to Lessor and shall contain provision whereby the carrier agrees not
to cancel or modify the insurance without thirty (30) days' prior written notice
to Lessor. Said insurance shall name Lessor as an additional insured and contain
severability provisions with respect to persons insured.
On or before taking possession of the Premises pursuant to this Lease,
Lessee shall furnish Lessor with a certificate evidencing the aforesaid
insurance coverage, and renewal certificates shall be furnished to Lessor at
least 15 days prior to the expiration date of each policy for which a
certificate was theretofore furnished.
-5-
<PAGE>
18. Lessee's Property Insurance. Lessee shall, at Lessee's sole expense,
maintain on all of Lessee's personal property and leasehold improvements and
alterations on the Premises (other than the Tenant Improvements), a policy of
"all risk" property damage insurance in the full amount of their replacement
value. Such insurance shall name Lessor as an additional insured and all
proceeds of any such insurance shall be applied to the restoration of fixtures,
improvements, and alterations to the extent provided in Section 21; any proceeds
of such insurance remaining after such restoration shall belong to Lessee.
19. Lessor's Insurance. Subject to Section 6, Lessor shall maintain "all
risk" hazard insurance coverage on the Building (including the Tenant
Improvements) in an amount of not less that one hundred percent (100%) of the
full replacement cost of the Building (including the Tenant Improvements) and
such liability insurance coverage and other property damage insurance coverage
as Lessor reasonably determines is necessary or as is required by any lender
holding a first mortgage lien against the Property. All proceeds of any hazard
insurance shall be payable to Lessor and shall be applied to the restoration of
the Building to the extent provided in Section 21; any proceeds of such
insurance remaining after such restoration shall belong to Lessor.
20. Assignment and Subletting. Neither this Lease nor any right hereunder
may be assigned, transferred, encumbered, or sublet in whole or in part by
Lessee, by operation of law or otherwise, without Lessor's prior consent, which
shall not be unreasonably withheld, conditioned or delayed. Subleases to any
subsidiaries or affiliates with common ownership of 50% or more shall not
require Lessor's consent. No assignment or sublease shall relieve Lessee of its
liabilities hereunder and no consent to any assignment or sublease shall be
deemed a consent to any further assignment or sublease. If Lessee is a
corporation, any merger, consolidation, liquidation, or any change in ownership
of or the power to vote the majority of its outstanding voting stock, shall not
constitute an assignment, whether the result of a single transaction or a series
of transactions. Lessor may assign its interest in this Lease.
21. Damage or Destruction. If the Premises are damaged or destroyed by fire
or any cause, Lessor shall restore the Premises and Tenant Improvements (except
for tenant improvements paid for by Lessee, trade fixtures, and personal
property which shall be restored by Lessee at Lessee's sole expense) as nearly
as practicable to their condition immediately prior to such damage or
destruction. The obligations to restore provided in this paragraph shall be
subject to Lessor's termination rights provided below. Any restoration shall be
promptly commenced and diligently prosecuted. Lessor shall not be liable for any
consequential damages by reason of any such damage or destruction.
Notwithstanding any of the foregoing provisions of this section, in the
event the Premises shall be destroyed or damaged to such an extent that Lessor
deems that it is not economically feasible to restore the same, then Lessor may
terminate this Lease as of the date the damage or destruction by giving Lessee
notice to that effect.
If Lessor undertakes to restore the Premises as provided above in this
section, then commencing with the date of the damage or destruction and
continuing through the period of restoration, the rent for the Premises shall be
abated for such period in the same proportion as the untenantable portion of the
Premises bears to the whole thereof, except that there shall be no abatement to
the extent that any such damage or destruction is caused by any act or omission
of Lessee, its employees, agents, invitees, or licensees.
See Addendum, Section 8.
-----------------------
22. Liens. Lessee shall not suffer or permit any lien to be filed against
the Building or any part thereof or the Lessee's leasehold interest, by reason
of work, labor, services, or materials performed or supplied to Lessee or anyone
holding the Premises or any part thereof under Lessee. If any such lien is filed
against the Building or Lessee's leasehold interest, Lessee shall cause the same
to be discharged of record within 30 days after the date of filing the same.
23. Indemnity by Lessee. Lessee agrees that Lessor shall not be liable for
any claims for death of or injury to persons or damages to or destruction of
property sustained by Lessee or by any other person in or
-6-
<PAGE>
outside of the Premises, including without limiting the generality of the
foregoing, any claims caused by or arising from the condition or maintenance of
any part of the Premises, unless such damage is caused by the sole negligence or
intentional misconduct of Lessor. Lessee hereby waives all claims therefor and
agrees to indemnify Lessor against any such loss, damage, or liability or any
expense (including attorney's fees) incurred by Lessor in connection therewith.
24. Default; Remedies; Late Charges. The occurrence of any one or more of
the following events shall be deemed a breach of this Lease, namely: if Lessee
shall fail to perform any obligation or otherwise breaches any of its covenants
or agreements contained herein; or if Lessee shall make an assignment for the
benefit of creditors or shall file a voluntary petition under any bankruptcy act
or under any other law for the relief of debtors' or if any involuntary petition
is filed against Lessee under any such law and is not dismissed within 60 days
after filing; or if a receiver be appointed for the property of Lessee and is
not discharged or removed within 60 days; or if any department of any government
or any officer thereof shall take possession of the business or property of
Lessee; or if the Lessee is adjudicated a bankrupt. Upon any such occurrence
Lessor, at its option, may terminate this Lease by notice to Lessee and upon
such termination Lessee shall quit and surrender the Premises to Lessor, but
Lessee shall remain liable as hereinafter provided.
See Addendum, Section 9.
-----------------------
If this Lease shall be terminated as herein provided, Lessor may
immediately or at any time thereafter re-enter the Premises and remove any and
all persons and property therefrom, by any suitable proceedings at law or
otherwise, without liability therefor, and re-enter the Premises, without such
re-entry diminishing Lessee's obligations to pay rental for the full term
hereof, and Lessee agrees to pay Lessor any deficiency arising from re-entry and
reletting of the Premises at a lesser rental than provided herein. Lessor shall
apply the proceeds of any reletting in the following order:
(a) First, to the payment of such reasonable expenses as Lessor may have
incurred in recovering possession of the Premises, including without limitation,
removing persons and property therefrom, and in putting the same into good order
or condition;
(b) Second, to all reasonable expenses incurred by Lessor for reletting the
Premises, including without limitation, preparing and/or altering the same for
reletting; and
(c) Then to Lessee's obligation to pay rental. Any such reletting may be
for the remainder of the term of the Lease or for a longer or shorter period. In
any such case, and whether or not the Premises or any part thereof be relet,
Lessee shall pay to Lessor the rent and all other charges required to be paid by
Lessee up to the time of such termination of this Lease, and thereafter, Lessee
agrees to pay the equivalent of the amount of all rent reserved herein and all
other charges required to be paid by Lessee, less the net proceeds of reletting,
if any, and the same shall be due and payable by Lessee monthly as the amount
thereof is ascertained by Lessor, and Lessor may bring an action therefor as
such monthly deficiencies arise. In any of the circumstances herein above
mentioned, Lessor shall have the option, instead of holding Lessee liable for
the amount of all rent and all other charges required to be paid by Lessee less
the net proceeds of reletting, if any, forthwith to recover from Lessee an
aggregate sum representing, at the time of such termination of this Lease, the
then present worth of the excess, if any, of the aggregate of the rent and all
other charges payable by Lessee hereunder that would have accrued until the end
of the Lease term over the aggregate rental value of the Premises during such
time. Lessor shall use reasonable efforts to mitigate any damages.
In the event Lessee fails to pay any Basic Rental, Additional Rental, or
other payment or reimbursement due to Lessor within five (5) days of the date
when due, the amount so delinquent shall bear interest at the rate of twelve
percent (12%) per annum from the due date until paid. In addition, Lessee shall
pay to Lessor a late charge equal to five percent (5%) of the amount so
delinquent, which late charge shall be liquidated damages (and not a penalty) to
compensate Lessor for the costs of handling such delinquency, the parties
agreeing that actual damages would be inconvenient, uncertain, and difficult to
ascertain. Such interest and late charges shall be deemed Additional Rental and
shall be due upon demand.
-7-
<PAGE>
See Addendum, Section 9.
-----------------------
25. Trade Fixtures. Lessee may install on the Premises such equipment as is
customarily used in the type of business conducted by Lessee on the Premises.
Upon the expiration or sooner termination of this Lease, Lessee shall, at
Lessee's expense, remove from the Premises all such equipment and all other
property of Lessee and repair any damage to the Premises occasioned by the
removal thereof. Any property left in the Premises after the expiration or
sooner termination of this Lease shall be deemed to have been abandoned by
Lessee and become the property of Lessor to dispose of as Lessor deems expedient
without accounting to Lessee therefor.
26. Condemnation. If all of the Premises are taken by any public authority
under the power of eminent domain, this Lease shall terminate as of the date
possession is taken by said public authority pursuant to such condemnation.
If any part of the Premises is so taken and, in the opinion of either
Lessor or Lessee, it is not economically feasible to continue this Lease in
effect, either party may terminate this Lease. If any substantial part of the
Building is so taken and, in the opinion of Lessor, it is not economically
feasible to continue this Lease in effect, Lessor may terminate this Lease. Such
termination by either party shall be made by notice to the other given not later
than 30 days after possession is so taken, the termination to be effective as of
the later of 30 days after said notice or the date possession is so taken.
If part of the Premises or part of the Building is so taken, and neither
Lessor or Lessee elects to terminate this Lease, or until termination is
effective, as the case may be, the rental shall be abated in the same proportion
as the portion of the Premises so taken bears to the whole of the Premises, and
Lessor shall make such repairs or alterations, if any, as are required to render
the remainder of the Premises tenantable.
All damages awarded for the taking or damaging of all or any part of the
Building or the Premises shall belong to and be the property of the Lessor, and
Lessee hereby assigns to Lessor any and all claims to such award, but nothing
herein contained shall be construed as precluding Lessee from asserting any
claim Lessee may have against such public authority for disruption or relocation
of Lessee's business on the Premises.
27. Notices. All notices, demands, and requests to be given by either party
to the other shall be in writing. All notices, demands, and request by Lessor to
Lessee shall be sent by United States registered or certified mail, postage
prepaid, (or by private overnight courier) addressed to Lessee at the Premises.
All notices, demands, and requests by Lessee to the Lessor shall be sent by
United States registered or certified mail, postage prepaid, (or by private
overnight courier) addressed to Lessor at: 10800 N.E. Eighth Street, Suite 1080,
Bellevue, Washington 98004, or such other place as Lessor may from time to time
designate by notice to Lessee. Notices, demands, and requests served upon Lessor
or Lessee as provided in this section in the manner aforesaid shall be deemed
sufficiently served or given for all purposes hereunder at the time such
notices, demand, or request shall be so mailed or deposited with private
courier.
28. Performance of Covenants. If Lessee shall fail to make any payment or
perform any of Lessee's obligations under this Lease, after notice and the
expiration of any applicable cure period, Lessor may, without notice to or
demand upon Lessee and without further waiving or releasing Lessee from any
obligations of Lessee under this Lease, make any such payment or perform any
such obligation on Lessee's behalf in such manner and to such extent as Lessor
deems desirable. All sums so paid by Lessor and all necessary costs and expenses
in connection with the performance of any such obligation by Lessor, together
with interest thereon at the rate of 12% per annum from the date of the making
of such expenditure by Lessor, shall be deemed Additional Rental hereunder and
shall be payable to Lessor on demand.
29. For Rent Signs; Showing Premises. Lessor may place for rent or for sale
signs on the exterior of the Premises and may enter the Premises for the purpose
of showing the Premises or the Building to prospective tenants,
-8-
<PAGE>
purchasers, and lenders.
See Addendum, Section 7.
-----------------------
30. Waiver of Subrogation. Lessor and Lessee shall each procure, if
obtainable without payment of an additional premium, an appropriate clause in,
or an endorsement on, any policy of fire or extended coverage insurance covering
the Premises and the Property, and the personal property, fixtures, and
equipment located in or on the Premises, pursuant to which the insurance
companies waive subrogation or consent to a waiver of right of recovery, and,
conditioned upon a party having obtained such clauses or endorsements or waiver
of subrogation or consent to a waiver or right of recovery, such party hereby
agrees that it shall not make any claim against or seek to recover from the
other for any loss or damage to its property, or the property of the other,
resulting from fire or other hazards covered by such insurance notwithstanding
other provisions of this Lease; provided, however, that the release, discharge,
exoneration, and covenant not to sue herein contained shall be limited by the
terms and provisions of the waiver of subrogation clauses or endorsement
consenting to a waiver of right of recovery, and shall be coextensive therewith.
If either Lessor or Lessee is unable to obtain such clause or endorsement, such
party shall promptly give the other party notice of such inability. If either
Lessor or Lessee is able to obtain such clause or endorsement only upon payment
of an additional premium, such party shall promptly give the other party notice
to that effect, in which event the other party shall have the right to pay such
additional premium, and upon such payment, the party whose insurer requires such
payment shall promptly procure such clause or endorsement.
31. Subordination of Lessee's Interest. This lease is and shall be
subordinate to any encumbrance now of record or any encumbrance hereafter
recorded affecting the Building. Lessee shall attorn to any purchaser at any
foreclosure sale, or to any grantee or transferee designated in any deed in lieu
of foreclosure. Lessee shall execute any documents required by any such holder
to accomplish the purpose of this section, and failure to execute such documents
shall be a default under this Lease.
See Addendum, Section 10.
------------------------
32. Surrender of Premises. Lessee, at the expiration or sooner termination
of this lease, shall quit and surrender the Premises in good, neat, clean, and
sanitary condition, except for reasonable wear and tear.
See Addendum, Section 11.
------------------------
33. Rules and Regulation. Lessee shall use the Premises and the common
areas in the Building in accordance with such reasonable rules and regulations
not inconsistent with this lease as may from time to time be made by Lessor for
the general safety, comfort, and convenience of Lessor and tenants of the
Building, and shall cause Lessee's employees, agents, invitees, and licensees to
abide by such rules and regulations.
34. Holdover. If Lessee holds over after the expiration of the term of this
Lease, such tenancy shall be a month-to-month tenancy. During such tenancy
Lessee agrees to pay Lessor 125% the rate of rental as provided herein for the
first 75 days of any holdover period and 200% of the rate of rental provided
herein for any holdover period exceeding 75 days, and to be bound by all of the
terms, covenants, and conditions herein specified.
35. Memorandum of Lease. Unless approved by Lessor in writing, this Lease
shall not be placed of record. If Lessor so requests, Lessee agrees to execute
and place of record an instrument, in recordable form, evidencing the
commencement date and expiration date of this Lease. At the expiration or sooner
termination of this Lease, Lessee shall execute in recordable form and deliver
to Lessor a quit claim deed covering the Building.
36. Force Majeure. Lessor shall have no liability whatsoever to Lessee on
account of the following acts of "force majeure," which shall include (a) the
inability of Lessor to fulfill, or delay in fulfilling, any of Lessor's
obligations under this Lease by reason of strike, lockout, other labor trouble,
dispute or disturbance; (b) governmental regulation, moratorium, action,
preemption or priorities or other controls; (c) shortages of fuel,
-9-
<PAGE>
supplies or labor; (d) any failure or defect in the supply, quantity or
character of electricity or water furnished to the Premises by reason of any
requirement, act or omission of the public utility or others furnishing the
Building with electricity or water; and (e) for any other reason, whether
similar or dissimilar to the above, or for Act of God, beyond Lessor's
reasonable control. If this Lease specifies a time period for performance of an
obligation of Lessor, that time period shall be extended by the period of any
delay in Lessor's performance caused by any of the events of force majeure
described within.
37. Light, Air, and View. Lessor does not guarantee the continued present
status of light, air, or view over any Premises adjoining or in the vicinity of
the Building.
38. Lessor's Liability. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Lessor are made and intended not as personal covenants, undertakings and
agreements for the purpose of binding Lessor personally or the assets of Lessor
except Lessor's interest in the Building, but are made and intended for the
purpose of binding only the Lessor's interest in the Building, as the same may
from time to time be encumbered. While Lessee may bring a legal action against
Lessor, judgments may be enforced only against Lessor's interest in the
Building. No personal liability or personal responsibility is assumed by, nor
shall at any time be asserted or enforceable against, Lessor or its partners or
agents or their respective heirs, legal representatives, successors, and assigns
on account of this Lease or on account of any covenant, undertaking or agreement
of Lessor in this Lease contained.
39. Miscellaneous.
(a) Nonwaiver. No failure of either party to insist upon the strict
---------
performance of any provision of this Lease shall be construed as depriving
either party of the right to insist on strict performance of such provision or
any other provision in the future. No waiver by either party of any provision of
this Lease shall be deemed to have been made unless expressed in writing and
signed by the party to be charged therewith. No acceptance of rent or of any
other payment by Lessor from Lessee after any default by Lessee shall constitute
a waiver of any such default or any other default. Consent by either party in
any one instance shall not dispense with necessity of consent by such part in
any other instance.
(b) Attorneys' Fees. If an action be commenced to enforce any of the
---------------
provisions of this Lease, the prevailing party shall, in addition to its other
remedies, be entitled to recover its reasonable attorneys' fees. If Lessor
consults with an attorney as a result of a default by Lessee hereunder, Lessee
agrees to pay any such attorneys' fees incurred by Lessor, and such attorneys'
fees shall constitute additional sums due by Lessee hereunder.
(c) Captions and Construction. The captions in this Lease are for the
-------------------------
convenience of the reader and are not to be considered in the interpretation of
its terms.
(d) Partial Invalidity. If any term or provision of this Lease or the
------------------
application thereof to any person or circumstance shall to any extent be invalid
or unenforceable, the remainder of the Lease, or the application of such term or
provision to persons or circumstances other than those as to which it is invalid
or unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and enforced as written to the fullest extent
permitted by law.
(e) Governing Law. This Lease shall be governed by the State of Washington.
-------------
(f) Estoppel Certificates. Lessee shall, from time to time, upon written
---------------------
request of Lessor, execute, acknowledge and deliver to Lessor or its designee a
written statement stating: The date this Lease was executed and the date it
expires; the date the term commenced and the date Lessee accepted the Premises;
the amount of Basic Rental and Additional Rental and the date to which such
Basic and Additional Rental has been paid; and certifying: That this Lease is in
full force and effect and has not been assigned, modified, supplemented or
amended in any way (or specifying the date and terms of agreement so affecting
this Lease); that this Lease represents the entire agreement between the parties
as to this leasing; that all conditions under this Lease to be
-10-
<PAGE>
performed by the Lessor have been satisfied; that all required contributions by
Lessor to Lessee on account of Lessor's improvements have been received; that
there are no existing claims, defenses or offsets which the Lessee has against
the enforcement of this Lease by the Lessor; that no Rental has been paid more
than one month in advance; and the amount of any security has been deposited
with Lessor. It is intended that any such statement delivered pursuant to this
section may be relied upon by a prospective purchaser or assignee of Lessor's
interest or by any lender. If Lessee shall fail to respond within ten (10) days
of receipt by Lessee of a written request by Lessor as herein provided, Lessee
shall be deemed to have given such certificate as above provided without
modification and shall be deemed to have admitted that this Lease is in full
force and effect, that there are no incurred defaults in Lessor's performance,
that the security deposit is as stated in this Lease, and that not more than one
month's Rental has been paid in advance. Lessee shall be entitled to receive an
estoppel certificate from Lessor on the same terms set forth in this Section
39(f).
(g) Transfer of Lessor's Interest. In the event of any transfer or
-----------------------------
transfers of Lessor's interest in the Premises, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Lessor accruing from and
after the date of such transfer and Lessee agrees to attorn to the transferee.
Any such transfer shall be made expressly subject to this Lease, and the
transferee must assume Lessor's obligations hereunder
(h) Interpretation. This Lease has been submitted to the scrutiny of all
--------------
parties hereto and their counsel if desired, and shall be given a fair and
reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted by any party
hereto or its counsel.
(i) Remedies Cumulative. The specified remedies to which Lessor may resort
-------------------
under the times of this Lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which Lessor may lawfully
be entitled in case of any breach or threatened breach by Lessee of any
provision of this injunction of the violation, or attempted or threatened
violation, of any of the covenants, conditions, provisions of this Lease.
(j) Number; Gender; Permissive Versus Mandatory Usage. Where the context
-------------------------------------------------
permits, references to the singular shall include the plural and vice versa, and
to the neuter gender shall include the feminine and masculine. Use of the word
"may" shall denote an option or privilege and shall impose no obligation upon
the party which may exercise such option or privilege; use of the word "shall"
shall denote a duty or an obligation.
(k) Time. Time is of the essence to this Lease.
----
(l) Binding Effect. Subject of the provisions of section 20 hereof, this
--------------
Agreement shall be binding upon the parties hereto and upon their respective
executors, administrators, legal representatives, successors, and assigns.
(m) Arbitration. If there is a dispute between the Lessor and Lessee
-----------
concerning Lessee's percentage share of Operating Expenses under Section 6 of
this Lease, the determination of such dispute shall be submitted to binding
arbitration upon the written demand of either party delivered to the other
party. Such arbitration shall be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect;
provided there shall be only one (1) arbitrator who shall be selected by the
parties and if the parties cannot agree then who shall be appointed by the
Presiding Judge of the King County Superior Court upon motion made by either
party. Judgement upon the award may be entered in any court having jurisdiction.
The cost and expenses of the arbitration shall be divided equally between the
Lessor and Lessee.
(n) Financial Information. Upon request from Lessor, Lessee agrees to
---------------------
provide such financial statements and other financial information concerning
Lessee as may be reasonably required by any financial institutional lender to
whom Lessor may be applying for financing on the Building.
-11-
<PAGE>
(o) Expansion. Lessee shall have the option to expand the Premises by 5,000
---------
square feet through September 1, 1993. The location of this expansion space
shall be contiguous to the original Premises.
See Addendum, Section 12.
------------------------
(p) Option to Renew. At the expiration of the initial term of the Lease,
---------------
Lessee shall have one (1) five (5) year option to renew at 95% of the market
rent for the Premises, however, the effective rent for the extended term shall
not exceed $1.14 per square foot per month, triple net.
See Addendum, Sections 13, 14, 15, and 16.
-----------------------------------------
EXECUTED as of the date first above written.
LESSOR:
/s/ Michael R. Mastro
--------------------------------
Michael R. Mastro
REDMOND EAST ASSOCIATES
By /s/ Michael R. Mastro
--------------------------------
Name: Michael R. Mastro
Title: General Partner
By /s/ Stravos Anastasiou
--------------------------------
Name: Stravos Anastasiou
Title: General Partner
By /s/ Perry Vyzis
--------------------------------
Name: Perry Vyzis
Title: General Partner
LESSEE:
INCONTOL, INC.
By /s/ Kurt C. Wheeler
------------------------------
Name: Kurt C. Wheeler
Title: C.E.O.
-12-
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this [ILLEGIBLE] day of August, 1991, before me, the undersigned, a
------------- -------------
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known, and acknowledged to me that
he signed and sealed the foregoing instrument as his free and voluntary act and
deed, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ Donna Reid
--------------------------------
NOTARY PUBLIC in and for the
State of Washington,
residing at Auburn
---------------------
My commission expires 2/17/94.
-------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this [ILLEGIBLE] day of August, 1991, before me, the undersigned, a
------------- -------------
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known to be a General Partner of
REDMOND EAST ASSOCIATES, and on behalf of such general partnership, acknowledged
to me that he signed and sealed the foregoing instrument as the free and
voluntary act and deed of said general partnership, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ Donna Reid
--------------------------------
NOTARY PUBLIC in and for the
State of Washington,
residing at Auburn
---------------------
My commission expires 2/17/94.
-------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 19th day of August, 1991, before me, the undersigned, a Notary
---- ------------
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Stavros Anastasiou, to me known to be a General Partner of
REDMOND EAST ASSOCIATES, and on behalf of such general partnership, acknowledged
to me that he signed and sealed the foregoing instrument as the free and
voluntary act and deed of said general partnership, for the uses and purposes
therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ M. Neagle
---------------------------------
NOTARY PUBLIC in and for the
State of Washington,
residing at Bellevue
---------------------
My commission expires 12/27/94.
--------
-13-
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 19TH day of August, 1991, before me, the undersigned, a Notary
------ -------------
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Perry Vyzis, to me known to be a General Partner of REDMOND
EAST ASSOCIATES, and on behalf of such general partnership, acknowledged to me
that he signed and sealed the foregoing instrument as the free and voluntary act
and deed of said general partnership, for the uses and purposes therein
mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ M. Neagle
---------------------------------
NOTARY PUBLIC in and for the
State of Washington,
residing at Bellevue
---------------------
My commission expires 12/27/94.
------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 13th day of August, 1991, before me, the undersigned, a Notary
---- ------------
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Kurt Wheeler, to me known to be the C.E.O. of INCONTROL,
------------ -----
INC. a Washington corporation, the corporation that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument
and that the seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[SEAL] /s/ M. Neagle
---------------------------------
NOTARY PUBLIC in and for the
State of Washington,
residing at Bellevue
---------------------
My commission expires 12/27/94.
---------
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<PAGE>
EXHIBIT A
Legal Description
-----------------
Lot 1, City of Redmond Lot Line Revision NO. LLR 89-7, as filed under File
No. 9002221025, Records of King County, Washington.
-15-
<PAGE>
EXHIBIT B
Premises
--------
To be replaced by a copy of the finalized space plan. The space plan is to
show, as part of the Premises, one grade level door located on the south side of
the Premises.
-16-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 and S-8) of our report dated January 21, 1999, except for Note 11, as
to which the date is March 26, 1999, with respect to the consolidated financial
statements of Cypress Bioscience, Inc. included in this Annual Report (Form 10-
K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
March 29, 1999
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