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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19871
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CYTOTHERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3078125
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
701 GEORGE WASHINGTON HIGHWAY, LINCOLN, RI 02865
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (401) 288-1000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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Title of class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or l5(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
Aggregate market value of Common Stock held by non-affiliates at March 9,
1998: $49,641,229. Inclusion of shares held beneficially by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common control with
the Registrant. Common stock outstanding at March 9, 1998: 18,264,522 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
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FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding, among
other things, the Company's expected results of operations, the progress of the
Company's collaborations, product development and clinical programs, the need
for, and timing of, additional capital and capital expenditures, collaboration
prospects, costs of manufacture of products, the protection of and the need for
additional intellectual property rights, regulatory matters, the need for
additional facilities and potential market opportunities. The Company's actual
results may vary materially from those contained in such forward-looking
statements because of risks to which the Company is subject such as risks of
delays in research, adverse results from the Company's development or clinical
testing programs, obsolescence of the Company's technology, lack of available
funding, competition from third parties, termination of the Company's
collaborations, intellectual property rights of third parties, unavailability of
needed raw materials, failure of the Company's or its collaborators to perform,
litigation, regulatory restrictions, and other risks to which the Company is
subject; see "Cautionary Factors Relevant to Forward-Looking Information" filed
herewith as Exhibit 99 and incorporated herein by reference.
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ITEM 1.
BUSINESS
THE COMPANY
CytoTherapeutics, Inc. ("CytoTherapeutics" or the "Company") is a leader in
the development of novel cell therapies designed to treat human diseases. The
Company is developing products based on two principal technologies:
encapsulated-cell therapies and stem cell therapies. The Company's encapsulated-
cell therapies are based upon the use of living cells encapsulated in the
Company's membranes and inserted into specific sites in the body; the Company's
stem cell therapies are based on the use of unencapsulated human stem cells to
replace or repair damaged or defective cells. The Company is currently
developing encapsulated-cell products for the treatment of chronic pain and
Parkinson's disease with additional research efforts directed to other
disorders. The Company has initiated a research and development program for
neural stem/progenitor cells and has also established a research program to
discover the stem cell of the pancreas and the liver. In addition, the Company
has encapsulated-cell research programs ongoing with respect to ophthalmic
diseases. The Company currently has one product candidate in clinical trials:
its encapsulated-cell implant to treat chronic pain.
CytoTherapeutics, Inc. was incorporated in Delaware in 1988 and currently
has one subsidiary, StemCells, Inc., a California corporation acquired by the
Company in September 1997.
THE UNMET NEED
Biotechnology has discovered or created a number of new and promising
proteins, but the lack of an effective way to deliver these proteins locally has
limited their widespread use. The Company believes its encapsulated-cell
therapies may provide a platform for effective local delivery of these and other
proteins to treat diseases. Many diseases result from organ failure where organs
cannot be transplanted to cure the disease (e.g., neurodegenerative diseases and
pancreatic failure) or where there are constraints due to a short supply of
organs for transplant. The Company believes its stem cell technology may provide
the basis for replacing certain lost or damaged cells. If the Company can
successfully develop either or both of its cell therapy technologies, it
believes that its technologies may provide the basis for addressing a number of
diseases with significant unmet medical needs.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
In healthy individuals, cells maintain normal physiological function by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
critical molecular substances required by the body. For example, the progressive
decline common to many neurodegenerative diseases, such as Parkinson's disease
and amyotrophic lateral sclerosis ("ALS"), is associated with impaired cellular
function.
Recent advances in biotechnology have led to the discovery of a number of
specific proteins that are, in certain diseases or disorders, inadequately
produced by the body's own cells. While these proteins overcome some of the
limitations of traditional pharmaceuticals, such as lack of specificity, they do
not reproduce the natural ability of cells to secrete such substances at the
precise sites of action and in the appropriate physiological quantities or for
the duration required. As a result, investigators have considered using cell
therapy to replace vital cells which are failing by implanting cells which carry
the ability to provide a needed critical molecule or by implanting cells to
replace those which have failed. In situations of
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irreversible failure of vital cells, transplantation of cells offers the
possibility of replacing the functions of these failed cells, thus potentially
restoring health.
THE POTENTIAL OF CELL-BASED THERAPY
Cell-based therapy, the use of cells to treat diseases, has the potential to
provide a broad therapeutic approach of comparable importance to traditional
pharmaceuticals and the more recently developed genetically engineered
biologics. However, autologous cells (cells from the individual into whom they
are to be transplanted) are available in limited supply, may be abnormal if the
patient is ill and often can only be obtained through significant surgical
procedures. Allogeneic (same species) cellular transplants and xenogeneic
(cross-species) cellular transplants generally require the use of potent
immunosuppressive drugs. These drugs broadly compromise the patient's immune
system in order to decrease the likelihood of rejection of the transplanted
cells and expose the transplant recipient to adverse side-effect(s), such as
increased risk of infection or cancer. CytoTherapeutics believes its
encapsulation technologies may reduce or eliminate the need for
immunosuppression, as well as allow site-specific delivery and relative control
of cell output. CytoTherapeutics believes its unencapsulated stem cell
technologies may provide a way to replace specific cells that have been damaged
or destroyed. This approach may be necessary when cell replacement requires
repair of cellular architecture or direct cell-to-cell contact. Such replacement
with stem cells, which may grow and differentiate to produce differentiated
progeny (i.e., mature, lineage-restricted cells), may allow for the restoration
of function through the replacement of normal cells where this has not been
possible in the past.
CYTOTHERAPEUTICS' PORTFOLIO TECHNOLOGIES:
ENCAPSULATED-CELL THERAPIES AND STEM CELL THERAPIES
ENCAPSULATED-CELL THERAPIES
Encapsulated-cell therapies represent a potentially broadly applicable
delivery platform for treating a number of diseases which are currently
untreatable or poorly treated with present technologies. The Company is
employing its proprietary encapsulation techniques to develop semipermeable
polymer implants containing living cells which are designed to be placed into
selected sites in the body to treat specific diseases or conditions. The
implants are also designed to allow nutrients to reach the encapsulated cells
and to allow wastes and the therapeutic protein(s) to pass out of the implant
while protecting the cells from elements of the patient's immune system.
The Company's implants are designed to be biocompatible, remaining in
contact with the recipient's tissues without generating a response that would
significantly inhibit the functioning of the encapsulated cells or cause
significant injury to host tissues. When such biocompatibility is achieved, the
membrane can selectively permit nutrients and oxygen to pass from the recipient
through the membrane into the implant, nourishing the cells and allowing them to
function. Similarly, such biocompatibility, together with the permeability of
the membrane, enables the substances produced by the encapsulated cells to pass
through the membrane and produce the desired therapeutic effect.
ADVANTAGES OF THE COMPANY'S ENCAPSULATED-CELL THERAPIES
Many diseases have no satisfactory treatment today, in certain cases,
because therapeutic substances generally do not reach the required sites in
appropriate concentrations when administered by conventional methods. The
Company believes that its encapsulated-cell technology represents an approach
that may offer a number of advantages over other forms of delivery for
therapeutics.
SITE SPECIFIC DELIVERY
Researchers have identified a number of substances which may be beneficial
in the treatment of human disorders. However, it has been difficult or
impossible to find a safe and effective way to deliver
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many of these potent substances to the required sites at the required
concentrations and at reasonable costs. Systemic delivery, such as oral or
intravenous delivery, may cause significant side-effects since very potent
molecules are being delivered to sites in the body where they are not normally
present or needed. This is especially likely where large amounts are
administered systemically to achieve therapeutic levels in the central nervous
system ("CNS"). A recent clinical trial of a new protein, CNTF, sponsored by
another company, for example, resulted in significant side-effects after
systemic administration.
In contrast, CytoTherapeutics' cell-containing devices are designed to
deliver these therapeutic substances to specific locations where they are
needed, thus avoiding many of the side-effects associated with conventional
routes of administration. This form of delivery should result in better
therapeutic ratios--reflecting an ability to provide effective doses with lower
toxicity. In addition, because the therapeutic substances are produced by living
cells sustained within the implant, these substances potentially may be
delivered over extended periods of time. The production of these substances at
the site of action eliminates the problems of drug stability which hampers
effective treatment with pumps and polymer carriers.
RETRIEVABILITY
The Company's implants are designed with a tether at the end of the active
portion of the implant to allow them to be retrieved with relative ease. By
exposing the tether, which is sutured below the skin, and withdrawing the
device, a physician should be able to retrieve or replace the implant. Should
complications arise, or if a new implant is desired, a physician should be able
to retrieve the capsule. Moreover, the capsule keeps the cells in the location
intended as opposed to unencapsulated cells which cannot be so constrained.
DELIVERY OF MULTIPLE SUBSTANCES
The Company's implants may also provide the advantage of delivering multiple
therapeutic substances simultaneously at a single site. The Company believes
that such an ability could lead to development of improved therapies. The
Company's implant to treat chronic pain is one such example of delivery of
multiple substances.
GENE THERAPY
The Company believes that its encapsulated-cell therapies may provide an
effective way to deliver gene therapy: the use of encapsulated cells to deliver
genetic information over an extended period may be able to increase the
efficiency of gene transfer to the host and hence improve the effectiveness of
gene therapy. In addition, the implant could be retrieved, if desired or
required. The Company does not presently have commercial access to any such
genes for use in gene therapy.
There can be no assurance that the Company will successfully develop its
encapsulated-cell therapies commercially or that, if successfully developed, it
will achieve the benefits described above or that the advantages of such
technology will be greater than the potential disadvantages.
STEM CELL TECHNOLOGY
Stem cells may be functionally characterized as cells whose progeny include,
both daughter stem cells (by self-renewal) as well as more differentiated cells.
Stem cells exist in humans as a self-renewing source of cells needed in the
various systems of the body (e.g., hematopoietic, neural and neural crest,
hepatic, pancreatic endocrine cells, and mesenchymal stem cells). These rare,
self-renewing stem cells are present in many tissues and are responsible for
organ regeneration after injury or during normal cell replacement. The Company
believes that these cells can form the basis of therapies which have the
potential to replace specific subsets of cells that have been injured or lost
through disease, injury or genetic defect.
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The Company is seeking to identify, isolate and find methods of expanding a
variety of different human stem cell cultures for use in treatment of a variety
of human disorders. The Company believes that there are a finite number of stem
cells in the human system and that it is possible for the person or entity that
first identifies and isolates a given stem cell culture to obtain patent
protection for such cells. The Company's strategy is to be the first to
identify, isolate and patent multiple types of human stem/progenitor cell
cultures with commercial importance.
Neurodegenerative diseases such as Parkinson's disease, ALS and Alzheimer's
disease affect a significant portion of the U.S. population and currently have
no effective long-term therapies. The Company believes that its neural
stem/progenitor cells may be useful in treating such diseases. The Company is
continuing research into, and has initiated the development of, its human neural
stem/ progenitor cell-based therapies.
The Company has also initiated research programs to discover the human
pancreatic islet stem cell and the liver stem cell. Pancreatic islet stem cells
may be useful in the treatment of Type 1 diabetes. Liver stem cells may be
useful in the treatment of diseases such as hepatitis, cirrhosis of the liver
and liver cancer.
There can be no assurance that the Company will successfully develop its
stem cell therapies commercially or that, if successfully developed, it will
achieve the benefits described above or will achieve benefits therapeutically
equal to or better than the standard of treatment at time of testing or that the
advantages of such technology will be greater than the potential disadvantages.
ADVANTAGES OF THE COMPANY'S STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of the knowledge of the Company, no one has developed an
approved method for replacing lost or damaged tissues from the human nervous
system; replacement of tissues in other areas of the human body is limited to
those few areas where autologous transplantation is now feasible; in a few
additional areas, allogeneic transplantation is now used, but is limited by the
paucity of organs available through donation. The Company believes that its stem
cell technologies have the potential to reestablish function in at least some of
the patients who have suffered the losses referred to above.
NATURE OF REPLACEMENT CELLS
The Company believes that stem cells can self-renew and differentiate into
the multiple kinds of cells that are commonly lost in, for example,
neurodegenerative diseases. Transplantation of these stem cells may allow these
cells to migrate limited distances to the proper location within the body, to
expand and differentiate and to replace damaged or defective cells. If the
Company can show that the foregoing process occurs, the cells that are
substituted could form new cells that could facilitate the return to proper
function. The Company believes that such replacement of damaged or defective
cells by functional cells is unlikely to be achieved with any other treatment.
PRODUCT DEVELOPMENT PROGRAMS AND RESEARCH EFFORTS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
The Company believes that its encapsulated-cell technology can be used to
deliver a wide variety of therapeutic substances or vital cells to the sites
where they are required. The Company's lead product, its implant for treatment
of chronic pain, is designed to provide a new means of delivering substances
with known therapeutic effects directly to the CNS. The next group of proposed
products in the Company's pipeline seeks to build on the Company's expertise in
encapsulating living cells that deliver therapeutics directly to the CNS for the
treatment of such chronic and disabling CNS disorders such as Parkinson's
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disease. The Company has also established a program to look at potential
treatments for diseases of the eye, based on its encapsulated-cell technology.
In addition, the Company is attempting to isolate and develop a series of
stem/progenitor cells to serve as a basis for replacing diseased or injured
cells, especially cells of the human nervous system, liver and pancreas.
The following table lists the potential therapeutic indications for and
current status of CytoTherapeutics' primary product development programs and
research projects and is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
Report. The Company continually evaluates its research and product development
efforts and reallocates resources among existing programs or to new programs in
light of experimental results, commercial potential, availability of third-party
funding, likelihood of near-term efficacy, collaboration success or significant
technology enhancement, as well as other factors. The Company's research and
product development programs are at relatively early stages of development and
will require substantial resources to commercialize. There can be no assurance
that the Company will successfully develop any product or obtain regulatory
approvals, enter clinical trials, achieve other milestones or commercialize any
products in accordance with currently anticipated timetables, or at all.
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PRODUCT DEVELOPMENT PROGRAMS
AND RESEARCH PROGRAMS
<TABLE>
<CAPTION>
PROGRAM CELL TYPE(1) STATUS(2) PARTNER
<S> <C> <C> <C>
ENCAPSULATED-CELL THERAPIES
Chronic Pain Bovine adrenal Phase I studies of prototype Astra AB
chromaffin cells devices completed in
approximately 50 patients;
Phase IIA trials initiated to
investigate new device version
in neuropathic pain patients;
mulitcenter placebo controlled
Phase IIB trial initiated in pain patients.
Enrollment in all trials voluntarily halted to
allow modification of implant and device
fixation procedures
Engineered cells releasing analgesics Research** Astra AB
Parkinson's Engineered cells releasing neurotrophic Research** Genentech,
Disease factor(s) Inc.
Amyotrophic Engineered cells releasing human CNTF Swiss pilot clinical study (investigator+ IND)
Lateral enrollment completed
Sclerosis
Engineered cells releasing NT4/5 and CT-1 Research** Genentech,
Inc.*
Huntington's Engineered cells releasing French pilot clinical trial (investigator++
Disease CNTF IND) scheduled to begin 2nd quarter of 1998
Engineered cells releasing neurotrophic Research** Genentech,
factors Inc.*
Ophthalmologic Engineered cells Research; preliminary
Diseases releasing rodent experiments
neurotrophic factor(s), completed
anti-inflammatory(s)
and/or antiangiogenic(s)
STEM CELL THERAPIES
CNS Disorders Neural stem cells (unencapsulated) Research/Preclinical
Disorders of the Stem cell discovery Research
liver and (unencapsulated)
pancreas
</TABLE>
(1) All cells are encapsulated unless otherwise indicated.
(2) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing.
"Preclinical" refers to further testing of a defined product candidate IN
VITRO and in animals prior to clinical studies.
"Pilot clinical study" refers to an initial clinical study in a small number
of patients.
* Genentech has commercialization options in these programs; they are funded
by CytoTherapeutics.
** Progress in these programs is dependent upon CytoTherapeutics developing an
appropriate platform cell(s) for these programs; in particular, the Company
is trying to develop hardy cell lines that will survive for appropriately
long periods within the Company's capsules.
+ This trial is being conducted by Dr. Patrick Aebischer; the Company is
paying certain costs associated with the trial.
++ This trial is being conducted by a third-party clinical investigator; the
Company is paying certain costs associated with the trial.
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ENCAPSULATED-CELL THERAPIES--LEAD PROGRAMS
CHRONIC PAIN PROGRAM
The Company estimates that more than one million patients in the United
States suffer unrelieved severe, chronic pain. Chronic, intractable pain often
accompanies or is the result of a number of serious diseases, procedures and
conditions including cancer, infection, nerve damage, back surgery, arthritis,
amputation, fractures and other conditions. Even where therapies exist, they
often have limits to their effectiveness in treating severe, chronic pain.
Patients may become intolerant of or unresponsive to narcotics such as morphine,
and may experience undesirable side-effects.
The Company believes that its encapsulated-cell technology can be used to
treat chronic pain by implanting encapsulated cells which release naturally
occurring analgesic substances, such as catecholamines and opioid peptides. The
Company, together with certain of its academic collaborators, has developed
methods for the encapsulation of bovine adrenal chromaffin cells for
implantation into the lumbar region of the spinal column for the treatment of
chronic pain. The Company believes that encapsulating properly chosen cell types
which secrete desired therapeutic substances may provide more effective pain
relief than traditional approaches and/or may enable treatment of patients who
experience little or no relief with other therapies.
During 1993 and 1994, the Company collaborated on a pilot clinical study of
its chronic pain implant technology with Dr. Patrick Aebischer, a founding
scientist of the Company. The study conducted at the Centre Hospitalier
Universitaire Vaudois ("CHUV") in Switzerland included nine seriously or
terminally ill patients experiencing severe, intractable pain for whom
narcotics, such as morphine, provided inadequate relief or could not be
tolerated. The implant procedure was performed safely in all nine patients.
Viable implants containing cells were retrieved from eight of the nine patients
upon the death of the patient or at or beyond the end of the intended trial
period.
In May 1995, the Company commenced its first Company-sponsored
Investigational New Drug ("IND") trial in the United States. The Phase I trial
was an open label study which included 15 terminally ill cancer patients
experiencing severe, intractable pain and having a life expectancy of less than
five months. According to the trial protocol, patients were to receive treatment
for the remainder of their lives. By February 26, 1997, all 15 patients had
completed the study.
In February 1996, the Company initiated an extension of the Phase I trial.
In this extension, four patients received a device containing approximately
three times the number of cells used in the devices implanted in the first 15
patients. By February 9, 1998, three of the four patients had completed the
study. The one patient that remains in the study has had a device in place for
nearly two years without any related significant safety issues.
A Phase IIA clinical trial for the treatment of neuropathic pain was then
initiated in Switzerland in May 1997. A parallel study was initiated in August
1997 in the United States. These trials were designed to evaluate the safety and
retrievability of the larger device. Neuropathic pain patients were implanted
with the device for 10 weeks. During the period, patients were monitored for
safety and pain scores. Following removal of the original device, patients could
elect to be reimplanted for six months.
In addition, in November 1997, a 150-patient, Phase IIB, placebo-controlled,
double-blinded, multicenter trial in cancer patients was initiated in central
Europe and Switzerland. In this trial, patients with end-stage cancer were and
will be implanted with either a cell-containing device or a placebo device for
10 weeks and will be monitored for pain scores, concurrent pain-related drug
usage and quality of life. Following removal of the original device, patients
can elect to be implanted with an active device for six months.
In December 1997, the Company became aware, after explant of devices from
some patients enrolled in the Phase IIA trials, that a significant number of
devices had migrated into or out of the intrathecal
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space during the evaluation period. In some cases migration resulted in device
breakage. To date, there have been no reports of significant medical
complications related to device migration or breakage. The Company has
investigated this migration phenomenon and has determined that it is necessary
to modify the device and the implantation procedure to secure the devices to
prevent migration. These modifications have included the development of a
"tether clip" to assist in securing the implants. The Company and its partner,
Astra Pain Control, have halted accrual in the Phase II trials until the
modifications to the implantation procedure can be implemented.
All clinical trials are being conducted by Astra Pain Control.
The Company has been closely monitoring the development of regulatory
regimes intended to deal with the risks of xenotransplantation and the use of
bovine cells. See "Government Regulations." Although the FDA has proposed
guidelines for the conduct of xenotransplantation trials, a number of European
countries, for example, have been more restrictive. The FDA has imposed strict
and potentially onerous restrictions on the clinical use of non-human cells.
These proposed FDA regulations may substantially increase the production costs
of implants for the Company's pain program. In addition, such regulations may
adversely affect physicians' and patients' perceptions about
xenotransplantation. The Company cannot predict the effect of existing
regulations or possible future regulatory actions except that, if not modified,
they will likely increase the cost of producing pain implants. There can be no
assurance that such regulations will not block sales (at least in some
countries) or make the product commercially non-viable.
There can be no assurances that the Company will receive regulatory and/or
ethical committee approvals to continue the Phase II trials or to initiate other
clinical trials in a timely manner or that such clinical trials will be
successfully completed or that, if successfully completed, such trials will lead
to the commercialization of such product.
In March 1995, the Company entered into a Collaborative Research and
Development Agreement with Astra AB for the development and marketing of certain
encapsulated-cell products to treat pain. Astra has the right to terminate this
Areement anytime after April 1998. See "Corporate Collaborations-- Astra AB."
PARKINSON'S DISEASE PROGRAM
Parkinson's disease ("PD") is a progressively debilitating neurological
disorder characterized by tremor, rigidity and reduced spontaneous movement. The
symptoms of PD result from inadequate levels of the neurotransmitter dopamine in
the striatum (a portion of the brain) due to the death of dopamine-producing
cells in the substantia nigra (a related area of the brain). The causes of the
disease are unknown. There is no known cure for PD nor is there any known method
for arresting or reversing the fundamental neurodegenerative process that
results in the death of dopamine-producing cells.
PD affects approximately 500,000 individuals in the United States, and it is
estimated that one in 500 people over 50 years of age will develop this
disorder. It is thought that approximately 50,000 new cases are diagnosed
annually in the United States, and this number is expected to increase as the
population ages. The Company's proposed product is expected to initially be
targeted for use by the estimated 300,000 mid-to-late-stage PD patients in the
United States.
Currently approved therapies for PD generally provide adequate treatment of
the disease for a limited period. Patients become increasingly resistant to the
benefits of such medications while concurrently becoming susceptible to a
variety of motor and cognitive side effects. Under these circumstances, they
often require extensive supportive care.
The Company is developing an implant to treat PD. The goal of this program
is to slow or prevent progression of the underlying degeneration of dopaminergic
neurons by delivering neurotrophic factors to the brain. The initial focus of
the program is the delivery of Neurturin, a neurotrophic factor with partial
homology to GDNF (glial derived neurotrophic factor), using human cells. The
Company believes that, if
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successfully developed, its implants will be capable of delivering effective,
low doses of Neurturin to the areas of the brain where they are required.
The Company has entered into an agreement with Genentech for the development
of implants releasing certain neurotrophic factor(s) to treat PD. Under the
terms of this Agreement, if certain development milestones are not achieved
before agreed-upon dates, Genentech has the right to terminate the Agreement.
See "Corporate Collaborations--Genentech, Inc."
ENCAPSULATED-CELL THERAPIES--OTHER NEURODEGENERATIVE DISEASES
The Company has entered into two additional agreements with Genentech, Inc.
under which the Company is attempting to develop encapsulated-cell treatments
for ALS and Huntington's disease. The Company has concluded, due to regulatory
considerations, that these programs should be based on human cell lines, rather
than the xenogeneic cell lines previously envisioned. At the present time,
progress in these programs in largely dependent upon the Company's success in
identifying human cell lines under its Parkinson's disease program which can
survive for appropriately long periods in the encapsulated environment.
ALS PROGRAM
Amyotrophic lateral sclerosis ("ALS"), also known as Lou Gehrig's disease,
is characterized by progressive loss of motor control and death due to
degeneration of neurons in the motor system. The Company estimates that
approximately 25,000 patients have ALS in the United States. The cause of ALS is
unknown in most cases. There is no known cure for the disease.
The Company is sponsoring research to evaluate the feasibility and
tolerability of using encapsulated human cells to deliver neurotrophic factors
into the CNS to treat ALS. Dr. Patrick Aebischer, a scientific founder of the
Company, has completed enrollment of an investigator-sponsored, 12-patient,
pilot trial of CNTF-releasing encapsulated cells in ALS patients. Results are
not yet available.
In November 1996, the Company signed an agreement with Genentech, Inc., for
the development and marketing of implants that release NT4/5 and CT-1 (a
cytokine related to CNTF) to treat ALS; the Agreement requires certain specific
due diligence of the Company (see "Corporate Collaborations-- Genentech, Inc.").
HUNTINGTON'S RESEARCH
Huntington's disease ("HD") is an autosomal dominant, progressive
neurodegenerative disease resulting in movement disorders, psychiatric
disturbances, and death. The symptoms of HD are caused primarily by the death of
striatal neurons. In 1993, there were approximately 25,000 patients with
symptomatic HD in the United States. There is no known cure or treatment for the
disease.
The Company is sponsoring research to evaluate the feasibility and
tolerability of using encapsulated cells to deliver neurotrophic factors into
the CNS and to treat HD. An investigator-sponsored trial to treat six
Huntington's disease patients has been approved by regulatory authorities in
France. The trial, expected to start in the first half of 1998, is intended to
test CNTF-releasing encapsulated cells.
In November 1996, CytoTherapeutics entered into an agreement with Genentech,
Inc. for the development and marketing of implants that release CT-1 to treat
HD; the Agreement requires certain specific due diligence by the Company. See
"Corporate Collaborations--Genentech, Inc.".
OPHTHALMOLOGY PROGRAM
Many diseases of the eye are presently ineffectively treated, which can lead
to reduced vision and blindness. There are more than one million blind people in
the United States and many more Americans
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suffer from potentially visually impairing ophthalmologic disorders. The
worldwide populations at risk are much larger.
Certain diseases of the eye, e.g., glaucoma and anterior segment
inflammation, can be treated today with topical preparations, although the
efficacy of these treatments is variable. These disorders are treatable largely
because some or all of the disease processes occur in the anterior portion of
the eye, which is accessible to topical drugs. Other serious diseases, such as
diabetic retinopathy and age-related macular degeneration, are not treatable, in
part because they occur in the posterior portion of the eye, an area that is
essentially unreachable with most current treatment methods.
Many of these untreatable diseases affect the retina, a posterior part of
the eye critical to sight. The retina is part of the CNS and the Company
believes that its encapsulated-cell implant technologies can be applied to
bypass the blood-retinal barrier of the eye using the same approach as bypassing
the blood-brain barrier in the rest of the CNS. If these implants are
successfully developed, the Company believes this delivery platform could allow
treatment of serious sight-threatening disorders.
CytoTherapeutics has begun design and production of implants adapted for use
in the eye and has started initial testing in animals with these implants.
TECHNOLOGY DEVELOPMENT
The Company continues to develop its encapsulated-cell technology. Through
its cell biology program, the Company is developing genetically engineered cell
lines that will function optimally when encapsulated. The Company's present work
focuses on identification of appropriately hardy human cells because of the
increasing regulatory constraints on use of non-human cells. There can be no
assurance such development will be successful.
The Company is developing cell lines which may represent important
components in second generation products (e.g., an engineered cell line to
deliver analgesics in its pain program) or new products (such as a single device
to deliver multiple therapeutic substances). It is also conducting research to
improve cell line expression levels of therapeutic substances, as well as
regulation and consistency of output.
The Company continues to evaluate new and modified forms of membranes for
use in its implants. These evaluations are focused on developing membranes with
increased strength, improved handling characteristics, enhanced transport
qualities and greater biocompatibility. These efforts are undertaken internally,
as well as externally with Akzo Nobel Faser AG. See "Corporate
Collaborations--Akzo Nobel Faser AG."
The Company is also assessing and developing distribution, handling, and
insertion systems to facilitate the distribution of its implants to clinicians
and enable clinicians both to surgically implant these devices into patients and
to retrieve and replace them, as necessary. See "Manufacturing."
STEM CELL THERAPIES
The Company's portfolio of stem cell technology results from the Company's
earlier licensing of neural stem/progenitor cell technology the Company's own
research and development efforts, and the acquisition of StemCells, Inc. in
1997.
NEURAL STEM/PROGENITOR CELL DEVELOPMENT PROGRAM
The Company began its work with neural stem/progenitor cultures in
collaboration with NeuroSpheres, Ltd., in 1992. The Company believes that
NeuroSpheres, Ltd., was the first to invent these cultures and NeuroSpheres has
filed patent applications on its inventions relating to these cultures. The
Company has obtained a license from NeuroSpheres to such inventions for
transplantation. See "License Agreements and Sponsored Research
Agreements--NeuroSpheres, Ltd."
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The Company has in the past and continues today to conduct its own research,
as well as sponsoring research, in the area of neural/progenitor cells and their
use.
In 1997, Company scientists invented a reproducible method for isolating and
growing human neural stem/progenitor cultures. In preclinical IN-VITRO and early
IN-VIVO studies, the Company demonstrated that these cells differentiate into
all three of the cell types of the CNS. Based on these results, the Company
believes that these cells may form the basis for replacement of cells lost in
certain degenerative diseases. The Company is continuing research into, and has
initiated the development of, its human neural stem/ progenitor cell cultures.
The Company has isolated the cultures and demonstrated that these cultures can
be expanded for a number of generations IN VITRO in defined media. A
collaborator of the Company, Dr. Anders Bjorklund, has shown that these cultures
can be successfully engrafted into the brains of rodents. The Company is
expanding its preclinical efforts in this area with an initial goal of selecting
the proper indications to pursue.
The Company's neural stem/progenitor cell program is at an early stage and
there can be no assurance that it will result in any commercial product.
STEM CELL DISCOVERY PROGRAM
The Company, through its 100% owned subsidiary, StemCells, Inc., has begun a
program seeking to discover and isolate various stem cells from the human body.
The Company believes that stem cells represent a fundamentally new approach to
the treatment of diseases caused by lost or damaged tissue. The Company has
assembled a very experienced team of scientists and scientific advisors,
including Irving L. Weissman, M.D., of Stanford University, Fred H. Gage, Ph.D.,
of The Salk Institute and David Anderson, Ph.D., of the California Institute of
Technology, to search for new stem cells and, in conjunction with a number of
academic researchers, has initiated programs for the isolation of the stem cell
for the pancreas and the liver. The Company has obtained rights to certain
inventions relating to stem cells from, and is conducting stem-cell related
research at, several academic institutions. See "License Agreement and Sponsored
Research Agreements." The Company expects to expand its search for new stem
cells and expects to acquire rights to additional inventions relating to stem
cells from third parties.
An important element of the Company's program in stem cell discovery is the
development of intellectual property positions with respect to stem and
progenitor cells. The Company believes that the first person or entity to
isolate and perfect intellectual property rights in new stem/progenitor cells
will be able to exclude others from using such cells commercially. To this end
the Company, through StemCells, Inc., has entered into several research
collaborations with academic institutions.
SUBSIDIARY
STEMCELLS, INC.
On September 26, 1997, CytoTherapeutics acquired by merger StemCells, Inc.,
a California corporation ("StemCells"). Through the merger, CytoTherapeutics
acquired StemCells in exchange for 1,320,691 shares of the Company's common
stock and options and warrants for the purchase of 259,296 common shares.
Simultaneously with the acquisition of StemCells, Richard M. Rose, M.D.,
President of StemCells, Inc., became President, Chief Executive Officer and a
director of CytoTherapeutics, and Irving L. Weissman, M.D., a founder of
StemCells, Inc., became a director of CytoTherapeutics.
The Company's current stem cell research is being conducted pursuant to the
provisions of an agreement between CytoTherapeutics and Drs. Weissman and Gage
providing for a two-year research plan. If the goals of the research plan are
accomplished, the stem cells research will continue to be funded under an
extension of such Research Plan approved by a Research Committee consisting of
two persons chosen by Drs. Weissman and Gage, two persons chosen by the Company
and a fifth member appointed by Drs. Weissman and Gage, subject to the
reasonable approval of the Company. Increases in stem cells
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research funding of not more than 25% a year approved by the Committee will be
funded by CTI for as long as the goals of the Research Plan are being met,
provided however, that CTI will retain the option of ceasing or reducing neural
stem research even if all of Research Plan goals are being met by accelerating
the vesting of all still-achievable performance-based options granted to Drs.
Weissman and Gage and other scientists and ceasing or reducing non-neural stem
cell research even if all Plan goals are being met by affording StemCells'
scientific founders the opportunity to continue development of the non-neural
stem research by licensing the technology related to such research to them in
exchange for a payment to CytoTherapeutics equal to all funding for such
research, plus royalty payments.
CORPORATE COLLABORATIONS
ASTRA AB
In March 1995, the Company signed a collaborative research and development
agreement with Astra for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, non-refundable
payment of $5,000,000 and may make up to $16,000,000 in additional payments
subject to the achievement of certain development milestones. Under the
agreement, the Company is obligated to conduct certain research and development
pursuant to a four-year research plan agreed upon by the parties. Over the term
of the research plan, the Company expects to receive annual research payments
from Astra of approximately $5-7 million, which the Company expects should
approximate the research and development costs incurred by the Company under the
plan. Approximately $29 million of research and development funding has been
received by the Company through December 31, 1997. Subject to the successful
development of such candidate products and obtaining necessary regulatory
approvals, Astra is obligated to fund and to conduct all clinical trials of
candidate products arising from the collaboration and to seek approval for their
sale and use. Astra has the exclusive worldwide right to market products covered
by the agreement. Until the later of either the last to expire of all patents
included in the licensed technology or a specified fixed term, the Company is
obligated to manufacture and supply products and is entitled to a fixed royalty
on the worldwide net sales of such products in return for the license granted to
Astra and the supply of product. Astra has the right to terminate the agreement
for any reason after April 1, 1998.
As is described in more detail under the caption "Encapsulated-Cell
Therapies--Lead Programs-Chronic Pain Program," enrollment in ongoing clinical
trials of the Company's implant for the treatment of chronic pain has been
voluntarily halted in order to implement modifications to the implantation
procedure. There can be no assurance that Astra will continue to fund the
research plan under the Agreement after April 1998, or that sufficient
modifications to the Company's implant can be made to permit resumption of
clinical trials, or that a suitable human cell line can be developed (if
necessary because of regulatory considerations) on a timely basis, or at all.
GENENTECH, INC.
On November 25, 1996 the Company entered into three agreements with
Genentech, Inc. ("Genentech") to develop treatments for Parkinson's disease,
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the
agreements the Company and Genentech expect to pursue treatments for these
diseases that utilize the Company's encapsulated-cell technology to deliver
several of Genentech's neurotrophic factors, potentially including
neurotrophin-4/5 ("NT-4/5"), cardiotrophin-1 ("CT-1"), Neurturin and nerve
growth factor ("NGF"). These agreements supersede the Development Collaboration
and License Agreement between the Company and Genentech entered into in March
1994 which related in part to the development of a product for the treatment of
Alzheimer's disease using NGF.
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The following is a brief overview of each of the agreements:
PARKINSON'S AGREEMENT
The initial focus of the research under the Development Collaboration and
License Agreement relation to Parkinson's disease (the "Parkinson's Agreement")
is the development of a treatment for Parkinson's disease using Neurturin. Under
the Parkinson's Agreement, the Company is obligated to perform certain
preclinical studies and initiate a pilot Phase I clinical study using Neurturin
(unless another growth factor is agreed upon by the parties). Genentech
purchased $8.3 million of the Company's Common Stock (829,171 shares at $10.01
per share) to fund the Company's expenses associated with such preclinical and
pilot clinical studies. If the parties agree that additional funds are required
to complete such studies, Genentech will purchase additional shares of the
Company's Common Stock (at the then current market price of the Company's Common
stock) to provide the Company the additional required funding.
Under the terms of the Agreement signed in 1996, Genentech has the right to
terminate development under the Parkinson's Agreement after the completion of
each of (i) certain preclinical studies, (ii) the pilot Phase I clinical trial
and (iii) a specified Phase II clinical trial. Should Genentech decide to
proceed to Phase II clinical trials, Genentech will purchase additional shares
of the Company's Common Stock (at the then current market price of the Company's
Common Stock) to fund such study. If following completion of the preclinical
studies, the pilot clinical study or the Phase II study, Genentech decides to
terminate further development under the Parkinson's Agreement or if Genentech
terminates the Parkinson's Agreement as a result of a breach of the Parkinson's
Agreement by the Company, and the funds the Company received from the sale of
stock to Genentech pursuant to the Parkinson's Agreement exceed the expenses
incurred by the Company in connection with such studies by more than $1 million,
Genentech has the right to require the Company to repurchase from Genentech
shares of Company Common Stock having a value equal to the amount of overfunding
(based on the per share price at which Genentech purchased such shares of Common
Stock from the Company). The Company is obligated to use reasonable efforts to
complete its development obligations under the Parkinson's Agreement within
prescribed periods. In addition, if certain development milestones are not
completed prior to agreed-upon dates, Genentech has the right to terminate the
Agreement. The first of these dates may occur as early as May 1998. There can be
no assurance that such milestones will be completed in a timely manner or that
Genentech will not terminate the Agreement when it is permitted to do so.
In the event Genentech decides to continue with Phase III clinical trials,
Genentech and the Company will share the cost of U.S. Phase III clinical trials
and Genentech will pay for any clinical testing required to sell products
developed under the Parkinson's Agreement outside the United States. Genentech
will extend the Company a line of credit to provide the Company cash to fund the
Company's share of the expenses of the Phase III trials in the United States.
The line of credit, together with interest thereon, is repayable, at the option
of the Company, in either cash or through the issuance of shares of the
Company's Common Stock having a value (based on the then current market price of
the Company's Common Stock) equal to the outstanding amount of the loan.
Upon commercialization, Genentech and the Company will share profits in the
United States at an agreed upon percentage, and Genentech will pay the Company a
royalty based on sales outside the United States. The Company will retain
manufacturing rights and will be paid manufacturing costs for products sold. In
the event the Parkinson's Agreement is terminated because of the Company's
default or bankruptcy, the Company is required to grant Genentech a license to
the Company's cell encapsulation technology and transfer to Genentech related
technology for use solely with the products developed under the Parkinson's
Agreement.
Under the Parkinson's Agreement, the Company has granted Genentech an
exclusive license to use the Company's cell encapsulation technology in certain
cases with certain of Genentech's growth factors
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for the treatment of Parkinson's disease. Under the Parkinson's Agreement, the
Company is also prohibited from entering into certain agreements relating to the
development of treatments for Parkinson's disease using certain compounds.
ALS AGREEMENT
Pursuant to the License Agreement between the Company and Genentech Relating
to Treatment of Amyotrophic Lateral Sclerosis (the "ALS Agreement") Genentech
has granted the Company a license to CT-1 and NT-4/5 to develop products for the
treatment of ALS using the Company's cell encapsulation technology. Subject to
certain limitations discussed below, the Company is responsible for all expenses
associated with the preclinical and clinical development under the ALS Agreement
and is obligated to pay Genentech royalties on net sales of products developed
under the ALS Agreement. The Company's license to CT-1 and NT-4/5 is dependent
upon the Company using reasonable efforts to achieve certain development
milestones within prescribed periods.
The Company has the right to commercialize the product outside the United
States. Upon the successful completion of a specified Phase II clinical trial,
Genentech has the option to obtain exclusive rights to sell products developed
under the ALS Agreement in the United States by agreeing to pay an agreed upon
percentage of the expenses of United States Phase III clinical development of
such products. If Genentech makes such an election, the parties will share
profits on sales of such products in the United States, subject to a royalty
payable to Genentech. In the event the ALS Agreement is terminated because of
the Company's default or bankruptcy, the Company is required to grant Genentech
a license to the Company's cell encapsulation technology and to transfer to
Genentech-related technology for use solely with the products developed under
the ALS Agreement.
HUNTINGTON'S AGREEMENT
Under the License Agreement Relating to Treatment of Huntington's Disease
(the "Huntington's Agreement"), Genentech has granted the Company an exclusive
license to CT-1 to develop, make, use and sell products for the treatment of
Huntington's disease that utilize CT-1 and the Company's cell encapsulation
technology. The Company is responsible for all preclinical and clinical
development under the Huntington's Agreement, including all expenses associated
with such development. The Company will pay Genentech a royalty based on net
sales of any products developed under the Huntington's Agreement. The Company's
license to CT-1 is dependent upon the Company using reasonable efforts to
achieve certain development milestones within prescribed periods.
Upon the earlier of (i) the Company agreeing to grant a third party
sublicense rights under the Huntington's Agreement, and (ii) the successful
completion of the specified Phase II trial on a product developed under the
Huntington's Agreement, Genentech has the option to require the Company to
negotiate exclusively with Genentech for a limited period regarding Genentech
co-developing and co-marketing products developed under the Huntington's
Agreement. In the event the parties are unable to reach an agreement, the
Company would have the right to sublicense its rights under the Huntington's
Agreement to a third party, provided such third party offers the Company terms
more favorable to the Company than the terms of Genentech's last offer. In the
event the Huntington's Agreement is terminated because of the Company's default
or bankruptcy, the Company is required to grant Genentech a license to the
Company's cell encapsulation technology and transfer to Genentech related
technology for use solely with products developed under the Huntington's
Agreement.
MODEX THERAPEUTIQUES SA
In July 1996, CytoTherapeutics, together with certain founding scientists,
established Modex Therapeutiques SA as a Swiss biotherapeutics company to pursue
extensions of CytoTherapeutics' broad-based, encapsulated-cell technology for
certain applications outside the central nervous system. Modex, headquartered in
Lausanne, Switzerland, was formed to integrate technologies developed at three
universities
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located in Lausanne--the University of Lausanne, the Centre Hospitalier
Universitaire Vaudois (CHUV), the Ecole Polytechnique Federale de Lausanne--as
well as from the Albert Einstein College of Medicine of Yeshiva University in
New York City and CytoTherapeutics--to develop products to treat non-CNS
diseases such as diabetes, obesity and anemia. In October 1997, the Company
completed a series of transactions which resulted in the establishment of Modex
as an independent company in which CytoTherapeutics has an equity position of
approximately 25%.
In October 1997, as part of Modex obtaining funds from outside investors,
the Company and Modex modified the terms of their existing royalty-bearing Cross
License Agreement to (i) expand the field in which Modex is exclusively licensed
to apply the Company's encapsulated-cell technology to include, in addition to
the original field of diabetes, obesity and anemia, the treatment of hemophilia
A and B utilizing Factor VIII and/or Factor IX, and two additional applications
to be agreed to by the Company and Modex; (ii) eliminate the requirement to make
future milestone payments to Modex of up to 300,000 shares of the Company's
Common Stock; (iii) limit the scope of the Company's technology licensed to
Modex to existing and future encapsulation technology; and (iv) specify the
terms under which the Company will manufacture any products Modex may develop
based on the Company's technology and grant Modex an option to manufacture or
have manufactured such products on payment of a higher royalty. The Cross
License Agreement continues to provide for the payment of royalties from Modex
to the Company on the sale of any licensed products. The revised agreement
similarly limits the scope of the Modex technology exclusively licensed, on a
royalty-bearing basis, to the Company for the application of diseases,
conditions and disorders of the central nervous system to existing and future
encapsulation technology and to certain additional existing technology.
AKZO NOBEL FASER AG
To develop additional new membranes to be used in the Company's
encapsulated-cell products and to obtain access to membrane expertise from one
of the world's leading membrane companies, the Company entered into a
Development and Supply Agreement with Akzo Nobel Faser AG ("Akzo") dated
December 1, 1993. Akzo is the world's largest supplier of medical grade
membranes. Under the terms of the agreement, Akzo and the Company are evaluating
Akzo's existing membranes to determine if the membranes can be used in
connection with the Company's proposed products. In addition, Akzo has begun
development of improved membranes for use by the Company. The Company has agreed
to reimburse Akzo for a portion of Akzo's costs incurred in the development. In
the event the Company determines to use membranes developed by Akzo in the
Company's products, Akzo will supply membranes to the Company at Akzo's cost
plus a certain profit. Akzo will also be entitled to a royalty on sales of the
Company's products utilizing Akzo's membranes. Akzo has agreed not to supply
membranes to any other third party for encapsulation of cells for in vivo
therapeutic applications. Either Akzo or the Company can terminate the Agreement
in the event Akzo is unable or unwilling to supply sufficient quantity of
membranes to meet the Company's needs. In such event, Akzo would license the
technology necessary to manufacture the membranes to CytoTherapeutics.
The Company has the right to utilize membranes from other manufacturers in
its products provided the Company pays a small royalty to Akzo on the sales of
such products. The Company will also continue its internal membrane development
efforts, and may utilize internally developed membranes in its products without
obligation to Akzo.
For the years ending December 31, 1997, 1996 and 1995, the Company paid Akzo
under the terms of the agreement approximately $98,000, $295,000 and $118,000,
respectively.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, StemCells, Inc. entered into two license agreements with
Signal Pharmaceuticals, Inc. under which each party licensed to the other
certain patent rights and biological materials for use in
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defined fields. The parties are in disagreement as to the interpretation of the
rights licensed to StemCells, Inc. The Company cannot presently determine
whether this dispute will lead to litigation.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
NEUROSPHERES, LTD.
In March 1994, the Company entered into a Contract Research and License
Agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive, worldwide, royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. In 1997, the Company settled a dispute that arose between it and
NeuroSpheres, Ltd. under the agreement. Pursuant to the settlement, the Company
has obtained an exclusive patent license from NeuroSpheres in the field of
transplantation, subject to a limited right of NeuroSpheres to purchase a
nonexclusive license from the Company. The Company has developed additional
intellectual property relating to the subject matter of the license.
COGNETIX, INC.
In February 1997, CytoTherapeutics, Inc. and Cognetix, Inc. entered into a
Collaboration and Development agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutics' cell-based delivery
technology. The Company and Cognetix are reexamining their relationship; the
Company expects this reexamination will lead to termination of the joint project
under the agreement signed in February 1997.
The Company and Cognetix have also entered into an option agreement giving
CytoTherapeutics the right to option up to three of Cognetix's compounds for use
in treating eye diseases. CytoTherapeutics has exercised its right as to one
protein.
STATE OF RHODE ISLAND
In 1989, the Company entered into an agreement with the State of Rhode
Island pursuant to which an agency of the State reimbursed the Company
$1,172,000 for certain research activities the Company funded at Brown
University. Under the terms of this grant, the Company is obligated to pay
royalties ranging from three to five percent of revenues from products developed
under the agreement, to a maximum of $1,758,000.
ACADEMIC RELATIONSHIPS
The Company and its wholly owned subsidiary, StemCells, Inc., have entered
into a number of research and/or license agreements with academic organizations.
These research agreements provide that the Company will fund certain research
costs and in return will have a license or an option for a license to the
resulting inventions. Under these license agreements, the Company and/or
StemCells, Inc. will typically be subject to obligations of due diligence and
the requirement to pay royalties on products which use patented technology
licensed under such agreements.
CYTOTHERAPEUTICS, INC.
The Company has expended and expects to continue to expend substantial sums
to support academic research programs. To date, the Company's principal academic
collaborations have been with Brown University and Dr. Patrick Aebischer at the
Centre Hospitalier Universitaire Vaudois in Switzerland. Research and
development expenses paid in connection with these collaborations aggregated
approximately $1,326,000, $1,337,000 and $1,008,000 for the years ended December
31, 1997, 1996 and 1995, respectively. The Company and StemCells, Inc. also have
a number of collaborative relationships with other academic institutions and
academic researchers.
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STEMCELLS, INC.
StemCells, Inc. has entered into a number of research agreements with
academic institutions. These include a Sponsored Research Agreement with The
Scripps Research Institute and a Sponsored Research Agreement with Oregon Health
Sciences University. These agreements require StemCells, Inc. to fund certain
research (in the amounts of approximately $931,000 over three years and $105,000
over one year, respectively) in return for licenses or options to license the
inventions resulting from such research.
In addition, StemCells, Inc. has entered into license agreements with the
California Institute of Technology and the University of Utah Research
Foundation. These license agreements and the agreements referred to in the
foregoing paragraph relate largely to stem cells or to progenitor cells and to
their isolation and identification.
MANUFACTURING
ENCAPSULATED CELLS
The Company believes the ability to manufacture encapsulated-cell products
which are safe and effective will be a key source of competitive advantage in
its encapsulated-cell therapy business. Thus, the Company intends to manufacture
its proposed products and maintain control of this important proprietary element
of its business wherever possible.
The manufacturing process for the Company's lead product (its chronic pain
implant) is comprised of five modules: (i) manufacture of the fiber membrane;
(ii) assembly of implants; (iii) acquisition and culturing of the cells; (iv)
placement of the cells within the implant; and (v) packaging of the cell-loaded
implants for shipping to the clinical site. The Company is employing this
process, using current Good Manufacturing Practices ("cGMP"), for manufacturing
its pain implants for use in clinical trials. Quality control tests are
performed on each batch of the finished pain devices to assess sterility and
potency. Only batches meeting all specifications are released for use in
clinical trials. Critical equipment and processes have been validated to assure
manufacturing consistency and control. A 21,000-square foot laboratory and pilot
manufacturing facility is now in operation.
Implants for clinical trials are currently produced in small quantities. The
commercial-scale manufacture of these products is expected to require
specialized automated or semi-automated equipment and expansion of manufacturing
facilities. The Company's current manufacturing process has been designed to
facilitate the incorporation of additional automation over time.
The facilities and equipment required to manufacture the Company's
encapsulated-cell implants are different from those required to manufacture
potentially competitive biopharmaceutical products.
The Company's pilot manufacturing plant, without additional expansion or
increasing staffing, does not have sufficient capacity to permit the Company to
produce all of the products necessary to complete clinical trials in all
indications the Company may wish to develop. In addition, the Company has not
yet developed the capability to manufacture any of its proposed products on a
commercial scale and is unaware of any other company which has manufactured any
membrane encapsulated-cell product on a commercial scale. Manufacture of the
Company's proposed products is expected to require specialized, automated
equipment capable of forming complex polymer membranes into implants which
combine media, matrices and living cells, and this process must be carried out
on a precisely controlled basis, under sterile conditions in a clean-room
environment. Failure to achieve commercial scale manufacturing capability at a
reasonable cost or to demonstrate consistent results using manufactured
prototypes in preclinical animal studies or clinical trials could prevent or
delay submission of products for regulatory approval and initiation of new
development programs, which could have a materially adverse effect on the
Company. Regulatory restrictions have substantially increased the likely cost of
manufacturing a product containing xenogeneic cells for commercial use. Since in
certain cases the Company has agreed on pricing for supply of its products
before commercial production begins, additional costs of production arising from
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regulations or otherwise, may cause the Company's cost of production to exceed
the price it receives for producing such products. In addition, fearing
liability, certain suppliers of raw materials used by the Company in connection
with its implants have or may restrict use of such materials in humans.
There can be no assurance that the Company will be able to develop the
capability of manufacturing any of its proposed products on a cost-effective
basis, or to identify and contract with manufacturers to produce such products
or needed raw materials, at a cost or in the quantities necessary to make a
commercially viable product.
STEM CELLS
The keys to successful commercialization of neural stem/progenitor cells
include efficacy, safety, consistency of the product and economy of the process.
The Company will address these issues by appropriate testing and banking
representative vials of large-scale cultures. Commercial production is expected
to involve expansion of banked cells and packaging them in an appropriate
container(s) after formulating the cells in an effective carrier (which may also
be used to affect the stability and engrafting of the stem cells or their
progeny). Because of the early stage of the Company's stem/progenitor cell
programs, the issues which will affect manufacture of stem/progenitor cell
products is relatively unclear.
MARKETING
The Company expects to market and sell its products primarily through
co-marketing, licensing or other arrangements with third parties. The Company
does not have experience in sales, marketing or distribution and does not expect
to develop such capabilities in the near future. Generally, the Company in its
commercial arrangements with third parties intends to have the marketing of its
products undertaken by its partners, although the Company may seek to retain
limited marketing rights in specific markets, particularly where the product may
be addressed by a specialty or niche sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company believes that proprietary protection of its inventions will be
of major importance to its future business. The Company has a program of
vigorously seeking and protecting intellectual property it believes may be
useful in connection with its products; the Company believes that its know-how
will also provide a significant competitive advantage and intends to continue to
develop and protect its know-how. The Company may also, from time to time, seek
to acquire licenses to important externally developed technologies.
The Company has exclusive or non-exclusive rights to a portfolio of patents
and patent applications related to the encapsulation of cells and related
technologies and to various stem cells and methods of deriving and using them.
In general, these encapsulation patents and patent applications pertain to the
release of neurotransmitters from encapsulated cells, use of various cell types,
encapsulation devices and their manufacture, encapsulation methods and various
aspects of the therapeutic use of capsules in the treatment of various diseases.
The stem/progenitor cell patents and patent applications relate mainly to
compositions of matter, methods of obtaining such cells, and methods for
preparing and utilizing such cells. Currently, the Company's U.S. patent
portfolio includes rights to 36 issued U.S. patents and a number of pending
patent applications.
The patent positions of pharmaceutical and biotechnology companies,
including those of the Company, are uncertain and involve complex and evolving
legal and factual questions. The coverage sought in a patent application can be
denied or significantly reduced before or after the patent is issued.
Consequently, the Company does not know whether any of its pending applications
will result in the issuance of patents, or if any existing or future patents
will provide significant protection or commercial advantage or will be
circumvented by others. Since patent applications are secret until patents are
issued in the United States or the applications are published in foreign
countries, and since publication of discoveries in the scientific or
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<PAGE>
patent literature often lags behind actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
pending patent applications or that it was the first to file patent applications
for such inventions. There can be no assurance that patents will issue from the
Company's pending or future patent applications or, if issued, that such patents
will be of commercial benefit to the Company, afford the Company adequate
protection from competing products or not be challenged or declared invalid.
In the event that a third party has also filed a patent application relating
to inventions claimed in Company patent applications, the Company may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine priority of invention, which could result in
substantial uncertainties and cost for the Company, even if the eventual outcome
is favorable to the Company. There can be no assurance that the Company's
patents, if issued, would be held valid by a court of competent jurisdiction.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy and encapsulation, stem cells and other
technologies potentially relevant to or required by the Company's expected
products. In particular, a third party has received a U.S. patent which such
third party asserts relates to cells for alleviating chronic pain in humans. The
Company cannot predict which, if any, of such applications will issue as patents
or the claims which might be allowed. The Company is aware that a number of
companies have filed applications relating to stem cells. The Company is also
aware of a number of patent applications and patents claiming use of genetically
modified cells to treat disease, disorder or injury. The Company also cannot
predict the impact of the application of existing patent applications and
patents on future unencapsulated products. The Company is aware of two issued
patents to a competitor claiming certain methods for treating defective,
diseased or damaged cells in the mammalian CNS by grafting genetically modified
donor cells from the same mammalian species. The Company is also aware of third
party patents and patent applications claiming rights to the neurotrophic
factors which the Company hopes to deliver with its cell encapsulation
technology, and to the production of these factors through the use of
genetically modified cells. The Company expects to use genetically modified
cells to produce these factors for use in its products.
The Company may also be required to seek licenses in regard to other cell
lines, the techniques used in creating or obtaining such cell lines, growth
factors required to obtain and maintain such cell lines, the materials used in
the manufacture of its implants or otherwise. If third party patents or patent
applications contain claims infringed by the Company's technology and such
claims or claims in issued patents are ultimately determined to be valid, there
can be no assurance that the Company would be able to obtain licenses to these
patents at a reasonable cost, if at all, or be able to develop or obtain
alternative technology. If the Company is unable to obtain such licenses at a
reasonable cost, it may be adversely affected. There can be no assurance that
the Company will not be obliged to defend itself in court against allegations of
infringement of third-party patents. Patent litigation is very expensive and
could consume substantial resources and create significant uncertainties. An
adverse outcome in such a suit could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require the Company to cease using such technology.
The Company also relies upon trade-secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its trade secrets.
The Company's policy is to require its employees, consultants, significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with the Company. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the
21
<PAGE>
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees and consultants, the agreements generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company in the event of unauthorized use, transfer or
disclosure of such information or inventions.
The Company has obtained rights from universities and research institutions
to technologies, processes and compounds that it believes may be important to
the development of its products. These agreements typically require the Company
to pay license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with Brown University and NeuroSpheres, Ltd. to certain patents and
know-how regarding present and certain future developments in encapsulation
technology and neural stem cells, respectively. The Company's licenses may be
canceled or converted to non-exclusive licenses if the Company fails to use the
relevant technology or the Company breaches its agreement. Loss of such licenses
could expose the Company to the risks of third party patents and/or technology.
There can be no assurance that any of these licenses will provide effective
protection against the Company's competitors.
COMPETITION
The Company's initial products are expected to compete with a variety of
therapeutic products and procedures. Major pharmaceutical companies currently
offer a number of pharmaceutical products to treat chronic pain, Parkinson's
disease, and other diseases for which the Company's technologies may be
applicable. The Company believes that its products, if successfully developed,
will compete with these products principally on the basis of improved and
extended efficacy and safety and the overall economic benefit to the health care
system offered by such products. However, many pharmaceutical and biotechnology
companies are investigating new drugs and therapeutic approaches to treat
neurodegenerative diseases, which may achieve new and better efficacy profiles,
extend the therapeutic window, alter the prognosis of these diseases or prevent
their onset.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense and is expected to increase. The Company's
most significant competitors are expected to be fully integrated pharmaceutical
companies and more established biotechnology companies. Such competitors have
significant resources and expertise in research and development, manufacturing,
testing, obtaining regulatory approvals and marketing and also have
significantly greater capital resources. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical or biotechnology companies. Many of these competitors have
significant products approved or in development which could be competitive with
the Company's potential products, and also operate large, well-funded research
and development programs. In addition, the Company competes with other companies
and institutions for highly qualified scientific and management personnel.
The Company's products to treat chronic pain, if successfully developed,
will compete with epidural and intrathecal opiates, such as morphine and its
analogs, and with adjuvant analgesics, antidepressants and anticonvulsants, as
well as with new therapeutics under development such as SNX 111, a conopeptide.
New delivery and dose control methods for traditional pain treatments, such as
morphine pumps, may also compete with the Company's products.
The Company's products to treat Parkinson's disease, if successfully
developed, may compete with orally administered drugs which contain L-dopa,
other forms of cell transplantation, ablative and stimulative procedures and new
drugs under development. Neurotrophic factors delivered to the patient other
than with the Company's encapsulation technology, such as by gene therapy, also
represent potential products that may compete with the Company's products. In
addition, certain companies are attempting to
22
<PAGE>
develop gene therapies including products (which may or may not involve
neurotrophic factors) for the treatment of a number of neurodegenerative
diseases, including Parkinson's disease.
The Company's stem/progenitor cell products, if successfully developed,
might face competition from existing products like those referred to in the
preceding paragraph. In addition, the Company believes that its competitors are
trying to develop stem/progenitor cell-based technologies. The Company expects
that these products, if developed, will compete with the Company's potential
stem/progenitor cell products based on efficacy, safety, cost and intellectual
property positions. The Company expects that gene therapy, if successfully
developed, will also be a source of competition for potential stem/progenitor
cell products.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than those being
developed by the Company or that would render the Company's technology obsolete
or non-competitive. The Company may also face competition from companies which
have filed patent applications relating to cell encapsulation and the use of
genetically modified cells to treat disease, disorder or injury. The Company may
be required to seek licenses from these competitors in order to commercialize
certain of its proposed products and there can be no assurance that the Company
will be able to obtain such licenses at a reasonable cost, if at all.
Any product that the Company succeeds in developing and for which it gains
regulatory approval must then compete for market acceptance and market share.
For certain of the Company's potential products, an important competitive factor
will be the timing of market introduction of competitive products. Accordingly,
the Company expects that an important competitive factor will be the relative
speed with which the Company and its competitors can develop products, complete
the clinical testing and approval processes and supply commercial quantities of
a product to market. With respect to clinical testing, competition may delay
progress by limiting the number of clinical investigators and patients available
to test the Company's potential products.
Competition for the Company's products is also expected to be based on
product efficacy, safety, the timing and scope of regulatory approvals
including, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent and technology position. There can be
no assurance that the Company's technology, if fully developed, will become
commercially viable.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's potential products and its
research and development activities are and will continue to be subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries. In the United States, pharmaceuticals,
biologicals and medical devices are subject to rigorous FDA regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of the Company's potential
products. Product development and approval within this regulatory framework
takes a number of years and involves substantial uncertainty combined with the
expenditure of substantial resources. In addition, the United States, states and
other jurisdictions have restrictions on the use of fetal tissue which could
restrict the Company's use of such materials.
Three branches of the FDA, the Center for Drug Evaluation and Research, the
Center for Biologics Evaluation and Research and the Center for Devices and
Radiological Health, review and approve drugs, biologics and devices,
respectively. The FDA has indicated to the Company that the Center for Biologics
Evaluation and Research will have primary jurisdiction for premarket review of
the Company's potential products that utilize the Company's encapsulated-cell
technology. However, the FDA has also indicated that the Center for Drug
Evaluation and Research and the Center for Devices and Radiological Health will
play a role in the agency's review of the Company's potential products. In
addition, the FDA has
23
<PAGE>
published certain guidelines regarding living cells and their transplantation
and has begun to develop guidelines for the regulation of xenotransplantation of
cells and organs.
The steps required before the Company's potential products 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
Exemption ("IND"), which must become effective before U.S. human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product, (iv) the submission to the FDA
of a marketing authorization application(s) and (v) FDA approval of the
application(s) prior to any commercial sale or shipment of the drug. Biologic
product manufacturing establishments located in certain states also may be
subject to separate regulatory and licensing requirements.
Preclinical tests include laboratory evaluation of the product and animal
studies to assess the potential safety and efficacy of the product and its
formulation as well as the quality and consistency of the manufacturing process.
The results of the preclinical tests are submitted to the FDA as part of an IND,
and the IND becomes effective 30 days following its receipt by the FDA, absent
questions, requests for delay or objections from the FDA.
Clinical trials involve the evaluation of the product in healthy volunteers
or in patients under the supervision of a qualified principal physician.
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. Any product administered in a U.S. clinical
trial must be manufactured in accordance with cGMP. Each protocol is submitted
to the FDA as part of the IND. The protocol for each clinical study must be
approved by an independent Institutional Review Board ("IRB") at the institution
at which the study is conducted and the informed consent of all participants
must be obtained. The IRB will consider, among other things, the existing
information on the product, ethical factors, the safety of human subjects, the
potential benefits of therapy and the possible liability of the institution.
Clinical development is traditionally conducted in three sequential phases.
The phases may overlap, however. In Phase I, products are typically introduced
into healthy human subjects or into selected patient populations to test for
safety (adverse reactions), dosage tolerance, absorption and distribution,
metabolism, excretion and clinical pharmacology. Phase II involves studies in a
limited patient population to (i) determine the efficacy of the product for
specific targeted indications and populations, (ii) determine optimal dosage and
dosage tolerance and (iii) identify possible adverse effects and safety risks.
When a dose is chosen and a candidate product is found to be effective and to
have an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to conclusively demonstrate clinical efficacy and to test further for
safety within an expanded patient population, generally at multiple study sites.
In certain instances, as may be the case with the Company's potential products,
the FDA permits Phase I clinical trials to be conducted using a small number of
patients instead of healthy volunteers. The FDA continually reviews the clinical
trial plans and results and may suggest changes or may require discontinuance of
the trials at any time if significant safety issues arise. The results of the
preclinical studies and clinical studies are submitted to the FDA in the form of
a marketing approval authorization application.
The testing and approval process is likely to require substantial time,
effort and expense and there can be no assurance that any FDA approval will be
granted on a timely basis, if at all. The time to approval is affected by a
number of factors, including relative risks and benefits demonstrated in
clinical trials, the availability of alternative treatments and the severity of
the disease. 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 and requisite approval of the manufacturing
facility, further clinical trials may be necessary to gain approval for the use
of the product for additional indications. The FDA may also require unusual or
restrictive post-marketing testing and surveillance to monitor for adverse
effects, which can involve significant expense or grant only conditional
approvals.
24
<PAGE>
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP. Even after product licensure approval, the manufacturer must comply
with cGMP on a continuing basis, and what constitutes cGMP may change as the
state of the art of manufacturing changes. Domestic manufacturing facilities are
subject to regular FDA inspections for cGMP compliance (normally at least every
two years), and foreign manufacturing facilities are subject to periodic FDA
inspections or inspections by the foreign regulatory authorities with reciprocal
inspection agreements with the FDA. Domestic manufacturing facilities may also
be subject to inspection by foreign authorities.
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that affect more than 200,000
individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. The
Company may apply for orphan drug status for certain of its therapies. Under the
Orphan Drug Act, a manufacturer of a designated orphan product can seek tax
benefits, and the holder of the first FDA approval of a designated orphan
product will be granted a seven-year period of marketing exclusivity in the
United States for that product for the orphan indication. While the marketing
exclusivity of an orphan drug would prevent other sponsors from obtaining
approval of the same compound for the same indication, it would not prevent
other types of products from being approved for the same use including in some
cases, slight variations on the originally designated orphan product.
Legislation has been introduced in the U.S. Congress in the past, and is likely
to be introduced again in the future, that would restrict the extent and
duration of the market exclusivity of an orphan drug, and there can be no
assurance that the benefits of the existing statute will remain in effect.
Export of the Company's investigational products is governed by laws and
regulations administered by the FDA. The Company has sought and received FDA
clearance for export of finished products for clinical trials outside the United
States. However, both the Company's past and future export practices could be
subject to FDA challenge and there can be no assurance that the FDA would agree
that such practices are in compliance with applicable law and regulations or
that such exports would be allowed.
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA which contain such research. Certain of the Company's collaborators have
stock options or other equity interests in the Company that could subject such
collaborators and the Company to the proposed regulations.
There has been increasing regulatory concern about the risks of
xenotransplantation. Concern has focused on the use of cells derived from cows
(such as are used in the Company's pain program) and cells from primates and
pigs. The United Kingdom has adopted a moratorium on xenotransplantation pending
further research and discussion; the EC Commission has introduced a ban on the
use of "high-risk material" from cattle and sheep in the Member States of the
European Union in the manufacture of pharmaceuticals (this ban would apparently
not include the type of cells used in the Company's pain program). In addition,
the FDA has recently proposed guidelines which impose significant constraints on
the clinical use of non-human cells. The regulations proposed, particularly if
they are made more restrictive, could impact significantly on the cost of
clinical trials and the cost to manufacture products using xenogeneic cells; the
Company has begun to concentrate on the use of human cells as opposed to cells
derived from non-human animals. Furthermore, the FDA has published a "Proposed
Approach to Regulation of Cellular and Tissue-Based Products" which relates to
the use of human cells. The Company cannot presently determine the effects of
such actions nor what other actions might be taken. Restrictions on the testing
or use of cells, whether human or nonhuman, as human therapeutics could
adversely affect the Company's product development programs and the Company
itself and could prevent the Company
25
<PAGE>
from producing and/or selling certain products or make the cost of production by
the Company prohibitively high.
In addition to safety regulations enforced by the FDA, the Company is also
subject to regulations under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act and other present
and potential future supranational, foreign, Federal, state and local
regulations.
Outside the United States, the Company will be subject to regulations which
govern the import of drug and device products from the United States or other
manufacturing sites and foreign regulatory requirements governing human clinical
trials and marketing approval for its products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursements vary
widely from country to country. In particular, the European Union ("EU") is
revising its regulatory approach to high tech products and representatives from
the United States, Japan and the EU are in the process or harmonizing and making
more uniform the regulations for the registration of pharmaceutical products in
these three markets. Although certain of such proposals have been adopted, the
Company cannot anticipate what effect the adoption of the final forms of this
harmonization or the changes to the EU high tech procedure may have.
Switzerland is expected to conduct a referendum in 1998 to determine the
extent to which the use of recombinant DNA technologies may be restricted within
Switzerland. The Company cannot predict the results of the referendum or
determine the effects of such restrictions.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
The Company's ability to commercialize products successfully may depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and others both in the United States and
abroad. Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Reimbursement limitations or prohibitions with
respect to any product developed by the Company could adversely affect the
Company's ability to establish and maintain price levels sufficient for
realization of an appropriate return on its investment in developing new
therapies. Government and other third party payers are increasingly attempting
to contain health care costs by limiting both coverage and the level of
reimbursement for new therapeutic products approved for marketing by the FDA and
by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
third party payers for uses of the Company's therapeutic products, the market
acceptance of these products would be adversely affected.
The revenues and profitability of health care-related companies may be
affected by the continuing efforts of governmental and third party payers to
contain or reduce the cost of healthcare through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to government control. In the United States, there have been, and the
Company expects that there will continue to be, a number of Federal and state
proposals to implement government control over healthcare costs. Efforts at
healthcare reform are likely to continue in future legislative sessions. It is
uncertain what legislative proposals will be adopted or what actions Federal,
state or private payers for healthcare goods and services may take in response
to healthcare reform proposals of legislation. The Company cannot predict the
effect healthcare reforms may have on its business. Any such reforms as well as
the uncertainty their proposal engenders could have a material adverse effect on
the Company.
EMPLOYEES
As of March 9, 1998, the Company had 120 full-time employees, including 20
employees with Ph.D. or M.D. degrees. Approximately 101 employees work in
research and development, regulatory affairs,
26
<PAGE>
prototype manufacturing, quality assurance and control and laboratory support
services. A number of the Company's employees have held positions with other
biotechnology or pharmaceutical companies or have worked in university research
programs. No employees are covered by collective bargaining agreements.
SCIENTIFIC ADVISORY BOARD
Members of the Company's Scientific Advisory Board provide the Company with
strategic guidance in regard to its research and product development programs,
as well as assistance in recruiting employees and collaborators. Each Scientific
Advisory Board member has entered into a consulting agreement with the Company.
These consulting agreements typically specify the compensation to be paid to the
consultant and require that all information about the Company's products and
technology be kept confidential. All of the Scientific Advisory Board members
are employed by employers other than the Company and may have commitments to or
consulting or advising agreements with other entities which may limit their
availability to the Company. The Scientific Advisory Board members have
generally agreed, however, for so long as they serve as consultants to the
Company, not to provide any services to any other entities which would conflict
with the services the member provides to the Company. Members of the Scientific
Advisory Board offer consultation on specific issues encountered by the Company
as well as general advice on the directions of appropriate scientific inquiry
for the Company. In addition, certain Scientific Advisory Board members assist
the Company in assessing the appropriateness of moving the Company's projects to
more advanced stages. The following persons are members of the Company's
Scientific Advisory Board:
IRVING L. WEISSMAN, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental Biology at
Stanford University. Dr. Weissman is a cofounder of Systemix, Inc., and Chairman
of the Scientific Advisory Board of Systemix, Inc. He has served on the
Scientific Advisory Boards of Amgen Inc., DNAX and T-Cell Sciences, Inc. Dr.
Weissman is Chairman of the Scientific Advisory Board of CytoTherapeutics.
PATRICK AEBISCHER, M.D., PH.D., is the Director of the Gene Therapy Center
at the Centre Hospitalier Universitaire Vaudois, Lausanne, Switzerland and
Professor of Biomaterials, Brown University. He is also Professor of the Swiss
Polytechnical School in Lausanne. Dr. Aebischer is a founding scientist of the
Company and a member of its Board of Directors and Chairman of the Board of
Modex Therapeutiques SA.
DAVID J. ANDERSON, PH.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
ANDERS BJORKLUND, M.D., is Professor, University of Lund, Lund, Sweden.
CONSTANCE L. CEPKO, PH.D., is Professor, Department of Genetics, Harvard
Medical School, Boston, Massachusetts.
FRED H. GAGE, PH.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct Professor,
Department of Neurosciences, University of California, San Diego, California.
WILLIAM F. HICKEY, M.D., is Chairman of Pathology, Dartmouth-Hitchcock
Medical Center, Lebanon, New Hampshire.
SIR PETER J. MORRIS, PH.D., is Professor, Nuffield Department of Surgery,
Oxford University, Oxford, England.
MEDICAL ADVISORY BOARD
The Company is creating a Medical Advisory Board to advise the Company on
the clinical aspects of its projects, including the indications to be pursued
and the trial strategies that are most efficient and effective. Edwin Cadman,
M.D., Chief of Staff, Yale-New Haven Hospital and former Chairman of Abbott
27
<PAGE>
Laboratories Medical Advisory Board, has agreed to assist the Company in
establishing the Board and to be its Chairman.
ITEM 2. PROPERTIES
The Company's research laboratories and administrative offices are located
in a 65,000 square-foot multipurpose building housing wet labs, specialty
research areas and administrative offices located in Lincoln, RI. The facilities
are leased pursuant to a fifteen-year lease agreement with the Company having
certain renewal options. The Company has also leased a 21,000 square-foot pilot
manufacturing facility and a 3,000 square-foot cell processing facility for its
pain program in Lincoln, Rhode Island. This facility was financed by bonds
issued by the Rhode Island Industrial Facilities Corporation. The Company has
also leased additional space near its pilot plant for expanded research and
development. In 1998, the Company entered into a three-year lease for
approximately 6,000 square feet of laboratory space in Sunnyvale, California.
This space is being refitted to serve as the laboratory for the research
activities of the Company's subsidiary, StemCells, Inc.
The Company's current facilities are expected to be sufficient to
accommodate the Company's needs at least past the end of 1999.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of CytoTherapeutics is traded on the National Market System
of NASDAQ under the Symbol CTII. The quarterly ranges of high and low sales
prices since January 1, 1996 are shown below:
<TABLE>
<CAPTION>
1998 HIGH LOW
- -------------------------------------------------- -------- ---------
<S> <C> <C>
First Quarter (through March 12).................. $ 4 3/16 $ 2 9/16
<CAPTION>
1997 HIGH LOW
- -------------------------------------------------- -------- ---------
<S> <C> <C>
Fourth Quarter.................................... $ 7 1/8 $ 3 11/16
Third Quarter..................................... $ 6 1/8 $ 4 3/4
Second Quarter.................................... $ 8 3/4 $ 4 15/16
First Quarter..................................... $10 7/8 $ 8 3/8
<CAPTION>
1996 HIGH LOW
- -------------------------------------------------- -------- ---------
<S> <C> <C>
Fourth Quarter.................................... $11 $ 7 5/8
Third Quarter..................................... $12 5/8 $ 7 1/8
Second Quarter.................................... $15 1/2 $10 5/8
First Quarter..................................... $18 3/4 $12 3/4
</TABLE>
No cash dividends have been declared on the Common Stock since the Company's
inception.
As of March 9, 1998, there were approximately 268 holders of record of the
Common Stock.
On December 11, 1996, the Company sold 829,171 shares of Common Stock to
Genentech in connection with the Company's collaboration agreement with
Genentech for $10.01 per share. The shares were issued as a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 based
on, among other things, availability of information about the issuer and
representations by the purchaser as to sophistication.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements....................... $ 10,617 $ 7,104 $ 11,761 $ 1,250 $ 190
Research and development expenses........................... 18,604 17,130 14,730 13,514 11,807
Acquired research and development........................... 8,344 -- -- -- --
Net loss.................................................... (18,114) (13,759) (8,891) (16,461) (12,544)
Net loss per share(1)....................................... (1.08) (0.89) (0.69) (1.52) (1.47)
Shares used in computing net loss per share(1).............. 16,704 15,430 12,799 10,833 8,541
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents and marketable securities........ $ 29,050 $ 42,607 $ 44,192 $ 19,138 $ 30,855
Total assets............................................... 44,301 58,397 56,808 32,194 40,996
Long-term debt, including capitalized leases............... 4,108 8,223 5,441 5,641 3,428
Redeemable common stock.................................... 5,583 8,159 -- -- --
Stockholders' equity....................................... 28,900 34,747 45,391 22,637 34,509
</TABLE>
- ------------------------
(1) See Note 2 to consolidated financial statements.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of CytoTherapeutics, Inc. should be read in conjunction with the
accompanying financial statements and the related footnotes thereto.
OVERVIEW
Since its inception in August 1988, the Company has been primarily engaged
in research and development of human therapeutic products. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales for at least several years. The Company
expects that its research and development expenditures will increase
substantially in future years as research and product development efforts
accelerate and clinical trials are initiated or broadened. The Company has
incurred annual operating losses since inception and expects to incur
substantial operating losses in the future. As a result, the Company is
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance its
operations. The Company's results of operations have varied significantly from
year to year and quarter to quarter and may vary significantly in the future due
to the occurrence of material, non recurring events, including without
limitation, the receipt of one-time, non recurring licensing payments.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues from collaborative agreements totaled $10,617,000, $7,104,000 and
$11,761,000 for the years ending December 31, 1997, 1996 and 1995, respectively.
Revenues were earned primarily from a Development, Marketing and License
Agreement with Astra AB, which was signed in March 1995. Included in the 1997
revenue is a $3,000,000 milestone payment from Astra AB related to the Phase II
clinical program for the Company's pain control implant. Included in 1995
revenue is a one-time licensing fee from Astra AB of $5,000,000.
Research and development expenses totaled $18,604,000 in 1997, as compared
to $17,130,000 in 1996 and $14,730,000 in 1995. The increase of $1,474,000, or
9% from 1996 to 1997 was primarily attributable to an increase in manufacturing
supplies associated with Phase II clinical trials and an additional $917,000 of
expense from Modex Therapeutiques SA ("Modex") the Company's formerly 50% owned
subsidiary, which was included in CytoTherapeutics' operating results through
October 1997. The increase of $2,400,000, or 16% from 1995 to 1996 was primarily
attributable to increases in the number of research, development and production
staff, spending for company sponsored research at academic and other
institutions and scientific consulting.
Acquired research and development consists of a one-time charge of
$8,344,000 related to the acquisition of StemCells, Inc. Commercialization of
the acquired technology will require significant incremental research
expenditures over a number of years.
General and administrative expenses were $6,158,000 for the year ended
December 31, 1997, compared with $5,679,000 in 1996 and $4,620,000 in 1995. The
increase of $479,000 , or 8%, from 1996 to 1997 was primarily attributable to
increased spending for legal fees associated with the NeuroSpheres, Ltd.
arbitration, patents, recruiting fees and other professional services. The
increase of $1,059,000, or 23%, from 1995 to 1996 was principally due to
increases in the number of administrative personnel, one-time hiring bonuses, as
well as consulting costs attributable to the establishment of Modex, a formerly
50% owned Swiss subsidiary.
Interest income for the years ended December 31, 1997, 1996 and 1995 totaled
$1,931,000, $2,260,000 and $1,714,000, respectively. The average cash and
investment balances were $33,343,000, $37,600,000 and
30
<PAGE>
$26,907,000 in 1997, 1996 and 1995, respectively. The decrease in interest
income from 1996 to 1997 was attributable to lower average balances. The
increase in interest income from 1995 to 1996 was principally due to higher
average balances.
In 1997, interest expense was $438,000, compared with $618,000 in 1996 and
$685,000 in 1995. The decrease from 1996 to 1997 was attributable to
capitalization of interest on the new facility in the amount of $210,000. The
decrease in 1995 to 1996 is principally due to decreasing balances of
capitalized lease obligations only partially offset by additional collateralized
loan obligations.
In October 1997, the Company recognized a gain in the amount of $3,387,000
related to the sale of half of the Company's interest in Modex.
In December 1995, the Company recognized a loss on its investment in Neocrin
Company of $2,330,848, as it determined that the carrying value in its
investment had been permanently impaired. The valuation reserve of $2,330,848
reduced the valuation of the investment to $200,000.
The net loss in 1997, 1996 and 1995 was $18,114,000, $13,759,000, and
$8,891,000, respectively. The loss per share was $1.08, $0.89 and $0.69 in 1997,
1996 and 1995, respectively. The large increase in 1997 is attributable to a
one-time charge of $8,344,000 for acquired research and development related to
the purchase of StemCells, Inc. offset by a gain on partial sale of the
Company's interest in Modex Therapeutiques, SA in the amount of $3,387,000. The
decreased loss in 1996 and 1995 is principally due to revenue earned for
research funding under the Company's agreement with Astra AB.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the
sale of common and preferred stock, the issuance of long-term debt and
capitalized lease obligations, revenues from collaborative agreements, research
grants and interest income.
The Company had unrestricted cash, cash equivalents and marketable
securities totaling $29,050,000 at December 31, 1997. Cash equivalents and
marketable securities are invested in agencies of the U.S. government,
investment grade corporate bonds and money market funds.
In May 1996, the Company secured an equipment loan facility with a bank in
the amount of $2,000,000. The Company has borrowed $741,000 under this agreement
as of December 31, 1997. The loan requires interest payments only for the first
two years; principal payments are payable over a three-year period beginning May
1998. Any unused commitment expires on May 15, 1998. The loan is secured by
equipment purchased with the proceeds of the credit facility.
In October 1997, the Company completed a series of transactions which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex as an independent company. In the transactions, the Company reduced its
ownership interest from 50% to approximately 25% in exchange for $4 million cash
and elimination of its prior contingent obligation to contribute an additional
Sfr 2.4 million (approximately $1.7 million) to Modex in July 1998. In the
transactions, all of the put and call arrangements between the Company and other
stockholders of Modex were eliminated and the Company forgave $463,000 due from
Modex Therapeutiques, SA, to the Company. The Company recorded a gain on the
transaction of $3,387,000 and will account for its now 25% ownership interest
under the equity method.
The Company and Modex also modified the terms of their existing
royalty-bearing Cross License Agreement to (i) expand the field in which Modex
is exclusively licensed to apply the Company's proprietary encapsulated cell
technology to include, in addition to the original field of diabetes, obesity
and anemia, the treatment of hemophilia A and B utilizing Factor VIII and/or
Factor IX and two additional applications to be agreed to by the Company and
Modex (ii) eliminate the requirement to make future milestone payments to Modex
of up to 300,000 shares of the Company's Common Stock; (iii) limit the scope of
the Company's technology licensed to Modex to existing and future encapsulation
technology; and
31
<PAGE>
(iv) specify the terms under which the Company will manufacture any products
Modex may develop based on the Company's technology and grant Modex an option to
manufacture or have manufactured such products on payment of a higher royalty.
The Cross License Agreement continues to provide for the payment of royalties
from Modex to the Company on the sale of any licensed products. The revised
agreement similarly limits the scope of the Modex technology exclusively
licensed, on a royalty-bearing basis, to the Company for the application of
diseases, conditions and disorders of the central nervous system to existing and
future encapsulation technology and certain additional existing technology.
In September 1997, a merger of a wholly owned subsidiary of the Company and
StemCells, Inc. was completed in the form of a purchase. Through the merger, the
Company acquired StemCells, Inc. for a purchase price totaling approximately
$9,475,000 consisting of 1,320,691 shares of the Company's common stock and
options and warrants for the purchase of 259,296 common shares at nominal
consideration, valued at $7,900,000, the assumption of certain liabilities of
$934,000 and transaction costs of $641,000. The purchase price was allocated,
through a valuation, to license agreements valued at $1,131,000 to be amortized
over three years and acquired research and development of $8,344,000 which has
been expensed. As part of the acquisition of StemCells, Inc., Richard M. Rose,
M.D. , became President, Chief Executive Officer and a director of
CytoTherapeutics, Inc. and Dr. Irving Weissman became a director of
CytoTherapeutics, Inc. Upon consummation of the merger, the Company entered into
consulting arrangements with the principal scientific founders of StemCells,
Inc.; Dr. Irving Weissman, Dr. Fred H. Gage and Dr. David Anderson.
Additionally, in connection with the merger, the Company was granted an option
by the former principal shareholders of StemCells, Inc. to repurchase
approximately 500,000 of the Company's shares of Common Stock exchanged for
StemCells Inc. shares, upon the occurrence of certain events as defined.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of approximately 1.6 million shares
of the Company's common stock, at an exercise price of $5.25 per share, the
quoted market price of the grant date; approximately 100,000 of these options
are exercisable immediately, 1,031,000 of these options vest and become
exercisable only on the achievement of specified milestones related to the
Company's stem cell development program and the remaining 469,000 options vest
over eight years. In connection with the 469,000 options issued to a
non-employee, Dr. Anderson, the Company has recorded deferred compensation of
$1,750,000, the fair value of such options at the date of grant, which will be
amortized over an eight-year period. If the milestones specified relating to the
1,031,000 option grant are achieved, at that time the Company will record
compensation expense for the excess of the quoted market price of the common
stock over the exercise price of $5.25 per share for 562,000 options and the
fair market value for 469,000 of such options determined using the Black-Scholes
method. The Company has also designated a pool of 400,000 options to be granted
to persons in a position to make a significant contribution to the success of
the stem cells program.
Stem cell research will be conducted pursuant to the provisions of an
agreement between the Company and Drs. Weissman and Gage providing for a
two-year research plan. If the goals of the research plan are accomplished, the
Company has agreed to fund continuing stems cells research. Increases in stem
cells research funding of not more than 25% a year will be funded by the Company
as long as the goals of the research plan are being met, provided, however, that
the Company will retain the option of (i) ceasing or reducing neural stem cell
research even if all research plan goals are met by accelerating the vesting of
all still-achievable performance based options and (ii) ceasing or reducing
non-neural stem cell research even if all plan goals are being met by affording
the scientific research founders the opportunity to continue development of the
non-neural stem cell research by licensing the technology related to such
research to the founders in exchange for a payment to the Company equal to all
funding for such research, plus royalty payments.
In 1997, the Company entered into an agreement with NeuroSpheres, Ltd. which
superseded all previous license agreements and settled a dispute with
NeuroSpheres, Ltd. Under the terms of the
32
<PAGE>
settlement, the Company has an exclusive royalty bearing license to
growth-factor responsive stem cells for transplantation and NeuroSpheres, Ltd.
has an option to acquire co-exclusive rights in exchange for an up front payment
of $5,000,000. NeuroSpheres, Ltd.' option expires in 1998, if unexercised. The
parties have no further research obligations to each other.
In February 1997, the Company and Cognetix, Inc. entered into a
collaboration and development agreement to screen selected peptides isolated by
Cognetix, Inc. for possible development into therapeutic products aimed at a
broad range of human disease states using the Company's cell-based delivery
technology. Due to lack of certain successes under the Agreement, the Company
and Cognetix, Inc. are reexamining their relationship; the Company expects this
reexamination will lead to termination of the joint project under the agreement
signed in February 1997. As part of the agreement with Cognetix, Inc., the
Company purchased $250,000 of Cognetix, Inc. preferred stock and subject to
certain milestones, is obligated to purchase as much as $1,500,000 of additional
Cognetix, Inc. preferred stock. In July 1997, the Company loaned $250,000 to
Cognetix, inc. which was repaid with interest in October 1997. The Company and
Cognetix, Inc. have also entered into an option agreement giving the Company the
right to purchase an option for up to three of Cognetix, Inc.'s compounds for
use in treating eye diseases. In January 1998, the Company has exercised its
option as to one protein for $100,000.
In November 1996, the Company signed collaborative development and licensing
agreements with Genentech, Inc. relating to the development of products using
the Company's technology to deliver certain of Genentech's proprietary growth
factors to treat certain diseases of the central nervous system. Under the terms
of the agreement for Parkinson's disease, Genentech, Inc. purchased 829,171
shares of Common Stock for $8,300,000 to fund development of products to treat
Parkinson's disease. Additional equity purchases and other funding by Genentech,
Inc. may be available for future clinical development if agreed by the parties.
Upon commercialization, Genentech, Inc. and the Company will share profits from
product sales in the U.S. at an agreed upon percentage and Genentech, Inc. will
pay the Company a royalty for product sales outside the U.S. The Company
retained manufacturing rights for all products sold.
The Company also licensed certain growth factors for the treatment of
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms
of the agreements, the Company is responsible for conducting and funding all
preclinical and clinical development, subject to specified rights of Genentech,
Inc. to participate in the development and marketing of the proposed products.
Should Genentech, Inc. share in the development cost of the proposed products,
the companies will share profits from certain territories at negotiated
percentages. Where Genentech, Inc. does not participate in the development, upon
commercialization, the Company will pay Genentech, Inc. an agreed upon royalty
based on sales.
In March 1995, the Company signed a collaborative research and development
agreement with Astra AB for the development and marketing of certain
encapsulated-cell products to treat pain. Astra AB made an initial,
non-refundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and may remit up
to an additional $13,000,000 subject to the achievement of certain development
milestones. Under the agreement, the Company is obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company expects to receive
annual research payments of $5 million to $7 million from Astra AB which should
fund the majority of the research and development costs incurred by the Company
under the Plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, Astra AB is obligated to conduct all
clinical trials of products arising from the collaboration and to seek approval
for their sale. Astra AB has the exclusive worldwide right to market products
covered by the agreement. Until the later of either the last to expire of all
patents included in the licensed technology or a specified fixed term, the
Company is entitled to a royalty on the worldwide net sales of such products in
return for the marketing license granted to Astra AB and the Company's
obligation to manufacture and supply products. Astra AB has the right to
terminate the agreement after April 1, 1998.
33
<PAGE>
Substantial additional funds will be required to support the Company's
research and development programs, for acquisition of technologies and
intellectual property rights, for preclinical and clinical testing of its
anticipated products, pursuit of regulatory approvals, acquisition of capital
equipment, expansion of laboratory and office facilities, establishment of
production capabilities and for general and administrative expenses. Until the
Company's operations generate significant revenues from product sales, cash
reserves and proceeds from equity and debt offerings, grants and funding from
collaborative arrangements will be used to fund operations.
The Company intends to pursue opportunities to obtain additional financing
in the future through equity and debt financing, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing and availability of any future financing will depend principally upon
equity market conditions, interest rates and, more specifically, on the
Company's continued progress in its exploratory, preclinical and clinical
development programs. There can be no assurance that such funds will be
available on favorable terms, if at all.
The Company expects that its existing capital resources, revenues from
collaborative agreements and income earned on invested capital will be
sufficient to fund its operations through 1999. The Company's cash requirements
may vary, however, depending on numerous factors. Lack of necessary funds may
require the Company to delay, scale back or eliminate some or all of its
research and product development programs and/or its capital expenditures or to
license its potential products or technologies to third parties.
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations to existing software and
converting to new software. The Year 2000 problem is not expected to pose a
significant problem for the Company.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CytoTherapeutics, Inc.
We have audited the accompanying consolidated balance sheets of
CytoTherapeutics, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in redeemable stock and
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CytoTherapeutics, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 6, 1998
35
<PAGE>
CYTOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $15,941,701 $19,921,584
Marketable securities............................................ 13,108,497 22,685,855
Accrued interest receivable...................................... 553,186 653,190
Other current assets............................................. 576,008 491,582
----------------------
TOTAL CURRENT ASSETS............................................... 30,179,392 43,752,211
Property, plant and equipment, net................................. 7,922,751 10,732,102
Other assets, net.................................................. 6,199,323 3,912,430
----------------------
TOTAL ASSETS....................................................... $44,301,466 $58,396,743
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 867,804 $1,850,925
Accrued expenses................................................. 3,241,547 2,308,844
Deferred revenue................................................. 16,144 1,859,092
Current maturities of capitalized lease obligations.............. 419,095 553,557
Current maturities of long-term debt............................. 658,986 695,570
----------------------
TOTAL CURRENT LIABILITIES.......................................... 5,203,576 7,267,988
Capitalized lease obligations, less current maturities............. 3,552,500 3,971,594
Long-term debt, less current maturities............................ 555,525 4,251,008
Commitments and contingencies
Redeemable common stock, $.01 par value; 557,754 and 815,065 shares
issued and outstanding at December 31, 1997 and 1996,
respectively..................................................... 5,583,110 8,158,798
Common stock to be issued.......................................... 506,600 --
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding................... -- --
Common stock, $.01 par value; 45,000,000 shares authorized;
17,526,220 and 15,614,333 shares issued and outstanding at
December 31, 1997 and 1996, respectively....................... 175,262 156,144
Additional paid-in capital....................................... 121,472,844 107,649,659
Accumulated deficit.............................................. (91,036,254) (72,922,674)
Unrealized gains (losses) on marketable securities............... (8,877) 14,760
Cumulative translation adjustment................................ -- (60,416)
Deferred compensation............................................ (1,702,820) (90,118)
----------------------
TOTAL STOCKHOLDERS' EQUITY......................................... 28,900,155 34,747,355
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $44,301,466 $58,396,743
----------------------
----------------------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Revenue from collaborative agreements............................. $ 10,617,443 $ 7,104,284 $ 11,760,666
Operating expenses:
Research and development........................................ 18,603,523 17,130,392 14,729,703
Acquired research and development............................... 8,343,684 -- --
General and administrative...................................... 6,158,410 5,678,783 4,619,733
---------------------------------------------
33,105,617 22,809,175 19,349,436
---------------------------------------------
LOSS FROM OPERATIONS.............................................. (22,488,174) (15,704,891) (7,588,770)
Other income (expense):
Interest income................................................. 1,931,260 2,259,886 1,713,849
Interest expense................................................ (437,991) (618,213) (685,470)
Gain on partial sale of Modex................................... 3,386,808 -- --
Loss on sale/leaseback.......................................... (342,014) -- --
Loss on equity investment....................................... (105,931) -- --
Other income (expense).......................................... (57,538) 404,128 --
Currency exchange loss.......................................... -- (100,048) --
Loss on other investment........................................ -- -- (2,330,848)
---------------------------------------------
4,374,594 1,945,753 (1,302,469)
---------------------------------------------
NET LOSS.......................................................... $ (18,113,580) $ (13,759,138) $ (8,891,239)
---------------------------------------------
---------------------------------------------
NET LOSS PER SHARE................................................ $ (1.08) $ (.89) $ (.69)
---------------------------------------------
---------------------------------------------
SHARES USED IN COMPUTING NET LOSS PER SHARE....................... 16,704,144 15,429,564 12,799,008
---------------------------------------------
---------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
<TABLE>
<CAPTION>
REDEEMABLE UNREALIZED
COMMON STOCK COMMON STOCK ADDITIONAL GAINS (LOSSES) CUMULATIVE
----------------------- ---------------------- PAID-IN ACCUMULATED ON MARKETABLE TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES ADJUSTMENTS
--------- ------------ ----------- --------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1995................ -- $ -- 11,003,568 $ 110,036 $ 73,008,958 $ (50,272,297) $ (100,356) $ --
Issuance of common
stock............... -- -- 4,070,598 40,706 30,797,086 -- --
----
Exercise of stock
options............. -- -- 102,831 1,028 465,614 -- -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- -- --
Change in unrealized
gains on marketable
securities.......... -- -- -- -- -- -- 231,842 --
Net loss.............. -- -- -- -- -- (8,891,239) -- --
----------------------------------------------------------------------------------------------------------
Balances, December 31,
1995................ -- -- 15,176,997 151,770 104,271,658 (59,163,536) 131,486 --
Issuance of common
stock............... -- -- 168,260 1,683 1,526,118 -- -- --
Issuance of common
stock under the
stock purchase
plan................ -- -- 18,338 184 140,557 -- -- --
Exercise of warrants.. -- -- 6,128 61 (61) -- -- --
Issuance of common
stock to consultants
and employees....... -- -- 48,700 487 429,079 -- -- --
Common stock issued
pursuant to employee
benefit plan........ -- -- 13,719 137 162,231 -- -- --
Issuance of redeemable
common stock........ 829,171 8,300,000 -- -- -- -- -- --
Redeemable common
stock lapses........ (14,106) (141,202) 14,106 141 141,061 -- -- --
Exercise of stock
options............. -- -- 168,085 1,681 979,016 -- -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- -- --
Change in unrealized
losses on marketable
securities.......... -- -- -- -- -- -- (116,726) --
Change in cumulative
translation
adjustment.......... -- -- -- -- -- -- -- (60,416)
Net loss.............. -- -- -- -- -- (13,759,138) -- --
----------------------------------------------------------------------------------------------------------
Balances, December 31,
1996................ 815,065 $ 8,158,798 15,614,333 $ 156,144 $ 107,649,659 $ (72,922,674) $ 14,760 $ (60,416)
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
<S> <C> <C>
Balances, January 1,
1995................ $ (109,271) $ 22,637,070
Issuance of common
stock............... -- 30,837,792
Exercise of stock
options............. -- 466,642
Amortization of
deferred
compensation........ 109,271 109,271
Change in unrealized
gains on marketable
securities.......... -- 231,842
Net loss.............. -- (8,891,239)
Balances, December 31,
1995................ -- 45,391,378
Issuance of common
stock............... -- 1,527,801
Issuance of common
stock under the
stock purchase
plan................ -- 140,741
Exercise of warrants.. -- --
Issuance of common
stock to consultants
and employees....... (185,201) 244,365
Common stock issued
pursuant to employee
benefit plan........ -- 162,368
Issuance of redeemable
common stock........ -- --
Redeemable common
stock lapses........ -- 141,202
Exercise of stock
options............. -- 980,697
Amortization of
deferred
compensation........ 95,083 95,083
Change in unrealized
losses on marketable
securities.......... -- (116,726)
Change in cumulative
translation
adjustment.......... -- (60,416)
Net loss.............. -- (13,759,138)
Balances, December 31,
1996................ $ (90,118 ) $ 34,747,355
</TABLE>
38
<PAGE>
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
REDEEMABLE (LOSSES)
COMMON STOCK COMMON STOCK ADDITIONAL ON CUMULATIVE
--------------------- -------------------- PAID-IN ACCUMULATED MARKETABLE TRANSLATION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES ADJUSTMENTS COMPENSATION
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock............ -- -- 307,548 3,074 1,552,432 -- -- -- --
Issuance of common
stock under the
stock purchase
plan............. -- -- 31,822 319 180,103 -- -- -- --
Deferred
compensation
recorded in
connection with
the granting of
stock options.... -- -- -- -- 1,750,000 -- -- -- (1,750,000)
Common stock issued
pursuant to
employee benefit
plan............. -- -- 25,588 256 169,196 -- -- -- --
Issuance of common
stock --
StemCells,
Inc.............. -- -- 1,219,381 12,194 7,381,206 -- -- -- --
Redeemable common
stock lapses..... (257,311) (2,575,688) 257,311 2,573 2,573,115 -- -- -- --
Exercise of stock
options.......... -- -- 75,237 752 244,427 -- -- -- --
Deferred
compensation--
amortization and
cancellations.... -- -- (5,000) (50) (27,294) -- -- -- 137,298
Change in
unrealized losses
on marketable
securities....... -- -- -- -- -- -- (23,637 ) -- --
Change in
cumulative
translation
adjustment....... -- -- -- -- -- -- -- 60,416 --
Net loss........... -- -- -- -- -- (18,113,580) -- -- --
-------------------------------------------------------------------------------------------------------------
Balances, December
31, 1997......... 557,754 $5,583,110 17,526,220 $ 175,262 $121,472,844 $(91,036,254) $ (8,877 ) $ -- $(1,702,820)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
Issuance of common
stock............ 1,555,506
Issuance of common
stock under the
stock purchase
plan............. 180,422
Deferred
compensation
recorded in
connection with
the granting of
stock options.... --
Common stock issued
pursuant to
employee benefit
plan............. 169,452
Issuance of common
stock --
StemCells,
Inc.............. 7,393,400
Redeemable common
stock lapses..... 2,575,688
Exercise of stock
options.......... 245,179
Deferred
compensation--
amortization and
cancellations.... 109,954
Change in
unrealized losses
on marketable
securities....... (23,637)
Change in
cumulative
translation
adjustment....... 60,416
Net loss........... (18,113,580)
Balances, December
31, 1997......... $28,900,155
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1997 1996 1995
<CAPTION>
------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(18,113,580) $(13,759,138) $(8,891,239)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization................... 1,968,234 1,671,068 1,465,351
Acquired research and development............... 8,343,684 -- --
Amortization of deferred compensation........... 109,954 95,083 109,271
Common stock issued as compensation............. -- 406,733 --
Equity interest loss............................ 105,931 -- --
Loss (gain) on investment....................... (3,386,808) -- 2,330,848
Loss on sale of fixed assets.................... 413,856 871 --
Changes in operating assets and liabilities:
Accrued interest receivable................... 100,004 140,025 (606,395)
Other current assets.......................... (232,604) 220,688 (293,909)
Accounts payable and accrued expenses......... (1,233,501) 1,077,350 183,680
Deferred revenue.............................. (1,842,948) 109,092 1,750,000
------------------------------------
NET CASH USED IN OPERATING ACTIVITIES............. (13,767,778) (10,038,228) (3,952,393)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Modex, net of cash
disposed........................................ 2,958,199 -- --
Purchases of marketable securities................ (14,182,521) (3,083,621) (48,127,842)
Proceeds from sales of marketable securities...... 23,736,242 14,924,200 24,139,057
Purchase of property, plant and equipment......... (7,710,126) (4,412,190) (1,405,522)
Proceeds on sale of fixed assets.................. 8,003,926 3,000 --
Purchase of other investment...................... (250,000) -- (500,100)
Acquisition of other assets....................... (1,599,418) (811,305) (550,116)
StemCells assets acquired......................... (640,490) -- --
Advance to Cognetix............................... 250,000 -- --
Repayment from Cognetix........................... (250,000) -- --
------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES...................................... 10,315,812 6,620,084 (26,444,523)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable common
stock........................................... -- 8,300,000 --
Proceeds from issuance of common stock............ 1,905,380 1,668,542 30,837,792
Proceeds from the exercise of stock options and
warrants........................................ 245,179 980,697 466,642
Proceeds from debt financings..................... -- 4,059,947 859,832
Repayments of debt and lease obligations.......... (2,496,849) (1,171,926) (934,661)
------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... (346,290) 13,837,260 31,229,605
Effect of exchange rate on cash and cash
equivalents..................................... (181,627) (46,111) --
------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (3,979,883) 10,373,005 832,689
Cash and cash equivalents, January 1.............. 19,921,584 9,548,579 8,715,890
------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31............ $15,941,701 $19,921,584 $9,548,579
------------------------------------
------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INTEREST PAID................................... $ 436,461 $ 616,671 $ 700,806
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS
CytoTherapeutics, Inc. (the "Company") is a biopharmaceutical company
engaged in the development of cell-based therapeutics designed to deliver
therapeutic substances to the central nervous system or regenerate damaged
tissue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The 1997 consolidated financial statements include accounts of the Company
and StemCells, Inc., a wholly owned subsidiary. The 1996 consolidated financial
statements include accounts of the Company and Modex Therapeutiques SA, a
50%-owned subsidiary. Significant intercompany accounts have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include funds held in investments with original
maturities of three months or less. The Company's policy regarding selection of
investments, pending their use, is to insure safety, liquidity, and capital
preservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment-grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
<TABLE>
<S> <C>
Building and improvements...................................... 3 - 15
years
Machinery and equipment........................................ 3 - 10
years
Furniture and fixtures......................................... 3 - 10
years
</TABLE>
PATENT COSTS
The Company capitalizes certain patent costs related to patent applications.
Accumulated costs are amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method, commencing at the time
the patent is issued. Costs related to patent applications are written off to
41
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expense at the time such patents are deemed to have no continuing value. At
December 31, 1997 and 1996, total costs capitalized were $3,486,000 and
$2,887,000 and the related accumulated amortization was $208,000 and $126,000,
respectively. Patent expense totaled $365,000, $249,000, and $195,000 in 1997,
1996 and 1995, respectively.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted, the Company recognizes as
compensation expense the excess of the deemed fair value of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. The compensation is amortized over the vesting period of each option or
the recipient's term of employment, if shorter.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
REVENUE FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurrence of reimbursable expenses or the achievement of certain
milestones. Payments received in advance of research performed are designated as
deferred revenue.
FOREIGN CURRENCY TRANSLATION
Prior to the sale of a majority ownership position in Modex, assets and
liabilities of operations outside the United States are translated into United
States dollars using current exchange rates; revenue and expense items are
translated into United Stated dollars using a weighted average exchange rate for
the period. The gains and losses resulting from such translation are accumulated
as a separate component of shareholders' equity, whereas gains and losses
resulting from foreign currency transactions generally are included in results
of operations.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
42
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1997, the Company adopted Statement of Accounting Standards No. 128,
EARNINGS PER SHARE (EPS) which is effective for both interim and annual
financial statements for periods ended after December 15, 1997. Under Statement
128, primary EPS computed in accordance with Opinion 15 has been replaced with a
simpler calculation called basic EPS. Basic EPS is calculated by dividing income
available to common stockholders by the weighted average common shares
outstanding. Fully dilutive EPS did not change significantly, but has been
renamed diluted EPS. The adoption of Statement 128 had no effect on the
Company's financial statements since common equivalent shares from stock options
and warrants have been excluded as their effect is antidilutive.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "REPORTING COMPREHENSIVE
INCOME," and Statement No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION." Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components. Statement No. 131
establishes standards for the way that public companies report information about
operating segments in financial statements. This Statement supersedes Statement
No. 14, "FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE," but retains
the requirements to report information about major customers. Statements 130 and
131 are effective for the Company in fiscal 1998. The Company does not believe
that the adoption of these Statements will have a material effect on the
Company's financial statements.
3. STEMCELLS, INC.
In September 1997, a merger of a wholly owned subsidiary of the Company and
StemCells, Inc. was completed in the form of a purchase. Through the merger, the
Company acquired StemCells for a purchase price totaling approximately
$9,475,000, consisting of 1,320,691 shares of the Company's common stock and
options and warrants for the purchase of 259,296 common shares at nominal
consideration, valued at $7,900,000 in the aggregate, the assumption of certain
liabilities of $934,000 and transaction costs of $641,000. The purchase price
was allocated, through a valuation, to license agreements valued at $1,131,000
to be amortized over three years and acquired research and development of
$8,344,000 which has been expensed. As part of the acquisition of StemCells,
Richard M. Rose, M.D., became President, Chief Executive Officer and director of
the Company and Dr. Irving Weissman became a director of the Company.
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former principal
shareholders of StemCells to repurchase approximately 500,000 of the Company's
shares of Common Stock exchanged for StemCells shares, upon the occurrence of
certain events as defined.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of approximately 1.6 million shares
of the Company's common stock, at an exercise price of $5.25 per share, the
quoted market price at the grant date; approximately 100,000 of these options
are exercisable immediately, 1,031,000 of these options vest and become
exercisable only upon the achievement of specified milestones related to the
Company's stem cell development program and the remaining 469,000
43
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. STEMCELLS, INC. (CONTINUED)
options vest over eight years. In connection with the 469,000 options issued to
a non-employee, Dr. Anderson, the Company has recorded deferred compensation of
$1,750,000, the fair value of such options at the date of grant, which will be
amortized over an eight-year period. If the milestones specified relating to the
1,031,000 option grant are achieved, at that time the Company will record
compensation expense for the excess of the quoted market price of the common
stock over the exercise price of $5.25 per share for 562,000 options and the
fair market value for 469,000 of such options determined using the Black-Scholes
method. The Company has also designated a pool of 400,000 options to be granted
to persons in a position to make a significant contribution to the success of
the stem cell program.
Stem cell research will be conducted pursuant to the provisions of an
agreement between the Company and Drs. Weissman and Gage providing for a
two-year research plan. If the goals of the research plan are accomplished, the
Company has agreed to fund continuing stem cell research. Increases in stem
cells research funding of not more than 25% a year will be funded by the Company
as long as the goals of the research plan are being met. However, the Company
will retain the option of (i) ceasing or reducing neural stem cell research even
if all research plan goals are met, but will be required to accelerate the
vesting of all still-achievable performance based stock options, and (ii)
ceasing or reducing non-neural stem cell research even if all plan goals are
being met by affording the scientific research founders the opportunity to
continue development of the non-neural stem cell research by licensing the
technology related to such research to the founders in exchange for a payment to
the Company equal to all prior Company funding for such research, plus royalty
payments.
4. MODEX
In October 1997, the Company completed a series of transactions which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutiques SA ("Modex") as an independent company. In the
transactions, the Company reduced its ownership interest from 50% to
approximately 25% in exchange for $4 million cash and elimination of its prior
contingent obligation to contribute an additional Sfr 2.4 million (approximately
$1.7 million) to Modex in July 1998. In the transactions, all of the put and
call arrangements between the Company and other stockholders of Modex were
eliminated and the Company forgave $463,000 due from Modex to the Company. The
Company recorded a gain on the transactions of $3,387,000 and will account for
its now approximately 25% investment under the equity method.
The Company and Modex also modified the terms of their existing
royalty-bearing Cross License Agreement to (i) expand the field in which Modex
is exclusively licensed to apply the Company's proprietary encapsulated cell
technology to include, in addition to the original field of diabetes, obesity
and anemia, the treatment of hemophilia A and B utilizing Factor VIII and/or
Factor IX and two additional applications to be agreed to by the Company and
Modex; (ii) eliminate the requirement to make future milestone payments to Modex
of up to 300,000 shares of the Company's common stock; (iii) limit the scope of
the Company's technology licensed to Modex to existing and future encapsulation
technology; and (iv) specify the terms under which the Company will manufacture
any products Modex may develop based on the Company's technology and grant Modex
an option to manufacture or have manufactured such products on payment of a
higher royalty. The Cross License Agreement continues to provide for the payment
of royalties from Modex to the Company on the sale of any licensed products. The
revised agreement similarly limits the scope of the Modex technology exclusively
licensed, on a royalty-bearing
44
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. MODEX (CONTINUED)
basis, to the Company for the application of diseases, conditions and disorders
of the central nervous system to existing and future encapsulation technology
and certain additional existing technology.
5. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities..................... $3,153,834 $ 92 $ (3,951) $3,149,975
U.S. corporate securities...................... 21,261,850 1,645 (6,663) 21,256,832
------------------------------------------------
Total debt securities.......................... $24,415,684 $ 1,737 $ (10,614 ) 24,406,807
------------------------------------
------------------------------------
Debt securities included in cash and cash
equivalents.................................. (11,298,310)
----------
Debt securities included in marketable
securities................................... $13,108,497
----------
----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities..................... $2,007,823 $ -- $ (14,023) $1,993,800
U.S. corporate securities...................... 21,651,507 28,784 -- 21,680,291
------------------------------------------------
Total debt securities.......................... $23,659,330 $ 28,784 $ (14,023 ) 23,674,091
------------------------------------
------------------------------------
Debt securities included in cash and cash
equivalents.................................. (988,236)
----------
Debt securities included in marketable
securities................................... $22,685,855
----------
----------
</TABLE>
Maturities of marketable securities held at December 31, 1997, are as follows:
<TABLE>
<S> <C>
Less than one year............................................................. $22,397,607
One through five years......................................................... 2,009,200
----------
$24,406,807
----------
----------
</TABLE>
45
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. OTHER INVESTMENT
In December 1993, the Company sold substantially all of the assets of its
primary cell diabetes product development program, including related equipment,
and licensed related intellectual property to Neocrin Company in exchange for
preferred stock representing a then 10% ownership interest with a fair market
value of $2,030,748. The transaction resulted in a gain before closing expenses
of $1,957,913 and a net gain of $1,780,209. In February 1995, the Company
purchased an additional $500,100 of Neocrin's preferred stock at the current
market value, as required under the original purchase agreement.
In December 1995, Neocrin completed an equity offering, in which the Company
did not participate, at a valuation substantially lower than prior financings.
As a result, the Company determined that the carrying value in its investment
had been permanently impaired and provided a $2,330,848 valuation reserve to
reduce the investment value to $200,000.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
<S> <C> <C>
---------------------------
Land....................................................................... $ -- $ 278,774
Building and improvements.................................................. 4,977,906 6,207,679
Machinery and equipment.................................................... 8,549,405 7,554,825
Furniture and fixtures..................................................... 717,377 1,424,907
Construction in progress................................................... 23,947 2,214,318
---------------------------
14,268,635 17,680,503
Less accumulated depreciation and amortization............................. 6,345,884 6,948,401
---------------------------
$ 7,922,751 $ 10,732,102
---------------------------
---------------------------
</TABLE>
Depreciation and amortization expense was $1,778,000, $1,564,000, and
$1,431,000 for the years ending December 31, 1997, 1996 and 1995, respectively.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $6,587,000 and $8,910,000, at December
31, 1997 and 1996, respectively, with related accumulated amortization of
$2,297,000 and $3,947,000 at December 31, 1997 and 1996, respectively.
In connection with the Company's new facility, the Company capitalized
$210,000 and $42,000 of interest costs in 1997 and 1996, respectively.
46
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
<S> <C> <C>
--------------------------
Patents, net................................................................ $ 3,278,709 $ 2,760,593
License agreements, net..................................................... 1,036,750 --
Security deposit--building lease............................................ 750,000 --
Restricted cash............................................................. 552,357 497,956
Other investments........................................................... 450,000 200,000
Deferred financing costs, net............................................... 131,507 297,698
Organizational costs, net................................................... -- 156,183
--------------------------
$ 6,199,323 $ 3,912,430
--------------------------
--------------------------
</TABLE>
At December 31, 1997 and 1996, accumulated amortization was $302,000 and
$126,000, respectively, for patents and license agreements.
9. ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
<S> <C> <C>
--------------------------
External services........................................................... $ 1,709,818 $ 537,605
Employee compensation....................................................... 755,951 824,910
Collaborative research...................................................... 499,575 413,497
Other....................................................................... 276,203 532,832
--------------------------
$ 3,241,547 $ 2,308,844
--------------------------
--------------------------
</TABLE>
10. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of assets. In addition, the Company is required to maintain a debt service
reserve, which totals $532,000, until December 1999.
In 1997, the Company completed construction of a new headquarters and
laboratory facility. In November 1997, the Company entered into sale and
leaseback agreement with a real estate investment trust. Under the terms of
these agreements, the Company sold its new facility for $8,000,000 incurring a
$342,000 loss on the sale. The Company simultaneously entered into a
fifteen-year lease for the facility. The lease agreement calls for minimum rent
of $750,000 for the first five years, $937,500 for years six to
47
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. LEASES (CONTINUED)
ten, $1,171,900 for years eleven to fourteen and $1,465,000 in year fifteen with
a $750,000 security deposit held for the term of the lease.
Future minimum capitalized lease obligations with noncancelable terms in
excess of one year at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 753,788
1999............................................................ 624,030
2000............................................................ 607,518
2001............................................................ 589,634
2002............................................................ 510,553
Thereafter...................................................... 3,568,452
---------
Total minimum lease payments.................................... 6,653,975
Less amounts representing interest.............................. 2,682,380
---------
Present value of minimum lease payments......................... 3,971,595
Less current maturities......................................... 419,095
---------
Capitalized lease obligations, less current maturities.......... $3,552,500
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995, was
$499,000, $495,000, and $463,000, respectively.
11. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
<S> <C> <C>
--------------------------
Term note payable, interest at the prime rate plus 1/2% (9% at December 31,
1997), principal payments commence in August 1998, due ratably through May
2000; secured by certain equipment........................................ $ 740,700 $ 740,700
Term note payable, interest at the prime rate plus 1/2% (9% at December 31,
1997), due ratably through December 1998; secured by certain equipment.... 432,588 867,227
Convertible subordinated note (Sfr 2,400,000)............................... -- 1,788,775
Facilities term note payable................................................ -- 1,450,000
Other....................................................................... 41,223 99,876
--------------------------
1,214,511 4,946,578
Current maturities of long-term debt........................................ 658,986 695,570
--------------------------
Long-term debt, less current maturities..................................... $ 555,525 $ 4,251,008
--------------------------
--------------------------
</TABLE>
Both term note agreements include certain restrictive covenants that limit,
among other things, the payment of dividends, sale of assets and the incurrence
of additional indebtedness. As noted above, in
48
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
11. LONG-TERM DEBT (CONTINUED)
1997, the Company ceased to consolidate the accounts of Modex Therapeutiques SA,
which included the convertible subordinated note. In conjunction with the sale
and leaseback of the Company's headquarters facility in 1997, the facilities
term note was repaid.
Maturities of long-term debt for the years ending December 31 are as
follows:
<TABLE>
<S> <C>
1998............................................ $ 658,986
1999............................................ 370,350
2000............................................ 185,175
---------
$1,214,511
---------
---------
</TABLE>
12. REDEEMABLE COMMON STOCK
Under a research agreement to fund development of products to treat
Parkinson's disease (see Note 15), Genentech, Inc. purchased 829,171 shares of
common stock for $8.3 million in December 1996. If the agreement is terminated
and the funds received from the sale of common stock exceed by more than $1
million the expenses incurred by the Company in connection with such
development, Genentech, Inc. has the right to require the Company to repurchase
shares of its Common Stock having a value equal to the amount of overfunding, at
the share price paid by Genentech. Accordingly, the common stock is classified
as redeemable common stock until such time as the related funds are expended. At
December 31, 1997, $2,717,000 had been spent on the collaboration with Genentech
and, accordingly, the Company has reclassified those common shares and related
value to stockholders' equity.
13. COMMON STOCK TO BE ISSUED
The merger with StemCells, Inc. required that StemCells shareholders tender
their StemCells shares and receive shares of CytoTherapeutics in exchange. At
December 31, 1997, 27,087 shares of StemCells common stock and promissory notes
totaling $168,750 remained to be tendered in exchange for 101,310 shares of
CytoTherapeutics' Common Stock with a value of $506,600 at the date of merger.
14. STOCKHOLDERS' EQUITY
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans which provide for the issuance
of incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant or within 3
months of termination. Options generally vest ratably over four years and are
exercisable for ten years from the date of grant or within three months of
termination. At December 31, 1997, the Company had reserved 3,116,312 shares of
common stock for the exercise of stock options.
49
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Outstanding at January 1.............. 2,423,025 $ 8.34 1,921,284 $ 7.72 1,480,844 $ 7.21
Granted............................... 679,074 5.33 852,160 9.48 678,604 8.35
Exercised............................. (82,737) 2.96 (168,085) 5.83 (102,831) 4.54
Canceled.............................. (572,789) 9.21 (182,334) 9.42 (135,333) 7.77
-------------------------------------------------------------------------------------
Outstanding at December 31............ 2,446,573 $ 7.48 2,423,025 $ 8.34 1,921,284 $ 7.72
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Options exercisable at
December 31......................... 1,338,163 $ 7.79 1,105,251 $ 7.11 839,260 $ 6.33
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
In addition to the options noted above, in conjunction with the StemCells
merger, StemCell's options were exchanged for options to purchase 250,344 shares
of the Company's common stock at $.01 per share originally issued under a prior
StemCells option plan; 75,384 of these options are exercisable at December 31,
1997, 96,750 of these options vest and become exercisable only upon achievement
of specified milestones, and the remaining 78,210 options vest over three years
from the date of grant. Additionally, the Company adopted the 1997
CytoTherapeutics, Inc. StemCells Research Stock Option Plan (the StemCells
Research Plan) whereby an additional 2,000,000 shares of common stock has been
reserved. During 1997, the Company awarded options under the StemCells Research
Plan to purchase 1.6 million shares of the Company's Common Stock to the Chief
Executive Officer and scientific founders of StemCells at an exercise price of
$5.25 per share; approximately 100,000 of these options are exercisable
immediately, 1,031,000 of these options vest and become exercisable only upon
achievement of specified milestones and the remaining 469,000 options vest over
eight years.
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and will continue to account for its stock option plans in
accordance with the provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES.
50
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------
Less than $5.00..................................... 286,189 4.85 $ 1.85 256,216 $ 1.73
$5.01 - $10.00...................................... 1,593,654 8.13 6.89 662,756 7.59
Greater than $10.00................................. 566,730 6.74 12.01 419,191 11.81
----------- ----------
2,446,573 1,338,163
----------- ----------
----------- ----------
</TABLE>
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share for 1997, 1996, and 1995, as if the compensation
cost for the option plans and the stock purchase plan had been determined based
on the fair value at the grant date for grants in 1997, 1996, and 1995,
consistent with the provisions of FAS 123:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
--------------------------------------------------------------------------------------------
Net loss................... $ (18,113,580) $ (19,924,437) $ (13,759,138) $ (14,931,000) $ (8,891,239) $ (9,161,000)
Net loss per share......... $ (1.08) $ (1.19) $ (.89) $ (.97) $ (.69) $ (.72)
</TABLE>
The weighted average fair value per share of options granted during 1997,
1996 and 1995, was $3.40, $5.67, and $4.84, respectively. The fair value of
options and shares issued pursuant to the stock purchase plan at the date of
grant were estimated using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
----------------------------------------------------------------
OPTIONS STOCK PURCHASE PLAN
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1997 1996 1995
----------------------------------------------------------------
Expected life (years)........................................ 5 5 5 .5 5 .5
Interest rate................................................ 6.2% 6.5% 5.8% 5.5% 6.5% 5.1%
Volatility................................................... 59.0% 63.0% 62.0% 59.0% 63.0% 62.0%
</TABLE>
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1997, 1996 and 1995 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the stock purchase plan are not necessarily representative of the
effects on reporting the results of operations for future years as the period
presented includes only one, two and three years, respectively, of option grants
under the Company's plans. As required by FAS 123, the Company has used the
Black-Scholes model for option valuation, which method may not accurately value
the options described.
51
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS
In conjunction with StemCells merger, the Company has exchanged StemCells
warrants for warrants to purchase 8,952 shares of Company common stock at $4.71
per share. In conjunction with various equipment leasing agreements, the Company
has outstanding warrants to purchase 31,545 shares of common stock at prices
ranging from $4.00 to $9.00 per share. The warrants expire through October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expire in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price of such common stock, sufficient
additional shares of common stock to maintain the warrant holder's percentage
ownership of the Company's Common Stock at 15%. This right, subject to certain
conditions and limitations, expires in April 2000.
COMMON STOCK RESERVED
The Company has reserved 7,374,000 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
15. RESEARCH AGREEMENTS
In November 1997, StemCells, Inc., a wholly-owned subsidiary of the Company,
signed a Research Funding and Option Agreement with The Scripps Research
Institute ("Scripps") relating to stem-cell research. Under the terms of the
Agreement, StemCells agreed to fund $931,000 of research at Scripps over a
period of three years. StemCells has paid $77,000 at December 31, 1997. In
addition, the Company agreed to issue to Scripps 4,837 shares of the Company's
common stock and a stock option to purchase 9,674 shares of the Company's Common
Stock with an exercise price of $.01 per share upon the achievement of specified
milestones. Under the Agreement, StemCells has an option for an exclusive
license to the inventions resulting from the sponsored research, subject to the
payment of royalties and certain other amounts, and is obligated to make
payments totaling $425,000 for achievement of certain milestones.
In February 1997, the Company and Cognetix, Inc. entered into a
Collaboration and Development Agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutic's cell-based delivery
technology. Continuation of the Agreement is contingent upon meeting an
agreed-upon proof of concept test. The companies will generally share expenses
associated with the development of any specific product candidate and any
resulting revenues, except as otherwise determined on a product-by-product
basis. As part of the agreement with Cognetix, the Company has purchased
$250,000 of Cognetix preferred stock and, subject to certain milestones, is
obligated to purchase as much as $1,500,000 of additional Cognetix stock over
the next year. In July 1997, the Company loaned $250,000 to Cognetix which was
repaid with interest in October 1997.
In 1997, the Company entered into an agreement with Neurospheres, Ltd. which
superseded all previous licensing agreements and settled a dispute with
Neurospheres. Under the terms of the settlement,
52
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
15. RESEARCH AGREEMENTS (CONTINUED)
the Company has an exclusive royalty bearing license for growth-factor
responsive stem cells for transplantation and Neurospheres has an option to
acquire co-exclusive rights in exchange for an upfront payment of $5,000,000.
Neurospheres' option expires in 1998, if unexercised. The parties have no
further research obligations to each other.
In November 1996, the Company signed collaborative development and licensing
agreements with Genentech, Inc. relating to the development of products using
the Company's technology to deliver certain of Genentech's proprietary growth
factors to treat certain diseases of the central nervous system. Under the terms
of the agreement, Genentech purchased 829,171 shares of redeemable common stock
for $8.3 million to fund development of products to treat Parkinson's disease.
Additional equity purchases and other funding by Genentech may be available for
future clinical development if agreed by the parties. Upon commercialization,
Genentech and the Company will share profits from product sales in the United
States at an agreed upon percentage and Genentech will pay the Company a royalty
for product sales outside the U.S. The Company retained manufacturing rights for
all products sold.
The Company also licensed growth factors for the treatment of Huntington's
disease and for amyotrophic lateral sclerosis ("ALS"). Under the terms of the
agreements, the Company is responsible for conducting and funding all
preclinical and clinical development, subject to specified rights of Genentech
to participate in the development and marketing of the proposed products. Should
Genentech share in the development costs of the proposed products, the companies
will share profits from certain territories at negotiated percentages. Where
Genentech does not participate in the development, upon commercialization, the
Company will pay Genentech an agreed upon royalty based on sales.
In March 1995, the Company signed a collaborative research and development
agreement with Astra AB for the development and marketing of encapsulated-cell
products to treat pain. Astra made an initial, nonrefundable payment of
$5,000,000, included in revenue from collaborative agreements in 1995, a
milestone payment of $3,000,000 in 1997 and may remit up to an additional
$13,000,000 subject to the achievement of certain development milestones. Under
the agreement, the Company is obligated to conduct certain research and
development pursuant to a four-year research plan agreed upon by the parties.
Over the term of the research plan, the Company expects to receive annual
payments of $5 million to $7 million from Astra which should approximate the
research and development costs incurred by the Company under the Plan. Subject
to successful product development and obtaining necessary regulatory approvals,
Astra is obligated to conduct all clinical trials of products arising from the
collaboration and to seek approval for their sale. Astra has the exclusive
worldwide right to market products covered by the agreement. Until the later of
either expiration of all patents included in the licensed technology or a
specified term, the Company is entitled to a royalty on the worldwide net sales
of such products in return for the marketing license granted to Astra and the
Company's obligation to manufacture and supply products. Astra has the right to
terminate the agreement after April 1, 1998.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. To date, the
Company's principal academic collaborations have been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
Research and development expenses incurred under
53
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
15. RESEARCH AGREEMENTS (CONTINUED)
these collaborations amounted to approximately $1,326,000, $1,337,000, and
$1,008,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 1997, the Company
had tax net operating loss carryforwards of $24,943,000 and research and
development tax credit carryforwards of $2,963,000 which expire at various times
through 2012. Due to the "change in ownership" provisions of the Tax Reform Act
of 1986, the Company's utilization of its net operating loss carryforwards and
tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
<S> <C> <C>
------------------------------
Deferred tax assets:
Capitalized research and development costs............................ $ 23,876,000 $ 21,286,000
Net operating losses.................................................. 9,977,000 8,648,000
Research and development credits...................................... 2,963,000 2,251,000
Other................................................................. 275,000 316,000
------------------------------
37,091,000 32,501,000
Deferred tax liabilities:
Patents............................................................... 1,296,000 1,096,000
------------------------------
35,795,000 31,405,000
Valuation allowance................................................... (35,795,000) (31,405,000)
------------------------------
Net deferred tax assets................................................. $ -- $ --
------------------------------
------------------------------
</TABLE>
Since there is uncertainty relating to the ultimate use of the loss
carryforwards and tax credits, a valuation allowance has been recognized at
December 31, 1997 and 1996, to fully offset the Company's deferred tax assets.
The valuation allowance increased $4,390,000 in 1997, due primarily to the
increases in capitalized research and development costs, net operating loss
carryforwards and tax credits.
17. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee contributions, up to 6%
of employee compensation, with the Company's common stock. The related expense
was $169,000, $162,000, and $131,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
54
<PAGE>
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
18. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate disposition of
these matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND
CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The sections entitled "Election of Directors" and "Executive Officer" in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
are hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's definitive
proxy statement for its 1998 Annual Meeting of Shareholders is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Share Ownership" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Shareholders is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
(1) Financial Statement Schedules:
<TABLE>
<CAPTION>
ITEM LOCATION
- ------------------------------------------------------------------------------------ -------------
<S> <C>
Schedule II--Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not included herein are omitted because they are not applicable or
the required information appears in the Financial Statements or Notes thereto.
(2) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR DESCRIPTION
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
3.1* Restated Certificate of Incorporation of the Registrant.
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of the Registrant's Common Stock in
April 1995.
10.4* Amendment to Registration Rights dated as of February 14, 1992 among the Registrant and certain
of its stockholders.
10.5* ** Research Agreement dated March 1, 1989 between the Registrant and Brown University as amended
by Modification No. 1 dated December 21, 1990, Modification No. 2 dated February 22, 1991 and
Modification No. 3 dated November 1, 1991.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR DESCRIPTION
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
10.5A* Letter Agreement dated March 4, 1992 between the Registrant and Brown University.
10.6* License Agreement dated March 16, 1989 between the Registrant and Brown University, as amended
by Amendment Agreement dated May 2, 1991.
10.7* Research Agreement dated March 16, 1989 between Registrant and Washington University.
10.12* Employment Agreement dated January 3, 1991 between the Registrant and Dr. Seth A. Rudnick.
10.15* Form of at-will Employment Agreement between the Registrant and most of its employees.
10.16* Agreement for Consulting Services dated March 16, 1989 between the Registrant and Dr. Patrick
Aebischer.
10.18* Agreement for Consulting Services dated March 16, 1989 between the Registrant and Dr. Paul
Lacy.
10.20* Form of Agreement for Consulting Services between the Registrant and members of its Scientific
Advisory Board.
10.21* Form of Nondisclosure Agreement between the Registrant and its Contractors.
10.22* Funding Agreement dated June 22, 1989 between the Registrant and the Rhode Island Partnership
for Science and Technology.
10.28* Master Lease and Warrant Agreement dated April 23, 1991 between the Registrant and PacifiCorp
Credit, Inc.
10.29* 1988 Stock Option Plan.
10.30* 1992 Equity Incentive Plan.
10.31* 1992 Stock Option Plan for Non-Employee Directors.
10.32* 1992 Employee Stock Purchase Plan.
10.35# Consulting Agreement dated as of September 1, 1992 between Dr. Edwin C. Cadman and the
Registrant.
10.36**# Letter Agreement between Registrant and Dr. Patrick Aebischer dated October 13, 1992 as amended
by a letter agreement dated December 23, 1993.
10.37+ Employment Agreement dated September 9, 1992 between Registrant and Frederic A. Eustis, III.
10.41**!!!! Development and Supply Agreement dated December 1993, between Registrant and AKZO Faser AG.
10.42**!!!! Asset Transfer Agreement dated as of December 23, 1994, between Registrant and Neocrin Company.
10.43##** Research Agreement dated as of February 1, 1994 between Genentech, Inc. and Registrant.
10.44##** Research Agreement dated as of March 16, 1994 between NeuroSpheres, Ltd. and Registrant.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR DESCRIPTION
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
10.46++ Termination Agreement dated as of August 4, 1994 between Registrant and Medtronic, Inc.
10.47++ Term Loan Agreement dated as of September 30, 1994 between The First National Bank of Boston
and Registrant.
10.48++ Lease Agreement between the Registrant and Rhode Island Industrial Facilities Corporation,
dated as of August 1, 1992.
10.49++ First Amendment to Lease Agreement between Registrant and The Rhode Island Industrial
Facilities Corporation dated as of September 15, 1994.
10.50++ Supplementary Agreement dated as of July 1, 1994 between Akzo Nobel Faser AG and the
Registrant.
10.51**++++ Development, Marketing and License Agreement, dated as of March 30, 1995, between Registrant
and Astra AB.
10.52++++ Form of Unit Purchase Agreement to be executed by the purchasers of the Common Stock and
Warrants offered in April 1995.
10.53+++ Form of Common Stock Purchase Agreement to be executed among the Registrant and certain
purchasers of the Registrant's Common Stock.
10.54!** Research and Commercialization Agreement dated as of September 4, 1995 among the Company, Dr.
Patrick Aebischer and Canton of Vaud, Switzerland.
10.55!! Employment agreement dated as of July 2, 1996 between Dr. Sandra Nusinoff Lehrman and
Registrant.
10.56!! Consulting agreement dated as of September 1, 1996 between Dr. Edwin C. Cadman and the
Registrant.
10.57!! Convertible loan agreement dated as of July 10, 1996 between the Company and Modex
Therapeutiques SA.
10.58 Lease Agreement dated as of November 21, 1997 by and between Hub RI Properties Trust, as
Landlord, and CytoTherapeutics, Inc., as Tenant.
10.59!! Modex Therapeutiques SA stockholders voting agreement dated as of July 10, 1996 among Modex,
the Company, the Societe Financiere Valoria SA and the other stockholders listed therein.
10.60!! CTI individual stockholders option agreement dated as of July 10, 1996 among the Company and
the individuals listed therein.
10.61!! CTI--Valoria option agreement dated of July 10, 1996 between the Company and the Societe
Financiere Valoria SA.
10.62**!!! Development Collaboration and License Agreement dated as of November 22, 1996 between
Genentech, Inc. and the Registrant.
10.63!!! Consulting Agreement dated as of December 1, 1996, between Peter Simon and the Registrant.
10.64!!! Term Loan Agreement dated as of October 22, 1996 between The First National Bank of Boston and
the Registrant.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR DESCRIPTION
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
10.65*** Agreement and Plan of Merger dated as of August 13, 1997 among StemCells, Inc., the Registrant
and CTI Acquisition Corp.
10.67*** Consulting Agreement dated as of September 25, 1997 between Dr. Irving Weissman and the
Registrant.
10.68 Letter Agreement between each of Dr. Irving Weissman and Dr. Fred H. Gage and the Registrant.
10.69** Amended and Restated Cross License Agreement dated as of October 29, 1997 between Modex
Therapeutiques SA and the Registrant.
10.70 Letter Agreement dated as of September 30, 1997 between Dr. Seth Rudnick and the Registrant.
10.71**** StemCells, Inc. 1996 Stock Option Plan.
10.72**** 1997 StemCells Research Stock Option Plan (the "1997 Plan").
10.73**** Form of Performance-Based Incentive Option Agreement issued under the 1997 Plan.
10.74 Employment Agreement dated as of September 25, 1997 between Dr. Richard M. Rose and the
Registrant.
10.75 Employment agreement dated as of April 17, 1997, between John S. McBride and the Registrant.
10.76 Severance agreement dated as of July 21, 1997, between Dr. Sandra Nusinoff Lehrman and the
Registrant.
10.77 Severance agreement dated as of July 29, 1997 between Dr. E. Edward Baetge and the Registrant.
10.78 Loan Agreement dated as of May 15, 1996 between Fleet National Bank and Registrant together
with the related Promissory Note executed by Registrant and an amendatory agreement dated as of
May 15, 1997.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for fiscal year ended December 31, 1997.
99 Cautionary Factors Relevant to Forward-Looking Information.
</TABLE>
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File No.
33-45739.
59
<PAGE>
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated
by reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated
by reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-8, File No. 333-37313.
(b) CURRENT REPORTS ON FORM 8-K.
On October 7, 1997, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission describing the StemCells, Inc. arrangements.
See "Subsidiary--StemCells, Inc."
60
<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
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CYTOTHERAPEUTICS, INC.
BY: /S/ RICHARD M. ROSE, M.D.
-----------------------------------------
Richard M. Rose, M.D.
President and Chief Executive Officer
</TABLE>
Dated: March 30, 1998
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 CAPACITY DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ RICHARD M. ROSE, M.D. Officer, and Director
- ------------------------------ (principal executive March 30, 1998
Richard M. Rose, M.D. officer)
Chief Financial Officer and
Treasurer (principal
/s/ JOHN S. MCBRIDE financial and accounting
- ------------------------------ officer); Senior Vice March 30, 1998
John S. McBride President, Business
Operations
/s/ PATRICK AEBISCHER, M.D., Director
PH.D.
- ------------------------------ March 30, 1998
Patrick Aebischer, M.D., Ph.D.
/s/ EDWIN C. CADMAN, M.D. Director
- ------------------------------ March 30, 1998
Edwin C. Cadman, M.D.
/s/ DONALD R. CONKLIN Director
- ------------------------------ March 30, 1998
Donald R. Conklin
/s/ MARK J. LEVIN Director
- ------------------------------ March 30, 1998
Mark J. Levin
/s/ SETH A. RUDNICK, M.D. Chairman of the Board
- ------------------------------ March 30, 1998
Seth A. Rudnick, M.D.
/s/ RICHARD J. RAMSDEN Director
- ------------------------------ March 30, 1998
Richard J. Ramsden
/s/ PETER K. SIMON Director
- ------------------------------ March 30, 1998
Peter K. Simon
/s/ IRVING L. WEISSMAN, M.D. Director
- ------------------------------ March 30, 1998
Irving L. Weissman, M.D.
</TABLE>
61
<PAGE>
(This page has been left blank intentionally.)
62
<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
CYTOTHERAPEUTICS, INC. (THE "COMPANY") WISHES TO CAUTION READERS THAT THE
FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, IN SOME CASES HAVE AFFECTED AND IN
THE FUTURE COULD AFFECT THE COMPANY'S RESULTS AND COULD CAUSE ACTUAL RESULTS AND
NEEDS OF THE COMPANY TO VARY MATERIALLY FROM FORWARD-LOOKING STATEMENTS MADE IN
THIS ANNUAL REPORT BY THE COMPANY ON THE BASIS OF MANAGEMENT'S CURRENT
EXPECTATIONS. THE BUSINESS IN WHICH THE COMPANY IS ENGAGED IS RAPIDLY CHANGING,
EXTREMELY COMPETITIVE AND INVOLVES A HIGH DEGREE OF RISK, AND ACCURACY WITH
RESPECT TO FORWARD-LOOKING PROJECTIONS IS DIFFICULT.
EARLY STAGE DEVELOPMENT; HISTORY OF OPERATING LOSSES -- Substantially all of
the Company's revenues to date have been derived, and for the foreseeable future
substantially all of the Company's revenues will be derived, from collaborative
agreements, research grants and income earned on invested funds. The Company
will incur substantial operating losses in the future as the Company conducts
its research, development, clinical trial and manufacturing activities. There
can be no assurance that the Company will achieve revenues from product sales or
become profitable.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING -- The development
of the Company's products will require the commitment of substantial resources
to conduct the time-consuming research, preclinical development and clinical
trials that are necessary for regulatory approvals and to establish production
and marketing capabilities, if such approvals are obtained. The Company will
need to raise substantial additional funds to continue its product development
efforts and intends to seek such additional funds through partnership,
collaborative or other arrangements with corporate sponsors, public or private
equity or debt financings, or from other sources. Future cash requirements may
vary from projections based on changes in the Company's research and development
programs, progress in preclinical and clinical testing, the Company's ability to
enter into, and perform successfully under, collaborative agreements,
competitive and technological advances, the need to obtain proprietary rights
owned by third parties, facilities requirements, changes in regulations and
other factors. Lack of necessary funds may require the Company to delay, reduce
or eliminate some or all of its research and product development programs or to
license its potential products or technologies to third parties. No assurance
can be given that funding will be available when needed, if at all, or on terms
acceptable to the Company.
UNCERTAINTIES OF CLINICAL DEVELOPMENT AND NEW MODE OF THERAPY -- None of the
Company's proposed products has been approved for commercial sale or entered
Phase III clinical trials. Even if the Company's proposed products appear to be
promising at an early stage of research or development such products may later
prove to be ineffective, have adverse side effects, fail to receive necessary
regulatory approvals, be difficult or uneconomical to manufacture or market on a
commercial scale, be adversely affected by government price controls or
limitations on reimbursement, be precluded from commercialization by proprietary
rights of third parties, by regulatory restrictions, or be subject to
significant competition from other products. There can be no assurance that the
Company will be able to demonstrate, as required, that its implants, on a
consistent basis and on a commercial scale, among other things: (i) successfully
isolate transplanted cells from the recipient's immune system; (ii) remain
biocompatible with the tissue into which they are implanted, including, for
certain implants, brain tissue; (iii) adequately maintain the viability of cells
contained within the membrane for a sufficiently long time to be efficacious and
commercially viable; (iv) safely permit the therapeutic substances produced by
the cells within the membrane to pass through the membrane unto the patient in
controlled doses for extended periods; and (v) are sufficiently durable for the
intended indication. While clinicians have generally had little difficulty in
retrieving the Company's implants, there have been cases where the implant broke
on attempted explant. The Company has changed its implantation procedure and its
implants and is continuing a program of developing stronger implants. In
addition, the viability of implanted encapsulated cells varies depending of the
cell type, the implantation location and other factors. Lack of viability could
restrict certain of the Company's programs to indications
63
<PAGE>
where long-term delivery of the therapeutics substances is not required. There
can also be no assurance that the products that may be generated in the
Company's stem cell programs will: (i) survive and persist in the desired
locations, (ii) provide the therapeutic benefits intended, (iii) properly
differentiate and integrate into existing tissue in the desired manner, or (iv)
not cause tumors or other side effects.
There has been increasing regulatory concern about the risks of cell
transplantation. Concern has focused on the use of cells derived from cows (such
as are used in the Company's pain program) and cells from primates and pigs. The
United Kingdom has adopted a moratorium on xenotransplantation pending further
research and discussion; the EC Commission has introduced a ban on the use of
"high-risk material" from cattle and sheep in the Member States of the European
Union in the manufacture of pharmaceuticals (this ban would apparently not
include the type of cells used in the Company's pain program). In addition, the
FDA has proposed guidelines which impose significant constraints on the conduct
of clinical trials utilizing xenotransplantion and are likely to significantly
affect the cost of producing the Company's products using nonhuman cells; such
costs could make the Company's products cost more to produce than the Company
receives for their production. Furthermore, the FDA has published a "Proposed
Approach to Regulation of Cellular and Tissue-Based Products" which relates to
the use of human cells. The Company cannot presently determine the effects of
such actions nor what other actions might be taken. Restrictions on the testing
or use of cells, whether human or nonhuman, as human therapeutics, could
adversely affect the Company's product development programs and the Company
itself. See "Government Regulation."
DEPENDENCE ON OUTSIDE PARTIES -- The Company's strategy for the research,
development, commercialization and marketing of its products contemplates that
the Company will enter into various arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that the Company will be able to enter into any additional
arrangements on terms acceptable to the Company, or successfully perform its
obligations under its existing or any additional arrangements. If any of the
Company's collaborators fails to perform its obligations in a timely manner or
terminate their agreement with the Company, the development or commercialization
of the Company's product candidate or research program under such collaborative
agreement may be adversely affected. Moreover, the Company is particularly
dependent on its pain program partner, Astra AB, because changes in the
development of this particular program may significantly affect the Company's
stock price. In addition, because of the Company's obligation to repurchase
certain of the stock it sold to Genentech in connection with certain
terminations of the Parkinson's Agreement, any such termination could have an
adverse effect on the Company's liquidity.
NEED FOR AND UNCERTAINTY OF OBTAINING PATENT PROTECTION -- Patent protection
for products such as those the Company proposes to develop is highly uncertain
and involves complex factual and evolving legal questions. No assurance can be
given that any patents issued or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted under such patents will
provide competitive advantages to the Company.
EXISTENCE OF THIRD PARTY PATENTS AND PROPRIETARY RIGHTS; NEED TO OBTAIN
LICENSE -- A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent applications or have
been issued patents relating to cell therapy and encapsulation and other
technologies potentially relevant to or required by the Company's expected
products. The Company cannot predict which, if any, of such applications will
issue as patents or the claims which might be allowed. The Company is aware that
a number of entities have filed applications relating to stem and/or progenitor
cells. The Company is also aware of a number of third-party patent applications
and patents relating to cell encapsulation or claiming use of genetically
modified cells to treat disease, disorder or injury. In particular, the Company
is aware of a third-party U.S. patent which relates the use of cells for
alleviating chronic pain in humans and of two issued U. S. patents claiming
certain methods for treating defective, diseased or damaged cells in the
mammalian CNS by grafting genetically modified cells. The Company cannot predict
64
<PAGE>
the effect of existing patent applications and patents on future unencapsulated
products. In addition, the Company is aware of third-party patents and patent
applications claiming rights to the neurotrophic factors (such as CNTF, NT 4/5,
Neurturin, and CT-1) which the Company hopes to deliver with its technology, and
to the production of these factors through the use of genetically modified
cells. The Company expects to use genetically modified cells to produce these
factors for use in its encapsulated products and expects that it may wish to
genetically modify its stem/progenitor cells. The Company may also be required
to seek licenses in regard to other cell lines, the techniques used in creating,
obtaining or maintaining such cell lines, the materials used in the manufacture
of its implants or otherwise. There can be no assurance that the Company will be
able to establish collaborative arrangements or obtain licenses to the foregoing
technology or to other necessary or desirable technology on acceptable terms, if
at all, or that the patents underlying any such licenses will be valid and
enforceable. See "Patents, Proprietary Rights and Licenses" in the Company's
Annual Report on Form 10-K.
GOVERNMENT REGULATION -- The Company's research, preclinical development and
clinical trials, as well as the manufacturing and marketing of its potential
products, are subject to extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain. There can be
no assurance that the Company or its collaborators will be able to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market its potential products in anticipated time frames, if at all. In
addition, several legislative proposals have been made to reform the FDA. If
such proposals are enacted they may result in significant changes in the
regulatory environment the Company faces. These changes could result in
different, more costly or more time consuming approval requirements for the
Company's products, in the dilution of FDA resources available to review the
Company's products, or in other unpredictable consequences. See "Government
Regulation" in the Company's Annual Report on Form 10-K.
SOURCES OF CELLS AND OTHER MATERIALS -- The Company's potential products
require genetically engineered cell lines or living cells harvested from animal
or human sources. There can be no assurance that the Company will successfully
identify or develop sources of the cells required for its potential products and
obtain such cells in quantities sufficient to satisfy the commercial
requirements of its potential products. These supply limitations may apply, in
particular, to primary cells which must be drawn directly from animal or human
sources, such as the bovine adrenal chromaffin cells currently used in the
Company's product for the treatment of pain. As an alternative to primary cells,
the Company is developing products based on the use of genetically altered
cells. Intellectual property rights to important genetic constructs used in
developing such cells, including the constructs used to develop cells producing
neurotrophic factors, are or may be claimed by one or more companies, which
could prevent the Company from using such cells. In addition, many suppliers of
materials used by the Company in its media, implants, and other components have
restricted the use of such materials for implantation into humans; if the
Company cannot obtain the necessary materials for its implants, the Company
would be adversely affected.
MANUFACTURING UNCERTAINTIES -- The Company's pilot manufacturing plant, may
not have sufficient capacity to permit the Company to produce all the products
for all of the clinical trials it anticipates developing. In addition, the
Company has not developed the capability to commercially manufacture any of its
proposed products and is unaware of any other company which has manufactured any
membrane-encapsulated cell product on a commercial scale. There can be no
assurance that the Company will be able to develop the capability of
manufacturing any of its proposed products at a cost or in the quantities
necessary to make a commercially viable product, if at all.
COMPETITION -- Competitors of the Company are numerous and include major
pharmaceutical and chemical companies, biotechnology companies, universities and
other research institutions. Currently, several of these competitors market and
sell therapeutic products for the treatment of chronic pain, Parkinson's disease
and other CNS conditions. In addition, most of the Company's competitors have
65
<PAGE>
substantially greater capital resources, experience in obtaining regulatory
approvals and, in the case of commercial entities, experience in manufacturing
and marketing pharmaceutical products, than the Company. A number of other
companies are attempting to develop methods of delivering therapeutic substances
within or across the blood brain barrier. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than those being developed by the Company or that would
render the Company's technology and products obsolete or non-competitive. See
"Competition" in the Company's Annual Report on Form 10-K.
DEPENDENCE ON KEY PERSONNEL -- The Company is highly dependent on the
principal members of its management and scientific staff and certain of its
outside consultants. Loss of the services of any of these individuals could have
a material adverse effect on the Company's operations. In addition, the
Company's operations are dependent upon its ability to attract and retain
additional qualified scientific and management personnel. There can be no
assurance the Company will be able to attract and retain such personnel on
acceptable terms given the competition among pharmaceutical, biotechnology and
health care companies, universities and research institutions for experienced
personnel.
REIMBURSEMENT AND HEALTH CARE REFORM -- In both domestic and foreign
markets, sales of the Company's potential products will depend in part upon the
availability and amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health care insurers and
other health care payors such as health maintenance organizations and
self-insured employee plans. There is considerable pressure to reduce the cost
of therapeutic products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable the Company to sell its products on a profitable
basis. See "Reimbursement and Health Cost Control" in the Company's Annual
Report on Form 10-K.
66
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Year Ended Dec. 31 1997:
Other Investments, net $2,330,848 0 0 0 $2,330,848
Year Ended Dec. 31, 1996:
Other Investments, net $2,330,848 0 0 0 $2,330,848
Year Ended Dec. 31, 1995:
Other Investments, net 0 $2,330,848 0 0 $2,330,848
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- --------------------------------------------------------------------
10.58 Lease Agreement dated as of November 21, 1997 by and between Hub RI
Properties Trust, as Landlord, and CytoTherapeutics, Inc., as Tenant
10.68 Letter Agreement between each of Dr. Irving Weissman and Dr. Fred H.
Gage and the Registrant
10.69 Amended and Restated Cross License Agreement dated as of October 29,
1997 between Modex Therapeutiques SA and the Registrant
10.70 Letter Agreement dated as of September 30, 1997 between Dr. Seth
Rudnick and the Registrant
10.74 Employment agreement dated as of September 25, 1997 between Dr.
Richard M. Rose and the Registrant
10.75 Employment agreement dated as of April 17, 1997, between John S.
McBride and the Registrant
10.76 Severance agreement dated as of July 21, 1997, between Dr. Sandra
Nusinoff Lehrman and the Registrant
10.77 Severance agreement dated as of July 29, 1997 between Dr. E. Edward
Baetge and the Registrant
<PAGE>
10.78 Loan Agreement dated as of May 15, 1996 between Fleet National Bank
and Registrant together with the related Promissory Note and an
amendatory agreement dated as of May 15, 1997
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule for fiscal year ended December 31, 1997
99 Cautionary Factors Relevant to Forward Looking Statements
<PAGE>
EXHIBIT 10.58
LEASE AGREEMENT
DATED AS OF NOVEMBER 21, 1997
BY AND BETWEEN
HUB RI PROPERTIES TRUST,
AS LANDLORD,
AND
CYTOTHERAPEUTICS, INC.,
AS TENANT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1
DEFINITIONS.......................................................................... 1
1.1 "Additional Rent"........................................................... 1
1.2 "Adjusted Purchase Price"................................................... 1
1.3 "Affiliated Person"......................................................... 1
1.4 "Agreement"................................................................. 2
1.5 "Applicable Laws"........................................................... 2
1.6 "Award"..................................................................... 2
1.7 "Business Day".............................................................. 2
1.8 "Capital Addition".......................................................... 2
1.9 "Capital Additions Cost".................................................... 3
1.10 "Change in Control"......................................................... 3
1.11 "Code"...................................................................... 3
1.12 "Commencement Date"......................................................... 3
1.13 "Condemnation".............................................................. 3
1.14 "Condemnor"................................................................. 3
1.15 "Consolidated Financials"................................................... 3
1.16 "Date of Taking"............................................................ 3
1.17 "Declaration................................................................ 3
1.18 "Default"................................................................... 4
1.19 "Encumbrance"............................................................... 4
1.20 "Entity..................................................................... 4
1.21 "Environment................................................................ 4
1.22 "Environmental Obligation".................................................. 4
1.23 "Environmental Notice"...................................................... 4
1.24 "Environmental Report"...................................................... 4
1.25 "Event of Default".......................................................... 4
1.26 "Extended Terms"............................................................ 4
1.27 "Facility".................................................................. 4
1.28 "Facility Mortgage"......................................................... 4
1.29 "Facility Mortgagee"........................................................ 4
1.30 "Fair Market Rental"........................................................ 4
1.31 "Fair Market Value"......................................................... 4
1.32 "Financial Officer's Certificate"........................................... 5
1.33 "Fiscal Year"............................................................... 5
1.34 "Fixed Term"................................................................ 5
1.35 "Fixtures".................................................................. 5
1.36 "GAAP"...................................................................... 5
1.37 "Government Agencies........................................................ 5
1.38 "Hazardous Substances"...................................................... 5
1.39 "Immediate Family........................................................... 6
1.40 "Impositions"............................................................... 6
1.41 "Indebtedness".............................................................. 7
1.42 "Insurance Requirements".................................................... 7
1.43 "Land"...................................................................... 7
1.44 "Landlord".................................................................. 7
1.45 "Lease Year"................................................................ 7
1.46 "Improvements".............................................................. 7
1.47 "Legal Requirements"........................................................ 7
1.48 "Lending Institution"....................................................... 7
1.49 "Lien"...................................................................... 8
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
1.50 "Minimum Rent".............................................................. 8
1.51 "Notice".................................................................... 8
1.52 "Officer's Certificate"..................................................... 8
1.53 "Overdue Rate".............................................................. 8
1.54 "Parent..................................................................... 8
1.55 "Permitted Encumbrances".................................................... 8
1.56 "Permitted Liens"........................................................... 8
1.57 "Person".................................................................... 8
1.58 "Primary Intended Use"...................................................... 8
1.59 "Property".................................................................. 9
1.60 "Qualified Appraiser........................................................ 9
1.61 "Regulated Medical Wastes................................................... 9
1.62 "Rent"...................................................................... 9
1.63 "SEC"....................................................................... 9
1.64 "Security Deposit".......................................................... 9
1.65 "State"..................................................................... 9
1.66 "Subordinated Creditor"..................................................... 9
1.67 "Subordination Agreement"................................................... 9
1.68 "Subsidiary"................................................................ 9
1.69 "Tangible Net Worth"........................................................ 9
1.70 "Tenant".................................................................... 10
1.71 "Tenant's Capital Additions"................................................ 10
1.72 "Tenant's Personal Property"................................................ 10
1.73 "Term"...................................................................... 10
1.74 "Unsuitable for Its Primary Intended Use"................................... 10
1.75 "Work"...................................................................... 10
ARTICLE 2
PROPERTY AND TERM.................................................................... 10
2.1 The Property................................................................ 10
2.2 Condition of the Property................................................... 11
2.3 Fixed Term.................................................................. 12
2.4 Extended Term............................................................... 12
ARTICLE 3
RENT................................................................................. 12
3.1 Rent........................................................................ 12
3.1.1 Minimum Rent......................................................... 12
3.1.2 Additional Rent...................................................... 12
3.2 Late Payment of Rent........................................................ 14
3.3 Net Lease................................................................... 15
3.4 No Termination, Abatement, Etc.............................................. 15
3.5 Security Deposit............................................................ 15
ARTICLE 4
USE OF THE PROPERTY.................................................................. 16
4.1 Permitted Use............................................................... 16
4.1.1 Primary Intended Use................................................. 16
4.1.2 Necessary Approvals.................................................. 17
4.1.3 Lawful Use, Etc...................................................... 17
4.2 Compliance with Legal and Insurance Requirements, Etc....................... 17
4.3 Environmental Matters....................................................... 17
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
4.3.1 Restriction on Use, Etc.............................................. 17
4.3.2 Environmental Report................................................. 18
4.3.4 Survival............................................................. 19
ARTICLE 5
MAINTENANCE AND REPAIRS, ETC......................................................... 20
5.1 Maintenance and Repair...................................................... 20
5.1.1 Tenant's Obligations................................................. 20
5.1.2 Landlord's Obligations............................................... 21
5.1.3 Nonresponsibility of Landlord; No Mechanics Liens.................... 21
5.2 Tenant's Personal Property.................................................. 22
5.3 Yield Up.................................................................... 22
5.4 Encroachments, Restrictions, Etc............................................ 22
5.5 Landlord to Grant Easements, Etc............................................ 23
ARTICLE 6
CAPITAL ADDITIONS, ETC............................................................... 23
6.1 Construction of Capital Additions........................................... 23
6.2 Non-Capital Additions....................................................... 24
ARTICLE 7
LIENS................................................................................ 25
ARTICLE 8
PERMITTED CONTESTS................................................................... 25
ARTICLE 9
INSURANCE AND INDEMNIFICATION........................................................ 26
9.1 General Insurance Requirements.............................................. 26
9.2 Replacement Cost............................................................ 27
9.3 Waiver of Subrogation....................................................... 27
9.4 Form Satisfactory, Etc...................................................... 28
9.5 Blanket Policy.............................................................. 28
9.6 No Separate Insurance....................................................... 28
9.7 Indemnification of Landlord................................................. 29
ARTICLE 10
CASUALTY............................................................................. 29
10.1 Insurance Proceeds.......................................................... 29
10.2 Damage or Destruction....................................................... 30
10.2.1 Damage or Destruction of Leased Property............................ 30
10.2.2 Partial Damage or Destruction....................................... 30
10.2.3 Insufficient Insurance Proceeds..................................... 30
10.2.4 Disbursement of Proceeds............................................ 30
10.3 Damage Near End of Term..................................................... 31
10.4 Tenant's Property........................................................... 31
10.5 Restoration of Tenant's Property............................................ 31
10.6 No Abatement of Rent........................................................ 32
10.7 Waiver...................................................................... 32
ARTICLE 11
CONDEMNATION......................................................................... 32
11.1 Total Condemnation, Etc..................................................... 32
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
11.2 Partial Condemnation........................................................ 32
11.3 Abatement of Rent........................................................... 33
11.4 Temporary Condemnation...................................................... 33
11.5 Allocation of Award......................................................... 34
ARTICLE 12
DEFAULTS AND REMEDIES................................................................ 34
12.1 Events of Default........................................................... 34
12.2 Remedies.................................................................... 36
12.3 Tenant's Waiver............................................................. 38
12.4 Application of Funds........................................................ 38
12.5 Landlord's Right to Cure Tenant's Default................................... 38
ARTICLE 13
HOLDING OVER......................................................................... 39
ARTICLE 14
LANDLORD'S DEFAULT................................................................... 39
ARTICLE 15
PURCHASE OF LEASED PROPERTY.......................................................... 39
ARTICLE 16
SUBLETTING AND ASSIGNMENT............................................................ 40
16.1 Subletting and Assignment................................................... 40
16.2 Required Sublease Provisions................................................ 42
16.3 Sublease Limitation......................................................... 43
ARTICLE 17
ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS....................................... 43
17.1 Estoppel Certificates....................................................... 43
17.2 Financial Statements........................................................ 43
ARTICLE 18
LANDLORD'S RIGHT TO INSPECT.......................................................... 45
ARTICLE 19
APPRAISAL............................................................................ 45
19.1 Appraisal Procedure 45
19.2 Landlord's Right to Appraisal 46
ARTICLE 20
REPRESENTATIONS AND WARRANTIES....................................................... 47
20.1 Representations of Tenant................................................... 47
20.1.1 Status and Authority of Tenant...................................... 47
20.1.2 Action of Tenant.................................................... 47
20.1.3 No Violations of Agreements......................................... 47
20.1.4 Litigation.......................................................... 47
20.1.5 Disclosure.......................................................... 47
20.1.6 Compliance With Law................................................. 48
20.1.7 Hazardous Substances................................................ 48
20.1.8 Generally........................................................... 48
20.2 Representations of Landlord................................................. 48
20.2.1 Status and Authority of Landlord.................................... 48
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C> <C>
20.2.2 Action of Landlord.................................................. 49
20.2.3 No Violations of Agreements......................................... 49
20.2.4 Litigation.......................................................... 49
20.2.5 Generally........................................................... 49
ARTICLE 21
FACILITY MORTGAGES................................................................... 49
21.1 Landlord May Grant Liens.................................................... 49
21.2 Subordination of Lease...................................................... 49
21.3 Notice to Mortgagee and Ground Landlord..................................... 51
ARTICLE 22
ADDITIONAL COVENANTS OF TENANT....................................................... 51
22.1 Conduct of Business......................................................... 51
22.2 Maintenance of Accounts and Records......................................... 51
22.3 Notice of Litigation, Potential Event of Default, Etc....................... 51
22.4 Financial Condition of Tenant............................................... 52
22.5 Prohibited Transactions..................................................... 52
22.6 Liens and Encumbrances...................................................... 52
22.7 Merger; Sale of Assets; Etc................................................. 52
ARTICLE 23
RIGHT OF FIRST REFUSAL TO PURCHASE................................................... 53
ARTICLE 24
MISCELLANEOUS........................................................................ 53
24.1 Limitation on Payment of Rent............................................... 53
24.2 No Waiver................................................................... 54
24.3 Remedies Cumulative......................................................... 54
24.4 Severability................................................................ 54
24.5 Acceptance of Surrender..................................................... 54
24.6 No Merger of Title.......................................................... 54
24.7 Conveyance by Landlord...................................................... 55
24.8 Quiet Enjoyment............................................................. 55
24.9 NON-LIABILITY OF TRUSTEES................................................... 55
24.10 Landlord's Consent of Trustees.............................................. 55
24.11 Memorandum of Lease......................................................... 56
24.12 Notices..................................................................... 56
24.13 Construction................................................................ 57
24.14 Counterparts; Headings...................................................... 57
24.15 Applicable Law, Etc......................................................... 57
</TABLE>
EXHIBITS
A - Legal Description
B - Minimum Rent
C - Tenant's Personal Property
v
<PAGE>
MASTER LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of this __ day of November, 1997,
by and between Hub RI Properties Trust, a Maryland real estate investment trust,
having its principal office at 400 Centre Street, Newton, Massachusetts 02158,
as landlord ("LANDLORD"), and Cytotherapeutics, Inc., a Delaware corporation,
having its principal office at 701 George Washington Highway, Lincoln, Rhode
Island 02865, as tenant ("TENANT").
W I T N E S S E T H:
WHEREAS, Landlord, on the date hereof, has acquired fee simple title to the
Property (this and other capitalized terms used and not otherwise defined herein
having the meanings ascribed to such terms in ARTICLE 1); and
WHEREAS, Landlord wishes to lease the Property to Tenant and Tenant wishes
to lease the Property from Landlord, all subject to and upon the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the mutual receipt and legal
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
ARTICLE 1
DEFINITIONS
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires, (i) the terms defined in this Article
shall have the meanings assigned to them in this Article and include the plural
as well as the singular, (ii) all accounting terms not otherwise defined herein
shall have the meanings assigned to them in accordance with GAAP, (iii) all
references in this Agreement to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Agreement, and (iv) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.
1.1 "ADDITIONAL RENT" shall have the meaning given such term in SECTION
3.1.2.
1.2 "ADJUSTED PURCHASE PRICE" shall mean $8,000,000, plus any other amount
disbursed or advanced by Landlord to finance, or to reimburse Tenant for its
financing of, any Capital Addition to the Property less the amount of any Award
or the proceeds of any insurance received by Landlord in connection with a
partial Condemnation or a partial casualty involving the Property as described
in SECTION 11.2 or 10.2.2, and not applied by Landlord to the restoration of the
Leased Property as provided therein.
1.3 "AFFILIATED PERSON" shall mean, with respect to any Person, (a) in the
case of any such Person which is a partnership, any partner in such partnership,
(b) in the case of any such Person which is a limited liability company, any
member of such company, (c) any other Person which is a Parent, a Subsidiary, or
a Subsidiary of a Parent with respect to such Person or to one or more of the
Persons referred to in the preceding clauses (a) and (b), (d) any other Person
who is an officer, director, trustee or employee of, or partner in, such Person
or any Person referred to in the preceding clauses (a), (b) and (c), and (e) any
other Person who is a member of the Immediate Family of such Person or of any
Person referred to in the preceding clauses (a) through (d).
1.4 "AGREEMENT" shall mean this Lease Agreement, including EXHIBITS A
THROUGH C hereto, as it and they may be amended from time to time as herein
provided.
1.5 "APPLICABLE LAWS" shall mean all applicable laws, statutes, regulations,
rules, ordinances, codes, licenses, permits and orders (whether now existing or
hereafter enacted or promulgated irrespective of whether its enactment is
foreseeable or contemplated), of all courts of competent jurisdiction and
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Government Agencies, and all applicable judicial and administrative and
regulatory decrees, judgments and orders, including common law rulings and
determinations, relating to injury to, or the protection of, real or personal
property or human health (except those requirements which, by definition, are
solely the responsibility of employers) or the Environment, including, without
limitation, all valid and lawful requirements of courts and other Government
Agencies pertaining to reporting, licensing, permitting, investigation,
remediation and removal of underground improvements (including, without
limitation, treatment or storage tanks, or water, gas or oil wells), or
emissions, discharges, releases or threatened releases of Hazardous Substances,
chemical substances, pesticides, petroleum or petroleum products, pollutants,
contaminants or hazardous or toxic substances, materials or wastes whether
solid, liquid or gaseous in nature, into the Environment, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances or Regulated Medical Wastes,
underground improvements (including, without limitation, treatment or storage
tanks, or water, gas or oil wells), or pollutants, contaminants or hazardous or
toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature.
1.6 "AWARD" shall mean all compensation, sums or other value awarded, paid
or received by virtue of a total or partial Condemnation of the Property (after
deduction of all reasonable legal fees and other reasonable out-of-pocket costs
and expenses, including, without limitation, expert witness fees, incurred by
Landlord, in connection with obtaining any such award).
1.7 "BUSINESS DAY" shall mean any day other than Saturday, Sunday, or any
other day on which banking institutions in the State are authorized by law or
executive action to close.
1.8 "CAPITAL ADDITION" shall mean one or more new buildings, structures or
the material expansion of existing improvements or structures, which are
constructed on any parcel or portion of the Land.
1.9 "CAPITAL ADDITIONS COST" shall mean the cost of any Capital Addition
proposed to be made by Tenant at the Property, whether paid for by Tenant or
Landlord.
1.10 "CHANGE IN CONTROL" shall mean the acquisition by any Person, or two or
more Persons acting in concert, of beneficial ownership (within the meaning of
Rule 13d-3 of the SEC) of 51% or more, or rights, options or warrants to acquire
51% or more, of the outstanding shares of voting stock of Tenant or the merger
or consolidation of Tenant with or into any other Person or any one or more
sales or conveyances to any Person of all or substantially all of the assets of
Tenant.
1.11 "CODE" shall mean the Internal Revenue Code of 1986 and, to the extent
applicable, the Treasury Regulations promulgated thereunder, each as from time
to time amended.
1.12 "COMMENCEMENT DATE" shall mean the date of this Agreement.
1.13 "CONDEMNATION" shall mean (a) the exercise of any governmental power
with respect to the Property, whether by legal proceedings or otherwise, by a
Condemnor of its power of condemnation; (b) a voluntary sale or transfer of the
Property by Landlord to any Condemnor, either under threat of condemnation or
while legal proceedings for condemnation are pending; and (c) a taking or
voluntary conveyance of all or part of the Property, or any interest therein, or
right accruing thereto or use thereof, as the result or in settlement of any
condemnation or other eminent domain proceeding affecting the Property, whether
or not the same shall have actually been commenced.
1.14 "CONDEMNOR" shall mean any public or quasi-public authority, or private
corporation or individual, having the power of Condemnation.
1.15 "CONSOLIDATED FINANCIALS" shall mean, for any Fiscal Year or other
accounting period of Tenant and its consolidated subsidiaries, annual audited
and quarterly unaudited financial statements prepared on a consolidated basis
(if required by GAAP), including Tenant's consolidated balance sheet and the
related statements of income and cash flows, all in reasonable detail, and
setting forth in comparative form the
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corresponding figures for the corresponding period in the preceding Fiscal Year,
and prepared in accordance with GAAP throughout the periods reflected.
1.16 "DATE OF TAKING" shall mean the date the Condemnor has the right to
possession of the Property, or any portion thereof, in connection with a
Condemnation.
1.17 "DECLARATION" shall mean the Declaration of Trust establishing
Landlord, dated November 3, 1997, as amended and restated from time to time.
1.18 "DEFAULT" shall mean any event or condition which with the giving of
notice and/or lapse of time may ripen into an Event of Default.
1.19 "ENCUMBRANCE" shall have the meaning given such term in SECTION 21.1.
1.20 "ENTITY" shall mean any general partnership, limited partnership,
limited liability company or partnership, corporation, joint venture, trust,
business trust, cooperative or association or any Governmental Agencies.
1.21 "ENVIRONMENT" shall mean soil, surface waters, ground waters, land,
stream, sediments, surface or subsurface strata and ambient air.
1.22 "ENVIRONMENTAL OBLIGATION" shall have the meaning given such term in
SECTION 4.3.1.
1.23 "ENVIRONMENTAL NOTICE" shall have the meaning given such term in
SECTION 4.3.1.
1.24 "ENVIRONMENTAL REPORT" shall have the meaning given such term in
SECTION 4.3.2.
1.25 "EVENT OF DEFAULT" shall have the meaning given such term in SECTION
12.1.
1.26 "EXTENDED TERMS" shall have the meaning given such term in SECTION 2.4.
1.27 "FACILITY" shall mean the buildings (including a rehabilitated building
and a newly constructed addition comprising, collectively, approximately 64,934
square feet of gross interior space and approximately 62,000 square feet of net
rentable space) and improvements located on the Land, as the same may be altered
in accordance with the terms hereof.
1.28 "FACILITY MORTGAGE" shall mean any Encumbrance placed upon the Property
in accordance with ARTICLE 21.
1.29 "FACILITY MORTGAGEE" shall mean the holder of any Facility Mortgage.
1.30 "FAIR MARKET RENTAL" shall mean the rental which a willing tenant not
compelled to rent would pay a willing landlord not compelled to lease for the
use and occupancy of the Property (including all Capital Additions other than
Tenant's Capital Additions) on the terms and conditions of this Agreement for
the term in question, assuming Tenant is not in default hereunder and determined
by agreement between Landlord and Tenant or, failing agreement, in accordance
with the appraisal procedures set forth in ARTICLE 19.
1.31 "FAIR MARKET VALUE" shall mean the price that a willing buyer not
compelled to buy would pay a willing seller not compelled to sell for the
Property (without taking into account any reduction in value resulting from any
indebtedness to which the Property is subject), assuming the same is
unencumbered by this Agreement and determined by agreement between Landlord and
Tenant or, failing agreement, the appraisal procedures set forth in ARTICLE 19.
1.32 "FINANCIAL OFFICER'S CERTIFICATE" shall mean, as to any Person, a
certificate of the chief financial officer of such Person, duly authorized,
accompanying the financial statements required to be delivered by such Person
pursuant to SECTION 17.2, in which such officer shall certify (a) that, to such
officer=s knowledge, such statements have been properly prepared in accordance
with GAAP and are true, correct and complete in all material respects and fairly
present the financial condition of such Person at and as of
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the dates thereof and the results of its and their operations for the periods
covered thereby, and (b) that such officer has reviewed this Agreement and, to
such officer=s knowledge, has no knowledge of any Default or Event of Default
hereunder.
1.33 "FISCAL YEAR" shall mean the twelve (12) month period from January 1 to
December 31.
1.34 "FIXED TERM" shall have the meaning given such term in SECTION 2.3.
1.35 "FIXTURES" shall have the meaning given such term in SECTION 2.1(D).
1.36 "GAAP" shall mean generally accepted accounting principles consistently
applied.
1.37 "GOVERNMENT AGENCIES" shall mean any court, agency, authority, board
(including, without limitation, environmental protection, planning and zoning),
bureau, commission, department, office or instrumentality of any nature
whatsoever of any governmental or quasi-governmental unit of the United States
or the State or any county or any political subdivision of any of the foregoing,
whether now or hereafter in existence, having jurisdiction over Tenant or the
Property or any portion thereof or the Facility operated thereon.
1.38 "HAZARDOUS SUBSTANCES" shall mean any substance:
(a) the presence of which requires or may hereafter require
notification, investigation or remediation under any federal, state or local
statute, regulation, rule, ordinance, order, action or policy; or
(b) which is or becomes defined as a "hazardous waste", "hazardous
material" or "hazardous substance" or "pollutant" or "contaminant" under any
present or future federal, state or local statute, regulation, rule or
ordinance or amendments thereto including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. ET SEQ.) and the Resource Conservation and Recovery Act (42 U.S.C.
section 6901 ET SEQ.) and the regulations promulgated thereunder; or
(c) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or
becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, any state
of the United States, or any political subdivision thereof; or
(d) the presence of which on the Property causes or threatens to cause a
violation of Applicable Laws or poses or threatens to pose a hazard to the
Property or to the health or safety of persons on or about the Property; or
(e) without limitation, which contains gasoline, diesel fuel or other
petroleum hydrocarbons or volatile organic compounds; or
(f) without limitation, which contains polychlorinated biphenyls (PCBs)
or asbestos or urea formaldehyde foam insulation; or
(g) without limitation, which contains or emits radioactive particles,
waves or material; or
(h) without limitation, constitutes Regulated Medical Wastes.
1.39 "IMMEDIATE FAMILY" shall mean, with respect to any individual, such
individual's spouse, parents, brothers, sisters, children (natural or adopted),
stepchildren, grandchildren, grandparents, parents-in-law, brothers-in-law,
sisters-in-law, nephews and nieces.
1.40 "IMPOSITIONS" shall mean, collectively, all taxes (including, without
limitation, all taxes imposed under the laws of the State, as such laws may be
amended from time to time, and all ad valorem, sales and use, single business,
gross receipts, transaction privilege, rent or similar taxes as the same relate
to or are imposed upon Landlord, Tenant or the business conducted upon the
Property), assessments (including,
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without limitation, all assessments for public improvements or benefit, whether
or not commenced or completed prior to the date hereof and whether or not to be
completed within the Term), water, sewer or other rents and charges, excises,
tax levies, fees (including, without limitation, license, permit, inspection,
authorization and similar fees) and all other governmental charges, in each case
whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Property or the business
conducted thereon by Tenant (including all interest and penalties thereon due to
any failure in payment by Tenant), which at any time prior to, during or in
respect of the Term hereof may be assessed or imposed on or in respect of or be
a lien upon (a) the Property or any part thereof or any rent therefrom or any
estate, right, title or interest therein, or (b) any occupancy, operation, use
or possession of, or sales from, or activity conducted on, or in connection with
the Property or the leasing or use of the Property or any part thereof by
Tenant; PROVIDED, HOWEVER, that nothing contained herein shall be construed to
require Tenant to pay (i) any tax based on income imposed on Landlord, (ii) any
revenue tax of Landlord, (iii) any transfer fee or other tax imposed with
respect to the sale, exchange or other disposition by Landlord of the Property
or the proceeds thereof (other than in connection with the sale, exchange or
other disposition to, or in connection with a transaction involving, Tenant), or
(iv) any single business, gross receipts (other than a tax on any rent received
by Landlord from Tenant), transaction privilege, rent or similar taxes as the
same relate to or are imposed upon Landlord, except to the extent that any tax,
assessment, tax levy or charge, which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (i) or (ii) preceding is levied, assessed or imposed
expressly in lieu thereof.
1.41 "INDEBTEDNESS" shall mean all obligations, contingent or otherwise,
which in accordance with GAAP should be reflected on the obligor's balance sheet
as liabilities.
1.42 "INSURANCE REQUIREMENTS" shall mean all terms of any insurance policy
required by this Agreement and all requirements of the issuer of any such
policy.
1.43 "LAND" shall have the meaning given such term in SECTION 2.1(A).
1.44 "LANDLORD" shall have the meaning given such term in the preambles to
this Agreement.
1.45 "LEASE YEAR" shall mean each calendar year, or portion thereof, during
the term, commencing with the 1997 calendar year.
1.46 "IMPROVEMENTS" shall have the meaning given such term in SECTION
2.1(B).
1.47 "LEGAL REQUIREMENTS" shall mean all Applicable Laws and (a) all
permits, licenses, certificates of need, authorizations and regulations
necessary to operate the Property for its Primary Intended Use, and (b) all
covenants, agreements, restrictions and encumbrances contained in any
instruments at any time in force affecting the Property, including those (i)
which may require material repairs, modifications or alterations in or to the
Property or (ii) with respect to which a violation thereof would in any way
adversely affect the use and enjoyment thereof.
1.48 "LENDING INSTITUTION" shall mean any insurance company, federally
insured commercial or savings bank, national banking association, savings and
loan association, employees' welfare, pension or retirement fund or system,
corporate profit sharing or pension trust, college or university, or real estate
investment trust, including any corporation qualified to be treated for federal
tax purposes as a real estate investment trust, such trust having a net worth of
at least $100,000,000.
1.49 "LIEN" shall mean any mortgage, security interest, pledge, collateral
assignment, or other encumbrance, lien or charge of any kind, or any transfer of
any property or assets for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to payment of
its general creditors.
1.50 "MINIMUM RENT" shall mean the respective monthly amounts set forth in
EXHIBIT B.
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1.51 "NOTICE" shall mean a notice given in accordance with SECTION 23.12.
1.52 "OFFICER'S CERTIFICATE" shall mean a certificate signed by an officer
of Tenant who has been duly authorized by the board of directors of Tenant.
1.53 "OVERDUE RATE" shall mean, on any date, a PER ANNUM rate of interest
equal to the lesser of 5% over the Prime Rate or the maximum rate allowed by
law. "PRIME RATE" shall mean the annual floating rate of interest, determined
daily and expressed as a percentage from time to time, announced by the largest
national or state-chartered banking institution in Rhode Island which announces
a "prime" or "base" rate. If at any time no national or state-chartered banking
institution having its principal offices in Rhode Island is announcing such a
floating rate, "PRIME RATE" shall mean a rate of interest, determined daily,
which is two (2) percentage points above the 14-day moving average closing
trading price of 90-day Treasury Bills.
1.54 "PARENT" shall mean, with respect to any Person, any Person which owns
directly, or indirectly through one or more Subsidiaries or Affiliated Persons,
fifty-one percent (51%) or more of the voting or beneficial interest in, or
otherwise has the right or power (whether by contract, through ownership of
securities or otherwise) to control, such Person.
1.55 "PERMITTED ENCUMBRANCES" shall mean all rights, restrictions, and
easements of record set forth on Schedule B to the applicable owner's title
insurance policy issued to Landlord on the date hereof, and a notice or
memorandum relating to this Lease.
1.56 "PERMITTED LIENS" shall mean any Liens granted in accordance with
SECTION 22.9.
1.57 "PERSON" shall mean any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors and assigns of such Person
where the context so admits.
1.58 "PRIMARY INTENDED USE" shall have the meaning given such term in
SECTION 4.1.1.
1.59 "PROPERTY" shall have the meaning given such term in SECTION 2.1.
1.60 "QUALIFIED APPRAISER" shall mean an appraiser who is not in control of,
controlled by or under common control with either Landlord or Tenant and has not
been an employee of Landlord or Tenant or any Affiliated Person with respect to
either of Landlord or Tenant at any time during the ten (10) year period
preceding the relevant date, who is qualified to appraise commercial real estate
in the State and is a member of the American Institute of Real Estate Appraisers
(or any successor association or body of comparable standing if such Institute
is not then in existence) and who has held his or her certificate as an M.A.I.
or its equivalent for a period of not less than three (3) years, and has been
actively engaged in the appraisal of commercial real estate in such area for a
period of not less than five (5) years, immediately preceding his or her
appointment hereunder.
1.61 "REGULATED MEDICAL WASTES" shall mean all materials generated or used
on the Property by Tenant, subtenants, patients, occupants or the operators of
the Property which are now or may hereafter be subject to regulation pursuant to
the Material Waste Tracking Act of 1988, or any Applicable Laws.
1.62 "RENT" shall mean, collectively, the Minimum Rent, and Additional Rent.
1.63 "SEC" shall mean the Securities and Exchange Commission.
1.64 "SECURITY DEPOSIT" shall mean $750,000.
1.65 "STATE" shall mean the State of Rhode Island.
1.66 "SUBORDINATED CREDITOR" shall mean any creditor of Tenant which is a
party to a Subordination Agreement in favor of Landlord.
1.67 "SUBORDINATION AGREEMENT" shall mean any agreement executed by a
Subordinated Creditor pursuant to which the payment and performance of Tenant's
obligations to such Subordinated Creditor are subordinated to the payment and
performance of Tenant's obligations to Landlord under this Agreement.
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1.68 "SUBSIDIARY" shall mean, with respect to any Person, any Entity (a) in
which such Person owns directly, or indirectly through one or more Subsidiaries,
more than fifty percent (50%) of the voting or beneficial interest or (b) which
such Person otherwise has the right or power to control (whether by contract,
through ownership of securities or otherwise).
1.69 "TANGIBLE NET WORTH" shall mean the excess of total assets (excluding
the Security Deposit) over total liabilities computed in accordance with GAAP,
less all intangible assets and deferred charges, including, without limitation,
goodwill, debt discount, organization expenses, trademarks and trade names,
patents, deferred product development costs and similar items, also so in
accordance with GAAP.
1.70 "TENANT" shall have the meaning given such term in the preambles to
this Agreement.
1.71 "TENANT'S CAPITAL ADDITIONS" shall have the meaning given such term in
SECTION 6.2.2.
1.72 "TENANT'S PERSONAL PROPERTY" shall mean all motor vehicles and
consumable inventory and supplies, furniture, furnishings, movable walls and
partitions, equipment and machinery and all other personal property of Tenant
located at the Property or used in Tenant's business at the Property as
described on EXHIBIT C, including all of Tenant's trade fixtures, and all
modifications, replacements, alterations and additions to such personal property
installed at the expense of Tenant.
1.73 "TERM" shall mean, collectively, the Fixed Term and the Extended Terms,
to the extent properly exercised pursuant to the provisions of SECTION 2.4,
unless sooner terminated pursuant to the provisions of this Agreement.
1.74 "UNSUITABLE FOR ITS PRIMARY INTENDED USE" shall mean a state or
condition of such Facility, such that (a) following any damage or destruction
involving the Property, such Property cannot reasonably be expected to be
restored to substantially the same condition as existed immediately before such
damage or destruction, and as otherwise required by SECTION 10.2.4, within the
period (not to exceed two (2) years following such damage or destruction) as to
which loss of rents insurance is available to cover Rent due during such
restoration period; or (b) as the result of a partial taking by Condemnation,
such Facility cannot be operated on a commercially practicable basis for the
Primary Intended Use.
1.75 "WORK" shall have the meaning given such term in SECTION 10.2.4.
ARTICLE 2
PROPERTY AND TERM
2.1 THE PROPERTY. Upon and subject to the terms and conditions hereinafter
set forth, Landlord leases to Tenant and Tenant leases from Landlord all of the
following (collectively, the "PROPERTY"):
(a) those certain parcels of land, as more particularly described in
EXHIBIT A, attached hereto and made a part hereof (the "LAND");
(b) all buildings, structures, Fixtures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels,
sidewalks, utility pipes, conduits and lines (on-site and off-site), parking
areas and roadways appurtenant to such buildings and structures presently
situated upon the Land and all Capital Additions other than Tenant's Capital
Additions (collectively, the "IMPROVEMENTS");
(c) all easements, rights and appurtenances relating to the Land and the
Improvements; and
(d) all equipment, machinery, fixtures, and other items of property, now
or hereafter permanently affixed to or incorporated into the Improvements,
including, without limitation, all furnaces, boilers, heaters, electrical
equipment, heating, plumbing, lighting, ventilating, incineration, air and
water pollution control, waste disposal, air-cooling and air-conditioning
systems and apparatus, sprinkler systems and fire and theft protection
equipment, all of which, to the maximum extent
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permitted by law, are hereby deemed by the parties hereto to constitute real
estate, together with all replacements, modifications, alterations and
additions thereto, but specifically excluding all items included within the
category of Tenant's Personal Property (collectively, the "FIXTURES").
2.2 CONDITION OF THE PROPERTY. Tenant acknowledges receipt and delivery of
possession of the Property and Tenant accepts the Property in its "as is"
condition, subject to the existing state of title, including all covenants,
conditions, restrictions, reservations, mineral leases, easements and other
matters of record or that are visible or apparent on the Property, all
applicable Legal Requirements, the lien of financing instruments, mortgages and
deeds of trust, and such other matters which would be disclosed by an inspection
of the Property and the record title thereto or by an accurate survey thereof.
TENANT REPRESENTS THAT IT OCCUPIES THE PROPERTY AND HAS FULLY INSPECTED THE
PROPERTY AND ALL OF THE FOREGOING AND HAS FOUND THE CONDITION THEREOF
SATISFACTORY AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR
LANDLORD'S AGENTS OR EMPLOYEES WITH RESPECT THERETO AND TENANT WAIVES ANY CLAIM
OR ACTION AGAINST LANDLORD IN RESPECT OF THE CONDITION THEREOF. LANDLORD MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE PROPERTY OR
ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY
PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR
WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE
TO BE BORNE BY TENANT. To the maximum extent permitted by law, however, Landlord
hereby assigns to Tenant all of Landlord's rights to proceed against any
predecessor in title, as well as contractors and suppliers for breaches of
warranties or representations, or for latent defects in the Property. Landlord
shall fully cooperate with Tenant in the prosecution of any such claims, in
Landlord's or Tenant's name, all at Tenant's sole cost and expense. Tenant shall
indemnify, defend, and hold harmless Landlord from and against any loss,
third-party cost, damage or liability (including reasonable attorneys' fees)
incurred by Landlord in connection with such cooperation.
2.3 FIXED TERM. The initial term of this Agreement (the "FIXED TERM")
shall commence on the Commencement Date and expire on June 30, 2013.
2.4 EXTENDED TERM. Tenant shall have the right to extend the Term for two
consecutive ten (10) year renewal terms (collectively, the "EXTENDED TERMS").
Each Extended Term shall commence on the day succeeding the expiration of
the Fixed Term or the preceding Extended Term, as the case may be. All of the
terms, covenants and provisions of this Agreement shall apply to each such
Extended Term, except that (i) the Minimum Rent shall be as set forth in EXHIBIT
B and (ii) Tenant shall have no right to extend the Term beyond the expiration
of the Extended Terms. If Tenant shall elect to exercise either of the aforesaid
options, it shall do so by giving Landlord Notice thereof not later than one (1)
year (and not sooner than eighteen (18) months) prior to the scheduled
expiration of the then current Term of this Agreement (Fixed or Extended, as the
case may be), it being understood and agreed that time shall be of the essence
with respect to the giving of such Notice. If Tenant shall fail to give any such
Notice, this Agreement shall automatically terminate at the end of the Term then
in effect and Tenant shall have no further option to extend the Term of this
Agreement. If Tenant shall give such Notice, the extension of this Agreement
shall be automatically effected without the execution of any additional
documents; it being understood and agreed, however, that Tenant and Landlord
shall execute such documents and agreements as either party shall reasonably
require to evidence the same.
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ARTICLE 3
RENT
3.1 RENT. Tenant shall pay to Landlord, in lawful money of the United
States of America which shall be legal tender for the payment of public and
private debts, without offset, abatement, demand or deduction, Minimum Rent and
Additional Rent, during the Term, except as hereinafter expressly provided. All
payments to Landlord shall be made by wire transfer of immediately available
federal funds or by other means acceptable to Landlord in its sole discretion.
Rent for any partial month shall be prorated on a per diem basis based on the
actual days in such month.
3.1.1 MINIMUM RENT. Minimum Rent shall be paid in advance on the first
day of each calendar month; PROVIDED, HOWEVER, that the payment of Minimum
Rent with respect to any partial month in which the Commencement Date occurs
and the first full month of the Fixed Term shall be payable on the
Commencement Date.
3.1.2 ADDITIONAL RENT. In addition to the Minimum Rent payable
hereunder, Tenant shall pay and discharge as and when due and payable the
following (collectively, "ADDITIONAL RENT"):
(a) IMPOSITIONS. Subject to ARTICLE 8 relating to Permitted
Contests, Tenant shall pay, or cause to be paid, all Impositions before
any fine, penalty, interest or cost (other than any opportunity cost as a
result of a failure to take advantage of any discount for early payment)
may be added for non-payment, such payments to be made directly to the
taxing authorities where feasible, and shall promptly, upon request,
furnish to Landlord copies of official receipts or other satisfactory
proof evidencing such payments. If any such Imposition may, at the option
of the taxpayer, lawfully be paid in installments (whether or not
interest shall accrue on the unpaid balance of such Imposition), Tenant
may exercise the option to pay the same (and any accrued interest on the
unpaid balance of such Imposition) in installments and, in such event,
subject to ARTICLE 8 relating to Permitted Contests, shall pay such
installments which are due during or with respect to periods occurring
during the Term as the same become due and before any fine, penalty,
premium, further interest or cost may be added thereto. Landlord, at its
expense, shall, to the extent required or permitted by applicable law,
prepare and file all tax returns in respect of Landlord's net income,
gross receipts, sales and use, single business, transaction privilege,
rent, ad valorem, franchise taxes and taxes on its capital stock, and
Tenant, at its expense, shall, to the extent required or permitted by
applicable laws and regulations, prepare and file all other tax returns
and reports in respect of any Imposition as may be required by Government
Agencies. Provided no Event of Default shall have occurred and be
continuing, if any refund shall be due from any taxing authority in
respect of any Imposition paid by Tenant, the same shall be paid over to
or retained by Tenant. Landlord and Tenant shall, upon request of the
other, provide such data as is maintained by the party to whom the
request is made with respect to the Property as may be necessary to
prepare any required returns and reports. In the event Government
Agencies classify any portion of the Property as personal property,
Tenant shall file all personal property tax returns in such jurisdictions
where it may legally so file. Each party shall, to the extent it
possesses the same, provide the other, upon request, with cost and
depreciation records necessary for filing returns for any portion of the
Property so classified as personal property. Where Landlord is legally
required to file personal property tax returns, Landlord shall provide
Tenant with copies of assessment notices in sufficient time for Tenant to
file a protest. All Impositions assessed against such personal property
shall be (irrespective of whether Landlord or Tenant shall file the
relevant return) paid by Tenant not later than the last date on which the
same may be made without interest or penalty, subject to the provisions
of ARTICLE 8 relating to Permitted Contests.
Landlord shall give prompt Notice to Tenant of all Impositions
payable by Tenant hereunder of which Landlord at any time has knowledge.
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(b) UTILITY CHARGES. Tenant shall pay or cause to be paid all
charges for electricity, power, gas, oil, water and other utilities used
in connection with the Property.
(c) INSURANCE PREMIUMS. Tenant shall pay or cause to be paid all
premiums for the insurance coverage required to be maintained pursuant to
ARTICLE 9.
(d) OTHER CHARGES. Tenant shall pay or cause to be paid all other
amounts, liabilities and obligations which Tenant assumes or agrees to
pay under this Agreement, including, without limitation, all agreements
to indemnify Landlord under SECTIONS 4.4 AND 9.7.
(e) REIMBURSEMENT FOR ADDITIONAL RENT. If Tenant pays or causes to
be paid property taxes or similar Additional Rent attributable to periods
after the end of the Term, whether upon expiration or sooner termination
of this Agreement (other than termination following an Event of Default),
Tenant may, within sixty (60) days of the end of the Term, provide Notice
to Landlord of its estimate of such amounts. Landlord shall promptly
reimburse Tenant for all payments of such taxes and other similar
Additional Rent that are attributable to any period after the Term of
this Agreement (less any amounts due from, but unpaid by, Tenant
hereunder). If an Event of Default has occurred, Landlord shall apply
such amounts to amounts due and owing under this Agreement and to the
costs of collection of the same and shall pay any excess to Tenant.
3.2 LATE PAYMENT OF RENT. If any installment of Minimum Rent, or any
Additional Rent which is payable directly to Landlord, shall not be paid on its
due date, Tenant shall pay Landlord, on demand, as Additional Rent, a late
charge (to the extent permitted by law) computed at the Overdue Rate on the
amount of such installment, from the due date of such installment to the date of
payment thereof, provided however if Landlord shall give Tenant a Notice of
Tenant's failure to pay any Rent when due then such late charge shall be
computed at the lesser of the Overdue Rate plus four (4) percentage points or
the maximum rate allowed by law. To the extent that Tenant pays any Additional
Rent directly to Landlord or any Facility Mortgagee pursuant to any requirement
of this Agreement, Tenant shall be relieved of its obligation to pay such
Additional Rent to the Entity to which it would otherwise be due.
In the event of any failure by Tenant to pay any Additional Rent when due,
Tenant shall promptly pay and discharge, as Additional Rent, every fine,
penalty, interest and cost which may be added for non-payment or late payment of
such items. Landlord shall have all legal, equitable and contractual rights,
powers and remedies provided either in this Agreement or by statute or otherwise
in the case of non-payment of the Additional Rent as in the case of non-payment
of the Minimum Rent.
3.3 NET LEASE. The Minimum Rent and Additional Rent shall be absolutely
net to Landlord so that this Agreement shall yield to Landlord the full amount
of the installments or amounts of Minimum Rent throughout the Term, subject to
any other provisions of this Agreement which expressly provide for adjustment or
abatement of such Rent.
3.4 NO TERMINATION, ABATEMENT, ETC. Except as otherwise specifically
provided in this Agreement, Tenant, to the maximum extent permitted by law,
shall remain bound by this Agreement in accordance with its terms and shall
neither take any action without the consent of Landlord to modify, surrender or
terminate this Agreement, nor seek, nor be entitled to any abatement, deduction,
deferment or reduction of the Rent, or set-off against the Rent, nor shall the
respective obligations of Landlord and Tenant be otherwise affected by reason of
(a) any damage to or destruction of the Property or any portion thereof from
whatever cause or any Condemnation; (b) the lawful or unlawful prohibition of,
or restriction upon, Tenant's use of the Property, or any portion thereof, or
the interference with such use by any Person or by reason of eviction by
paramount title; (c) any claim which Tenant may have against Landlord by reason
of any default or breach of any warranty by Landlord under this Agreement; (d)
any bankruptcy, insolvency, reorganization, composition, readjustment,
liquidation, dissolution, winding up or other proceedings affecting Landlord or
any assignee or transferee of Landlord; or (e) for any other cause whether
similar or dissimilar to any of the foregoing. Tenant hereby waives all rights
arising from any occurrence whatsoever,
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which may now or hereafter be conferred upon it by law, to (a) modify, surrender
or terminate this Agreement or quit or surrender the Property or any portion
thereof; or (b) entitle Tenant to any abatement, reduction, suspension or
deferment of the Rent or other sums payable or other obligations to be performed
by Tenant hereunder, except as otherwise specifically provided in this
Agreement. The obligations of Tenant hereunder shall be separate and independent
covenants and agreements, and the Rent and all other sums payable by Tenant
hereunder shall continue to be payable in all events unless the obligations to
pay the same shall be terminated, modified or amended pursuant to the express
provisions of this Agreement.
3.5 SECURITY DEPOSIT. Upon execution of this Agreement, Tenant shall
deposit with Landlord the Security Deposit. The Security Deposit shall be held
by Landlord as security for the faithful performance of all the terms of this
Lease to be observed and performed by Tenant. The Security Deposit shall not be
mortgaged, assigned, transferred or encumbered by Tenant and any such act on the
part of Tenant shall be without force and effect and shall not be binding upon
Landlord.
If the Minimum Rent or Additional Rent payable hereunder shall be overdue
and unpaid or should Landlord make any payment on behalf of the Tenant, or
Tenant shall fail to perform any of the terms of this Lease, then Landlord may,
at its option and without notice or prejudice to any other remedy which Landlord
may have on account thereof, appropriate and apply the entire Security Deposit
or so much thereof as may be necessary to compensate Landlord toward the payment
of Minimum Rent, Additional Rent or other sums or loss or damage sustained by
Landlord due to such breach by Tenant; and Tenant shall forthwith upon demand
restore the Security Deposit to the original sum deposited. Landlord shall
return the Security Deposit, or so much thereof as shall have not theretofore
been applied in accordance with the terms hereof, and less any amounts due from,
but unpaid by, Tenant hereunder, to Tenant promptly following the expiration or
earlier termination of the Term of this Agreement and the surrender of
possession of the Property by Tenant to Landlord in accordance with the Terms of
this Agreement. While Landlord holds the Security Deposit, Landlord shall have
no obligation to pay interest on the same and shall have the right to commingle
the same with Landlord's other funds. If Landlord conveys Landlord's interest in
the Property, the Security Deposit, or any part thereof not previously applied,
shall be turned over by Landlord to Landlord's grantee, and Tenant shall look
solely to such grantee for proper application of the Security Deposit in
accordance with the terms hereof. Tenant agrees that the holder of a mortgage on
the Property shall not be responsible to Tenant for the return or application of
the Security Deposit, whether or not it succeeds to the position of Landlord
hereunder, unless such holder actually receives the Security Deposit.
ARTICLE 4
USE OF THE PROPERTY
4.1 PERMITTED USE.
4.1.1 PRIMARY INTENDED USE. Tenant shall, at all times during the Term
and at any other time that Tenant shall be in possession of the Property,
use the Property as laboratory and office space for research and development
related to healthcare and for such other uses as may be ancillary,
incidental or necessary thereto, including, without limitation, production,
distribution and sale of diagnostics, vaccines, drugs, and other products
(any such use, together with any change as to which Landlord shall consent
as hereinafter provided being hereinafter referred to as the Property's
"PRIMARY INTENDED USE"). Tenant shall not use the Property for any other use
without the prior written consent of Landlord, provided that Landlord shall
not unreasonably withhold consent to any other laboratory, medical office
and healthcare use permitted by Applicable Law and which shall not adversely
affect the value of the Property as determined by a Qualified Appraiser. No
use shall be made or permitted to be made of the Property and no acts shall
be done thereon which will cause the cancellation of any insurance policy
covering the Property, nor shall Tenant permit to be kept or used any
article which
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may be prohibited by law or by the standard form of fire insurance policies,
or any other insurance policies required to be carried hereunder, or fire
underwriter's regulations. Tenant shall, at its sole cost, comply with all
of the requirements pertaining to the Property of any insurance board,
association, organization or company necessary for the maintenance of
insurance, as herein provided, covering the Property and Tenant's Personal
Property, including, without limitation, the Insurance Requirements. Tenant
shall not take or omit to take any action, the taking or omission of which
may materially impair the value or the usefulness of the Property or any
part thereof for the Primary Intended Use.
4.1.2 NECESSARY APPROVALS. Tenant shall proceed with all due diligence
and exercise best efforts to obtain and maintain all approvals necessary to
use and operate the Property for the Primary Intended Use.
4.1.3 LAWFUL USE, ETC. Tenant shall not use or suffer or permit the
use of the Property or Tenant's Personal Property for any unlawful purpose.
Tenant shall not commit or suffer to be committed any waste on the Property,
nor shall Tenant cause or permit any nuisance thereon or therein. Tenant
shall neither suffer nor permit the Property or any portion thereof,
including any Capital Addition, or Tenant's Personal Property, to be used in
such a manner as (a) might reasonably tend to impair Landlord's (or
Tenant's, as the case may be) title thereto or to any portion thereof, or
(b) may reasonably make possible a claim or claims for adverse usage or
adverse possession by the public, as such, or of implied dedication of the
Property or any portion thereof.
4.2 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS, ETC. Subject to the
provisions of ARTICLE 8, Tenant, at its sole expense, shall (a) comply with
Legal Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair, alteration and restoration of all of the Property, and (b)
procure, maintain and comply with all appropriate licenses, permits, and other
authorizations and agreements required for any use of the Property and Tenant's
Personal Property then being made, and for the proper erection, installation,
operation and maintenance of the Property or any part thereof, including,
without limitation, any Capital Additions.
4.3 ENVIRONMENTAL MATTERS.
4.3.1 RESTRICTION ON USE, ETC. Tenant shall not store, spill upon,
dispose of or transfer to or from the Property any Hazardous Substance,
except that Tenant may store, transfer and dispose of Hazardous Substances
in compliance with Applicable Laws. Tenant shall maintain the Property at
all times free of any Hazardous Substance (except such Hazardous Substances
as are maintained in compliance with all Applicable Laws). Tenant shall
promptly: (a) at Landlord's request notify Landlord in writing of any change
in the nature or extent of Hazardous Substances at the Property; (b) at
Landlord=s request transmit to Landlord a copy of any Community Right to
Know report which is required to be filed by Tenant with respect to the
Property pursuant to SARA Title III or any other Applicable Law; (c)
transmit to Landlord copies of any citations, orders, notices of
responsibility or other governmental communications received by Tenant or
its agents or representatives with respect to Hazardous Materials
(collectively, "ENVIRONMENTAL NOTICE"), and copies of any reports or other
information detailing any Hazardous Substance on the Property, which
identify or could give rise to a violation of any Applicable Law and/or
could give rise to any cost, expense, loss or damage exceeding $50,000 (an
"ENVIRONMENTAL OBLIGATION"); (d) observe and comply with all Applicable Laws
relating to the use, maintenance and disposal of Hazardous Substances and
all orders or directives from any official, court or agency of competent
jurisdiction relating to the use or maintenance or requiring the removal,
treatment, containment or other disposition thereof; and (e) pay or
otherwise dispose of any fine, charge or Imposition related thereto, unless
Tenant shall contest the same in good faith and by appropriate proceedings
and the right to use and the value of the Property is not materially and
adversely affected thereby.
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If, at any time prior to the termination of this Agreement, Hazardous
Substances are discovered on the Property in violation of Applicable Law,
Tenant shall take all actions and incur any and all expenses, as may be
reasonably necessary and as may be required by any Government Agency, (i) to
clean up and remove from and about the Property all Hazardous Substances
thereon, (ii) to contain and prevent any further release or threat of
release of Hazardous Substances on or about the Property and (iii) to
eliminate any further release or threat of release of Hazardous Substances
on or about the Property.
4.3.2 ENVIRONMENTAL REPORT. Six (6) months prior to expiration of the
Term, Tenant, at its sole cost and expense, shall designate a qualified
environmental engineer, reasonably satisfactory to Landlord, which engineer
shall conduct an environmental investigation of the Property and prepare an
environmental site assessment report (the "ENVIRONMENTAL REPORT") with
respect thereto. The scope of such Environmental Report shall include,
without limitation, review of relevant records, interviews with persons
knowledgeable about the Property and relevant governmental agencies, a site
inspection of the Property and adjoining properties (Phase I) and shall
otherwise be reasonably satisfactory in form and substance to Landlord. If
such investigation, in the opinion of the performing engineer, indicates
that any portion of the Property is not free from oil, asbestos, radon and
other Hazardous Substances, such investigation shall also include a more
detailed physical site inspection, appropriate testing, subsurface and
otherwise, and review of historical records (Phase II) to demonstrate the
compliance of such of the Property with Applicable Laws and the absence of
Hazardous Substances.
All preliminary drafts and final versions of the Environmental Report,
and supplements and amendments thereto, shall be provided to Landlord
contemporaneously with delivery thereof to Tenant. With respect to any
recommendations contained in the Environmental Report, violations of
Applicable Laws and/or the existence of any conditions at the Property which
could give rise to an Environmental Obligation, Tenant shall promptly give
Notice thereof to Landlord, together with a description, setting forth in
reasonable detail, of all actions Tenant proposes to take in connection
therewith and Tenant shall promptly take all actions, and incur any and all
expenses, as may be reasonably necessary and as may be required by any
Government Agency and as may be reasonably required by Landlord, (i) to
clean up, remove or remediate from and about the Property all Hazardous
Substances thereon, (ii) to contain, prevent and eliminate any further
release or threat of release of Hazardous Substances on or about the
Property, and (iii) otherwise to eliminate such violation or condition from
the Property to the reasonable satisfaction of Landlord.
4.3.3 INDEMNIFICATION OF LANDLORD. Tenant shall protect, indemnify and
hold harmless Landlord and each Facility Mortgagee, their trustees,
officers, agents, employees and beneficiaries, and any of their respective
successors or assigns (hereafter the "INDEMNITEES," and when referred to
singly, an "INDEMNITEE") for, from and against any and all debts, liens,
claims, causes of action, administrative orders or notices, costs, fines,
penalties or expenses (including, without limitation, reasonable attorneys'
fees and expenses) imposed upon, incurred by or asserted against any
Indemnitee resulting from, either directly or indirectly, the presence in,
upon or under the soil or ground water of any portion of the Property or (if
caused by activity at the Property) any properties surrounding the Property
of any Hazardous Substances in violation of any Applicable Law by reason of
any failure by Tenant or any Person to perform or comply with any of the
terms of this SECTION 4.3. Tenant's duty herein includes, but is not limited
to, costs associated with personal injury or property damage claims as a
result of the presence of Hazardous Substances in, upon or under the soil or
ground water of any portion of the Property in violation of any Applicable
Law but does not include any attribution of Landlord=s internal
administrative costs. Upon Notice from Landlord, Tenant shall undertake the
defense, at Tenant's sole cost and expense, of any indemnification duties
set forth herein.
Tenant shall, upon demand, pay to Landlord, as Additional Rent, any
cost, expense, loss or damage (including, without limitation, reasonable
attorneys' fees) incurred by Landlord and arising from a failure of Tenant
strictly to observe and perform the foregoing requirements, which amounts
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shall bear interest five (5) days after the date of such demand until paid
by Tenant to Landlord at the Overdue Rate.
Notwithstanding any of the foregoing to the contrary, in no event shall
Tenant be required to indemnify Landlord against any damage arising from the
negligence or other wrongful conduct of Landlord or its employees; nor be
required to pay any settlement not approved by Tenant unless Tenant shall
have failed to comply with its obligations under the first paragraph of this
SECTION 4.3.3.
4.3.4 SURVIVAL. The provisions of this SECTION 4.3 shall survive the
expiration or sooner termination of this Agreement.
ARTICLE 5
MAINTENANCE AND REPAIRS, ETC.
5.1 MAINTENANCE AND REPAIR.
5.1.1 TENANT'S OBLIGATIONS. Tenant shall, at its sole cost and
expense, keep the Property and all private roadways, sidewalks and curbs
appurtenant thereto (and Tenant's Personal Property) in good order and
repair, reasonable wear and tear excepted (whether or not the need for such
repairs occurs as a result of Tenant's use, any prior use, the elements or
the passage of time), and shall promptly make all necessary and appropriate
repairs and replacements thereto of every kind and nature, whether interior
or exterior, structural or nonstructural, ordinary or extraordinary,
foreseen or unforeseen or arising by reason of a condition existing prior to
the commencement of the Term (concealed or otherwise); PROVIDED, HOWEVER,
that Tenant shall be permitted to prosecute claims against Landlord's
predecessors in title, as well as contractors and suppliers for breach of
any representation or warranty made to or on behalf of Landlord, or for any
latent defects in the Property. All repairs shall be made in good,
workmanlike and first-class manner, in accordance with all applicable
federal, state and local statutes, ordinances, by-laws, codes, rules and
regulations relating to any such work. Tenant shall not take or omit to take
any action, the taking or omission of which would materially impair the
value of the Property or any part thereof for its Primary Intended Use.
Tenant's obligations under this SECTION 5.1.1 shall be limited in the event
of any casualty or Condemnation as set forth in SECTIONS 10.2 AND 11.2.
Notwithstanding any provisions of this SECTION 5.1 to the contrary, Tenant's
obligations with respect to Hazardous Substances are as set forth in SECTION
4.3.
Notwithstanding the foregoing, in the event that Landlord shall give
notice to Tenant that Tenant is in default of its obligations under SECTION
5.1.1, such default shall not have arisen due to a casualty or a taking, or
the requirements of Applicable Laws, and the cost of remedying such default
shall exceed $1,000,000 (which amount shall be increased over the term of
this Agreement by the increase in the Index from the Commencement Date to
the date of such notice), then Landlord shall (at its sole discretion)
either agree to provide to Tenant the funds necessary to cure such default,
or excuse Tenant from curing such default. If Landlord shall agree to
provide such funds then the Minimum Rent, as of the date(s) Landlord shall
disburse the same, shall increase by one-twelfth of the product of (a) the
amount of funds advanced multiplied by (b) the greater of (i) ten percent
(10%) or (ii) the sum of the quoted per annum rate for fifteen year U.S.
Treasury obligations on the date(s) of funding plus three hundred fifty
(350) basis points; and the funds shall be disbursed upon receipt by
Landlord of (i) lien waivers from all contractors performing the work for
which such funds are provided, and (ii) evidence satisfactory to Landlord
that all such work shall have been performed in a first-class manner and in
compliance with Applicable Laws.
"INDEX" shall mean the Consumer Price Index for Urban Consumers,
Boston-Lawrence-Salem, Massachusetts/New Hampshire, All Items,
1982-1984=100, (or the Consumer Price Index for the smallest geographic area
for which includes Boston-Lawrence-Salem, Massachusetts/New Hampshire. The
Index is presently published by the Bureau of Labor Statistics of the United
States Department of
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Labor. In the event publication of the Index ceases, then the Index shall be
whatever index is published by the United States Department of Labor at that
time that is most nearly comparable as a measure of general changes in price
levels for such area.
5.1.2 LANDLORD'S OBLIGATIONS. Landlord shall not, under any
circumstances, be required to build or rebuild any improvement on the
Property, or to make any repairs, replacements, alterations, restorations or
renewals of any nature or description to the Property, whether ordinary or
extraordinary, structural or nonstructural, foreseen or unforeseen, or to
make any expenditure whatsoever with respect thereto (except as provided in
ARTICLES 10 AND 11 with respect to disbursement of insurance and Award
proceeds), or to maintain the Property in any way, except as specifically
provided herein. Tenant hereby waives, to the maximum extent permitted by
law, the right to make repairs at the expense of Landlord pursuant to any
law in effect on the date hereof or hereafter enacted. Landlord shall have
the right to give, record and post, as appropriate, notices of
nonresponsibility under any mechanic's lien laws now or hereafter existing.
5.1.3 NONRESPONSIBILITY OF LANDLORD; NO MECHANICS LIENS. Landlord's
interest in the Property shall not be subject to liens for Capital Additions
made by Tenant and Tenant shall have no power or authority to create any
lien or permit any lien to attach to any of the Property or the present
estate, reversion or other estate of Landlord in the Property or on the
building or other improvements thereon as a result of Capital Additions made
by Tenant or for any other cause or reason. All materialmen, contractors,
artisans, mechanics and laborers and other persons contracting with Tenant
with respect to the Property, or any part thereof, are hereby charged with
notice that such liens are expressly prohibited and that they must look
solely to Tenant to secure payment for any work done or material furnished
for Capital Additions by Tenant or for any other purpose during the term of
this Agreement.
Nothing contained in this Agreement shall be deemed or construed in any
way as constituting the consent or request of Landlord, express or implied,
by inference or otherwise, to any contractor, subcontractor, laborer or
materialmen for the performance of any labor or the furnishing of any
materials for any alteration, addition, improvement or repair to the
Property or any part thereof or as giving Tenant any right, power or
authority to contract for or permit the rendering of any services or the
furnishing of any materials that would give rise to the filing of any lien
against the Property or any part thereof nor to subject Landlord's estate in
the Property or any part thereof to liability under any mechanic's or
materialmen's lien Law of the State in any way, it being expressly
understood Landlord's estate shall not be subject to any such liability.
5.2 TENANT'S PERSONAL PROPERTY. Tenant may, at its expense, install, affix
or assemble or place on any parcels of the Land, any items of Tenant's Personal
Property; and Tenant may, subject to the conditions set forth below, remove the
same at any time, provided that no Default or Event of Default has occurred and
is continuing. Tenant shall provide and maintain throughout the Term all such
Tenant's Personal Property as shall be necessary in order to operate the
Facility, in compliance with applicable Legal Requirements and Insurance
Requirements. All of Tenant's Personal Property not removed by Tenant on or
prior to the expiration or earlier termination of this Agreement shall be
considered abandoned by Tenant and may be appropriated, sold, destroyed or
otherwise disposed of by Landlord without the necessity of first giving notice
thereof to Tenant, without any payment to Tenant and without any obligation to
account therefor. Tenant shall, at its expense, restore the Property to the
condition required by SECTION 5.3, including repair of all damage to the
Property caused by the removal of Tenant's Personal Property, whether effected
by Tenant or Landlord.
5.3 YIELD UP. Upon the expiration or sooner termination of this Agreement,
Tenant shall vacate and surrender the Property to Landlord free from Tenant's
Personal Property and free from any Hazardous Substances and in the condition in
which the Property was in on the Commencement Date, except as repaired, rebuilt,
restored, altered or added to as permitted or required by the provisions of this
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Agreement, reasonable wear and tear (and casualty damage and Condemnation, in
the event that this Agreement is terminated following a casualty or total
Condemnation in accordance with ARTICLE 10 or ARTICLE 11) excepted.
Notwithstanding the foregoing, Tenant shall not be required to remove fixtures
which, at the expiration or sooner termination of this Agreement, shall be in
compliance with Applicable Law and remain in good order and condition, nor shall
Tenant be required to remove Hazardous Materials which were either part of the
Facility base building construction at the Commencement Date or which are added
to the Facility during the term with Landlord=s consent, but without
conditioning of such consent on removal by Tenant, and in either case which, at
the expiration or sooner termination of this Agreement, shall be in compliance
with Applicable Laws.
5.4 ENCROACHMENTS, RESTRICTIONS, ETC. If any of the Improvements shall, at
any time, encroach upon any property, street or right-of-way adjacent to the
Property, or shall violate the agreements or conditions contained in any lawful
restrictive covenant or other agreement affecting the Property, or any part
thereof, or shall impair the rights of others under any easement or right-of-way
to which the Property is subject, upon the request of Landlord (but only as to
any encroachment, violation or impairment that is not a Permitted Encumbrance)
or of any Person affected by any such encroachment, violation or impairment,
Tenant shall, at its sole cost and expense, subject to its right to contest the
existence of any encroachment, violation or impairment in accordance with the
provisions of ARTICLE 8, either (a) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting from each such
encroachment, violation or impairment, whether the same shall affect Landlord or
Tenant, or (b) make such changes in the Leased Improvements and take such other
actions, as are necessary to remove such encroachment and to end such violation
or impairment, including, if necessary, the alteration of any of the
Improvements and, in any event, take all such actions as may be necessary in
order to ensure the continued operation of the Facility for the Primary Intended
Use substantially in the manner and to the extent such Facility was operated
prior to the assertion of such violation, impairment or encroachment. Any such
alteration shall be made in conformity with the applicable requirements of this
ARTICLE 5. Tenant's obligations under this SECTION 5.4 shall be in addition to
and shall in no way discharge or diminish any obligation of any insurer under
any policy of title or other insurance.
5.5 LANDLORD TO GRANT EASEMENTS, ETC. Landlord shall from time to time, so
long as no Default or Event of Default shall have occurred and be continuing, at
the request of Tenant and at Tenant's sole cost and expense, (a) grant easements
and other rights in the nature of easements with respect to the Property to
third parties; (b) release existing easements or other rights in the nature of
easements which are for the benefit of the Property; (c) dedicate or transfer
unimproved portions of the Property for road, highway or other public purposes;
(d) execute petitions to have the Property annexed to any municipal corporation
or utility district; (e) execute amendments to any covenants and restrictions
affecting the Property; and (f) execute and deliver to any Person any instrument
appropriate to confirm or effect such grants, release, dedications, transfers,
petitions and amendments (to the extent of its interests in the Property);
PROVIDED, HOWEVER, that Landlord shall have first determined that such grant,
release, dedication, transfer, petition or amendment is not detrimental to the
operation of the Property for the Primary Intended Use and does not materially
reduce the value of the Property, and Landlord shall have received an Officer's
Certificate confirming such determination, together with such additional
ainformation with respect thereto as Landlord may reasonably request.
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ARTICLE 6
CAPITAL ADDITIONS, ETC.
6.1 CONSTRUCTION OF CAPITAL ADDITIONS. Tenant shall not construct or
install Capital Additions on the Property without obtaining Landlord's prior
written consent, provided that no consent shall be required for any Capital
Addition so long as (a) the Capital Additions Costs for such Capital Addition
are less than $150,000 in the aggregate; (b) such construction or installation
would not adversely affect or violate any Legal Requirement or Insurance
Requirement applicable to the Property; (c) the Capital Addition Costs incurred
or to be incurred by Tenant in the twelve-month period ending with the
completion of the latest Capital Additions shall not exceed $500,000; and (d)
Landlord shall have received an Officer's Certificate certifying as to the
satisfaction of the conditions set out in clauses (a), (b) and (c) above.
Landlord shall not unreasonably withhold consent to any Capital Addition which
shall not alter the character of the Property or diminish the value of the
Property (which, in the event of a dispute, shall be determined by a Qualified
Appraiser selected by Landlord and reasonably acceptable to Tenant). If
Landlord's consent is required, prior to commencing construction of any Capital
Addition, Tenant shall submit to Landlord, in writing, a proposal setting forth,
in reasonable detail, any proposed Capital Addition and, if required by
Landlord, the report of the Qualified Appraiser attesting to effect on value and
shall provide to Landlord such plans and specifications, permits, licenses,
contracts and other information concerning the proposed Capital Addition as
Landlord may reasonably request. Landlord shall have thirty (30) days to review
all materials submitted to Landlord in connection with any such proposal.
Failure of Landlord to respond to Tenant's proposal within thirty (30) days
after receipt of all information and materials requested by Landlord in
connection with the proposed Capital Addition shall be deemed to constitute
approval of such proposed Capital Addition, provided that such proposal states
prominently that the failure of Landlord to respond within such 30-day period
shall constitute approval. Without limiting the generality of the foregoing,
such proposal shall indicate the approximate projected cost of constructing such
Capital Addition and the use or uses to which it will be put. No Capital
Addition shall be made which would tie in or connect any Improvement on the
Property with any other improvements on property adjacent to the Property. Any
Capital Additions shall, upon the expiration or sooner termination of this
Agreement, pass to and become the property of Landlord, free and clear of all
encumbrances other than Permitted Encumbrances.
6.2 NON-CAPITAL ADDITIONS. Tenant shall have the right, at Tenant's sole
cost and expense, without Landlord consent, to make additions, modifications or
improvements to the Property which are not Capital Additions ("NON-CAPITAL
ADDITIONS") from time to time as Tenant, in its discretion, may deem desirable
for the Primary Intended Use (including, without limitation, the improvement, in
a fashion consistent with the remainder of the Facility, of portions of the
Facility that are, as of the Commencement Date, unfinished shelf space) provided
that any such Non-Capital Addition will not materially alter the character or
purpose or materially detract from the value or operating efficiency of the
Property or adversely affect the ability of Tenant to comply with the provisions
of this Agreement and, without limiting the foregoing, will not adversely affect
or violate any Legal Requirement or Insurance Requirement applicable to the
Property. All such Non-Capital Additions shall, upon expiration or earlier
termination of this Agreement, pass to and become the property of Landlord, free
and clear of all liens and encumbrances, other than Permitted Encumbrances.
ARTICLE 7
LIENS
Subject to ARTICLE 8, Tenant shall not, directly or indirectly, create or
allow to remain and shall promptly discharge or bond over in a manner reasonably
satisfactory to Landlord, at its expense, any lien, encumbrance, attachment,
title retention agreement or claim upon the Property or Tenant's leasehold
interest therein or any attachment, levy, claim or encumbrance in respect of the
Rent, other than (a) Permitted Encumbrances; (b) restrictions, liens and other
encumbrances which are consented to in
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writing by Landlord (which shall, upon such consent, become "Permitted
Encumbrances"); (c) liens for those taxes of Landlord which Tenant is not
required to pay hereunder; (d) subleases permitted by ARTICLE 17; (e) liens for
Impositions or for sums resulting from noncompliance with Legal Requirements so
long as (i) the same are not yet payable, or (ii) are being contested in
accordance with ARTICLE 8; (f) liens of mechanics, laborers, materialmen,
suppliers or vendors incurred in the ordinary course of business that are not
yet due and payable or are for sums that are being contested in accordance with
ARTICLE 8; and (g) any Facility Mortgages or other liens which are the
responsibility of Landlord pursuant to the provisions of ARTICLE 21.
ARTICLE 8
PERMITTED CONTESTS
Tenant shall have the right to contest the amount or validity of any
Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy,
encumbrance, charge or claim (collectively, "CLAIMS") by appropriate legal
proceedings, conducted in good faith and with due diligence, provided that (a)
the foregoing shall in no way be construed as relieving, modifying or extending
Tenant's obligation to pay any Claims as finally determined; (b) such contest
shall not cause Tenant to be in default under any mortgage or deed of trust
encumbering its interest in the Property or result in a lien attaching to the
Property which is not discharged or bonded within 10 days of Notice to Tenant of
its attachment; (c) no part of the Property nor any Rent therefrom shall be in
any immediate danger of sale, forfeiture, attachment or loss; and (d) Tenant
shall indemnify and hold harmless Landlord from and against any cost, claim,
damage, penalty or reasonable expense, including reasonable attorneys' fees,
incurred by Landlord in connection therewith or as a result thereof. Upon
Landlord's request, which request may be made by Landlord only if the Security
Deposit then held by Landlord shall not be at least three times the amount of
the Claim (together with interest and penalties), Tenant shall either (i)
provide a bond, title indemnity, endorsement or other assurance reasonably
satisfactory to Landlord that all Claims which may be assessed against the
Property, together with all interest and penalties thereon will be paid, or (ii)
deposit within the time otherwise required for payment with a bank or trust
company, as trustee, as security for the payment of such Claims, an amount
sufficient to pay the same, together with interest and penalties in connection
therewith and all Claims which may be assessed against or become a Claim on the
Property, or any part thereof, in connection with any such contest. Tenant shall
furnish Landlord and any Facility Mortgagee with reasonable evidence of such
deposit, title indemnity, endorsement or other assurance within five (5) days
after request therefor. Landlord agrees to join in any such proceedings if
required legally to prosecute such contest, provided that Landlord shall not
thereby be subjected to any liability therefor (including, without limitation,
for the payment of any costs or expenses in connection therewith). Tenant shall
be entitled to any refund of any Claims and such charges and penalties or
interest thereon which have been paid by Tenant or paid by Landlord and for
which Landlord has been fully reimbursed by Tenant. If Tenant shall fail (x) to
pay any Claims when finally determined, (y) to provide security therefor as
provided in this ARTICLE 8, or (z) to prosecute any such contest diligently and
in good faith, Landlord may, upon reasonable notice to Tenant which notice shall
not be required if Landlord shall reasonably determine that the same is not
practicable), pay such charges, together with interest and penalties due with
respect thereto, and Tenant shall reimburse Landlord therefor, upon demand, as
Additional Rent.
ARTICLE 9
INSURANCE AND INDEMNIFICATION
9.1 GENERAL INSURANCE REQUIREMENTS. Tenant shall, at all times during the
Term and at any other time Tenant shall be in possession of the Property, keep
the Property and all property located therein or thereon, including Tenant's
Personal Property, insured against the risks and in the amounts as follows and
shall maintain the following insurance:
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(a) "All-risk" property insurance, including insurance against loss or
damage by fire, vandalism and malicious mischief, explosion of steamboilers,
pressure vessels or other similar apparatus, now or hereafter installed in
the Facility, extended coverage perils, earthquake and all physical loss
perils insurance, including, but not limited to, sprinkler leakage, in an
amount equal to one hundred percent (100%) of the then full Replacement Cost
thereof (as defined in SECTION 9.2) with the usual extended coverage
endorsements, including a Replacement Cost and Agreed Amount Endorsement and
Builder's Risk Coverage during the continuance of any construction at the
Property;
(b) Loss of rents insurance in an amount not less than the Rent due for
any succeeding twenty-four (24) month period hereunder;
(c) Commercial general liability insurance, including bodily injury and
property damage (on an occurrence basis and on a 1988 ISO CGL form or its
equivalent or otherwise in the broadest form available, including, without
limitation, broad form contractual liability, fire legal liability,
independent contractor's hazard and completed operations coverage) in an
amount not less than One Million Dollars ($1,000,000) per occurrence, Two
Million Dollars ($2,000,000) in the aggregate and umbrella coverage of all
such claims in an amount not less than Twenty Million Dollars ($20,000,000);
(d) Flood (if the Property is located in whole or in part within an area
identified as an area having special flood hazards and in which flood
insurance has been made available under the National Flood Insurance Act of
1968, as amended, or the Flood Disaster Protection Act of 1973, as amended
(or any successor acts thereto)) and such other hazards and in such amounts
as may be customary for comparable properties in the area;
(e) Worker's compensation insurance coverage for all persons employed by
Tenant on the Property with statutory limits and otherwise with limits of
and provisions in accordance with the requirements of applicable local,
State and federal law, and employer's liability insurance in such amounts as
Landlord shall reasonably require; and
(f) Such additional insurance or increased limits on the coverages
stated above as may be reasonably required, from time to time, by Landlord
or any Facility Mortgagee.
9.2 REPLACEMENT COST. "REPLACEMENT COST" as used herein shall mean the
actual replacement cost of the property requiring replacement from time to time,
including an increased cost of construction endorsement, less exclusions
provided in the standard form of fire insurance policy. In the event either
party believes that the then full Replacement Cost has increased or decreased at
any time during the Term, such party, at its own cost, shall have the right to
have such full Replacement Cost redetermined by an accredited appraiser approved
by the other, which approval shall not be unreasonably withheld or delayed. The
party desiring to have the full Replacement Cost so redetermined shall
forthwith, on receipt of such determination by such appraiser, give written
notice thereof to the other. The determination of such appraiser shall be final
and binding on the parties hereto, and Tenant shall forthwith conform the amount
of the insurance carried to the amount so determined by the appraiser.
9.3 WAIVER OF SUBROGATION. Landlord and Tenant agree that (insofar as and
to the extent that such agreement may be effective without invalidating or
making it impossible to secure insurance coverage from responsible insurance
companies doing business in the State) with respect to any property loss which
is covered by insurance then being carried by Landlord or Tenant, respectively,
the party carrying such insurance and suffering said loss releases the other of
and from any and all claims with respect to such loss; and they further 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. In the event that any extra premium is payable by Tenant as a result
of this provision, Landlord shall not be liable for reimbursement to Tenant for
such extra premium.
9.4 FORM SATISFACTORY, ETC. All insurance policies and endorsements
required pursuant to this ARTICLE 9 shall be fully paid for, nonassessable and
shall contain such provisions and expiration dates and be
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in such form and amounts and issued by insurance carriers authorized to do
business in the State, having a general policy holder's rating of A or A+ in
Best's latest rating guide, and as otherwise shall be reasonably approved by
Landlord. Without limiting the foregoing, such policies shall include no
deductible in excess of $25,000 (unless consistent with deductibles included in
policies carried by entities engaged in similar businesses and owning similar
properties similarly situated and agreed to in advance by Landlord) and, with
the exception of the insurance described in SECTION 9.1(E), shall name Landlord
and any Facility Mortgagee as additional insureds, as their interests may appear
except that the insurance under Section 9.1(a) and (b) above shall list Landlord
as the first named insured. All losses shall be payable to Landlord, any
Facility Mortgagee or Tenant as provided in ARTICLE 10. Any loss adjustment
shall require the prior written consent of Landlord, Tenant, and each Facility
Mortgagee. Tenant shall pay all insurance premiums and deliver policies or
certificates thereof to Landlord prior to their effective date (and, with
respect to any renewal policy, thirty (30) days prior to the expiration of the
existing policy) and, in the event Tenant shall fail to effect such insurance as
herein required, to pay the premiums therefor or to deliver such policies or
certificates to Landlord or any Facility Mortgagee at the times required,
Landlord shall have the right, but not the obligation, to acquire such insurance
and pay the premiums therefor, which amounts shall be payable to Landlord, upon
demand, as Additional Rent, together with interest accrued thereon at the
Overdue Rate from the date such demand is made until the date repaid. All such
policies shall provide Landlord (and any Facility Mortgagee, if required by the
same) thirty (30) days' prior written notice of any modification, expiration or
cancellation of such policy.
9.5 BLANKET POLICY. Notwithstanding anything to the contrary contained in
this ARTICLE 9, Tenant's obligation to maintain the insurance herein required
may be brought within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Tenant and its Affiliated Persons, provided,
that (a) the coverage thereby afforded will not be reduced or diminished from
that which would exist under a separate policy meeting all other requirements of
this Agreement, and (b) the requirements of this ARTICLE 9 are otherwise
satisfied. Without limiting the foregoing, the amounts of insurance that are
required to be maintained pursuant to Section 9.1 shall be on a Facility by
Facility basis, and shall not be subject to an aggregate limit.
9.6 NO SEPARATE INSURANCE. Tenant shall not take out separate insurance,
concurrent in form or contributing in the event of loss with that required by
this ARTICLE 9, or increase the amount of any existing insurance by securing an
additional policy or additional policies, unless all parties having an insurable
interest in the subject matter of such insurance, including Landlord and all
Facility Mortgagees, are included therein as additional insureds and the loss is
payable under such insurance in the same manner as losses are payable under this
Agreement. In the event Tenant shall take out any such separate insurance or
increase any of the amounts of the then existing insurance, Tenant shall give
Landlord prompt Notice thereof.
9.7 INDEMNIFICATION OF LANDLORD. Notwithstanding the existence of any
insurance provided for herein and without regard to the policy limits of any
such insurance, Tenant shall protect, indemnify and hold harmless Landlord for,
from and against all liabilities, obligations, claims, damages, penalties,
causes of action, costs and reasonable expenses (including, without limitation,
reasonable attorneys' fees), to the maximum extent permitted by law, imposed
upon or incurred by or asserted against Landlord by reason of: (a) any accident,
injury to or death of persons or loss of or damage to property occurring on or
about the Property or adjoining sidewalks or rights of way, including, without
limitation, any claims of malpractice; (b) any past, present or future use,
misuse, non-use, condition, management, maintenance or repair by Tenant or
anyone claiming under Tenant of the Property or Tenant's Personal Property or
any litigation, proceeding or claim by governmental entities or other third
parties to which Landlord is made a party or participant relating to the
Property and arising during the Term or Tenant's Personal Property or such use,
misuse, non-use, condition, management, maintenance, or repair thereof
including, failure to perform obligations (other than Condemnation proceedings)
to which Landlord is made a party; (c) any Impositions (which are the
obligations of Tenant to pay pursuant to the applicable provisions of this
Agreement);
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and (d) any failure on the part of Tenant or anyone claiming under Tenant to
perform or comply with any of the terms of this Agreement. Subject to the
provisions of Article 8, Tenant shall pay all amounts payable under this SECTION
9.7 within ten (10) days after demand therefor, and if not timely paid, such
amounts shall bear interest at the Overdue Rate from the date due to the date of
payment. Tenant, at its expense, shall contest, resist and defend any such
claim, action or proceeding asserted or instituted against Landlord or may
compromise or otherwise dispose of the same, provided Landlord shall be fully
released or bonded off in form satisfactory to Landlord. The obligations of
Tenant under this SECTION 9.7 are in addition to the obligations set forth in
SECTION 4.4 and shall survive the termination of this Agreement.
ARTICLE 10
CASUALTY
10.1 INSURANCE PROCEEDS. All proceeds payable by reason of any loss or
damage to the Property, or any portion thereof, and insured under any policy of
insurance required by ARTICLE 9 (including, without limitation, proceeds of any
loss of rents insurance) shall be paid directly to Landlord (subject to the
provisions of SECTION 10.2). If Tenant is required to reconstruct or repair the
Property as provided herein, such proceeds shall be paid out by Landlord from
time to time for the reasonable costs of reconstruction or repair of the
Property necessitated by such damage or destruction, subject to the provisions
of SECTION 10.2.4. Any excess proceeds of insurance remaining after the
completion of the restoration shall be paid to Tenant, except for any portion
reasonably reserved against any Event of Default that has occurred and is
continuing. In the event that SECTION 10.2.1 below is applicable, the insurance
proceeds shall be retained by the party entitled thereto pursuant to SECTION
10.2.1. All salvage resulting from any risk covered by insurance shall belong to
Landlord, except that any salvage related to Tenant's Capital Additions and
Tenant's Personal Property shall belong to Tenant and Landlord shall apply the
proceeds received for any salvage to the costs paid by Tenant for restoration.
10.2 DAMAGE OR DESTRUCTION.
10.2.1 DAMAGE OR DESTRUCTION OF LEASED PROPERTY. If, during the Term,
the Property shall be totally or partially destroyed and the Facility
located thereon is thereby rendered Unsuitable for Its Primary Intended Use,
Tenant shall purchase the Property from Landlord for a purchase price equal
to the Adjusted Purchase Price of the Property. If Tenant purchases the
Property as provided herein, the closing with respect thereto shall occur on
a date designated by Landlord by Notice to Tenant (but in no event prior to
30 days after such Notice), this Agreement shall terminate upon payment of
the purchase price therefor, and Landlord shall remit to Tenant all
insurance proceeds pertaining to the Property then held by Landlord and
shall assign to Tenant all rights to any proceeds available to Landlord
under the insurance policies carried by Tenant pursuant to Section 9.1(a).
10.2.2 PARTIAL DAMAGE OR DESTRUCTION. If, during the Term, the
Property shall be totally or partially destroyed but the Facility located
thereon is not rendered Unsuitable for Its Primary Intended Use, Tenant
shall promptly restore such Facility as provided in SECTION 10.2.4.
10.2.3 INSUFFICIENT INSURANCE PROCEEDS. If the cost of the repair or
restoration of the Property exceeds the amount of insurance proceeds
received by Landlord pursuant to ARTICLE 9, Tenant shall contribute any
excess amounts needed to restore the Property. Such difference shall be paid
by Tenant to Landlord and held by Landlord, together with any other
insurance proceeds, for application to the cost of repair and restoration.
10.2.4 DISBURSEMENT OF PROCEEDS. In the event Tenant is required to
restore the Property pursuant to SECTION 10.2, Tenant shall, at its sole
cost and expense, commence promptly and continue diligently to perform the
repair and restoration of the Property (hereinafter called the "WORK"), or
shall cause the same to be done, so as to restore it in full compliance with
all Legal Requirements so that the Property shall be at least equal in value
and general utility to its general utility and value
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immediately prior to such damage or destruction and substantially similar
thereto. Subject to the terms hereof, Landlord shall advance the casualty
insurance proceeds available under the policy carried by Tenant pursuant to
Section 9.1(a) and the amounts paid to Landlord pursuant to SECTION 10.2.3
to Tenant regularly during the repair and restoration period so as to permit
payment for the cost of any such restoration and repair. Any such advances
shall be for not less than $25,000 (or such lesser amount as equals the
entire balance of the repair and restoration) and Tenant shall submit to
Landlord a written requisition and substantiation therefor on AIA Forms G702
and G703 (or on such other form or forms as may be reasonably acceptable to
Landlord). Landlord may, at its option, condition advancement of said
insurance proceeds and other amounts on (a) the absence of any Event of
Default; (b) its reasonable approval of plans and specifications of an
architect reasonably satisfactory to Landlord; (c) general contractors'
estimates; (d) architect's certificates; (e) unconditional lien waivers of
general contractors; (f) evidence of approval by all governmental
authorities and other regulatory bodies whose approval is required; and (g)
such other certificates as Landlord may, from time to time, reasonably
require. Proceeds of loss of rents insurance shall be applied by Landlord,
on the first day of the calendar month following such disbursement, first to
the payment of all Minimum Rent, Additional Rent and Additional Charges then
due and payable and to become due and payable for the period for which such
proceeds have been paid by the insurance provider, and the balance, if any,
to Tenant. If, at any time, the amount of such proceeds will be insufficient
to pay all Minimum Rent, Additional Rent and Additional Charges due or to
come due during such period, Landlord may, in its sole discretion, suspend
disbursement of any casualty proceeds to Tenant.
10.3 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of SECTION
10.1 OR 10.2 to the contrary, if damage to or destruction of the Property occurs
during the last twenty-four (24) months of the Term and if such damage or
destruction cannot reasonably be expected to be fully repaired and restored
prior to the date that is six (6) months prior to the end of such Term, the
provisions of SECTION 10.2.1 shall apply as if the Property had been totally or
partially destroyed and the Facility located thereon rendered Unsuitable for its
Primary Intended Use.
10.4 TENANT'S PROPERTY. All insurance proceeds payable by reason of any
loss of or damage to any of Tenant's Personal Property or Tenant's Capital
Additions shall be paid to Tenant and, to the extent necessary to repair or
replace Tenant's Capital Additions or Tenant's Personal Property in accordance
with SECTION 10.5, Tenant shall apply such proceeds only toward the cost of
repairing or replacing damaged Tenant's Personal Property or Tenant's Capital
Additions.
10.5 RESTORATION OF TENANT'S PROPERTY. If Tenant is required to restore
the Property as hereinabove provided, Tenant shall either (a) restore those
items of Tenant's Personal Property needed for the efficient operation of the
Facility, or (b) replace such items with items of the same or better quality and
utility.
10.6 NO ABATEMENT OF RENT. This Agreement shall remain in full force and
effect and Tenant's obligation to make all payments of Rent and to pay all other
charges as and when required under this Agreement shall, except as otherwise
provided in SECTION 10.2.1, remain unabated during the Term notwithstanding any
damage involving the Property (provided that Landlord shall credit against such
payments any amounts paid to Landlord as a consequence of such damage under any
business interruption insurance obtained by Tenant hereunder). The provisions of
this ARTICLE 10 shall be considered an express agreement governing any cause of
damage or destruction to the Property and, to the maximum extent permitted by
Applicable Law, no local or State statute, law, rule, regulation or ordinance in
effect during the Term which provide for such a contingency shall have any
application in such case.
10.7 WAIVER. Tenant hereby waives any statutory rights of termination
which may arise by reason of any damage or destruction of the Property.
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ARTICLE 11
CONDEMNATION
11.1 TOTAL CONDEMNATION, ETC. If either (a) the whole of the Property
shall be taken by Condemnation or (b) a Condemnation of less than the whole of
the Property renders the Property Unsuitable for Its Primary Intended Use, this
Agreement shall terminate as of the date of such condemnation, and Tenant and
Landlord shall seek the Award for their interests in the Property as provided in
SECTION 11.5. If the Award received by Landlord for Landlord's interest in the
Property is less than the Adjusted Purchase Price, Tenant shall contribute and
pay to Landlord the amount of such shortfall.
11.2 PARTIAL CONDEMNATION. In the event of a Condemnation of less than the
whole of the Property such that the Property is still suitable for its Primary
Intended Use, Tenant shall, at its sole cost and expense, commence promptly and
continue diligently to restore the untaken portion of the Improvements on the
Property so that such Improvements shall constitute a complete architectural
unit of the same general character and condition (as nearly as may be possible
under the circumstances) as the Improvements existing immediately prior to such
Condemnation, in full compliance with all Legal Requirements. Subject to the
terms hereof, Landlord shall contribute to the cost of restoration that part of
the Award necessary to complete such repair or restoration, together with
severance and other damages awarded for the taken Improvements, to Tenant
regularly during the restoration period so as to permit payment for the cost of
such repair or restoration. Landlord may, at its option, condition advancement
of such Award and other amounts on (a) the absence of any Default or Event of
Default; (b) its approval of plans and specifications of an architect
satisfactory to Landlord (which approval shall not be unreasonably withheld or
delayed); (c) general contractors' estimates; (d) architect's certificates; (e)
unconditional lien waivers of general contractors; (f) evidence of approval by
all governmental authorities and other regulatory bodies whose approval is
required; and (g) such other certificates as Landlord may, from time to time,
reasonably require. Landlord's obligation under this SECTION 11.2 to disburse
the Award and such other amounts shall be subject to the collection thereof by
Landlord. Tenant's obligation to restore the Property shall be subject to the
release of the Award by the Facility Mortgagee to Landlord and Landlord=s
release of the Award to Tenant in accordance with the terms of this Agreement.
If the cost of the restoration of the Property exceeds that part of the Award
necessary to complete such restoration, together with severance and other
damages awarded for the taken Improvements, Tenant shall contribute upon the
demand of Landlord any excess amounts needed to restore the Property. Such
difference shall be paid by Tenant to Landlord and held by Landlord, together
with such part of the Award and such severance and other damages, for
application to the cost of restoration.
11.3 ABATEMENT OF RENT. Other than as specifically provided in this
Agreement, this Agreement shall remain in full force and effect and Tenant's
obligation to make all payments of Rent and to pay all other charges as and when
required under this Agreement shall remain unabated during the Term
notwithstanding any Condemnation. The provisions of this ARTICLE 11 shall be
considered an express agreement governing any Condemnation and, to the maximum
extent permitted bylaw, no local or State statute, law, rule, regulation or
ordinance in effect during the Term which provides for such a contingency shall
have any application in such case. Notwithstanding the foregoing, to the extent
this Agreement shall not be terminated due to any Condemnation but Landlord
shall receive an Award which it shall not remit to Tenant and which shall not be
available to Tenant for restoration as provided in Section 11.2 (the "RETAINED
AWARD") then the Minimum Rent due from time to time shall be reduced by the
percentage determined by dividing the Retained Award by the Adjusted Purchase
Price.
11.4 TEMPORARY CONDEMNATION. In the event of any temporary Condemnation of
all or any part of the Property or Tenant's interest therein, this Agreement
shall continue in full force and effect, and Tenant shall continue to pay, in
the manner and on the terms herein specified, the full amount of the Rent.
Tenant shall continue to perform and observe all of the other terms and
conditions this Agreement on the part of the Tenant to be performed and
observed. Provided no Default or Event of Default has occurred and is
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continuing, the entire amount of any Award made for such temporary Condemnation
allocable to the Term, whether paid by way of damages, rent or otherwise, shall
be paid to Tenant. Tenant shall, promptly upon the termination of any such
period of temporary Condemnation, at its sole cost and expense, restore the
Property to the condition that existed immediately prior to such Condemnation,
in full compliance with all Legal Requirements, unless such period of temporary
Condemnation shall extend beyond the expiration of the Term, in which event
Tenant shall not be required to make such restoration. For purposes of this
SECTION 11.4, a Condemnation shall be deemed to be temporary if the period of
such Condemnation is not expected to exceed twenty-four (24) months.
11.5 ALLOCATION OF AWARD. Except as provided in the second sentence of
this SECTION 11.5, the total Award shall be solely the property of and payable
to Landlord. Any portion of the Award made for the taking of Tenant's leasehold
interest in the Property, Tenant's Capital Additions, loss of business during
the remainder of the Term, the taking of Tenant's Personal Property, or Tenant's
removal and relocation expenses shall be the sole property of and payable to
Tenant (subject to the provisions of SECTION 11.2). In any Condemnation
proceedings, Landlord and Tenant shall each seek its own Award in conformity
herewith, at its own expense.
ARTICLE 12
DEFAULTS AND REMEDIES
12.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an "EVENT OF DEFAULT" hereunder:
(a) should Tenant fail to make any payment of Rent when due and such
failure shall continue for a period of at least five (5) Business Days after
Notice thereof; or
(b) should Tenant shall fail to maintain the insurance coverages
required under ARTICLE 9 and such failure shall continue for a period of at
least five (5) Business Days after Notice; or
(c) should Tenant default in the due observance or performance of any of
the terms, covenants or agreements contained herein to be performed or
observed by it (other than as specified in clauses (a) and (b) above) and
such default shall continue for a period of thirty (30) days after Notice
thereof from Landlord to Tenant (provided that Notice but no such cure
period shall be required if Landlord shall reasonably determine immediate
action is necessary to protect person or property); PROVIDED, HOWEVER, that
if such default is susceptible of cure but such cure cannot be accomplished
with due diligence within such period of time and if, in addition, Tenant
commences to cure such default within thirty (30) days after Notice thereof
from Landlord and thereafter prosecutes the curing of such default with all
due diligence and Landlord shall not be materially affected by the
continuing uncured default, such period of time shall be extended to such
period of time (not to exceed an additional ninety (90) days in the
aggregate) as may be necessary to cure such default with all due diligence;
or
(d) should Tenant have failed to pay Rent timely at least three times
during any twelve-month period during the Term and Landlord shall have given
Tenant at least two (2) Notices during any such twelve-month period of
Tenant's failure to pay Rent when due; or
(e) should there occur a final unappealable determination by applicable
State authorities of the revocation or limitation of any license, permit,
certification or approval required for the lawful operation of the Facility
in accordance with the Primary Intended Use; or
(f) should any representation or warranty made by or on behalf of Tenant
or any other Person under or in connection with this Agreement, or in any
document, certificate or agreement delivered in connection herewith or
therewith prove to have been false or misleading in any material respect on
the date when made or deemed made; or
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(g) should Tenant generally not be paying its debts as they become due,
or should Tenant make a general assignment for the benefit of creditors; or
(h) should any petition be filed by or against Tenant under the Federal
bankruptcy laws, or should any other proceeding be instituted by or against
Tenant seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, reorganization, arrangement, adjustment or composition of it or
its debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for
Tenant, or for any substantial part of the property of Tenant, and such
proceeding is not dismissed, stayed or bonded against within ninety (90)
days after institution thereof, or should Tenant take any action to
authorize or effect any of the actions set forth above in this paragraph; or
(i) should Tenant institute any proceeding for its dissolution or
termination; or
(j) should Tenant voluntarily cease operation of the Property for the
Primary Intended Use for a period in excess of thirty (30) consecutive days,
except as a result of damage, destruction or partial or complete
Condemnation; or
(k) should a default occur under any mortgage which is secured by
Tenant's leasehold interest hereunder entitling the holder to accelerate the
debt secured thereby or to commence foreclosure proceedings in connection
with said mortgage; or
(l) should the estate or interest of Tenant in the Property or any part
thereof be levied upon or attached in any proceeding and the same shall not
be vacated or discharged within the later of (x) one hundred and twenty
(120) days after commencement thereof, unless the amount in dispute is less
than $100,000, in which case Tenant shall give Notice to Landlord of the
dispute but Tenant may defend in any suitable way, and (y) thirty (30) days
after receipt by Tenant of Notice thereof from Landlord (unless Tenant shall
be contesting such lien or attachment in good faith in accordance with
ARTICLE 8);
then, and in any such event, Landlord, in addition to all other remedies
available to it, may terminate this Agreement by giving Notice thereof to Tenant
and upon the expiration of the time, if any, fixed in such Notice, this
Agreement shall terminate and all rights of Tenant under this Agreement shall
cease. Landlord shall have and may exercise all rights and remedies available at
law and in equity to Landlord as a result of Tenant's breach of this Agreement.
Upon the occurrence of an Event of Default, Landlord may, in addition to any
other remedies provided herein, subject to Applicable Law, enter upon the
Property or any portion thereof and take possession of any and all of Tenant's
Personal Property on the Property without liability for trespass or conversion
(Tenant hereby waiving any right to notice or hearing prior to such taking of
possession by Landlord) and sell the same at public or private sale, after
giving Tenant reasonable Notice of the time and place of any public or private
sale, at which sale Landlord or its assigns may purchase all or any portion of
Tenant's Personal Property unless otherwise prohibited by law. Unless otherwise
provided by law and without intending to exclude any other manner of giving
Tenant reasonable notice, the requirement of reasonable Notice shall be met if
such Notice is given at least ten (10) days before the date of sale. The
proceeds from any such disposition, less all expenses incurred in connection
with the taking of possession, holding and selling of such property (including,
reasonable attorneys' fees) shall be applied as a credit against the
indebtedness which is secured by the security interest granted in SECTION 7.2.
Any surplus shall be paid to Tenant or as otherwise required by law and Tenant
shall pay any deficiency to Landlord, as Additional Charges, upon demand.
12.2 REMEDIES. None of (a) the termination of this Agreement pursuant to
SECTION 12.1; (b) the repossession of the Property or any portion thereof; (c)
the failure of Landlord to re-let the Property or any portion thereof; nor (d)
the reletting of all or any of portion of the Property, shall relieve Tenant of
its liability and obligations hereunder, all of which shall survive any such
termination, repossession or re-letting. In the event of any such termination,
Tenant shall forthwith pay to Landlord all Rent due and
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payable hereunder through and including the date of such termination.
Thereafter, Tenant, until the end of what would have been the Term of this
Agreement in the absence of such termination, shall be liable to Landlord for,
and shall pay to Landlord, as current damages, the Rent and other charges which
would be payable hereunder for the remainder of the Term had such termination
not occurred, less the net proceeds, if any, of any re-letting of the Property,
after deducting all expenses in connection with such reletting, including,
without limitation, all repossession costs, brokerage commissions, legal
expenses, attorneys' fees, advertising, expenses of employees, alteration costs
and expenses of preparation for such reletting. Tenant shall pay such current
damages to Landlord monthly on the days on which the Minimum Rent would have
been payable hereunder if this Agreement had not been so terminated with respect
to such of the Property.
At any time after such termination, whether or not Landlord shall have
collected any such current damages, as liquidated final damages beyond the date
of such termination, at Landlord's election, Tenant shall pay to Landlord either
(a) an amount equal to the excess, if any (discounted to present value at the
Prime Rate), of the Rent and other charges which would be payable hereunder from
the date of such termination (assuming that, for the purposes of this paragraph,
annual payments by Tenant on account of Impositions would be the same as
payments required for the immediately preceding twelve calendar months, or if
less than twelve calendar months have expired since the Commencement Date, the
payments required for such lesser period projected to an annual amount) for what
would be the then unexpired term of this Agreement if the same remained in
effect, less the Fair Market Rental for the same period, or (b) an amount equal
to the lesser of (i) the Rent and other charges that would have been payable for
the balance of the Term had it not been terminated, and (ii) the aggregate of
the Rent and other charges accrued in the nine (9) months ended next prior to
such termination. In the event this Agreement is so terminated prior to the
expiration of the first full year of the Term, the liquidated damages which
Landlord may elect to recover pursuant to clause (b) (ii) of this paragraph
shall be calculated as if such termination had occurred on the first anniversary
of the Commencement Date. Nothing contained in this Agreement shall, however,
limit or prejudice the right of Landlord to prove and obtain in proceedings for
bankruptcy or insolvency an amount equal to the maximum allowed by any statute
or rule of law in effect at the time when, and governing the proceedings in
which, the damages are to be proved, whether or not the amount be greater than,
equal to, or less than the amount of the loss or damages referred to above.
In case of any Event of Default, re-entry, expiration and dispossession by
summary proceedings or otherwise, Landlord may (a) relet the Property as to
which this Agreement is so terminated or any part or parts thereof, either in
the name of Landlord or otherwise, for a term or terms which may at Landlord's
option, be equal to, less than or exceed the period which would otherwise have
constituted the balance of the Term and may grant concessions or free rent to
the extent that Landlord considers advisable and necessary to relet the same,
and (b) may make such reasonable alterations, repairs and decorations in the
Property or any portion thereof as Landlord, in its sole and absolute
discretion, considers advisable and necessary for the purpose of reletting the
Property; and the making of such alterations, repairs and decorations shall not
operate or be construed to release Tenant from liability hereunder as aforesaid.
Landlord shall in no event be liable in any way whatsoever for any failure to
relet all or any portion of the Property, or, in the event that the Property is
relet, for failure to collect the rent under such reletting. To the maximum
extent permitted by law, Tenant hereby expressly waives any and all rights of
redemption granted under any present or future laws in the event of Tenant being
evicted or dispossessed, or in the event of Landlord obtaining possession of the
Property, by reason of the violation by Tenant of any of the covenants and
conditions of this Agreement.
12.3 TENANT'S WAIVER. IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION
12.1 OR 12.2, TENANT WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO A
TRIAL BY JURY IN THE EVENT OF SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET
FORTH IN THIS ARTICLE 12, AND THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE
EXEMPTING PROPERTY FROM LIABILITY FOR RENT OR FOR DEBT.
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12.4 APPLICATION OF FUNDS. Any payments received by Landlord under any of
the provisions of this Agreement during the existence or continuance of any
Default or Event of Default (and any payment made to Landlord rather than Tenant
due to the existence of any Default or Event of Default) shall be applied to
Tenant's obligations under this Agreement in such order as Landlord may
determine or as may be required by Applicable Law.
12.5 LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT. If a Default shall have
occurred and be continuing, Landlord, after Notice to Tenant (which Notice shall
not be required if Landlord shall reasonably determine in good faith immediate
action is necessary to protect person or property), without waiving or releasing
any obligation of Tenant and without waiving or releasing any Default, may (but
shall not be obligated to), at any time thereafter, make such payment or perform
such act for the account and at the expense of Tenant, and may, to the maximum
extent permitted by law, enter upon the Property or any portion thereof for such
purpose and take all such action thereon as, in Landlord's sole and absolute
discretion, may be necessary or appropriate therefor. No such entry shall be
deemed an eviction of Tenant. All reasonable costs and expenses (including,
without limitation, reasonable attorneys' fees) incurred by Landlord in
connection therewith (except to the extent such costs and expenses arise out of
the negligence or wilful misconduct of Landlord or its agents), together with
interest thereon (to the extent permitted by law) at the Overdue Rate from the
date such sums are paid by Landlord until repaid, shall be paid by Tenant to
Landlord, on demand.
ARTICLE 13
HOLDING OVER
Any holding over by Tenant after the expiration or sooner termination of
this Agreement shall be treated as a daily tenancy at sufferance at a rate equal
to one and one-half times the greater of the Fair Market Rental Value or the
Minimum Rent and the Additional Rent then in effect plus any other charges
herein provided (prorated on a daily basis). Tenant shall also pay to Landlord
all actual damages sustained by reason of any such holding over. Otherwise, such
holding over shall be on the terms and conditions set forth in this Agreement,
to the extent applicable. Nothing contained herein shall constitute the consent,
express or implied, of Landlord to the holding over of Tenant after the
expiration or earlier termination of this Agreement.
ARTICLE 14
LANDLORD'S DEFAULT
Landlord shall not be deemed to be in default in the performance of any of
its obligations hereunder unless it shall fail to perform such obligations and
such failure shall continue for a period of thirty (30) days or such additional
time as is reasonably required to correct any such default after Notice has been
given by Tenant to Landlord specifying the nature of Landlord's alleged default.
Tenant shall have no right to terminate this Agreement for any default by
Landlord hereunder and no right, for any such default, to offset or counterclaim
against any Rent due hereunder. In no event shall Landlord ever be liable to
Tenant for any punitive damages or for any loss of business or any other
indirect, special or consequential damages suffered by Tenant from whatever
cause.
ARTICLE 15
PURCHASE OF LEASED PROPERTY
In the event Tenant shall purchase the Property from Landlord pursuant to
the terms of this Agreement, Landlord shall, upon receipt from Tenant of the
applicable purchase price by wire transfer of immediately available federal
funds, together with full payment of any unpaid Rent and other charges due and
payable with respect to any period ending on or before the date of the purchase,
deliver to Tenant a
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quitclaim deed and other instruments, conveying the entire interest of Landlord
in and to the Property to Tenant, free and clear of all encumbrances created
through the act or omission of Landlord other than (i) Permitted Encumbrances
and such other liens, if any, which Tenant has agreed in writing to accept and
take title subject to, and (ii) encumbrances imposed on the Property under
SECTION 5.5. The Property shall be conveyed to Tenant on an "as is" basis and in
its "as-is" physical condition. The closing of any such sale shall be subject to
all terms and conditions with respect thereto set forth in this Agreement and
expenses of such conveyance, including, without limitation, all transfer and
sales taxes, documentary fees, the fees and expenses of counsel to Landlord and
the cost of any title examination or title insurance, shall be paid by Tenant.
ARTICLE 16
SUBLETTING AND ASSIGNMENT
16.1 SUBLETTING AND ASSIGNMENT. Tenant shall not, without the prior
written consent of Landlord, assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer this Agreement or sublease (which term shall be deemed to
include the granting of concessions, licenses and the like), all or any part of
the Property or suffer or permit this Agreement or the leasehold estate created
hereby or any other rights arising under this Agreement to be assigned,
transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in
part, whether voluntarily, involuntarily or by operation of law, or permit the
use or occupancy of the Property by anyone other than Tenant, or the Property to
be offered or advertised for assignment or subletting.
Notwithstanding the foregoing, Tenant may, without the need for Landlord's
consent, assign its interest in this Lease (a "PERMITTED ASSIGNMENT") to any
Affiliated Person so long as (i) Tenant shall promptly furnish Landlord with
fully executed counterparts of any such assignment after consummation thereof
which assignment shall include an agreement by the assignee, in form reasonably
satisfactory to Landlord, to be bound by all of the terms of this Lease, and
(ii) there shall not be an Event of Default at the effective date of such
Permitted Assignment. Tenant shall also be permitted, without the need for
Landlord's consent but upon prior notice to Landlord (including delivery of a
copy of such sublease), to enter into any sublease with any Affiliated Party
provided that such sublease shall expire upon any event pursuant to which the
sublessee thereunder shall cease to be an Affiliated Party. Any assignment or
sublease to an Affiliated Party may, at Landlord's election, be deemed
terminated if during the term of this Lease such assignee or sublessee shall
cease to be an Affiliated Party.
If this Agreement is assigned or if the Property or any part thereof is
sublet, Landlord may collect the rents from such assignee or subtenant, as the
case may be, and apply the net amount collected to the Rent herein reserved, but
no such collection shall be deemed a waiver of the provisions set forth in the
first paragraph of this SECTION 16.1, the acceptance by Landlord of such
assignee or subtenant, as the case may be, as a tenant, or a release of Tenant
from the future performance by Tenant of its covenants, agreements or
obligations contained in this Agreement.
Provided that Tenant shall have complied with the provisions of the final
paragraph of this SECTION 16.1, so long as there shall exist no Event of
Default, Landlord shall not unreasonably withhold, condition or delay its
consent to one or more subleases of all or a portion of the Property for the
balance of the term of this Lease providing that: (I) the proposed subtenant(s)
have a good reputation and financial standing; (II) in Landlord's reasonable
judgment, the business of the proposed subtenant(s) is within the definition of
the Primary Intended Use; (III) the proposed subtenant(s) are not governmental
agencies or occupants; (IV) Tenant shall, at its expense, perform all work
necessary to divide the sublet premises from the remainder of the Improvements;
and (V) Landlord has received sufficient information from Tenant to make a
reasonable determination regarding the requirements set forth in clauses (I) and
(II).
If the rent and other sums (including, without limitation, all monetary
payments plus the reasonable value of any services performed or any other thing
of value given by any assignee or subtenant in
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consideration of such assignment or sublease), either initially or over the term
of any assignment or sublease other than a Permitted Assignment or a sublease or
assignment to an Affiliated Party (collectively an "UNRELATED TRANSACTION"),
payable by such assignee or subtenant exceed the sum of (a) Minimum Rent, plus
(b) Additional Rent and other charges called for hereunder with respect to the
space assigned or sublet, plus (c) the cost of any leasehold improvements to the
space to be subleased or assigned performed for such subtenant or assignee, plus
(d) the then unamortized cost substantiated by appropriate information supplied
to Landlord by Tenant of any leasehold improvements performed to the space to be
sublet or assigned by Tenant at the request of such subtenant or assignee, plus
(e) any reasonable brokerage commissions and attorneys fees incurred by Tenant
in connection with such sublease or assignment or in obtaining Landlord's
consent (all such costs to be amortized over the term of such sublease or
assignment), Tenant shall pay to Landlord as Additional Rent fifty percent (50%)
of such excess payable monthly at the time for payment of Minimum Rent. Nothing
in this paragraph shall be deemed to abrogate the provisions of this Article 16
and Landlord's acceptance of any sums pursuant to this paragraph shall not be
deemed a granting of consent to any assignment of the Lease or sublease of all
or any portion of the Property.
No subletting or assignment shall in any way impair the continuing primary
liability of Tenant hereunder, and no consent to any subletting or assignment in
a particular instance shall be deemed to be a waiver of the prohibition set
forth in this SECTION 16.1. No assignment, subletting or occupancy shall be
permitted for any use other than the Primary Intended Use. Any subletting,
assignment or other transfer of Tenant's interest under this Agreement in
contravention of this SECTION 16.1 shall be voidable at Landlord's option.
In the event that Tenant shall intend to enter into any Unrelated
Transaction which is either (A) an assignment or (B) a sublease which together
with any other related sublease shall encompass not less than fifty percent of
the rentable area of the Facility, then Tenant shall, not sooner than one
hundred and twenty (120) days, and not later than thirty (30) days, prior to the
proposed effective date of such Unrelated Transaction, give Landlord notice of
such intent, identifying the prospective subtenant or assignee and setting forth
the proposed terms of such sublease or assignment and Landlord may elect to
terminate this Lease by giving notice to Tenant of such election not later than
thirty (30) days after receiving notice of such intent from Tenant, whereupon
this Lease shall terminate on what would have been the effective date of such
sublease or assignment as if this Lease had expired by effluxion of time. If
Tenant shall not enter into such sublease or assignment within such following
thirty (30) day period and shall still desire to enter into any sublease or
assignment, or if Tenant shall change the terms and conditions thereof following
the date of Tenant's notice to Landlord, the first sentence of this paragraph
shall again become applicable.
16.2 REQUIRED SUBLEASE PROVISIONS. Any sublease of all or any portion of
the Property shall provide (a) that it is subject and subordinate to this
Agreement and to the matters to which this Agreement is or shall be subject or
subordinate; (b) that in the event of termination of this Agreement or reentry
or dispossession of Tenant by Landlord under this Agreement, Landlord may, at
its option, terminate such sublease or take over all of the right, title and
interest of Tenant, as sublessor under such sublease, and such subtenant shall,
at Landlord's option, attorn to Landlord pursuant to the then executory
provisions of such sublease, except that neither Landlord nor any Facility
Mortgagee, as holder of a mortgage or as Landlord under this Agreement, if such
mortgagee succeeds to that position, shall (i) be liable for any act or omission
of Tenant under such sublease, (ii) be subject to any credit, counterclaim,
offset or defense which theretofore accrued to such subtenant against Tenant,
(iii) be bound by any previous modification of such sublease not consented to in
writing by Landlord or by any previous prepayment of more than one (1) month's
Rent, (iv) be bound by any covenant of Tenant to undertake or complete any
construction of the Property or any portion thereof, (v) be required to account
for any security deposit of the subtenant other than any security deposit
actually delivered to Landlord by Tenant, (vi) be bound by any obligation to
make any payment to such subtenant or grant any credits, (vii) be responsible
for any monies owing by Tenant to the credit of such subtenant, or (viii) be
required to remove any Person occupying any portion of the Property; and (c)
that in the event that such subtenant receives a written Notice from Landlord or
any
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Facility Mortgagee stating that an Event of Default has occurred and is
continuing, such subtenant shall thereafter be obligated to pay all rentals
accruing under such sublease directly to the party giving such Notice or as such
party may direct. All rentals received from such subtenant by Landlord or the
Facility Mortgagee, as the case may be, shall be credited against the amounts
owing by Tenant under this Agreement and such sublease shall provide that the
subtenant thereunder shall, at the request of Landlord, execute a suitable
instrument in confirmation of such agreement to attorn. An original counterpart
of each such sublease and assignment and assumption, duly executed by Tenant and
such subtenant or assignee, as the case may be, in form and substance reasonably
satisfactory to Landlord, shall be delivered promptly to Landlord and in the
case of an assignment, the assignee shall assume in writing and agree to keep
and perform all of the terms of this Agreement on the part of Tenant to be kept
and performed and shall be, and become, jointly and severally liable with Tenant
for the performance thereof.
The provisions of this SECTION 16.2 shall not be deemed a waiver of the
provisions set forth in the first paragraph of SECTION 16.1.
16.3 SUBLEASE LIMITATION. Anything contained in this Agreement to the
contrary notwithstanding, Tenant shall not sublet the Property on any basis such
that the rental to be paid by any sublessee thereunder would be based, in whole
or in part, on either (a) the income or profits derived by the business
activities of such sublessee, or (b) any other formula such that any portion of
such sublease rental would fail to qualify as "rents from real property" within
the meaning of Section 856(d) of the Code, or any similar or successor provision
thereto.
ARTICLE 17
STOPPEL CERTIFICATES AND FINANCIAL STATEMENTS
17.1 ESTOPPEL CERTIFICATES. Upon not less than ten (10) days' prior Notice
by Landlord, Tenant shall (and upon not less than ten (10) days' prior Notice by
Tenant Landlord shall) execute, acknowledge and deliver a statement in writing
certifying that this Agreement is unmodified and in full force and effect (or,
if there have been any modifications, that this Agreement is in full force and
effect as modified and stating the modifications and, if there are any defenses,
offsets or counterclaims, setting them forth in reasonable detail) and the dates
to which the Minimum Rent and Additional Rent and other charges have been paid;
and in the case Tenant is the party from whom the certification is sought, that
it has no defenses, offsets or counterclaims against its obligations to pay the
Minimum Rent and Additional Rent and other charges have been paid, and any other
matter pertaining to this Agreement which is the subject of a reasonable
inquiry. Any such statement delivered pursuant to this Section 17.1 may be
relied upon by any prospective purchaser or mortgagee of the Property, or any
prospective assignee of such mortgage, or by any lender or Government Agency
doing or proposing to do business with Tenant or any prospective assignee or
sublessee of Tenant Any certification may be limited to the knowledge of the
individual executing the certification provided such individual shall be
familiar with this Agreement and the condition of the Property.
17.2 FINANCIAL STATEMENTS.
Tenant shall furnish the following statements to Landlord:
(a) within forty-five (45) days after each of the first three quarters
of any Fiscal Year, the most recent Consolidated Financials and the most
recent unaudited financial statements of Tenant, in each case accompanied by
the Financial Officer's Certificate;
(b) within ninety (90) days after the end of each Fiscal Year, the most
recent Consolidated Financials for such year, including the most recent
financial statements of Tenant, in each case certified by Ernst & Young LLP
or another independent certified public accountant reasonably satisfactory
to Landlord and accompanied by a Financial Officer's Certificate;
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(c) promptly after the sending thereof, copies of all reports which
Tenant sends to its security holders generally, and (if applicable) copies
of all periodic reports which Tenant and/or any Guarantor files with the SEC
or any stock exchange on which its shares are listed or traded;
(d) promptly after the delivery thereof to Tenant or its management, a
copy of any management letter or written report prepared by the certified
public accountants with respect to the financial condition, operations,
business or prospects of Tenant;
(e) at any time and from time to time upon not less than twenty (20)
days Notice from Landlord any Consolidated Financials or any other financial
reporting information required to be filed by Landlord with any securities
and exchange commission, the SEC or any successor agency, or any other
governmental authority, or required pursuant to any order issued by any
court, governmental authority or arbitrator in any litigation to which
Landlord is a party, for purposes of compliance therewith provided to the
extent Tenant incurs any costs in connection with the preparation of any
such information in excess of the cost incurred in preparing the information
required in Section 17.2(a)-(d), then Landlord shall pay the reasonable
costs Tenant shall so incur, provided Tenant shall give Landlord Notice of a
reasonable estimate thereof prior to incurring such costs; and
(f) promptly, upon Notice from Landlord, such other information
concerning the business, financial condition and affairs of Tenant as
Landlord may reasonably request from time to time.
Landlord may at any time, and from time to time, provide any Facility Mortgagee
with copies of any of the foregoing statements.
ARTICLE 18
LANDLORD'S RIGHT TO INSPECT
Tenant shall permit Landlord and its authorized representatives to inspect
the Property during usual business hours upon not less than twenty-four (24)
hours' notice, and to make such repairs as Landlord is permitted or required to
make pursuant to the terms of this Agreement, provided that any inspection or
repair by Landlord or its representatives will not unreasonably interfere with
Tenant's use and operation of the Property and further provided that in the
event of an emergency, as determined by Landlord in its sole discretion, prior
Notice shall not be necessary.
ARTICLE 19
APPRAISAL
19.1 APPRAISAL PROCEDURE. In the event that it becomes necessary to
determine the Fair Market Value of the Property for any purpose of this
Agreement and the parties cannot agree thereon, such Fair Market Value shall be
determined upon the written demand of either party in accordance with the
following procedure.
The party requesting an appraisal, by Notice given within thirty (30) days
after the date of the event which requires or permits such procedure, shall
appoint a Qualified Appraiser. The other party, by Notice given within fifteen
(15) days after receipt of such Notice appointing the first Qualified Appraiser,
may appoint a second Qualified Appraiser. If the other party fails to appoint
the second Qualified Appraiser within such fifteen (15) day period, such party
shall have waived its right to appoint a Qualified Appraiser, the first
Qualified Appraiser shall appoint a second Qualified Appraiser within fifteen
(15) days thereafter and the Fair Market Value shall be determined by the
Qualified Appraisers as set forth below.
The two Qualified Appraisers shall thereupon endeavor to agree upon the Fair
Market Value. If the two Qualified Appraisers so named cannot agree upon such
value within thirty (30) days after the designation of the second such
appraiser, each such appraiser shall, within five (5) days after the expiration
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of such thirty (30) day period, submit his appraisal of fair market value to the
other appraiser in writing, and if the fair market values set forth in such
appraisals vary by five percent (5%) or less of the greater value, the fair
market value shall be determined by calculating the average of the two fair
market values determined by the two appraisers.
If the Fair Market Value set forth in the two appraisals vary by more than
five percent (5%) of the greater value, the two Qualified Appraisers shall
select a third Qualified Appraiser within an additional fifteen (15) days
following the expiration of the aforesaid five (5) day period. If the two
appraisers are unable to agree upon the appointment of a third appraiser within
such fifteen (15) day period, either party may, upon written notice to the
other, request that such appointment be made by the then President (or
equivalent officer) of the State's Chapter of the American Institute of Real
Estate Appraisers, or his or her designee or, if there is no such organization
or if such individual declines to make such appointment, by any state or Federal
court of competent jurisdiction for the State.
The third Qualified Appraiser shall determine Fair Market Value by selecting
the Fair Market Value of one of the two other Qualified Appraisers.
In the event that any appraiser appointed hereunder does not or is unable to
perform his or her obligation hereunder, then the party or the appraisers
appointing such appraiser shall have the right to appoint a substitute Qualified
Appraiser, but if the party or the appraisers who have the right to appoint a
substitute Qualified Appraiser fail to do so within ten (10) days after written
notice from the other party (or either party in the event such appraiser was
appointed by the other appraisers) either party may, upon written notice to the
party having the right to appoint a substitute Qualified Appraiser, request that
such appointment be made by such officer of the American Institute of Real
Estate Appraisers or court of competent jurisdiction as described above;
PROVIDED, HOWEVER, that a party who has the right to appoint an appraiser or a
substitute appraiser shall have the right to make such appointment only up until
the time such appointment is made by such officer or court.
In connection with the appraisal process, Tenant shall provide the
appraisers full access during normal business hours to examine the Property, the
books, records and files of Tenant and all agreements, leases and other
operating agreements relating to the Property.
The costs (other than Landlord's counsel fees) of each such appraisal shall
be borne by Tenant and shall be Additional Rent. Upon determining such value,
the appraisers shall promptly notify Landlord and Tenant in writing of such
determination. If any party shall fail to appear at the hearings appointed by
the appraisers, the appraisers may act in the absence of such party.
The determination of the Qualified Appraisers made in accordance with the
foregoing provisions shall be final and binding upon the parties, such
determination may be entered as an award in arbitration in a court of competent
jurisdiction, and judgment thereon may be entered.
19.2 LANDLORD'S RIGHT TO APPRAISAL. Landlord shall have the right,
exercisable not more than once during the Term, to appoint a Qualified Appraiser
to perform a complete appraisal of the Property, which appraisal shall meet all
requirements of any state or Federal bank regulatory authority that Landlord
considers relevant or any Facility Mortgagee. The costs of each such appraisal
shall be borne by Tenant and shall be included as Additional Rent.
ARTICLE 20
REPRESENTATIONS AND WARRANTIES
20.1 REPRESENTATIONS OF TENANT. To induce Landlord to enter into this
Agreement, Tenant represents and warrants to Landlord as follows:
20.1.1 STATUS AND AUTHORITY OF TENANT. Tenant is a corporation duly
organized, validly existing and in corporate good standing under the laws of
its state of incorporation. Tenant has all requisite
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power and authority under the laws of its state of formation and its charter
documents to enter into and perform its obligations under this Agreement and
to consummate the transactions contemplated hereby. Tenant has duly
qualified to transact business in each jurisdiction in which the nature of
the business conducted by it requires such qualification.
20.1.2 ACTION OF TENANT. Tenant has taken all necessary action to
authorize the execution, delivery and performance of this Agreement, and
this Agreement constitutes the valid and binding obligation and agreement of
Tenant, enforceable against Tenant in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws of general application affecting the rights and
remedies of creditors and equitable principles.
20.1.3 NO VIOLATIONS OF AGREEMENTS. Neither the execution, delivery or
performance of this Agreement by Tenant, nor compliance with the terms and
provisions hereof, will result in any breach of the terms, conditions or
provisions of, or conflict with or constitute a default under, or result in
the creation of any lien, charge or encumbrance upon the Property pursuant
to the terms of any indenture, mortgage, deed of trust, note, evidence of
indebtedness or any other material agreement or instrument by which Tenant
is bound.
20.1.4 LITIGATION. Tenant has received no written notice of and, to
Tenant's knowledge, no action or proceeding is pending or threatened and no
investigation looking toward such an action or proceeding has begun, which
questions the validity of this Agreement or any action taken or to be taken
pursuant hereto, will result in any material adverse change in the business,
operation, affairs or condition of the Property, will result in or subject
the Property to a material liability, or involves condemnation or eminent
domain proceedings against any material part of the Property.
20.1.5 DISCLOSURE. To Tenant's knowledge, there is no fact or
condition which materially and adversely affects the condition of the
Property which has not been set forth in this Agreement or in the other
documents, certificates or statements furnished to Landlord in connection
with the transactions contemplated hereby.
20.1.6 COMPLIANCE WITH LAW. Except as disclosed in writing to
Landlord, to Tenant's knowledge, the Property and the use and operation
thereof do not violate any material federal, state, municipal and other
governmental statutes, ordinances, by-laws, rules, regulations or any other
legal requirements, including, without limitation, those relating to
construction, occupancy, zoning, adequacy of parking, environmental
protection, occupational health and safety and fire safety applicable
thereto; and there are presently in effect all material licenses, permits
and other authorizations necessary for the current use, occupancy and
operation thereof. Tenant has not received written notice of any threatened
request, application, proceeding, plan, study or effort which would
materially adversely affect the present use or zoning of the Property or
which would modify or realign any adjacent street or highway in a manner
which would materially adversely affect the use and operation of the
Property.
20.1.7 HAZARDOUS SUBSTANCES. Except as disclosed to Landlord or as
described in any environmental report delivered to Landlord, to Tenant's
knowledge, none of Tenant nor any tenant or other occupant or user of the
Property, or any portion thereof, has stored or disposed of (or engaged in
the business of storing or disposing of) or has released or caused the
release of any Hazardous Substances on the Property, the removal of which is
required or the maintenance of which is prohibited or penalized by any
Applicable Law, and, to Tenant's knowledge, except as disclosed to Landlord
or as described in any environmental report delivered to Landlord, the
Property is free from any such Hazardous Substances, except any such
materials maintained in accordance with Applicable Law.
20.1.8 GENERALLY. For purposes of this Section 20.1, Tenant's
knowledge shall be limited to the actual knowledge of Frederick A. Eustis,
III or John S. McBride.
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20.2 REPRESENTATIONS OF LANDLORD. To induce Tenant to enter in this
Agreement, Landlord represents and warrants to Tenant as follows:
20.2.1 STATUS AND AUTHORITY OF LANDLORD. Landlord is a Maryland real
estate investment trust duly organized, validly existing and in good
standing under the laws of the State of Maryland, and has all requisite
power and authority under the laws of such state and under its charter
documents to enter into and perform its obligations under this Agreement and
to consummate the transactions contemplated hereby. Landlord has duly
qualified and is in good standing as a trust or unincorporated business
association in each jurisdiction in which the nature of the business
conducted by it requires such qualification.
20.2.2 ACTION OF LANDLORD. Landlord has taken all necessary action to
authorize the execution, delivery and performance of this Agreement, and
upon the execution and delivery of this Agreement by Landlord constitutes
the valid and binding obligation and agreement of Landlord, enforceable
against Landlord in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws of general application affecting the rights and remedies of creditors
and equitable principles.
20.2.3 NO VIOLATIONS OF AGREEMENTS. Neither the execution, delivery or
performance of this Agreement by Landlord, nor compliance with the terms and
provisions hereof, will result in any breach of the terms, conditions or
provisions of, or conflict with or constitute a default under, or result in
the creation of any lien, charge or encumbrance upon any property or assets
of Landlord pursuant to the terms of any indenture, mortgage, deed of trust,
note, evidence of indebtedness or any other agreement or instrument by which
Landlord is bound.
20.2.4 LITIGATION. No investigation, action or proceeding is pending
and, to Landlord's actual knowledge, no action or proceeding is threatened
and no investigation looking toward such an action or proceeding has begun,
which questions the validity of this Agreement or any action taken or to be
taken pursuant hereto.
20.2.5 GENERALLY. For purposes of this Section 20.2, Landlord's
knowledge shall be limited to the actual knowledge of David Hegarty.
ARTICLE 21
FACILITY MORTGAGES
21.1 LANDLORD MAY GRANT LIENS. Without the consent of Tenant, Landlord
may, subject to the terms and conditions set forth in this SECTION 21.1, from
time to time, directly or indirectly, create or otherwise cause to exist any
lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance shall
include the right to prepay (whether or not subject to a prepayment penalty) and
shall provide (subject to SECTION 21.2 below) that it is subject to the rights
of Tenant under this Agreement, including the rights of Tenant to acquire the
Property pursuant to the applicable provisions of this Agreement.
21.2 SUBORDINATION OF LEASE. Subject to SECTION 21.1, this Agreement, any
and all rights of Tenant hereunder, are and shall be subject and subordinate to
any ground or master lease, and all renewals, extensions, modifications and
replacements thereof, and to all mortgages and deeds of trust, which may now or
hereafter affect the Property, or any of them, or any improvements thereon
and/or any of such leases, whether or not such mortgages or deeds of trust shall
also cover other lands and/or buildings and/or leases, to each and every advance
made or hereafter to be made under such mortgages and deeds of trust, and to all
renewals, modifications, replacements and extensions of such leases and such
mortgages and deeds of trust and all consolidations of such mortgages and deeds
of trust, provided that, with respect to any such lease, mortgage or deed of
trust, Landlord shall deliver to Tenant an agreement by such lessor or
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holder in a commercially reasonable form to the effect that Tenant's rights
hereunder shall not be disturbed by such lessor or holder so long as there
exists no Event of Default. This section shall be self-operative and no further
instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall promptly execute, acknowledge and deliver any
instrument that Landlord, the lessor under any such lease or the holder of any
such mortgage or the trustee or beneficiary of any deed of trust or any of their
respective successors in interest may reasonably request to evidence such
subordination. Any lease to which this Agreement is, at the time referred to,
subject and subordinate is herein called "SUPERIOR LEASE" and the lessor of a
Superior Lease or its successor in interest at the time referred to, is herein
called "SUPERIOR LANDLORD" and any mortgage or deed of trust to which this
Agreement is, at the time referred to, subject and subordinate, is herein called
"SUPERIOR MORTGAGE" and the holder, trustee or beneficiary of a Superior
Mortgage is herein called "SUPERIOR MORTGAGEE".
If any Superior Landlord or Superior Mortgagee or the nominee or designee of
any Superior Landlord or Superior Mortgagee shall succeed to the rights of
Landlord under this Agreement, whether through possession or foreclosure action
or delivery of a new lease or deed, or otherwise, then at the request of such
party so succeeding to Landlord's rights (herein called "SUCCESSOR LANDLORD")
and upon such Successor Landlord's written agreement to accept Tenant's
attornment, Tenant shall attorn to and recognize such Successor Landlord as
Tenant's landlord under this Agreement, and shall promptly execute and deliver
any instrument that such Successor Landlord may reasonably request to evidence
such attornment. Upon such attornment, this Agreement shall continue in full
force and effect as a direct lease between the Successor Landlord and Tenant
upon all of the terms, conditions and covenants as are set forth in this
Agreement, except that the Successor Landlord (unless formerly the landlord
under this Agreement or its nominee or designee) shall not be (a) liable in any
way to Tenant for any act or omission, neglect or default on the part of
Landlord under this Agreement; (b) responsible for any monies owing by or on
deposit with Landlord to the credit of Tenant; (c) subject to any counterclaim
or setoff which theretofore accrued to Tenant against Landlord; (d) bound by any
modification of this Agreement subsequent to such Superior Lease or Mortgage, or
by any previous prepayment of Minimum Rent or Additional Rent for more than one
(1) month, which was not approved in writing by the Superior Landlord or the
Superior Mortgagee thereto; (e) liable to Tenant beyond the Successor Landlord's
interest in the Property and the rents, income, receipts, revenues, issues and
profits issuing from the Property; (f) responsible for the performance of any
work to be done by the Landlord under this Agreement to render the Property
ready for occupancy by Tenant; or (g) required to remove any Person occupying
the Property or any part thereof, except if such person claims by, through or
under the Successor Landlord. Tenant agrees at any time and from time to time to
execute a suitable instrument in confirmation of Tenant's agreement to attorn,
as aforesaid.
21.3 NOTICE TO MORTGAGEE AND GROUND LANDLORD. Subsequent to the receipt by
Tenant of notice from any Person that it is a Facility Mortgagee, or that it is
the ground lessor under a lease with Landlord, as ground lessee, which includes
the Property as part of the demised premises, no notice from Tenant to Landlord
shall be effective unless and until a copy of the same is given to such Facility
Mortgagee or ground lessor, and the curing of any of Landlord's defaults by such
Facility Mortgagee or ground lessor shall be treated as performance by Landlord.
ARTICLE 22
ADDITIONAL COVENANTS OF TENANT
22.1 CONDUCT OF BUSINESS. Tenant shall do or cause to be done all things
necessary to preserve, renew and keep in full force and effect and in good
standing its corporate existence and its rights and licenses necessary to
conduct its business.
22.2 MAINTENANCE OF ACCOUNTS AND RECORDS. Tenant shall keep true records
and books of account in which full, true and correct entries will be made of
dealings and transactions in relation to the business and
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affairs of Tenant in accordance with GAAP. Tenant shall apply accounting
principles in the preparation of the financial statements of Tenant which, in
the judgment of and the opinion of its independent public accountants, are in
accordance with GAAP, except for changes approved by such independent public
accountants.
22.3 NOTICE OF LITIGATION, POTENTIAL EVENT OF DEFAULT, ETC. Tenant shall
give prompt Notice to Landlord of any litigation or any administrative
proceeding to which it may hereafter become a party which involves a potential
uninsured liability equal to or greater than Twenty-Five Thousand Dollars
($25,000) or which may otherwise result in any material adverse change in the
business, operations, property, prospects, results of operation or condition,
financial or other, of Tenant. Forthwith upon Tenant obtaining knowledge of any
event or condition that would be required to be disclosed in a current report
filed by Tenant on Form 8-K or in Part II of a quarterly report on Form 10-Q if
Tenant were required to file such reports under the Securities Exchange Act of
1934, as amended, Tenant shall furnish Notice thereof to Landlord specifying the
nature and period of existence thereof and what action Tenant has taken or is
taking or proposes to take with respect thereto.
22.4 FINANCIAL CONDITION OF TENANT.
(a) Tenant shall at all times maintain current assets (excluding the
Security Deposit) in excess of current liabilities by an amount at least
equal to the Rent due for the following twelve months. The terms "current
assets" and "current liabilities", respectively, shall mean all assets or
liabilities, as the case may be, which should, in accordance with GAAP, be
classified as current assets or current liabilities, as the case may be.
(b) Tenant shall at all times maintain Tangible Net Worth in an amount
at least equal to the Rent due for the following twelve months.
22.5 PROHIBITED TRANSACTIONS. Tenant shall not permit to exist or enter
into any agreement or arrangement whereby it engages in a transaction of any
kind with any Affiliated Person (other than a wholly owned subsidiary) except on
terms and conditions which are not less favorable to Tenant than those on which
similar transactions between unaffiliated parties could fairly be expected to be
entered into on an arms-length basis.
22.6 LIENS AND ENCUMBRANCES. Except as permitted by SECTION 7.1, subject
to the provisions of ARTICLE 8 relating to Permitted Contests, Tenant shall not
create or incur or suffer to be created or incurred or to exist any Lien on this
Agreement, or its leasehold interest in the Property other than Permitted
Encumbrances.
22.7 MERGER; SALE OF ASSETS; ETC. Except as otherwise expressly provided
in this Agreement, Tenant shall not (a) sell, lease (as lessor or sublessor),
transfer or otherwise dispose of, or abandon, more than 49% of its assets,
regardless of the consideration, or any material portion of its assets
(including capital stock) or business to any Person for less than the fair value
thereof; (b) merge into or with or consolidate with any other Entity; or (c)
allow a Change in Control of Tenant to occur PROVIDED, HOWEVER, that,
notwithstanding the provisions of clauses (a), (b) or (c) preceding, Tenant may
merge into or may sell all or substantially all of its assets to an Entity which
shall in any case have both a positive operating cash flow for each of the
preceding three years, both before and after giving effect to such merger or
sale and any related transactions, and a Tangible Net Worth of $20,000,000 after
giving effect to such merger or sale and any related transactions and which
shall assume all of Tenant's obligations under this Agreement in form
satisfactory to Landlord; provided however, that (i) if holders of the equity
interest in Tenant prior to the merger shall collectively own not less than
fifty-one percent (51%) of the equity interest in the Entity following and
giving effect to the merger, then the positive operating cash flow requirement
shall not be a requirement and (ii) if Tenant shall intend to merge into or to
sell all or substantially all of its assets to an Entity which shall not meet
the foregoing requirements then Tenant may, provided such merger or sale is to
an independent third party and is made for a bonafide corporate purpose and not
principally to allow
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termination of this Agreement, elect by Notice to Landlord to purchase the
Property. If Tenant shall make such election, then the closing of such
transaction shall occur as of the date of such merger or sale (but in no event
less than sixty (60) nor more than ninety (90) days following such Notice),
Tenant shall pay the greater of Nine Millions Dollars ($9,000,000) or Fair
Market Value to Landlord at closing, and upon payment thereof, this Agreement
shall terminate.
ARTICLE 23
RIGHT OF FIRST REFUSAL TO PURCHASE
If at any time during the Term of this Agreement, Landlord intends to accept
an offer or enter into an agreement to sell its entire interest in the Property,
Landlord shall give Notice to Tenant in which it shall first offer to sell the
Property to Tenant on the same terms and conditions which Landlord intends to
accept. Landlord's Notice of such offer shall include the material terms under
which Landlord intends to make such sale. Tenant shall have ten (10) days in
which to respond to Landlord's offer. If Tenant elects to accept such offer,
Tenant shall give Landlord Notice thereof within such 10-day period, and
Landlord and Tenant shall, within fifteen (15) business days after Tenant's
Notice, execute a purchase and sale agreement prepared by Landlord incorporating
such terms and conditions and other mutually acceptable terms and provisions.
The provisions of the first paragraph of this Article 23 shall not apply to
(i) any proposed transaction by Landlord with any Affiliated Person or (ii) any
proposed transfer to any entity providing financing to Landlord or any
foreclosure proceeding or lease or deed in lieu of foreclosure, or (iii) any
proposed sale of the Property as part of a sale of a portfolio of properties
(i.e., in a transaction pursuant to which the Property is to be sold together
with at least one other property owned by Landlord or any Affiliated Person),
but to the extent applicable prior to any such transaction the first paragraph
hereof shall apply after the closing of such transaction.
It is expressly understood and agreed that time shall be of the essence with
respect to the giving of such Notice by Tenant and the failure of Tenant to give
such Notice within the time and in the manner hereinabove provided shall be a
waiver of Tenant's rights pursuant to this Article 23. Any purchase of the
Property by Tenant shall be made in accordance with the provisions of ARTICLE
15.
ARTICLE 24
MISCELLANEOUS
24.1 LIMITATION ON PAYMENT OF RENT. All agreements between Landlord and
Tenant herein are hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of Rent, or otherwise, shall the
Rent or any other amounts payable to Landlord under this Agreement exceed the
maximum permissible under applicable law, the benefit of which may be asserted
by Tenant as a defense, and if, from any circumstance whatsoever, fulfillment of
any provision of this Agreement, at the time performance of such provision shall
be due, shall involve transcending the limit of validity prescribed by law, or
if from any circumstances Landlord should ever receive as fulfillment of such
provision such an excessive amount, then, IPSO FACTO, the amount which would be
excessive shall be applied to the reduction of the installment(s) of Minimum
Rent next due and not to the payment of such excessive amount. This provision
shall control every other provision of this Agreement and any other agreements
between Landlord and Tenant.
24.2 NO WAIVER. No failure by Landlord to insist upon the strict
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the maximum extent permitted by law, no
waiver of any breach shall affect
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or alter this Agreement, which shall continue in full force and effect with
respect to any other then existing or subsequent breach.
24.3 REMEDIES CUMULATIVE. To the maximum extent permitted by law, each
legal, equitable or contractual right, power and remedy of Landlord, now or
hereafter provided either in this Agreement or by statute or otherwise, shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy and the exercise or beginning of the exercise by Landlord of any one
or more of such rights, powers and remedies shall not preclude the simultaneous
or subsequent exercise by Landlord of any or all of such other rights, powers
and remedies.
24.4 SEVERABILITY. Any clause, sentence, paragraph, section or provision
of this Agreement held by a court of competent jurisdiction to be invalid,
illegal or ineffective shall not impair, invalidate or nullify the remainder of
this Agreement, but rather the effect thereof shall be confined to the clause,
sentence, paragraph, section or provision so held to be invalid, illegal or
ineffective, and this Agreement shall be construed as if such invalid, illegal
or ineffective provisions had never been contained therein.
24.5 ACCEPTANCE OF SURRENDER. No surrender to Landlord of this Agreement
or of the Property or any part thereof, or of any interest therein, shall be
valid or effective unless agreed to and accepted in writing by Landlord and no
act by Landlord or any representative or agent of Landlord, other than such a
written acceptance by Landlord, shall constitute an acceptance of any such
surrender.
24.6 NO MERGER OF TITLE. It is expressly acknowledged and agreed that it
is the intent of the parties that there shall be no merger of this Agreement or
of the leasehold estate created hereby by reason of the fact that the same
Person may acquire, own or hold, directly or indirectly this Agreement or the
leasehold estate created hereby and the fee estate or ground landlord's interest
in the Property.
24.7 CONVEYANCE BY LANDLORD. If Landlord or any successor owner of all or
any portion of the Property shall convey all or any portion there in accordance
with the terms hereof other than as security for a debt, and the grantee or
transferee thereof shall expressly assume all obligations of Landlord hereunder
arising or accruing from and after the date of such conveyance or transfer,
Landlord or such successor owner, as the case may be, shall thereupon be
released from all future liabilities and obligations of Landlord under this
Agreement with respect to the Property arising or accruing from and after the
date of such conveyance or other transfer and all such future liabilities and
obligations shall thereupon be binding upon the new owner.
24.8 QUIET ENJOYMENT. So long as Tenant shall pay the Rent as the same
becomes due and shall comply with all of the terms of this Agreement, Tenant
shall peaceably and quietly have, hold and enjoy the Property for the Term, free
of hindrance or molestation by Landlord or anyone claiming by, through or under
Landlord, but subject to (a) any Encumbrance permitted under Article 21 or
otherwise permitted to be created by Landlord hereunder, (b) all Permitted
Encumbrances, (c) liens as to obligations of Landlord that are either not yet
due or which are being contested in good faith and by proper proceedings without
threat to Tenant's leasehold estate, and (d) liens that have been consented to
in writing by Tenant. Except as otherwise provided in this Agreement, no failure
by Landlord to comply with the foregoing covenant shall give Tenant any right to
cancel or terminate this Agreement or abate, reduce or make a deduction from or
offset against the Rent or any other sum payable under this Agreement, or to
fail to perform any other obligation of Tenant hereunder.
24.9 NON-LIABILITY OF TRUSTEES. TENANT ACKNOWLEDGES THAT THE DECLARATION,
A COPY OF WHICH IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF
THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HUB RI PROPERTIES TRUST" REFERS
TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT
INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF LANDLORD SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM
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AGAINST, LANDLORD. ALL PERSONS DEALING WITH LANDLORD, IN ANY WAY, SHALL LOOK
ONLY TO THE ASSETS OF LANDLORD FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF
ANY OBLIGATION. TENANT ACCEPTS AND AGREES TO COMPLY AND BE BOUND BY THE
FOREGOING.
24.10 LANDLORD'S CONSENT OF TRUSTEES. Where provision is made in this
Agreement for Landlord's consent and Landlord shall fail or refuse to give such
consent, Tenant shall not be entitled to any damages for any withholding by
Landlord of its consent, it being intended that Tenant's sole remedy shall be an
action for specific performance or injunction, and that such remedy shall be
available only in those cases where Landlord has expressly agreed in writing not
unreasonably to withhold its consent.
24.11 MEMORANDUM OF LEASE. Neither Landlord nor Tenant shall record this
Agreement. However, Landlord and Tenant shall promptly, upon the request of the
other, enter into a short form memorandum of this Agreement, in form suitable
for recording under the laws of the State in which reference to this Agreement,
and all options contained herein, shall be made. Tenant shall pay all costs and
expenses of recording such memorandum.
24.12 NOTICES.
(a) Any and all notices, demands, consents, approvals, offers, elections
and other communications required or permitted under this Agreement shall be
deemed adequately given if in writing and the same shall be delivered either
in hand, by telecopier with written acknowledgment of receipt, or by mail or
Federal Express or similar expedited commercial carrier, addressed to the
recipient of the notice, postpaid and registered or certified with return
receipt requested (if by mail), or with all freight charges prepaid (if by
Federal Express or similar carrier).
(b) All notices required or permitted to be sent hereunder shall be
deemed to have been given for all purposes of this Agreement upon the date
of acknowledged receipt, in the case of a notice by telecopier, and, in all
other cases, upon the date of receipt or refusal, except that whenever under
this Agreement a notice is either received on a day which is not a Business
Day or is required to be delivered on or before a specific day which is not
a Business Day, the day of receipt or required delivery shall automatically
be extended to the next Business Day.
(c) All such notices shall be addressed,
if to Landlord to:
Hub RI Properties Trust
400 Centre Street
Newton, Massachusetts 02158
Attn: Mr. David J. Hegarty
[Telecopier No. (617) 332-2261]
with a copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Attn: Warren M. Heilbronner, Esq.
[Telecopier No. (617) 338-2880]
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if to Tenant to:
Cytotherapeutics, Inc.
701 George Washington Highway
Lincoln, Rhode Island 02865
Attn: Vice President, Business Operations
[Telecopier No. (401) 334-9152]
with a copy to:
Cytotherapeutics, Inc.
701 George Washington Highway
Lincoln, Rhode Island 02865
Attn: General Counsel
[Telecopier No. (401) 333-0684]
(d) By notice given as herein provided, the parties hereto and their
respective successor and assigns shall have the right from time to time and
at any time during the term of this Agreement to change their respective
addresses effective upon receipt by the other parties of such notice and
each shall have the right to specify as its address any other address within
the United States of America.
24.13 CONSTRUCTION. Anything contained in this Agreement to the contrary
notwithstanding, all claims against, and liabilities of, Tenant or Landlord
arising prior to any date of termination or expiration of this Agreement shall
survive such termination or expiration. In no event shall Landlord be liable for
any consequential damages suffered by Tenant as the result of a breach of this
Agreement by Landlord. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated except by an instrument in writing
signed by the party to be charged. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. Each term or provision of this
Agreement to be performed by Tenant shall be construed as an independent
covenant and condition. Time is of the essence with respect to the exercise of
any rights of Tenant under this Agreement.
24.14 COUNTERPARTS; HEADINGS. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but which, when
taken together, shall constitute but one instrument and shall become effective
as of the date hereof when copies hereof, which, when taken together, bear the
signatures of each of the parties hereto shall have been signed. Headings in
this Agreement are for purposes of reference only and shall not limit or affect
the meaning of the provisions hereof.
24.15 APPLICABLE LAW, ETC. Except as to matters regarding the internal
affairs of Landlord and issues of or limitations on any personal liability of
the shareholders and trustees of Landlord for obligations of Landlord, as to
which the laws of the State of Maryland shall govern, this Agreement shall be
interpreted, construed, applied and enforced in accordance with the laws of the
State of Rhode Island.
To the maximum extent permitted by applicable law, any action to enforce,
arising out of, or relating in any way to, any of the provisions of this
Agreement may be brought and prosecuted in such court or courts located in The
Commonwealth of Massachusetts as is provided by law; and the parties consent to
the jurisdiction of said court or courts located in The Commonwealth of
Massachusetts and to service of process by registered mail, return receipt
requested, or by any other manner provided by law.
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IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed
instrument as of the date above first written.
LANDLORD:
HUB RI PROPERTIES TRUST
By: /s/ DAVID J. HEGARTY
--------------------------------------
Its: President
TENANT:
CYTOTHERAPEUTICS, INC.
By: /s/ JOHN S. MCBRIDE
--------------------------------------
Its (Vice) President
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EXHIBIT A
LEGAL DESCRIPTION
That certain lot or parcel of land with all the buildings and improvements
thereon, situated on the southerly side of Washington Highway, in the Town of
Lincoln, County of Providence, said parcel comprises Plat 29, Lot 300 and Parcel
"A" as shown on that plan entitled "ALTA/ACSM Land Title Survey of
Administrative Subdivision for CytoTherapeutics, Inc., Plat 29, Lots 150 & 300,
Lincoln, Rhode Island, September 16, 1996, Scale: 1 inch equals 40 feet" by Marc
N. Nyberg Associates, Inc. recorded September 20, 1996 at 12:19 p.m. as Map
#234, more particularly bounded and described as follows:
Beginning at a point in the southerly line of said Washington Highway, said
point being the most northeasterly corner of land now or formerly owned by
Thomas M. & Judith G. Cullen and the most northwesterly corner of the parcel
hereby described;
thence running easterly, following the southerly line of said Washington
Highway, by a curve to the left, said curve having a radius of two thousand
one hundred seventy-seven and 62/100 (2,177.62) feet, a central angle of 01
degrees 54 feet 36 inches, for a distance of seventy-two and 59/100 (72.59)
feet to a point of tangency, said point being opposite state highway station
443+58.00 as shown on R.I. State Highway Plat No. 749;
thence running easterly, following the southerly line of said Washington
Highway, five hundred ninety-six and 29/100 (596.29) feet;
thence running southeasterly, by a curve to the left, said curve having
a radius of one hundred seventy-five and 00/100 (175.00) feet, a central
angle of 24 degrees 48 feet 27 inches, for a distance of seventy-five and
77/100 (75.77) feet to a point of reverse curvature;
thence running southeasterly and southerly by a curve to the right, said
curve having a radius of one hundred twenty-five and 00/100 (125.00) feet, a
central angle of 41 degrees 24 feet 35 inches for a distance of ninety and
34/100 (90.34) feet to a point of tangency;
thence running southerly, two hundred fifty-one and 57/100 (251.57) feet,
the last three lines bounding easterly on land now or formerly owned by Cullen,
Inc.;
thence turning an interior angle of 90 degrees 00 feet 00 inches and
running westerly, four hundred eighty-three and 38/100 (483.38) feet, the
last line bounding southerly on remaining land now or lately of John J.
Cullen and Roland Montigny;
thence turning an interior angle of 122 degrees 15 feet 15 inches and
running northwesterly, four hundred seventy-four and 42/100 (474.42) feet to
the point and place of beginning, the last line bounding westerly on other
land now or lately of Thomas M. Cullen & Judith G. Cullen.
Said parcel contains 239,597 square feet or 5.500 aces.
<PAGE>
EXHIBIT B
MINIMUM RENT
<TABLE>
<CAPTION>
PERIOD MINIMUM RENT
- -------------------------------------------------------------------------- -------------------------------------
<S> <C>
Original Term
Commencement Date--12/31/2002........................................... $62,500.00 per month
1/1/2003--12/31/2007.................................................... $78,125.00 per month
1/1/2008--12/31/2012.................................................... $97,656.25 per month
1/1/2013--6/30/2013..................................................... $122,070.30 per month
First Extended Term
7/1/2013--12/31/2017.................................................... $122,070.30 per month
1/1/2018--12/31/2022.................................................... $152,587.86 per month
1/1/2023--6/30/2023..................................................... $190,734.83 per month
Second Extended Term
7/1/2023--12/31/2027.................................................... $190,734.83 per month
1/1/2028--12/31/2032.................................................... $238,418.54 per month
1/1/2033--6/30/2033..................................................... $298,023.18 per month
</TABLE>
<PAGE>
EXHIBIT C
TENANT'S PERSONAL PROPERTY
<TABLE>
<CAPTION>
Tenant's Trade Fixtures
COST COST
ITEM # DESCRIPTION MANUFACTURER QUANTITY EACH EXTENSION
<S> <C> <C> <C> <C>
1 Central glassware washer AMSCO/Steris 1 61500 61500
2 Access control devices, cameras, VCRs Various 1 67000 67000
3 Main Cagewasher-Model 4200 AMSCOS/Steris 1 51162 51162
4 Autoclave #1 Gatinge 1 18340 18340
5 Autoclave #2 Gatinge 1 32350 32350
6 Autoclave #3 Gatinge 1 18450 18450
7 Autoclave #4 Gatinge 1 18500 18500
8 Quarantine Cagewasher-Model 3500 AMSCO/Steris 1 22250 22250
9 Iceflakers Scotsman 3 2149 6447
10 Undercounter Steam Scrubbers Universal 3 4594 13782
11 Undercounter glasswashers ASKO 2 750 1500
12 RO/D1 water production system Millipore 1 27000 27000
13 Hazardous Materials Storage Shed Safety Storage 1 19733 19733
14 Natural gas emergency generator-EAB Olympian 1 21250 21250
15 Chemical fume hoods HEMCO 5 5720 28600
16 Flammables storage cabinets Safety Storage 6 400 2400
17 Laundry appliances Maytag 1 900 900
18 Kitchen appliances-package Various 1 5986 5986
19 Office furniture-package Various 1 197500 197500
20 Freezers-package Various 1 23520 23520
21 Window treatments-package Various 1 17886 17886
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COST COST
ITEM # DESCRIPTION MANUFACTURER QUANTITY EACH EXTENSION
<S> <C> <C> <C> <C>
22 Lab benches Millwork One 1 205000 205000
23 Exhausted biosafety cabinets Baker/Nuaire 5 6800 34000
24 Microisolator caging systems Thoren 2 19500 39000
25 Bedding disposal units TBJ/Nuaire 3 12500 37500
26 Telephone system package NEC 1 77805 77805
27 Caging systems-package Various 1 42300 42300
28 Surgery lights, animal care equipment Various 1 87500 87500
29 Behavior testing equipment - animal care Various 1 115000 115000
1274151
</TABLE>
Included but not scheduled are all portable lab and other devices that are
typically mounted above or below countertops, which may or may not be powered by
standard wall electrical recepticles.
<PAGE>
Exhibit 10.68
CYTOTHERAPEUTICS, INC.
Two Richmond Square
Providence, RI 02906
Irving L. Weissman
Pathology B-257
Stanford Medical School
Stanford, CA 94305
Fred H. Gage
Laboratory of Genetics
10010 N. Torrey Pines Road
La Jolla, CA 92037
Re: Conduct of StemCells Research
Dear Irv and Rusty:
In connection with your agreeing to become consultants to
CytoTherapeutics, Inc. ("CTI") pursuant to Consulting Agreements between each of
you and the Company of even date herewith and the award to you pursuant to such
Agreements of certain Options, we have agreed as follows regarding the conduct
of certain research expected to have a material impact on the vesting of such
options and a number of related matters. The provisions of this Agreement shall
become effective on the closing of the acquisition of StemCells, Inc.
("SCI") by CTI.
1. Funding and Control of StemCells Research
a. SCI shall become the stem cells research arm of CTI. All stem
cells research to be conducted or contracted for by CTI or SCI
shall be conducted or contracted for through SCI; development
work may be conducted or contracted for at CTI.
b. The stem cells research program to be conducted by SCI through
June 30, 1999 shall be conducted as provided in the Research
Plan (the "Research Plan") in the form attached hereto as
Exhibit 1. All stem cells research shall be conducted in
accordance with the Research Plan. Any changes in the Research
Plan must be approved by the Research Committee (as defined
below).
c. The Research Committee shall consist of two persons chosen by
the Scientific Founders (initially, Weissman and Gage), two
persons chosen by CTI (initially, Richard Rose and Seth
Rudnick) and a fifth, independent member appointed by
<PAGE>
the Scientific Founders, subject to the reasonable approval of
CTI. The term "Scientific Founders" shall refer to two of you,
provided, however, that if any one of you should resign
without Good Reason or be terminated for Cause (as such terms
are defined in your Consulting Agreements), the term
Scientific Founders shall mean the remaining one of you.
d. The Research Committee shall meet at least quarterly to review
progress under the Research Plan and make any adjustments to
the Research Plan which the Committee deems necessary or
desirable to the Research Plan, provided that there shall be
no reduction in the agreed upon level of expenditures in the
initial Research Plan without the consent of at least four
members of the Committee.
e. The initial Research Plan and any modifications or
continuations of the Research Plan subsequently adopted by the
Research Committee shall have as a priority the achievement of
research goals directly related to CTI's overall product
development efforts and shall provide for CTI to support stem
cell research on a basis that is commercially reasonable.
f. The initial Research Plan allocates resources to specific
research programs and sets objective goals (the "Initial
Goals") for these programs. Prior to June 30, 1999 and each
June 30 thereafter through June 30, 2001, the Research
Committee shall determine the Research Plan for the following
twelve month period, and set objective goals, reasonably based
on the Research Plan, to be achieved during such period. For
so long as the Initial Goals and any subsequently adopted
goals are achieved, the Research Committee shall continue to
control all stem cells research conducted at CTI and SCI and
CTI shall continue to fund such research at the level called
for in the Research Plan adopted by the Committee (provided
such funding shall not increase by more than 25% per year
without the approval of CTI). CTI may, however, at any time
after September 1, 1999
i. cease funding of the neural stem cells research
program or reduce the level of funding for such
program below the level of funding provided for such
program in the Research Plan or exercise control
itself over the neural stem cells research program by
accelerating the vesting of all unvested
Performance-Based Incentive Options related to the
achievement of all milestones, other than milestones
that are, at such time, time-barred and therefore no
longer achievable;
ii. cease funding of the non-neural stem cells research
program or reduce the level of funding for such
program below the level of funding provided for such
program in the Research Plan or exercise control
itself over the non-neural stem cells research
program by transferring to the Scientific Founders or
their assigns all intellectual property created in
the non-neural
2
<PAGE>
stem cell research program together with all
non-neural Initial Technology (as defined below)
(collectively, the "Non-Neural Technology"), as more
fully provided below; or
iii. so cease or reduce the funding or exercise control
itself in regard to both the neural stem cell
research program and the non-neural stem cell
research program by either (A) transferring the
Non-Neural Technology as provided in (ii) above and
accelerating the options as provided in (i) above or,
at CTI's option, (B) transferring both (x) the
intellectual property created in the neural stem cell
program together with all neural Initial Technology
(collectively, the "Neural Technology," together with
the Non-Neural Technology, the "Stem Cell
Technology") and (y) the Non-Neural Technology to the
Scientific Founders or their assigns as more fully
described below.
Initial Technology shall mean existing in-licensed technology
of StemCells, Inc. on the date of this Agreement. Any transfer
of Technology pursuant to this paragraph shall be provided for
by CTI granting to the Scientific Founders or their assigns an
exclusive license or, in the case of in-licensed technology,
an exclusive sublicense, to the Technology (together with the
benefits of any in-licensed technology and subject to any
prior out-licenses approved by the Research Committee) in
consideration of the payment to CTI of cash equal to the total
funding for all research conducted in the non-neural stem cell
research program (in the case of a transfer of Non-Neural
Technology) or the stem cell research program generally (in
regard to a transfer of Stem Cell Technology). This license
will be provided for in a commercially reasonable license
agreement designed to permit the continued development and
commercialization of the transferred Technology. In the case
of any transfer of in-licensed technology, any such transfer
shall be subject to all applicable terms and conditions of the
in-license. In order to give CTI an on-going interest in the
successful commercialization of such technology, such license
agreement will provide for a royalty to be paid to CTI at a
royalty rate equal to 1% of the net sales of any product whose
manufacture, use or sale would but for the grant of the
license infringe on any claim in any issued patent included in
the licensed Technology (other than the Initial Technology).
If CTI determines to cease or reduce funding or assume control
as provided in (ii) or (iii) above, CTI shall promptly notify
the Scientific Founders and shall give the Scientific Founders
one year from the date of such notice to arrange financing for
the transactions described above. The provisions of this
paragraph shall terminate on the earlier of July 1, 2005 or
such time as the total funding of stem cell research conducted
pursuant to the Research Plan shall have exceed $25 million,
at least $15 million of which shall have been expended for
non-neural stem cell research.
3
<PAGE>
g. All stem cells research conducted by CTI shall be under the
direction of a Director of Stem Cells Research, who shall be
nominated by the Research Committee, subject to reasonable
approval by CTI.
2. Award of Additional Options
a. CTI shall award Options to acquire 400,000 shares of CTI
Common Stock to persons (including, if the Research Committee
so determines, the Scientific Founders) designated by the
Research Committee, after consultation with CTI to assure (if
applicable) consistency with CTI policies regarding the
granting of options to employees. All persons to whom such
options are granted shall be persons determined by the
Research Committee, after consultation with CTI, to be persons
whom it is critically important to recruit, retain or
otherwise incent for the stem cells research program described
above.
3. Amendment. This Agreement may be amended at any time by a written
agreement executed by CTI and the Scientific Founders.
If you agree that the foregoing represents our understanding regarding the
matters described in this letter agreement, please so indicate by signing the
copy of this agreement (which may be executed in more than one counterpart, each
of which shall constitute a single original) and returning it to us.
Very truly yours,
CYTOTHERAPEUTICS, INC.
By: /s/ Seth Rudnick
---------------------------
President
READ AND AGREED:
/s/ Irving L. Weissman
- ---------------------------
Irving L. Weissman
/s/ Fred H. Gage
- ---------------------------
Fred H. Gage
4
<PAGE>
Exhibit 10.69
CROSS LICENSE AGREEMENT
BY AND BETWEEN
CYTOTHERAPEUTICS, INC.
AND
MODEX THERAPEUTICS, S.A.
ORIGINALLY DATED AS OF JULY 10, 1996
AMENDED AND RESTATED AS OF OCTOBER 29, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS........................................................................ 1
1.1. "Confidential Information..................................................... 1
1.2. "CTI Field.................................................................... 2
1.3. "CTI Know-How................................................................. 2
1.4. "CTI Licensed Product......................................................... 2
1.5. "CTI Patents.................................................................. 2
1.6. "CTI Sublicensee.............................................................. 3
1.7. "CTI Third Party Royalty Amount............................................... 3
1.8. "CTI Technology............................................................... 3
1.9. "Dollar" and "$............................................................... 3
1.10. "Encapsulation Technology.................................................... 3
1.11. "Field....................................................................... 4
1.12. "First Commercial Sale....................................................... 4
1.13. "Fully Burdened Manufacturing Cost........................................... 4
1.14. "Joint Technology............................................................ 4
1.15. "Licensed Products........................................................... 4
1.16. "Modex Field................................................................. 4
1.16.1 Diabetes.................................................................... 4
1.16.2 Obesity..................................................................... 4
1.16.3 Anemia...................................................................... 4
1.16.4 The treatment of Hemophilia................................................. 4
1.16.5 Two additional fields categories............................................ 4
1.17. "Modex Know-How.............................................................. 5
1.18. "Modex Licensed Products..................................................... 5
1.19. "Modex Patents............................................................... 5
1.20. "Modex Technology............................................................ 6
1.21. "Modex Sublicensee........................................................... 6
1.22. "Modex Third Party Royalty Amount............................................ 6
1.23. "Net Sales................................................................... 6
1.24. "Party....................................................................... 7
1.25. "Person...................................................................... 7
1.26. "Sublicensees................................................................ 7
2. LICENSE TERMS...................................................................... 7
2.1. License Grant to Modex........................................................ 7
2.1.1 Manufacturing License under CTI Patents...................................... 7
2.1.2 Manufacturing License under CTI Know-How..................................... 7
2.2. License Grant to CTI.......................................................... 8
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
2.3. Limited Rights................................................................ 8
2.4. Joint Technology.............................................................. 8
2.4.1 Modex License to Joint Technology............................................ 8
2.4.2 CTI License to Joint Technology.............................................. 8
2.5. Sublicensees.................................................................. 8
2.6. Technology Transfer........................................................... 9
3. ROYALTIES.......................................................................... 9
3.1. Royalties Payable by Modex.................................................... 9
3.2. Royalties Payable by CTI...................................................... 9
3.3. Termination of Royalty Obligations............................................ 10
3.4. Payment Dates and Statements.................................................. 10
3.5. Records and Accounting........................................................ 10
3.6. Currency of Payments.......................................................... 11
3.7. Tax Withholding............................................................... 11
4. PATENTS AND TECHNOLOGY............................................................. 11
4.1. Ownership of Technology....................................................... 11
4.2. Joint Patents................................................................. 11
4.3. Infringement of Patents....................................................... 12
4.4. Survival...................................................................... 12
5. CONFIDENTIAL INFORMATION........................................................... 12
5.1. Treatment of Confidential Information......................................... 12
5.2. Release from Restrictions..................................................... 13
5.3. Confidential Agreements....................................................... 13
6. SUPPLY OF MODEX LICENSED PRODUCT................................................... 13
6.1. General....................................................................... 13
6.2. Supply of Modex Licensed Products for Clinical Trials......................... 13
6.3. Supply of Modex Licensed Products for Commercial Sale......................... 14
6.6. Exercise by Modex of Rights to Manufacture or Have Manufactured Modex Licensed
Products........................................................................... 16
6.6.1 CTI's Failure to Perform..................................................... 16
6.6.2 Modex's Decision to Manufacture.............................................. 17
6.6.3 Modex's Rights to Manufacture Where Transfer Price Exceeds [***] of Net
Sales.............................................................................. 17
7. TERM AND TERMINATION............................................................... 17
7.1. Term.......................................................................... 17
7.2. Breach........................................................................ 17
7.3. Insolvency or Bankruptcy...................................................... 18
7.4. Effect of Termination......................................................... 18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
8. MISCELLANEOUS PROVISIONS........................................................... 19
8.1. No Partnership................................................................ 19
8.2. Assignments................................................................... 19
8.3. Force Majeure................................................................. 19
8.4. No Trademark Rights........................................................... 20
8.5. Public Announcements.......................................................... 20
8.6. Entire Agreement of the Parties; Amendment.................................... 20
8.7. Severability.................................................................. 20
8.8. Captions...................................................................... 20
8.9. Notice and Delivery........................................................... 20
8.10. Limitation of Liability...................................................... 21
8.11. Modex Indemnification........................................................ 21
8.12. CTI Indemnification.......................................................... 21
8.13. Liability Insurance.......................................................... 22
8.14. Governing Law................................................................ 22
8.15. No Drafting Presumption...................................................... 22
8.16. Submission to Jurisdiction in Rhode Island................................... 22
9. RESOLUTION OF DISPUTES............................................................. 22
9.1. General....................................................................... 22
9.2. Dispute Resolution Process.................................................... 23
9.3. Arbitration Costs............................................................. 24
SCHEDULE 1.3.3................................................................................ 25
SCHEDULE 1.5.................................................................................. 26
SCHEDULE 1.5A................................................................................. 29
SCHEDULE 1.17.3............................................................................... 31
SCHEDULE 1.19................................................................................. 32
SCHEDULE 1.19A................................................................................ 33
</TABLE>
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
iii
<PAGE>
AMENDED AND RESTATED CROSS LICENSE AGREEMENT
This AGREEMENT, originally dated as of July 10, 1996 by and between
CYTOTHERAPEUTICS, INC. ("CTI"), a Delaware corporation having its principal
office at Two Richmond Square, Providence, Rhode Island 02906 and MODEX
THERAPEUTIQUES, SA ("Modex"), a Swiss (Vaud) corporation having its principal
office at 27 Rue du Bugnon, 1005 Lausanne is hereby amended and restated, as of
October 29, 1997 (the "Restatement Date"), to read in its entirety as follows:
WHEREAS, CTI has or may obtain rights to certain technology which CTI
desires to license to Modex and which Modex desires to license from CTI; and
WHEREAS, Modex has or may obtain rights to certain technology which Modex
desires to license to CTI and which CTI desires to license from Modex; and
WHEREAS, Modex desires to arrange for CTI to manufacture certain products to
be developed by Modex and CTI wishes to manufacture such products;
NOW, THEREFORE, CTI and Modex hereby agree as follows:
1. DEFINITIONS. The following capitalized terms shall have the meanings
given below:
1.1. "Confidential Information" shall mean any and all information of or
about a Party including all information relating to any technology, product,
process or intellectual property of such Party (including, but not limited to,
owned or licensed intellectual property rights, data, know-how, samples,
technical and non-technical materials, and specifications) as well as any
business plan, financial information, or other confidential commercial
information of or about such other Party. Notwithstanding the foregoing,
specific information shall not be considered "Confidential Information" with
respect to such Party to the extent that the other Party possessing such
information can demonstrate by written record or other suitable physical
evidence that:
(i) such specific information was lawfully in such other Party's possession
or control prior to the time such information was disclosed to such other
Party by the Party to whom the information relates;
(ii) such specific information was developed by such other Party without
such Party having access to the Confidential Information;
(iii) such specific information was lawfully obtained by such other Party
from a third Party under no obligation of confidentiality to the Party to
whom such information relates; or
1
<PAGE>
(iv) such specific information was at the time it was disclosed or obtained
by such other Party, or thereafter became, publicly known otherwise than
through a breach by such other Party of such other Party's obligations to
the Party to whom such information relates.
1.2. "CTI Field" shall mean the diagnosis, prevention and treatment of
diseases, conditions and disorders which affect or involve the central nervous
system, (including, without limitation, pain and any ophthalmologic, auricular
(hearing) or other sensory-related disease state or condition),
1.3. "CTI Know-How" shall mean
1.3.1 CURRENT ENCAPSULATION KNOW-HOW. All Confidential Information of
CTI owned by CTI or under which CTI has the right to grant licenses to Modex
in the Modex Field which constitutes Encapsulation Technology as of the
Restatement Date (for so long as such Confidential Information continues to
be Confidential Information of CTI);
1.3.2 FUTURE ENCAPSULATION KNOW-HOW. Any future Confidential Information
of CTI owned by CTI or under which CTI has the right to grant licenses to
Modex in the Modex Field which constitutes Encapsulation Technology (for so
long as such Confidential Information continues to be Confidential
Information of CTI); and
1.3.3 CURRENT CELL LINE KNOW-HOW. Certain additional Confidential
Information regarding cells and cell lines owned by CTI or under which CTI
has the right to grant licenses to Modex in the Modex Field as of the
Restatement Date, as more specifically described on Schedule 1.3.3 (for so
long as such Confidential Information continues to be Confidential
Information of CTI).
Notwithstanding any other provision of this Agreement, however, CTI Know-How as
described in Section 1.3.3 or elsewhere shall not include any Confidential
Information relating to stem or progenitor cells of any type; any Confidential
Information of CTI's subsidiary, StemCells, Inc., or any Confidential
Information of CTI acquired from StemCells, Inc. (including, without limitation,
any immortalization/disimmortalization technology or technology relating to stem
or progenitor cells); and any Confidential Information relating to protein
discovery or vaccine research.
1.4. "CTI Licensed Product" shall mean any product (i) the manufacture, use
or sale of which would, absent the license granted by Modex to CTI herein,
infringe an issued patent constituting a part of the Modex Patents or any
portion thereof; or (ii) the manufacture, use or sale of which makes use of all
or a portion of the Modex Know-How.
1.5. "CTI Patents" shall mean
2
<PAGE>
1.5.1 CURRENT PATENT PORTFOLIO. Those patents (including all additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions and renewals thereof), and patent applications
(including patents issued thereon) listed on Schedule 1.5, which CTI
represents and warrants to Modex constitute all patents and patent
applications which, as of the Restatement Date, are owned by CTI or under
which CTI has the right to grant licenses to Modex in the Modex Field other
than those patents or patent applications listed as "Not Included" on
Schedule 1.5A;
1.5.2 FUTURE ENCAPSULATION PATENTS. Any future patent (including all
additions, divisions, continuations, continuations-in-part, substitutions,
extensions, patent term extensions and renewals thereof), or patent
application (including patents issued thereon) owned by CTI or under which
CTI has the right to grant licenses to Modex in the Modex Field to the
extent, and only to the extent, that such patent or patent application
constitutes Encapsulation Technology; and
1.5.3 PATENTS DERIVED FROM CURRENT CELL LINE KNOW-HOW. Any future patent
(including all additions, divisions, continuations, continuations-in-part,
substitutions, extensions, patent term extensions and renewals thereof), or
patent application (including patents issued thereon) owned by CTI or under
which CTI has the right to grant licenses to Modex in the Modex Field to the
extent, and only to the extent, that such patent or patent application
covers the CTI Know-How described in Section 1.3.3 as of the Restatement
Date.
1.6. "CTI Sublicensee" shall mean any Person to whom CTI grants a sublicense
of the rights granted to CTI to pursuant to Section 2.2 hereof.
1.7. "CTI Third Party Royalty Amount" shall mean any amounts CTI may from
time to time be obligated to pay in respect of the manufacture, use, sale or
other disposition by Modex or its Sublicensees of Modex Licensed Products or any
other third-party royalty or other similar payment payable by CTI under any
license granted to CTI which CTI has sublicensed to Modex hereunder.
1.8. "CTI Technology" shall mean (i) the CTI Patents and (ii) the CTI
Know-How. CTI Technology shall not include Modex Technology or Joint Technology.
1.9. "Dollar" and "$" shall mean United States dollars.
1.10. "Encapsulation Technology" shall mean the following patented and
non-patented technology: devices for encapsulating cells, methods of making such
devices, membrane jackets for such devices, matrix cores for such devices and
methods of delivering molecules from such devices. Such technology shall not
include any technology relating to the encapsulated cells themselves.
1.11. "Field" shall mean collectively the CTI Field and the Modex Field.
3
<PAGE>
1.12. "First Commercial Sale" shall mean, with respect to each Licensed
Product in each country, the first bona fide, arms' length sale of such Licensed
Product in such country following receipt of all regulatory approvals necessary
to commence regular, commercial scale sales of such Licensed Product in such
country. Sales prior to receipt of all approvals necessary to commence
commercial sales, such as so-called "named patient sales" and "compassionate
use" sales, shall not be First Commercial Sales.
1.13. "Fully Burdened Manufacturing Cost" shall mean the actual cost of the
production of a Licensed Product or other implant, which shall be comprised of
the sum of (a) the cost of goods produced as determined in accordance with
United States generally accepted accounting principles as consistently applied
by CTI, including, but not limited to, direct labor, packaging, shipping and
insurance costs, and material and product testing costs incurred in connection
with the manufacture or quality control testing of Modex Licensed Products or
other implants, as well as overhead and amortized capital depreciation allocated
to the manufacture of Modex Licensed Products or other implants in accordance
with United States generally accepted accounting principles as consistently
applied by CTI, and (b) all royalties (earned or paid up) and other amounts
payable to third parties under license(s) taken by CTI in connection with such
Modex Licensed Products, to the extent such royalties or other amounts are not
included in the CTI Third Party Royalty Amount.
1.14. "Joint Technology"--see Section 4.1.
1.15. "Licensed Products" shall mean collectively the CTI Licensed Products
and the Modex Licensed Products.
1.16. "Modex Field" shall mean the diagnosis, prevention and treatment,
through encapsulated cell therapy, of:
1.16.1 Diabetes (other than the diagnosis, prevention or treatment of
diabetes utilizing encapsulated primary islet cells);
1.16.2 Obesity;
1.16.3 Anemia;
1.16.4 The treatment of Hemophilia A or B through the delivery of Factor
VIII, Factor IX or both; and
1.16.5 Two additional fields categories to be agreed to by CTI and Modex
no later than June 30, 2003, each such field category to be specified by
reference to a disease state or disorder and, if applicable, the delivery of
a specific substance or substances. Each of the additional field categories
shall be specified by Modex, subject to the consent of CTI, which
4
<PAGE>
shall not be unreasonably withheld (with the withholding of any such consent
based solely on the potential market share of such field category being deemed
unreasonable), provided, however, that CTI may, in its sole discretion, withhold
consent to any Field category involving the treatment of any disease state or
disorder of the [******* ******* ****** *********** ******* *********** **** ***
*** *************** ********* ********* ** ***** *************** ******* *****
** *********** ** *** ******* ***** ** ********* *** ***** *** ** ********
********** * ******** **********]
1.17. "Modex Know-How" shall mean
1.17.1 CURRENT ENCAPSULATION KNOW-HOW. All Confidential Information of
Modex owned by Modex or under which Modex has the right to grant licenses to
CTI in the CTI Field which constitutes Encapsulation Technology as of the
Restatement Date (for so long as such Confidential Information continues to
be Confidential Information of Modex);
1.17.2 FUTURE ENCAPSULATION KNOW-HOW. Any future Confidential
Information of Modex owned by Modex or under which Modex has the right to
grant licenses to CTI in the CTI Field which constitutes Encapsulation
Technology (for so long as such Confidential Information continues to be
Confidential Information of Modex); and
1.17.3 CURRENT CELL LINE KNOW-HOW. Certain additional Confidential
Information regarding cells and cell lines owned by Modex or under which
Modex has the right to grant licenses to CTI in the CTI Field as of the
Restatement Date, as more specifically described on Schedule 1.17.3 (for so
long as such Confidential Information continues to be Confidential
Information of Modex).
1.18. "Modex Licensed Products" shall mean any product (i) the manufacture,
use or sale of which would, absent the license granted by CTI to Modex herein,
infringe an issued patent constituting a part of the CTI Patents, or any portion
thereof, or (ii) the manufacture, use or sale of which makes use of all or a
portion of the CTI Know-How.
1.19. "Modex Patents" shall mean
1.19.1 CURRENT PATENT PORTFOLIO. Those patents (including all additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions and renewals thereof), and patent applications
(including patents issued thereon) listed on Schedule 1.19, which Modex
represents and warrants to CTI constitute all patents and patent
applications which, as of the Restatement Date, are owned by Modex or under
which Modex has the right to grant licenses to CTI in the CTI Field other
than those patents or patent applications listed as "Not Included" on
Schedule 1.19A;
1.19.2 FUTURE ENCAPSULATION PATENTS. Any future patent (including all
additions, divisions, continuations, continuations-in-part, substitutions,
extensions, patent term
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
5
<PAGE>
extensions and renewals thereof), or patent application (including patents
issued thereon) owned by Modex or under which Modex has the right to grant
licenses to CTI in the CTI Field to the extent, and only to the extent, that
such patent or patent application constitutes Encapsulation Technology; and
1.19.3 PATENTS DERIVED FROM CURRENT CELL LINE KNOW-HOW. Any future
patent (including all additions, divisions, continuations,
continuations-in-part, substitutions, extensions, patent term extensions and
renewals thereof), or patent application (including patents issued thereon)
owned by Modex or under which Modex has the right to grant licenses to CTI
in the CTI Field to the extent, and only to the extent, that such patent or
patent application covers the Modex Know-How described in Section 1.17.3 as
of the Restatement Date.
1.20. "Modex Technology" shall mean (i) the Modex Patents, and (ii) the
Modex Know-How. Modex Technology shall not include CTI Technology or Joint
Technology.
1.21. "Modex Sublicensee" shall mean any Person to whom Modex grants a
sublicense of the rights granted to Modex pursuant to Section 2.1 hereof.
1.22. "Modex Third Party Royalty Amount" shall mean any amounts Modex may
from time to time be obligated to pay in respect of the manufacture, use, sale
or other disposition by CTI or its Sublicensees of the CTI Licensed Products or
any other third-party royalty or other similar payment payable by Modex under
any license granted to Modex which Modex has sublicensed to CTI hereunder.
1.23. "Net Sales" shall mean as to any period for each Licensed Product in a
given country, the gross invoiced sales price for all such Licensed Products
sold or commercially disposed of for value in such country by a Party, or such
Party's Sublicensees, in arm's length sales to independent third parties in that
period, after deduction of the following items incurred by a Party or such
Party's Sublicensees, as the case may be, during such period with respect to
sales of Licensed Products hereunder regardless of the period in which such
sales were made, provided that such items are included in the price charged, and
do not exceed reasonable and customary amounts in the country in which such sale
occurred:
(i) trade and quantity discounts or rebates actually taken or allowed;
(ii) credits or allowances given or made for rejection or return of
previously sold Licensed Products actually taken or allowed;
(iii) any tax or government charge (including any tax such as a value added
or similar tax or government charge other than an income tax) levied on
the sale, transportation or delivery of a Licensed Product and borne by
the seller thereof; and
6
<PAGE>
(iv) any charges for freight or insurance billed to the final customer.
If a Licensed Product is sold, leased or otherwise commercially disposed of for
value (including, without limitation, disposition in connection with the
delivery of other products or services) in a transaction that is not an arm's
length transaction with an independent third Party, and is not for resale, etc.
to an independent Party in an arm's length transaction, then the gross sales
price in such transaction shall be deemed to be the greater of the actual sales
price or the gross sales price in the most similar substantially contemporaneous
arm's length sale to an independent third Party for such Licensed Product, or if
there is none, for the most similar Licensed Product for which there is a
transaction. Net Sales shall also include any other consideration received by a
Party or its Sublicensees in respect of the sale, distribution or transfer of a
Licensed Product other than in the course of clinical trials.
1.24. "Party" shall mean each of CTI and Modex and their respective
successors and permitted assigns.
1.25. "Person" shall mean any person, entity, organization or body.
1.26. "Sublicensees" shall mean collectively the CTI Sublicensees and the
Modex Sublicensees.
2. LICENSE TERMS
2.1. LICENSE GRANT TO MODEX. Subject to the terms and conditions of this
Agreement, CTI hereby grants to Modex an exclusive, royalty-bearing, worldwide
license, including the right to grant sublicenses, under the CTI Technology to
use, sell and have sold Modex Licensed Products in the Modex Field.
2.1.1 MANUFACTURING LICENSE UNDER CTI PATENTS. Subject to the terms and
conditions of this Agreement (including, without limitation, the provisions
of Section 6.6), CTI also hereby grants to Modex a co-exclusive,
royalty-bearing world-wide license, including the right to grant
sublicenses, under the CTI Patents, to manufacture and to have manufactured
Modex Licensed Products in the Modex Field.
2.1.2 MANUFACTURING LICENSE UNDER CTI KNOW-HOW. Subject to the terms and
conditions of this Agreement (including, without limitation, the provisions
of Section 6.6), CTI also hereby grants to Modex a Non-exclusive,
royalty-bearing world-wide license, including the right to grant
sublicenses, under the CTI Know-How, to manufacture and to have manufactured
Modex Licensed Products in the Modex Field.
2.2. LICENSE GRANT TO CTI. Subject to the terms and conditions of this
Agreement, Modex hereby grants to CTI (i) a non-exclusive, royalty-free,
worldwide license, including the
7
<PAGE>
right to grant sublicenses, under the Modex Technology to manufacture, and have
manufactured, the Modex Licensed Products, and (ii) an exclusive,
royalty-bearing, worldwide license, including the right to grant sublicenses,
under the Modex Technology to manufacture, have manufactured, use, sell and have
sold CTI Licensed Products in the CTI Field.
2.3. LIMITED RIGHTS. The rights granted hereunder shall be limited to the
rights expressly stated to be granted hereunder and no additional right or
licenses are implied. Without limiting the generality of the foregoing, nothing
in this Agreement shall be construed to grant (i) to Modex rights under any CTI
Technology to make, have made, use, sell or have sold any products other than
the Modex Licensed Products in the Modex Field or (ii) to CTI (A) rights under
any Modex Technology to make or have made any products other than the Modex
Licensed Products or (B) rights under any Modex Technology to make, have made,
use, sell or have sold any products other than the CTI Licensed Products in the
CTI Field, except as provided in (A) above.
2.4. JOINT TECHNOLOGY. Subject to the provisions of this Section 2.4, each
Party shall have the right to exploit the Joint Technology without being
obligated to account to the other Party.
2.4.1 MODEX LICENSE TO JOINT TECHNOLOGY. In the event during the term of
this Agreement Modex desires to obtain exclusive rights to the Joint
Technology to make, have made, use, sell and have sold products in the Modex
Field, Modex shall give notice to CTI of its desire and this Agreement shall
be appropriately modified to give Modex such rights and to include such
products in the definition of Modex Licensed Products, which CTI or Modex
shall manufacture or have manufactured as provided in Section 6, and which
shall entitle CTI to receive royalty payments equal to the Specified
Percentage of the Net Sales of such products as provided in Section 3.
2.4.2 CTI LICENSE TO JOINT TECHNOLOGY. In the event during the term of
this Agreement CTI desires to obtain exclusive rights to the Joint
Technology to make, have made, use, sell and have sold products in the CTI
Field, CTI shall give notice to Modex of its desire and this Agreement shall
be appropriately modified to give CTI such rights and to include such
products in the definition of CTI Licensed Products, which shall entitle
Modex to receive royalty payments equal to [*** ******* ****] of the Net
Sales of such products as provided in Section 3.
2.5. SUBLICENSEES. Each Party shall give notice to the other of any
Sublicensee appointed by it. The Party appointing a Sublicensee shall be
responsible for all obligations of such Sublicensee hereunder, including without
limitation their obligation to pay royalties on sales of Licensed Products, and
the obligation of such Sublicensees not to sell Licensed Products outside, in
the case of Modex Sublicensees, the Modex Field, and, in the case of CTI
Sublicensees, the CTI Field. In the event that the license granted to Modex
hereunder by CTI shall terminate for any reason, any Sublicensee under any such
terminated license shall
- --------------------------
* This confidential portion has been omitted and filed separately with the
Commission
8
<PAGE>
continue automatically to have the rights and license previously licensed by CTI
to Modex under such terminated license and shall be entitled to enforce such
rights and license directly against CTI, provided that any such Sublicensee
agrees in writing with CTI that CTI shall be entitled to enforce the provisions
of such terminated license directly against such Sublicensee. In the event that
the license granted to CTI hereunder by Modex shall terminate for any reason,
any Sublicensee under any such terminated license shall continue automatically
to have the rights and license previously licensed by Modex to CTI under such
terminated license and shall be entitled to enforce such rights and license
directly against Modex, provided that any such Sublicensee agrees in writing
with Modex that Modex shall be entitled to enforce the provisions of such
terminated license directly against such Sublicensee. At the request of either
Party, the other Party shall enter into a direct contractual arrangement with
any Sublicensee of the requesting Party providing for such Sublicensee to have
such rights and obligations as described in the two preceding sentences,
effective upon any termination of the license granted hereunder from the
requested Party to the requesting Party.
2.6. TECHNOLOGY TRANSFER. Each Party shall, at its own expense, provide the
other Party with reasonable cooperation in order to permit each such Party to
exploit the rights granted to it hereunder.
3. ROYALTIES
3.1. ROYALTIES PAYABLE BY MODEX. Except as otherwise provided herein,
following the First Commercial Sale of each Modex Licensed Product, Modex shall
pay to CTI a royalty equal to (i) the Specified Percentage of Net Sales for such
Modex Licensed Product in each calendar quarter, plus (ii) any CTI Third Party
Royalty Amount payable in respect of such Modex Licensed Products. The royalty
payable shall be calculated separately for each country and for each Modex
Licensed Product. Modex shall be responsible for the payment of, and shall remit
to CTI, all royalties payable to CTI hereunder. No multiple royalties shall be
payable because the manufacture, use or sale of any Modex Licensed Product (i)
shall be covered by more than one CTI Patent and/or any patent included in Joint
Technology or (ii) uses or incorporates more than one aspect of the CTI
Technology and/or Joint Technology or both (i) and (ii) apply. The Specified
Percentage shall equal [*** ******* ****], except as otherwise provided in
Section 6.6.
3.2. ROYALTIES PAYABLE BY CTI. Except as otherwise provided herein,
following the First Commercial Sale of each CTI Licensed Product, CTI shall pay
to Modex a royalty equal to (i) [*** ******* ****] of Net Sales for such CTI
Licensed Product in each calendar quarter, plus (ii) the Modex Third Party
Royalty Amount payable in respect of such CTI Licensed Products. The royalty
payable shall be calculated separately for each country and for each CTI
Licensed Product. CTI shall be responsible for the payment of, and shall remit
to Modex, all royalties payable to Modex hereunder. No multiple royalties shall
be payable because the manufacture, use or sale of any CTI Licensed Product (i)
shall be covered by more than one
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
9
<PAGE>
Modex Patent and/or any patent included in Joint Technology or (ii) uses or
incorporates more than one aspect of the Modex Technology and/or Joint
Technology or both (i) and (ii) apply.
3.3. TERMINATION OF ROYALTY OBLIGATIONS. With respect to each Licensed
Product, the royalty obligations of each of Modex and CTI shall cease upon the
later of (i) the last to expire of any patent which would be infringed by the
manufacture, use or sale of such Licensed Product but for a license granted
hereunder; (ii) on a country-by-country basis, the date that is ten (10) years
from the First Commercial Sale in any country of such Licensed Product; and
(iii) with respect to any CTI Third Party Royalty Amount or Modex Third Party
Royalty Amount, the expiration of the obligation of, respectively, CTI or Modex
to pay any such amount.
3.4. PAYMENT DATES AND STATEMENTS. Within forty-five (45) days of the end of
each calendar quarter in which Net Sales occur, each Party shall calculate the
royalty amount owed under this Section 3 and shall remit such amount to the
other Party. Such payment shall be accompanied by a statement showing the
calculation of the amount owed for each country, the total Net Sales of each
Licensed Product by country for that quarter, and the exchange rate (as
determined pursuant to Section 3.6) used to directly convert any royalty amounts
into Dollars. For purposes of determining when a sale of a Licensed Product
occurs, the sale shall be deemed to occur on the earlier of: (i) the date the
Licensed Product is shipped by CTI or Modex, as applicable, or (ii) the date of
the invoice to the purchaser of the Licensed Product. Any payment owed under
this Section 3 that is not paid on or before the date such payment is due under
this Agreement shall bear interest, to the extent permitted by applicable law,
at two percentage points (2%) over the prime rate of interest as reported in the
New York edition of The Wall Street Journal on the due date of such payment
calculated on the number of days such payment is delinquent. If materially
different from the foregoing provisions, any CTI Third Party Royalty Amount or
Modex Third Party Royalty Amount shall be calculated and paid in accordance with
the provisions applicable to the payment of any such amount.
3.5. RECORDS AND ACCOUNTING. Each Party shall keep, and shall cause its
Sublicensees to keep, complete and accurate records of the latest three (3)
years of its Net Sales. Each Party shall have the right annually at its own
expense to have an independent, certified public accountant to which the other
Party has no reasonable objection, review such records upon reasonable notice
and during reasonable business hours for the purposes of verifying royalties
payable to it hereunder and Net Sales by the other Party and its Sublicensees.
Results of such review shall be made available to both parties. If the review
reflects an underpayment of royalties, such underpayment shall be promptly
remitted to the Party to whom such royalties are payable with interest as
provided in Section 3.4. If the underpayment is equal to or greater than five
percent (5%) of the royalty amount that was otherwise due, the Party to whom
such royalties are payable shall be entitled to have the other Party pay all of
the costs of such review. Each Party shall cause its accountant undertaking a
review of the other Party's records pursuant to this Section 3.5 to treat all
information of such Party's records as Confidential Information of such Party
and such accountant shall disclose to
10
<PAGE>
its client only such information as is relevant to determining the accuracy of
the royalties paid. Each party shall also maintain such records and take such
other actions as the other party may reasonably require in connection with the
determination of any CTI Third Party Royalty Amount or Modex Third Party Royalty
Amount.
3.6. CURRENCY OF PAYMENTS. All payments under this Agreement shall be made
in Dollars by wire transfer to such bank account as the Party to whom royalties
are payable may designate from time to time. Any payments due hereunder on Net
Sales outside of the United States shall be payable in Dollars at the rate of
exchange of the currency of the country in which the Net Sales are made as
reported in the New York edition of The Wall Street Journal for the last
business day of the quarter for which the royalties are payable. Where royalties
are due hereunder for Net Sales in a country where, by reason of currency
regulations or taxes of any kind, it is illegal for the Party obligated to
transfer royalty payments out of such country for Net Sales in that country,
such royalties shall be deposited in a currency that is permitted for the Party
not able to make the transfer for the benefit or credit of the other Party. If
materially different from the foregoing provisions, any CTI Third Party Royalty
Amount or Modex Third Party Royalty Amount shall be calculated and paid in
accordance with the provisions applicable to the payment of any such amount.
3.7. TAX WITHHOLDING. Modex and CTI shall use all reasonable and legal
efforts to reduce tax withholding on payments made hereunder. Notwithstanding
such efforts, if the Parties conclude that tax withholdings are required with
respect to payments made hereunder, the Party making such payments shall
withhold the required amount and pay it to the appropriate governmental
authority. In such a case, the Party paying such amount will promptly provide
the other Party with original receipts or other evidence sufficient to allow the
other Party to obtain the benefits of such tax withholdings. If materially
different from the foregoing provisions, any tax withholding with respect to any
CTI Third Party Royalty Amount or Modex Third Party Royalty Amount shall be
governed by the provisions applicable to tax withholding with regard to such
amount.
4. PATENTS AND TECHNOLOGY
4.1. OWNERSHIP OF TECHNOLOGY. Each Party shall retain sole title to any
technology which it develops solely. Except as provided in this Agreement,
neither Party shall have any right to use or license technology to which the
other Party has sole title. Each Party shall own a fifty percent (50%) undivided
interest in all technology, know-how, inventions, concepts, processes and the
like (whether or not patentable) made, conceived, reduced to practice or
generated jointly by or on behalf of both parties ("Joint Technology").
4.2. JOINT PATENTS. CTI shall prepare, file and prosecute patent
applications, covering any Joint Technology in the countries of CTI's choice
(after consultation with Modex) with appropriate credit to Modex, including
naming representatives of Modex as inventors where appropriate. CTI and Modex
shall share equally all of the costs associated with the
11
<PAGE>
preparation, filing and prosecution of such patent applications in such
countries. The Parties shall assist each other to the maximum extent reasonable
in securing intellectual property rights resulting from their respective
research programs. Either Party may withdraw from or abandon any jointly-owned
patent or patent application on notice to the other in which case any such
patent or patent application shall become the sole property of the other Party.
If Modex wishes to prepare, file or prosecute any patent application covering
any Joint Technology in a country where CTI, after consultation with Modex,
determines not to file such application, Modex may do so after reasonable notice
to CTI, in which case CTI shall either share equally all of the costs associated
with the preparation, filing and prosecution of such patent application in such
country or such patent application and any patent or patents that may issue
therefrom shall become the sole property of Modex.
4.3. INFRINGEMENT OF PATENTS. If a Party has reason to believe that any of
the patents of the other is being infringed by a third party, the former shall
promptly notify the latter and shall provide it with any evidence of any
infringement which is reasonably available. The Party owning such patent shall
have the first opportunity at its own expense to attempt to resolve such
infringement by appropriate steps including suit. In such event, the other Party
will assist in taking such steps, including suit, within reasonable limits, and
any amount recovered as a result thereof shall first be applied to reimbursing
the Party taking such action for its out-of-pocket expenses, then for
reimbursing the other Party for its out-of-pocket expenses incurred in
connection with such action, and the remainder, if any, shall be for the account
of the Party owning such patent. In the event the Party owning such patent fails
to cause such infringement to cease or institute suit or other legal action with
respect to any such infringement within a period of six (6) months following
such notice of infringement, the other Party shall have the right to take any
appropriate steps, including filing suit against the infringer at its own
expense and in the name of the Party owning the patent, if necessary. In such
event, the other Party shall assist the Party bringing suit as reasonably
requested and shall permit the Party bringing suit to prosecute such
infringement in the name of the owner of the patent. The expenses reasonably
incurred in taking such steps, including suit and legal action, and any amount
recovered as a result thereof shall be first applied to reimbursing the Party
taking such action for out-of-pocket expenses, and then to reimbursing the Party
not taking such action for its out-of-pocket expenses incurred in connection
with such action, and the remainder, if any, shall be for the account of the
Party taking such action.
4.4. SURVIVAL. This Section 4 shall survive the termination or expiration of
this Agreement.
5. CONFIDENTIAL INFORMATION
5.1. TREATMENT OF CONFIDENTIAL INFORMATION. Each Party hereto shall maintain
the Confidential Information of the other Party in confidence, and shall not
disclose, divulge or otherwise communicate such Confidential Information to
others, or use it for any purpose, except pursuant to, and in order to carry
out, the terms and objectives of this Agreement, and
12
<PAGE>
each Party hereby agrees to exercise every reasonable precaution to prevent and
restrain the unauthorized disclosure of such Confidential Information by any of
its directors, officers, employees, consultants, subcontractors, Sublicensees or
agents.
5.2. RELEASE FROM RESTRICTIONS. The provisions of Section 5.1 shall not
apply to any Confidential Information disclosed hereunder which is: required to
be disclosed by the receiving Party to comply with applicable laws, or to comply
with laws or regulations (including without limitation testing and marketing
regulations), in each case only to the extent required to carry out the work
contemplated by this Agreement or other legal obligations provided that the
receiving Party provides prior written notice of such disclosure to the other
Party and takes reasonable and lawful actions to avoid and/or minimize the
degree of such disclosure.
5.3. CONFIDENTIAL AGREEMENTS. Each Party shall maintain employment
agreements with their respective employees and representatives providing for
confidentiality and nonuse commitments consistent with its obligations hereunder
and will require all of its employees, consultants, agents or others who have
access to any Confidential Information of the other Party to execute
confidentiality agreements covering all Confidential Information subject to
Section 5 and will exercise its reasonable best efforts to obtain compliance
therewith.
6. SUPPLY OF MODEX LICENSED PRODUCT
6.1. GENERAL. Except as provided in Section 6.6, CTI shall exclusively
manufacture or have manufactured and supply all Modex Licensed Products for
Modex and all Modex Sublicensees, as well as any other implants (e.g., placebos
or other controls) deemed necessary or desirable by Modex or any Modex
Sublicensee in connection with the development or clinical trials of any Modex
Licensed Product, and Modex and any Modex Sublicensee shall exclusively rely on
CTI to so manufacture or have manufactured all Modex Licensed Products, all as
more fully provided below.
6.2. SUPPLY OF MODEX LICENSED PRODUCTS FOR CLINICAL TRIALS. The transfer
price to Modex of all Modex Licensed Products and other implants used in
clinical trails of any Modex Licensed Product or any pre-clinical research
regarding any such product shall be [**** ** ***** ***** ******** *************
****] of such Modex Licensed Products and implants. CTI shall not be required to
supply more than 10 implants per Modex Licensed Product in any week through the
completion of Phase II clinical trials or more than 25 implants per week per
Modex Licensed Product during Phase III clinical trials (including named patient
sales). Modex shall provide CTI with reasonable lead time to manufacture all
such Modex Licensed Products and other implants for clinical trial use. If Modex
requires greater quantities of implants for any clinical trial for any Modex
Licensed Product, Modex will give CTI ninety (90) days prior notice and CTI will
use commercially reasonable efforts to accommodate such request.
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
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6.3. SUPPLY OF MODEX LICENSED PRODUCTS FOR COMMERCIAL SALE.
6.3.1 TRANSFER PRICE. The transfer price for all Modex Licensed Products
other than those used in clinical trials shall be calculated in accordance
with the following formula (the "Commercial Transfer Price"):
CTP = [*** ****** ** *** *** *** ****** ** **** **** ** ****]
Where: CTP = Commercial Transfer Price
FBMC = CTI's Fully Burdened Manufacturing Cost of such Modex Licensed
Product
Cap Amount = [*** ******* ** *** **** *** ******** **** ****** ** **
******** ** ***** **** **** ** **** **** ** ******* *** ******** ** ***
******** ***** ***** ** ********** ** ********* ** *** ******** *****
***** *** *** ***** ********* ** ******** ** *** ****** ** *****
********** ** *** ****** ****** ********** ** ****** ** **** **** **
****].
The following examples indicate the application of this formula:
<TABLE>
<CAPTION>
[************ **** ** **** **** **** ** **** ***
- ------------------------------------------------------------------------ --------------- ----- --------------- ---
<S> <C> <C> <C> <C>
**** **** **** ****
**** **** **** ****
**** **** **** ****
**** **** ******* ****
**** **** ******* *****
</TABLE>
6.3.2 ESTIMATE OF NEED FOR MODEX LICENSED PRODUCT. At least two (2)
years before the expected first launch of any Modex Licensed Product in any
country, Modex shall inform CTI of its best estimate of the quantity of such
Modex Licensed Product needed by Modex for use or sale during the initial
two (2) years after launch. Such estimates will thereafter be updated
annually.
To assist CTI in preparing for its supply of Modex Licensed Product,
Modex will provide CTI with the following signals for each Licensed Product:
<TABLE>
<CAPTION>
SIGNAL TIMING FORECAST
- ------------- ---------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
1 Prior to Phase II studies Market potential estimates based on market research.
</TABLE>
*This confidential portion has been omitted and filed separately
with the Commission
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<PAGE>
<TABLE>
<CAPTION>
SIGNAL TIMING FORECAST
- ------------- ---------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
2 Prior to Phase III studies Market potential estimates based on more
comprehensive market research, targeted indications
or suggested by Phase II data.
3 Prior to 1st Product License Application or Final pre-launch forecast based on extensive market
equivalent to the US Food and Drug Administration research using Phase III results and considering
(the "FDA") or similar foreign filing (1-1 1/2yrs reimbursement issues.
before launch)
</TABLE>
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
The estimates given by Modex pursuant to this Paragraph 6.3.2 will be used
by CTI only for the purpose of preparing CTI's production capacity for Modex
Licensed Product.
6.3.3 QUARTERLY FORECAST. Starting twelve (12) months prior to the
expected first launch of any Modex Licensed Product, Modex will, before each
January 1, April 1, July 1 and October 1, present to CTI a written forecast
estimating the monthly quantities of Modex Licensed Products to be delivered
during the next twelve (12) month period. With such forecast, Modex will
provide CTI with a summary of its inventory, if any.
Modex will place firm orders for delivery not less than ninety (90) days
prior to the start of the calendar quarter for which shipment is ordered, and
CTI will be obliged (subject to such orders being within CTI's supply capacity,
assuming proportional allocation of such capacity based on firm orders for such
capacity) to deliver all ordered quantities of Modex Licensed Product by the
delivery date stated in the order, except to the extent that such quantities
would exceed either of the following:
(a) 130% of the twelve (12) months forecast for such quarter made twelve
(12) months prior to the start of such quarter; and
(b) 120% of the six (6) months forecast for such quarter made six (6) months
prior to the start of such quarter.
Similarly, the quantities subject to such firm order shall not be less than
either of the following:
(c) 70% of the twelve (12) months forecast for such quarter made twelve (12)
months prior to the start of such quarter; and
15
<PAGE>
(d) 80% of the six (6) months forecast for such quarter made six (6) months
prior to the start of such quarter.
In addition, the firm order for any quarter shall not require delivery of
more than forty percent (40%) of such order in any one month.
CTI will, however, make reasonable efforts also to supply quantities of
Modex Licensed Product in excess of forecast amounts if ordered by Modex.
6.3.4 PAYMENT AND DELIVERY TERMS. Each delivery of Modex Licensed
Product will be effected ex works (CTI's plant) (Incoterms 1990 as published
by the International Chamber of Commerce). All quantities of Modex Licensed
Product will be delivered in finished form, ready for sale and suitably
packed for transportation. Payment for Modex Licensed Products shall be made
within 30 days following delivery.
6.3.5 CIRCUMSTANCES AFFECTING SUPPLY. Each Party will promptly notify
the other Party of any circumstances that it believes may be of importance
as to CTI's ability to supply Modex with Modex Licensed Product.
6.4. SPECIFICATIONS. All Modex Licensed Products manufactured by CTI
pursuant to this Agreement shall, upon delivery to Modex, conform to the
specifications for such Modex Licensed Product to be agreed upon by Modex and
CTI.
6.5. ADDITIONAL MANUFACTURING FACILITY. If prior to the termination of
Modex' rights and licenses hereunder, the parties determine that CTI will be
required to construct an additional facility to meet the demand for the supply
of Modex Licensed Products, CTI agrees to use reasonable efforts to locate such
facility in Switzerland. CTI's obligation to use reasonable efforts to construct
such facility in Switzerland is subject to CTI's determination that such
facility would be commercially practicable in light of the demand for CTI's
other products and the agreement by the Parties on minimum purchase obligations
on the part of Modex that would make such facility profitable. CTI would be
permitted to utilize any such facility for the manufacture of products other
than Modex Licensed Products.
6.6. EXERCISE BY MODEX OF RIGHTS TO MANUFACTURE OR HAVE MANUFACTURED MODEX
LICENSED PRODUCTS.Modex may exercise its rights to manufacture or have
manufactured Modex Licensed Products pursuant to the licenses granted by CTI to
Modex under Sections 2.1.1 and 2.1.2 on the following terms and conditions:
6.6.1 CTI'S FAILURE TO PERFORM. If CTI fails to supply Modex or any
Modex Sublicensee as required under the preceding provisions of this Section
6, following written notice from Modex and a commercially reasonable
opportunity to cure, Modex may exercise its rights under the licenses
granted to Modex under Sections 2.1.1 and 2.1.2, and the Specified
Percentage shall remain [*** ******* ****]. CTI shall maintain at all times
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
16
<PAGE>
sufficiently detailed records of the CTI Know-How required for the
manufacture of Modex Licensed Products so as to allow Modex to exercise its
license rights to such CTI Know-How if CTI fails to perform for any reason,
including, without limitation, CTI's bankruptcy or insolvency.
6.6.2 MODEX'S DECISION TO MANUFACTURE. Modex may at any time exercise
its rights under the license granted to it by CTI under Section 2.1.1 by
providing CTI with 90 days advance written notice of its intention to so
manufacture or have manufactured Modex Licensed Products. The Specified
Percentage in regard to the Net Sales of any Modex Licensed Product which
Modex manufactures or has manufactured pursuant to the provisions of this
Section 6.6.2 shall be [***** ******* ****]. The exercise by Modex of its
rights under this Section 6.6.2 shall not relieve Modex of its obligations
with respect to any firm order placed under Section 6.3. The Parties intend
that Modex may exercise its rights under this Section 6.6.2 with respect to
a portion of the manufacture of any Modex Licensed Product or with respect
to certain Modex Licensed Products but not others.
6.6.3 MODEX'S RIGHTS TO MANUFACTURE WHERE TRANSFER PRICE EXCEEDS [***]
OF NET SALES. In the event that [***] of the aggregate Net Sales of any type
of Modex Licensed Product in any calendar quarter is less than the aggregate
Commercial Transfer Price payable with respect to the delivery of Modex
Licensed Products, Modex may so notify CTI, in which event, CTI shall either
reduce the aggregate Commercial Transfer Price payable with respect to such
Modex Licensed Products to no more than [***] of such aggregate Net Sales or
(ii) permit Modex to exercise its rights under Section 2.1.1, in which case
the Specified Percentage in regard to Net Sales of such Modex Licensed
Product shall be [**** ******* ****] rather than [***** ******* ****].
7. TERM AND TERMINATION
7.1. TERM. The term of this Agreement (the "Term") shall commence as of the
Effective Date. Unless sooner terminated pursuant to Section 7.2 or 7.3, the
term of this Agreement shall expire at such time as neither Party shall have any
further obligations to pay royalties on the sale of Licensed Products.
7.2. BREACH. Failure by a Party to comply with any of its material
obligations contained in this Agreement shall entitle the other Party to give to
the Party in default notice specifying the nature of the default and requiring
it to cure such default. If such default is not cured within 30 days after the
receipt of such notice (or 90 days in the event such breach cannot be reasonably
expected to be cured within 30 days, and the defaulting Party gives notice to
the other Party of its inability to cure such default within a 30 day period and
the defaulting Party thereafter uses reasonable efforts to cure such default as
soon as practicable), the notifying Party shall be entitled, without prejudice
to any of its other rights under this Agreement, and in addition to any other
remedies available to it by law or in equity, to terminate the rights and
licenses of the defaulting Party under this Agreement by giving notice
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
17
<PAGE>
to that effect to the defaulting Party. The right of either Party to terminate
the rights and licenses granted to the other Party under this Agreements as
hereinabove provided shall not be affected in any way by its waiver or failure
to take action with respect to any previous default.
7.3. INSOLVENCY OR BANKRUPTCY. Either Party may, in addition to any other
remedies available to it by law or in equity, terminate the rights and licenses
granted to the other Party under this Agreement by written notice to the other
Party in the event (i) the other Party shall have become insolvent or bankrupt,
or shall have made an assignment for the benefit of its creditors, or (ii) there
shall have been appointed a trustee or receiver of the other Party or for all or
a substantial part of its property, or (iii) any case or proceeding shall have
been commenced or some other action taken by or against the other Party in
bankruptcy or seeking reorganization, liquidation, dissolution, winding-up,
arrangement, composition or readjustment of its debts or any other relief under
any bankruptcy, insolvency, reorganization or other similar act or law of any
jurisdiction now or hereafter in effect or there shall have been issued a
warrant of attachment, execution, distraint or similar process against any
substantial part of the property of the other Party, and any such event or
action shall have continued for 60 days undismissed, unbounded and undischarged;
provided, however, that no such right to terminate shall pertain solely by
virtue of a voluntary reorganization for the purpose of solvent amalgamation or
reconstruction. To the extent that the provisions of any bankruptcy or
insolvency law applicable to the bankruptcy or insolvency of Modex fail to
provide CTI as Licensee of Modex hereunder with rights analogous to those which
Modex enjoys under the provisions of United States bankruptcy law in regard to
its ability to continue to exercise its rights under the licenses granted to
Modex by CTI hereunder so long as Modex continues to satisfy its obligations
hereunder, appropriate provisions will be added to this Agreement providing CTI,
to the maximum extent possible, with such analogous rights.
7.4. EFFECT OF TERMINATION.
(a) Upon termination of this Agreement for any reason, nothing herein shall
be construed to release either Party from any obligation that matured
prior to the effective date of such termination.
(b) The termination pursuant to Sections 7.2 or 7.3 of the rights and
licenses granted to a Party under this Agreement shall not affect the
rights and licenses of the other Party under this Agreement, provided
such other Party continues to comply with its obligations hereunder.
(c) Upon the termination of a Party's rights and licenses granted under this
Agreement for any reason, the terminated Party shall return and deliver
to the other Party all materials and documents developed during the
performance of this Agreement, all data and records required by the FDA
or other regulatory authorities to be maintained with respect to the
sale, storage, handling, shipping and use of the Licensed Products of the
other Party, all reimbursement approval
18
<PAGE>
files, all documents, data and information related to clinical trials and
other studies of Licensed Products of the other Party required by the FDA
or other regulatory authorities, and all copies and facsimiles of such
materials, documents, information and files. Such other Party shall have
the right to utilize and allow others to utilize all such materials,
documents and records in connection with the development, regulatory
approval, manufacture and sale of its Licensed Products and the
terminated Party shall provide such other Party with reasonable
cooperation, including without limitation, providing such other Party
with a letter authorizing such other Party to cross reference the
terminated Party's files with the FDA or other regulatory body.
(d) The provisions of Sections 4 (Patents and Technology), 5 (Confidential
Information), 8.11 (Modex Indemnification), 8.12 (CTI Indemnification),
8.13 (Liability Insurance) and 9 (Resolution of Disputes) shall survive
termination of this Agreement or termination of any Party's rights and
licenses for any reason. Provided the rights and licenses granted to a
Party under this Agreement have not been previously terminated, upon
expiration of the Term of this Agreement, the licenses granted to such
Party hereunder shall become nonexclusive and royalty free.
8. MISCELLANEOUS PROVISIONS
8.1. NO PARTNERSHIP. Nothing in this Agreement is intended or shall be
deemed to constitute a partnership, agency, employer, employee or joint venture
relationship between the Parties. Neither Party shall incur any debts or make
any commitments for the other.
8.2. ASSIGNMENTS. Except as otherwise provided herein, neither this
Agreement nor any interest hereunder shall be assignable by either Party by
operation of law or otherwise without the prior written consent of the other;
provided, however, that either Party may assign this Agreement to any
wholly-owned subsidiary or to any successor by merger or sale of substantially
all of its assets to which this Agreement relates in a manner such that the
assignor shall remain liable and responsible for the performance and observance
of all its duties and obligations hereunder, or if the assignor disappears
because of such transaction, the assignee must agree to abide by the terms and
conditions of this Agreement. This Agreement shall be binding upon the
successors and permitted assigns of the parties.
8.3. FORCE MAJEURE. Neither Party shall be liable to the other for loss or
damages or shall have any right to terminate this Agreement for any default or
delay (including, without limitation, an inability to supply Licensed Product)
attributable to any act of God, earthquake, flood, fire, explosion, strike,
lockout, labor dispute, casualty or accident, war, revolution, civil commotion,
act of public enemies, blockage or embargo, injunction, law, order,
proclamation, regulation, ordinance, demand or requirement of any government or
subdivision, authority (including, without limitation, drug regulatory
authorities) or
19
<PAGE>
representative of any such government, or any other cause beyond the reasonable
control of such Party, if the Party affected shall give prompt notice of the
commencement and cessation of any such cause to the other Party. The Party given
such notice shall thereupon be excused from such of its obligations hereunder as
it is so disabled and for 30 days thereafter. Notwithstanding the foregoing,
nothing in this Section shall excuse or suspend the obligation to make any
payment due hereunder in the manner and at the time provided.
8.4. NO TRADEMARK RIGHTS. No right, express or implied, is granted by this
Agreement to use in any manner any trade name or trademark of CTI or Modex in
connection with the performance of this Agreement or the exploitation of any
license granted hereunder.
8.5. PUBLIC ANNOUNCEMENTS. Except as required by law or the rules of any
exchange or quotation system on which a Party's capital stock is then traded or
listed, neither Party will issue any press release or make any public
announcement of the existence or terms of this Agreement without prior
consultation with and approval by the other Party, which consent shall not be
unreasonably withheld or delayed.
8.6. ENTIRE AGREEMENT OF THE PARTIES; AMENDMENT. This Agreement constitutes
and contains the entire understanding and agreement of the Parties and cancels
and supersedes any and all prior negotiations, correspondence and understandings
and agreements, whether verbal or written, between the Parties respecting the
subject matter hereof. No waiver, modification or amendment of any provision of
this Agreement shall be valid or effective unless made in writing and signed by
a duly authorized officer of each of the Parties.
8.7. SEVERABILITY. In the event any one or more of the provisions of this
Agreement should for any reason be held by any court or authority having
jurisdiction over this Agreement or either of the Parties to be invalid, illegal
or unenforceable, such provision or provisions shall be validly reformed by
addition or deletion of wording as appropriate to avoid such result and as
nearly as possible approximate the intent of the Parties and, if unreformable,
shall be divisible and deleted in such jurisdiction; elsewhere, this Agreement
shall not be affected.
8.8. CAPTIONS. The captions to this Agreement are for convenience only, and
are to be of no force or effect in construing or interpreting any of the
provisions of this Agreement.
8.9. NOTICE AND DELIVERY. Any notice, request, delivery, approval or consent
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been sufficiently given if delivered in person,
transmitted by internationally recognized courier, telegraph or telecopier (with
confirmed answer-back) or sent by registered air mail letter to the Party (which
notice shall be considered effective five days after it is sent) to whom it is
directed at its address shown below or such other address as such Party shall
have last given by notice to the other Party.
20
<PAGE>
If to CTI, addressed to: CytoTherapeutics, Inc.
Two Richmond Square
Providence, Rhode Island 02906
Attention: Vice President, Business Development
Telephone: (401) 272-3310
Telecopier: (401) 272-3485
with a copy addressed to the General Counsel
If to Modex, addressed to: Modex Therapeutiques, SA
Rue de Bugnon, 27
1005 Lausanne
Switzerland
Attention: Managing Director
Telephone: 011-41-21-692-5450
Telecopier: 011-41-21-692-5455
8.10. LIMITATION OF LIABILITY. Neither Party shall be liable to the other
for indirect, incidental or consequential damages arising out of any of the
terms or conditions of this Agreement or with respect to their performance or
lack thereof.
8.11. MODEX INDEMNIFICATION. Modex shall indemnify, defend and hold CTI and
each of its officers, directors, employees, agents and consultants (each a "CTI
Indemnitee") harmless from and against all third party costs, claims, suits,
expenses (including reasonable attorneys' fees) and damages arising out of or
resulting from (i) any breach or failure by Modex in the performance of its
obligations under this Agreement, or (ii) the use by or administration to any
Person of any Modex Licensed Products that arises out of sales of Modex Licensed
Products by Modex, or a Modex Sublicensee (except where such cost, claim, suit,
expense or damage arose or resulted from any negligence of CTI in the
manufacture of any Modex Licensed Products by CTI, or the failure of CTI to
manufacture Licensed Products in accordance with the specifications for such
products), provided that the CTI Indemnitee gives reasonable notice to Modex of
any such claim or action, tenders the defense of such claim or action to Modex
and assists Modex at Modex's expense in defending such claim or action and does
not compromise or settle such claim or action without Modex's prior written
consent.
8.12. CTI INDEMNIFICATION. CTI shall indemnify, defend and hold Modex and
each of its officers, directors, employees, agents and consultants (each a
"Modex Indemnitee") harmless from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages arising out
of or resulting from (i) any breach or failure by CTI
21
<PAGE>
in the performance of its obligations under this Agreement, or (ii) the use by
or administration to any Person of any CTI Licensed Products that arises out of
sales of CTI Licensed Products by CTI or a CTI Sublicense, or (iii) any
negligence of CTI in the manufacture of Licensed Products by CTI, or the failure
of CTI to manufacture Licensed Products in accordance with the specifications
for such products, provided that such Modex Indemnitee gives reasonable notice
to CTI of any such claims or action, tenders the defense of such claim or action
to CTI and assists CTI at CTI's expense in defending such claim or action and
does not compromise or settle such claim or action without CTI's prior written
consent.
8.13. LIABILITY INSURANCE. Each Party shall maintain (subject to
availability at a price common in the industry) (i) prior to the first
commercial sale of a Licensed Product comprehensive general and products
liability and completed operations insurance with a Best-rated A-XIV insurance
company covering that Party's activities related to this Agreement in an amount
of not less than $1,000,000 and (ii) during the remaining term of this Agreement
either (1) net worth of no less than $50,000,000 or (2) comprehensive general
and products liability and completed operations insurance covering that Party's
activities related to this Agreement in an amount of not less than $5,000,000.
Upon request, each Party shall provide to the other satisfactory evidence of
that Party's compliance with this provision. The obligations under this Section
8.13 shall terminate upon the expiration of the statute of limitations
applicable to any liability covered by the above-referenced insurance.
8.14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Rhode Island without regard to the
conflict of laws provisions thereof.
8.15. NO DRAFTING PRESUMPTION. In construing the provisions of this
Agreement, no presumption shall be made construing the provisions against either
Party on the basis of such Party or such Party's counsel having drafted the
provisions of this Agreement.
8.16. SUBMISSION TO JURISDICTION IN RHODE ISLAND. Modex hereby agrees to
submit to the jurisdiction of the state and federal courts in the State of Rhode
Island in regard to any dispute arising out of this Agreement which is not
resolved as provided in Section 9.
9. RESOLUTION OF DISPUTES
9.1. GENERAL. In acknowledgment of the benefit to both Parties to resolve
differences quickly and efficiently with as little disruption of each Parties'
business as possible, the Parties agree to abide by the following provisions in
connection with any dispute that should arise between the parties with respect
to any matter relating to this Agreement, including any questions regarding the
existence, validity or termination thereof.
22
<PAGE>
9.2. DISPUTE RESOLUTION PROCESS.
(a) MEDIATION. In the event of any dispute between the Parties with respect
to any matter relating to this Agreement, the Parties shall first use
their best efforts to resolve such dispute among themselves. Prior to
seeking any third party to resolve a dispute, the principal executive
officers of CTI and Modex shall meet in a private meeting in New York,
New York for at least one-half (1/2) of a day to attempt to resolve the
dispute. If the Parties are unable to resolve the dispute within 30 days
after the principal executive officers have met, the Parties will then
seek the assistance of one or more unaffiliated third parties to assist
in mediating the dispute.
(b) SELECTION OF ARBITRATORS. In the event that the Parties are unable to
resolve a dispute within 30 days after commencement of mediation efforts,
either Party may submit the matter to binding arbitration in accordance
with the procedures set forth in this Section 9. If a Party intends to
commence arbitration to resolve a dispute, such Party shall provide
written notice to the other Party of such intention, and shall designate
one arbitrator. Within 10 days of receipt of such notice, the other Party
shall designate in writing a second arbitrator. The two arbitrators so
designated shall, within 10 days thereafter, designate a third
arbitrator. The arbitrators so designated shall not be employees,
consultants, officers, directors or shareholders of or otherwise
associated with either Party. Except as modified by the provisions of
this Section 9, the arbitration shall be conducted in accordance with the
rules of, and under the auspices of, the International Chamber of
Commerce and the location of the arbitration shall be New York, New York.
The language of such arbitration shall be English and all notices and
written submissions provided in such proceeding shall be in English.
(c) WRITTEN PROPOSALS. Within 15 days after the designation of the third
arbitrator, the arbitrators and the Parties shall meet at which time each
Party shall be required to set forth in writing the issues which need to
be resolved and a proposed ruling on each such issue. Written submissions
shall be limited to 30 pages of text (not including exhibits which may
include copies of agreements, or extracts from books and records, but not
testimony affidavits).
(d) HEARING. The arbitrators shall set a date for a hearing, which shall be
no later than 20 days after the submission of written proposals, to
discuss each of the issues identified by the Parties. Each Party shall
have the right to be represented by counsel. The arbitrators shall have
sole discretion with regard to the admissibility of any evidence. Unless
otherwise determined by unanimous agreement of the arbitrators the
hearing shall be concluded in one day.
23
<PAGE>
(e) RULING. The arbitrators shall use their best efforts to rule on each
disputed issue within 20 days after the completion of the hearings
described in subsection (d) above. The arbitrators shall, by majority
decision, select the ruling proposed by one of the Parties as the
arbitrators' ruling. The arbitrators' ruling shall be, in the absence of
fraud or manifest error, binding and conclusive upon both Parties and may
be enforced in a court of competent jurisdiction. The arbitrators may not
award punitive or exemplary damages.
9.3. ARBITRATION COSTS. The arbitrators shall be paid a reasonable fee plus
expenses, which fees and expenses shall be paid as designated by the
arbitrators, or if the arbitrators do not so designate, such costs shall be
shared equally by the Parties.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their respective duly authorized officers as of the day and year set forth
below, each copy of which shall for all purposes be deemed to be an original.
<TABLE>
<S> <C> <C>
CYTOTHERAPEUTICS, INC.
By: /s/ IVOR ELRIFI
-----------------------------------------
Ivor Elrifi, GENERAL COUNSEL, VICE
PRESIDENT, SECRETARY
Date: October 29, 1997
MODEX THERAPEUTIQUES, SA
By: /s/ PATRICK AEBISCHER
-----------------------------------------
Patrick Aebischer, PRESIDENT
Date: October 29, 1997
By: /s/ JACQUES ESSINGER
-----------------------------------------
Jacques Essinger, DIRECTOR
Date: October 29, 1997
</TABLE>
24
<PAGE>
SCHEDULE 1.3.3
Confidential Information regarding the selection and development of cells
and cell lines for encapsulated cell therapy, including such cells and cell
lines themselves, including, without limitation, (i) Confidential Information
regarding the development of so-called "hardy" cells (including, without
limitation, cells engineered to [******* **** *** **]; cells engineered to
[******* ******* ** *** ***** *********** ** * ******* ********]; and cells
engineered for [* ********** ***********]) and (ii) Confidential Information
regarding the selection and development of human cells or cell lines derived
from human cells for use in encapsulated cell therapy.
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
25
<PAGE>
SCHEDULE 1.5
CTI PATENTS/PATENT APPLICATIONS--INCLUDED
The following patents and patent applications (including patents issued
thereon), and any counterpart patents that issue claiming priority from these
patents and patent applications, including, without limitation, additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions, renewals and foreign counterparts:
[** ********* ******** *** **** ******** ** **************** ** **********
************ ******* ************ ********** ** *** ******* ****** ******
**********
** ********* ******** ************* ******* ******** ************ ***********
**** ******* ****** ******* ********** **********
** ********* ******** ******* ******* ****** *** ******** ************
********** ** *** ******* ****** ****** **********
** ********* ******** *********** ******* *** *** ***** ******* **
*************** *********** ************ *********** ******* ******* ******
******* ********** **********
** ********* ******** ***** ******* ********* ******** ************ ***********
********* ******* ****** ******* ********** *********** ********** **********
** ********* ******** ****************** ********* ************ ********** **
**** ******* ****** ******* ********** **********
** ********* ******** *** **** ******** ** ****** ****** ** ********** *****
********** ************ *********** ***** ******* ****** ****** **********
** ********* ******** ********** ****** ******* ****** *** ******** ************
********** ** **** ******* ****** ****** ***********
** ********* ******** ************ ************* *************** ******* ***
******** ** ******** *********** ********** ************ ****** ** *** *******
**** ***********
** ********* ******** ********* ******** *** ************ ******* ***********
********** ********* ***** **********
** ********* ******** ************ ******** ****** *** ********** *********
************ ********** ** *** ******* ****** ****** **********]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
26
<PAGE>
[****** ****** ****** ********** ******** ********** ********* *** ********
*********** ****** ****** *** ******* ************ **** ******
** ******** ********* ********** *** ******* ****** ******** ************
******* ** **** ******* ****** ******* ********** **********
** ********* ******** ********* ************ *** ******* *** *** ******** **
************ ****** ********* ***** *********** ******* ***** ********* **
************* *************** ********** ************ ****** **
**** ******* ****** ******* ********** ********** **********
**** *********** ********** ******** ****** ********* ************* ****
********** *********** ******* ** **** *** ******* ************ **** ******
****** ****** ****** ********* ******** ******* *** ************* ***** ***
************* ************** *********** ******* ***** *** ******* ************
**** ******
** ********* ******** ************* *************** ************ ******* ** ****
***** *********** ***********
** ********* ******** ******* *** ********* *** ******* *********** ********
************* ********* ************ ***** ** **** ******* ****** *******
********** **********
** ********* ******** ********* ****** ** ** ******************* *********
************ ********* ** **** ***** ***********
** ********* ******** ************* *** ******* *** ************* *************
******** ************ *********** ** **** ******* **** ***********
** ********* ******** ************** ****** ********** *********** *********
*********** ************ ******* ** **** ***** ***********
** ********** ******** ********** *** ****** *** ******* *** *************** **
************* ******* ************ ******** ******* ***** ***********
** ******** ********* *********** *** *** ** ************ ********* ************
******* ** **** ******* ****** ****** **********
*************** ******** ************* **** ********* ************ ********
********** ***** ***********
*************** ******** ********* ** *********** ************ ******* ** ****
***** **********]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
27
<PAGE>
[************** ******** ********* ** ****************** ***********
************ ********* ** **** ***** ***********
**** *********** ******** ************** ******* **** **** ***********
************ *** *******
*************** ******** ********** **** ********* ************ ***********
***** *********** ***********
** ********* ******** ******* *** ********** ************ ***** ** * ******
************ ******** ** **** ******* ****** *****************
** ********* ********* ******* ********* ************ ********** ** **** *******
**** *********** **** **** *********** ******** **** ************* ************
*****
** ************ ******** ******** ********** ******* ********* **** **** *******
************ ******* ** **** ******* ****** ****** **********]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
28
<PAGE>
SCHEDULE 1.5A
CTI PATENTS/PATENT APPLICATIONS--NOT INCLUDED
The following patents and patent applications (including patents issued
thereon), and any counterpart patents that issue claiming priority from these
patents and patent applications, including, without limitation, additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions, renewals and foreign counterparts:
[**** *********** ******** ************* **** ***** *** ********** **
*********** ********* ************ ******* ** **** *** ******* ************ ****
******
** ********* ******** ******* *** ******** *********** ******* ********* *****
*********** *************** ******* ************ ********* ** **** *****
***********
*************** ******** ***** **** ****** ************ ***** ******* *****
***********
*************** ******** *********** ******** ****** *** ********* ************
******* ** **** ***** ***********
**** *********** ******** ******* *** ****** *** ********** ****** *** ******
************ ********* ** ***
** ********* ** ********* ** ********* ** ********* ** ********* ** *********
******** ******** ******* ****** **** ******* ************ ****** *********
******** ******
** ********* ********* ************* ** ************* ************ **** ****
********** ******** ********** ******* ****** **** ******* ************ *****
********
*********** ******** ***************** **** ******* ************ ******** ***
*********** ******** ******* *********** ******* ******** ************ *****
********
********** ******** ***************** *** ***************** ** *******
************ ***** ********
**** **** *** ********** ******** ****** *** ****** **** ******* *************
******* ********** ***** ********* ** ****
********** ******** ******* *** ********** **************** ********* **********
********** ************ ************ ******* **** ********* ******** ** ******
********* ** ********]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
29
<PAGE>
[********** ******** ****** ******** ********* ************ ******* ** ***
********* ******** ** ****** ******** ** ********
********** ******** ******* ** ******* ********* ** **** ******** **** ********
************ **** ** *** ********* ******** ** ****** ******** ** ********
********** ********* *** ********* ** **** ***** ******************** **********
****** ******** *****]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
30
<PAGE>
SCHEDULE 1.17.3
Confidential Information regarding the selection and development of cells
and cell lines for encapsulated cell therapy, including such cells and cell
lines themselves, including, without limitation, (i) Confidential Information
regarding the development of so-called "hardy" cells (including, without
limitation, cells engineered to [******* **** *** **]; cells engineered to
[******* ******* ** *** ***** *********** ** * ******* ********]; and cells
engineered for [* ********** ***********]) and (ii) Confidential Information
regarding the selection and development of human cells or cell lines derived
from human cells for use in encapsulated cell therapy.
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
31
<PAGE>
SCHEDULE 1.19
MODEX PATENTS/PATENT APPLICATIONS
The following patents and patent applications (including patents issued
thereon), and any counterpart patents that issue claiming priority from these
patents and patent applications, including, without limitation, additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions, renewals and foreign counterparts:
[************** ******** *************** ******************** ************
****** ** ***
*********** ****** ******* *** *** *** ********** ***** ********* ** *****
******** ************ ****** *** ******* **************** ***** ********
********* ************ ************
*************** ******** *********** ** *********** ********** ** *******
************ *******
*************** ******** ************ **** ****** ************ *****]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
32
<PAGE>
SCHEDULE 1.19A
MODEX PATENTS/PATENT APPLICATIONS--NOT INCLUDED
The following patents and patent applications (including patents issued
thereon), and any counterpart patents that issue claiming priority from these
patents and patent applications, including, without limitation, additions,
divisions, continuations, continuations-in-part, substitutions, extensions,
patent term extensions, renewals and foreign counterparts:
[**** *********** ********* ******* *** ****** *** ******* ** ****************
************ ********* ** **]
- ------------------------
* This confidential portion has been omitted and filed separately with the
Commission
33
<PAGE>
Exhibit 10.70
CYTOTHERAPEUTICS, INC.
701 George Washington Highway
Lincoln, RI 02865
(401) 288-1000
Dated as of September 30, 1997
Seth A. Rudnick, M.D.
CytoTherapeutics, Inc.
701 George Washington Highway
Lincoln, RI 02865
Re: Board Chairman and Consulting Positions
Dear Seth:
This letter will reflect our understanding in regard to your agreement to
serve as Chairman of the Board of Directors of CytoTherapeutics, Inc. (the
"Company") and as a Consultant to the Company.
1. Change in Position and Duties. Effective as of September 30, 1997,
you will cease to serve as President and Chief Executive Officer of
the Company. You will continue to serve as Chairman of the Board of
Directors of the Company until the next Annual Meeting of the
Stockholders of the Company and the provisions of this Agreement
regarding your service as Chairman of the Board shall also apply
during any further period in which you may be elected to such
position. As Chairman of the Board, you will chair all meetings of
the Board of Directors of the Company and will have those other duties
and responsibilities, if any, specified for the Chairman of the Board
of Directors of the Company in the By-laws of the Company, as the same
may exist from time to time.
1.1. Transition Period. During the period commencing October 1, 1997
through December 31, 1997 (the "Transition Period"), you will
make yourself available as requested by the Company's Chief
Executive Officer to fulfill such other duties and
responsibilities as the Chief Executive Officer may reasonably
expect, consistent with your status as
<PAGE>
the current Chairman of the Board of Directors of the Company and
former President and Chief Executive Officer of the Company and
with any applicable provisions of this Agreement. In this regard
it is expected that you will devote approximately one day per
week to in-office consultation with the Chief Executive Officer
and other members of the Company's senior management; that you
will travel on Company business as the Chief Executive Officer
may reasonably request for an additional one or two days per
week; and that you will make yourself generally available as
required at other times during normal business hours to consult
by telephone regarding the business of the Company.
1.2. Consulting Period. From January 1, 1998 through December 31,
1999 (the "Consulting Period"), you will serve as a Consultant to
the Company and shall provide such consulting services to the
Company as the Company's Chief Executive Officer may reasonably
request from time to time up to a maximum commitment of 5 days
per month and 50 days per year of such consulting services.
2. Salary and Bonus.
2.1. Transition Period. During the Transition Period, your salary
shall be paid at an annual rate of $200,000 per year.
2.2. 1997 Bonuses. The Board of Directors will review your
performance in all positions you have held with the Company
during 1997 and you shall be eligible to receive a bonus at least
equal to the bonus you would have been eligible to receive under
your employment contract as President and CEO for the time during
1997 in which you served in such capacity (up to (9 months/12
months) x 20% x $300,000 = $45,000).
2.3. Consulting Period Payments. For your services as a Consultant
and, to the extent applicable, Chairman and a member of the Board
of Directors of the Company, during the Consulting Period you
shall be paid a consulting fee of $12,500 per month, plus
reimbursement for any out-of-pocket expenses reasonably incurred
by you in the course of performing such services, subject to
appropriate documentation of such expenses on a basis consistent
with Company policy. During the Consulting Period you shall not
receive any other compensation for any service you may render as
a member of the Board of Directors of the Company or as Chairman
thereof; should you serve in any such position after the end of
the Consulting Period, you shall be compensated therefore
according to the Company's then-existing policies for the
compensation of a non-employee holding any such position.
2
<PAGE>
2.4. Vacation Pay. No later than January 15, 1998, you shall be paid
$25,000 as a lump sum payment in lieu of all unused vacation time
accrued by you during your service as Chief Executive Officer of
the Company.
3. Stock Options. During the Transition Period and the Consulting
Period, stock options granted to you and not yet expired, exercised,
canceled or otherwise become unexerciseable shall continue to vest.
In addition, subject to approval by the Company's Board of Directors,
the exercise period for all options previously granted to you shall be
extended until the end of the Consulting Period (i.e., all options may
be exercised at any time prior to December 31, 1999 and must be
exercised no later than that date).
4. Benefits.
4.1. Health and Dental. During the Transition Period and the
Consulting Period, to the extent permitted by the terms of the
Company's group health and dental plan and by its health and
dental plan insurer or providers, as applicable, the Company will
continue your participation and that of your eligible dependents
in its group health and dental plan to the same extent as you and
they currently participate and will pay the premium cost of such
participation, to the same extent currently paid, through the
earlier of (i) the end of the Consulting Period or (ii) the date
you commence other employment which makes you eligible, at no
greater cost to you than the current cost to you, if any, under
the Company's health and dental plans, to obtain comparable
coverage under the health and dental plans of your new employer.
If the Company is unable to provide continuation as contemplated
in the previous sentence, you may exercise your right to continue
your coverage and that of your eligible dependents in the
Company's group health and dental plan under the federal law
known as COBRA, provided you are eligible to do so, and, if you
are eligible, then, until the end of the Consulting Period or the
date you cease to be eligible for continuation under COBRA, the
Company will pay the premium cost of your coverage and that of
your eligible dependents.
4.2. Life Insurance. During the Transition Period and the Consulting
Period, to the extent permitted by the terms of the Company's
group life insurance plan, the Company will continue your
coverage under its group life insurance plan in the same face
amount in which your life is currently insured under such plan
through the end of the earlier of (i) the Consulting Period or
(ii) the date you commence other employment
3
<PAGE>
under circumstances which entitle you to group life insurance
coverage comparable to that provided by Company at no greater
cost to you than such coverage as currently provided to you by
the Company. If life insurance coverage is not available under
the Company's plan, the Company shall pay $2,500 per year toward
the cost of any life insurance coverage which you may arrange.
4.3. Plan Limitations. It is understood and agreed that the benefits
of the group health and group life insurance plans of the Company
are subject to such conditions and limitations as are set forth
in the applicable plan, policy or contract terms, as such may
exist from time to time, and that any disputes concerning
eligibility for payment of benefits under such plan shall be
settled in accordance with the terms thereof, and that the
Company shall have no liability to you, your dependents or any
other person claiming through you, for payment of benefits under
any such plan.
4.4. Retirement Annuity. Commencing at the time you reach age 60 and
continuing until your death, the Company shall pay to you a
monthly retirement payment at the rate of $30,000 per year. You
acknowledge that this payment obligation is an unsecured payment
obligation of the Company that has not been (and is not expected
to be) funded by the Company through the purchase of an annuity
contract or otherwise.
4.5. Office Space. During the time you serve as Chairman of the Board
of the Company, the Company shall make available to you office
space, either at the Company, or at the Company's option, at a
separate location located no more than one-half hour from the
Company, for you to use. If the Company elects to provide you
with a separate office location, the cost to the Company
(including rent, secretarial services, leased equipment, etc.)
shall not exceed $2,000 per month.
5. During the Transition and Consulting Periods and for one year
thereafter, you will not, either directly or indirectly, become
employed by, serve as a director of or consultant to or otherwise
participate in any competitor of the Company. A competitor shall be
defined as any entity utilizing or proposing to utilize the
transplantation of cells as a therapeutic agent for the treatment of
human disease. You further agree that during the Transition and
Consulting Periods and for a period of one year thereafter, you will
not directly or indirectly solicit the services of any employee of the
Company for another entity, or otherwise induce or attempt to induce
any such employee to leave the employ of the Company.
4
<PAGE>
6. You shall not disclose to any other person, corporation or other
entity (except as required by applicable law or for the proper
performance of your duties and responsibilities hereunder), or use
for your own benefit or gain, any Confidential Information of the
Company. Confidential Information of the Company shall mean all
information of or regarding the Company other than information that
is generally known to the public through no fault of yours,
including, without limitation, information regarding the research
and development activities of the Company, the products and
services of the Company, the cost, sources of supply and strategic
plans of the Company, the identity and special needs of the
customers of the Company and those persons and organizations with
whom the Company has business relationships and the nature of those
relationships, as well as any comparable information that the
Company may possess regarding customers or others who do business
with the Company.
If the terms of this Letter Agreement accurately reflect your
understanding of the matters set forth herein, please sign this Agreement and
return it to the Company. The enclosed copy of this Letter Agreement, which
you should also sign and date, is for your records.
Sincerely,
CYTOTHERAPEUTICS, INC.
By:___________________________
Name:
Title:
Accepted and Agreed:
/s/ Seth Rudnick
- ---------------------------
Seth A. Rudnick, M.D.
5
<PAGE>
Exhibit 10.74
CYTOTHERAPEUTICS, INC.
Two Richmond Square
Providence, RI 02906
401-272-3310
September 25, 1997
Richard M. Rose, M.D.
6826 LaValle
Plateada
P.O. Box 567
Rancho Santa Fe, CA 92067
Dear Richard:
This letter will confirm our offer to you of employment with
CytoTherapeutics, Inc. (the "Company") under the terms and conditions that
follow:
1. Position and Duties. As of the Effective Date, as such term is
defined in the Agreement and Plan of Merger among the Company, CTI Acquisition,
Inc., StemCells, Inc., you and certain other individuals dated August 13, 1997,
you will be employed by the Company hereunder on a full-time basis as its
President and Chief Executive Officer. In addition, and without further
compensation, you agree to service as a member of the Board of Directors of the
Company (the "Board") and as a director or officer of one or more of the
Company's Affiliates, as defined below, if so elected or appointed from time to
time. As President and Chief Executive Officer, you will be expected to exert
your full-time best efforts to promote and protect the business interests of the
Company. Specifically, but not exclusively, your responsibilities will be to
manage the operations of the Company, to build and maintain an outstanding and
harmonious working team of both scientific and professional employees, to
secure, promote and maintain the appropriate financing and capital structure of
the Company, to manage and direct the strategic development of the Company's
business plan and its implementation and to oversee the overall scientific
affairs of the Company. You will report directly to the Board.
2. Salary and Bonus. For all services that you perform for the Company
and its Affiliates, the Company will provide you compensation during your
employment in accordance with this Paragraph 2. Your base salary will be at the
rate of Two Hundred and Seventy-Five Thousand Dollars ($275,000) per year. Your
performance and compensation will be reviewed at least annually by the
Compensation Committee of the Board. In
<PAGE>
addition to your base salary, you will eligible, at the end of calendar year,
beginning with calendar 1998, during your employment hereunder, for a bonus of
up to twenty-five percent (25%) of your base salary, the amount of each such
bonus being determined by the Board in its discretion.
3. Stock Options.
a. Through the CytoTherapeutics, Inc. 1992 Equity Incentive Plan
(the "Incentive Plan"), and subject to the terms and conditions of such Plan,
you will be granted an option to acquire 200,000 shares of the common stock of
the Company (the "Time-Based Option") at the fair market value of such shares on
the Effective Date, as determined by the Board. Subject to your continued
employment by the Company, the Time-Based Option will vest over forty-eight (48)
months as follows: (i) one quarter of the shares will vest on the first
anniversary of the Effective Date and (ii) the remaining shares shall vest at
the rate of one forty-eighth (1/48) per month on the last day of each month
during the ensuing thirty-six months. Except as otherwise expressly provided
herein, the Time-Based Option shall be governed by the terms of the Incentive
Plan, as in effect from time to time. Any Change in Control will result in the
accelerated vesting of the option to acquire 100% of such shares. A Change in
Control shall mean any consolidation or merger in which the Company is not the
surviving corporation, a transaction or series of related transactions that
result in the acquisition of all of substantially all of the Company's
outstanding Common Stock by a single person or entity or by a group of persons
or entities acting in concert, or the sale or transfer of all or substantially
all of the Company's assets.
b. In addition to the Time-Vested Option, the Company will grant you
an option to acquire 100,000 shares of the common stock of the Company (the
"Performance-Based Option") at fair market value of such shares on the Effective
Date, as determined by the Board. The Performance-Based Options are subject to
the terms of the Performance-Based Incentive Option Agreement, a copy of which
is attached hereto as Schedule A, and to your execution of that Option
Agreement.
c. In addition to the foregoing options, you shall be eligible, at
the end of any calendar year beginning with calendar year 1998, or as otherwise
determined from time to time by the Board or the Compensation Committee of the
Board, to receive additional options, the amount and terms of any such options
to be determined by the Board or such Compensation Committee in their sole
discretion.
4. Relocation and Relocation Allowance. Promptly following the
Effective Date, you will establish your principal office at the Company's
offices in Rhode Island and a temporary residence for yourself within driving
distance of such office. You will relocate permanently to the Rhode Island area
no later than July 31, 1998. The allocation of your time between the Company's
operations in Rhode Island, the Company's operations in
2
<PAGE>
California and travel elsewhere on Company business will, in your role as
President and CEO of the Company, be primarily determined by you; however, you
will not spend an average of more than one business day per week during any
calendar quarter in California without approval of the Board. The Company will
provide you with One Hundred and Twenty Five Thousand Dollars ($125,000) for
relocation, temporary housing and related expenses, which sum shall be payable
to you $75,000 on execution and delivery of this Agreement and $50,000 upon your
permanent relocation to Rhode Island as provided above. In addition, the
Company will provide you with an interest-free bridge loan in an amount (not to
exceed $200,000) reasonably required by you in order to purchase a house within
driving distance of the Company's offices in Rhode Island, such loan to be
secured by a second mortgage on such house and to be payable by you at the time
of the sale of your residence in California. You agree to use reasonable
efforts to sell such residence.
5. Benefits. You will be entitled to participate in any and all employee
benefit plans from time to time in effect for senior management of the Company
generally, except to the extent that such plans are duplicative of benefits
otherwise provided to you under this Agreement. Such participation shall be
subject to (i) the terms of the applicable plan documents, (ii) generally
applicable policies of the Company and (iii) the discretion of the Board and
plan administrators, as provided for in or contemplated by such plan. The
Company will provide you with a leased automobile, the cost of which will be
paid by you and the Company in proportion to your business and personal use of
such automobile. Prior to your permanent relocation to within driving distance
of the Company's principal offices, the Company will reimburse you for the cost
of two round trips per month to southern California. The Company expects that
these trips will generally be made in connection with Company business and that
you will attempt, to the extent possible, to schedule any personal trips to
coincide with such business. The Company will provide you with four weeks
vacation per year. The Company shall reimburse you for all expenses reasonably
incurred by you in connection with your performance of your duties hereunder on
a basis consistent with Company policies.
6. Confidentiality and Restricted Activities. You agree that some
restrictions on your activities during and after employment are necessary to
protect the goodwill, Confidential Information and other legitimate interests of
the Company:
a. During your employment and thereafter, except as required by
applicable law or for the proper performance of your duties and responsibilities
to the Company, you shall not use or disclose to any Person any Confidential
Information, as defined below. This restriction shall continue to apply after
your employment terminates, regardless of the reason for such termination.
b. While you are employed by the Company and for a period of one (1)
year thereafter, you will not, directly or indirectly, engage in any activity,
whether as
3
<PAGE>
owner, partner, investor, consultant, employee, agent or otherwise, that is
competitive with the business of the Company or its Affiliates, provided,
however, that nothing contained in this paragraph shall prohibit you from owning
up no more than one percent (1%) of the outstanding stock of any publicly traded
company.
c. While you are employed by the Company and for a period of one (1)
year thereafter, you will not, directly or indirectly, hire or attempt to hire
any employee of the Company or its Affiliates, assist in such hiring by any
Person or otherwise solicit, induce or encourage any employee of the Company or
any of its Affiliates to terminate his or her relationship with them.
d. You agree that you will not, during your employment with the
Company, improperly use or disclose any proprietary information or trade secrets
of any former or concurrent employer or other Person with whom you have an
agreement or duty to keep in confidence information acquired by you in
confidence, if any. You also agree that you will not bring onto Company
premises any unpublished document or proprietary information belonging to any
such employer or other Person, unless consented to in writing by such employer
or other Person.
e. All documents, records, tapes, software and other media of every
kind and description relating to the business, present or otherwise, of the
Company and its Affiliates and any copies, in whole or in part, thereof (the
"Documents"), whether or not prepared by you, shall be the sole and exclusive
property of the Company and its Affiliates. You agree to safeguard all
Documents and to surrender to the Company at the time your employment
terminates, or at such earlier time or times as the Board may specify, all
Documents and other property of the Company and its Affiliates (including
without limitation, devices and equipment) then in your possession or control.
f. You agree that the Company shall, in addition to any other
remedies available to it, be entitled to preliminary and permanent injunctive
relief against any breach by you of the covenants contained in this Paragraph 6,
without having to post bond. In the event that any provision of this Paragraph
6 shall be determined by a court of competent jurisdiction to be unenforceable
by reason of its being extended over too great a time, too large a geographic
area or too great a range of activities, it shall be interpreted to extend only
over the maximum period of time, geographic area or range of activities as to
which it may be enforceable.
g. For purposes of this Agreement:
i. A business shall be deemed to be competitive with the
Company or its Affiliates if it engages or proposes to engage in any business
activity which is both (A) utilizing or seeking to develop technology capable of
utilizing the transplantation
4
<PAGE>
of cells as a therapeutic agent for the diagnosis, prevention or treatment of
human disease, injury or condition and (B) in any field the Company or any of
its Affiliates is then pursuing or then has in contemplation or planning.
ii. "Affiliates" means all persons and entities directly or
indirectly controlling, controlled by or under common control with the Company,
where control may be by management authority, equity interest or otherwise.
iii. "Confidential Information" means any and all information of
the Company and its Affiliates that is not generally known by others with whom
they compete or do business or with whom they plan to compete or do business and
any and all information, publicly known in whole or in part or not, which, if
disclosed by the Company or its Affiliates, would assist in competition against
them. Confidential Information includes without limitation such information
relating to (i) the development, research, testing, production and marketing
activities of the Company and its Affiliates, (ii) the products and services of
the Company and its Affiliates, (iii) their patents, trade secrets, licenses and
intellectual property, patients and clinical trials; (iv) the costs, sources of
supply, financial performance and strategic plans of the Company and its
Affiliates, (v) the identity and special needs of the customers of the Company
and its Affiliates and (vi) the people and organizations with whom the Company
and its Affiliates have business relationships and those relationships.
Confidential Information also includes information that the Company or any of
its Affiliates has received belonging to others with any understanding, express
or implied, that it would not be disclosed. Confidential Information does not
include, however, information that has become publicly known and generally
available other than through a wrongful act by you or any other Person owing a
duty of confidentiality to the Company or any of its Affiliates.
iv. "Person" means an individual, a corporation, an association,
a partnership, an estate, a trust and any other entity or organization, other
than the Company or any of its Affiliates.
7. Inventions.
a. You hereby represent to the Company and agree that, except as
described in Schedule B hereof, you have no inventions, original works of
authorship, developments, improvements or trade secrets that were made by you
prior to your employment with the Company and which relates to the Company's
current or proposed business, products or research and development.
b. You will promptly make full written disclosure to the Company,
hold in trust for the Company's sole right and benefit and hereby assign and
agree to assign to the Company or its designee all of your right, title and
interest in any and all Inventions.
5
<PAGE>
As used in this Agreement, "Inventions" means inventions, discoveries,
developments, methods, processes, compositions, works, concepts and ideas
(whether or not patentable or copyrightable or constituting trade secrets)
conceived, made, created, developed or reduced to practice by you (whether alone
or with others and whether or not during normal business hours or on or off
Company premises) during your employment that relate in any way to the business,
products or services of the Company or any of its Affiliates or to any
prospective activity of the Company or any of its Affiliates or for which the
Confidential Information or the Company's facilities have been utilized. You
further acknowledge and agree that all original works of authorship made by you
solely or jointly with others within the scope of your employment and eligible
for protection by copyright are "works made for hire," as that term is defined
in the United States Copyright Act. You agree to keep and maintain adequate and
current records of all Inventions made by you solely or jointly with others
during your employment with the Company. Such records will be in the form of
notes, sketches, drawings or any other format that may be specified by the
Company These records will be available to, and remain the sole property of,
the Company at all times. You agree to assist the Company or its designee, at
the Company's expense, in every proper way, to secure the Company's rights in
the Inventions and copyrights, including without limitation disclosure to the
Company of all pertinent information and data with respect thereto, the
execution of all applications, specifications, oaths, assignments and all other
instruments that the Company shall deem necessary or desirable in order to apply
for and obtain such rights, and in order to assign and convey to the Company,
its successors, designees and nominees the sole and exclusive right, title and
interest in and to such Inventions, and any copyrights, patents, or other
intellectual property rights relating thereto, both during your employment by
the Company and thereafter. In the event that the Company is unable for any
reason to secure or to prosecute any patent application with respect to any of
such Inventions (including without limitation, renewals, extensions,
continuations, divisions or continuations in part thereof), you hereby
irrevocably designate and appoint the Company and its duly authorized officers
and agents as your agents and attorney-in-fact to act for and in your behalf and
instead of you, to execute and file any such application and to do all other
lawfully permitted acts to further the prosecution and issuance of patents
thereof with the same legal force and effect as if executed by you. You agree
that you will assist the Company in the prosecution and enforcement of the
Company's rights to the Inventions and copyrightable materials after termination
of your employment, at the Company's expense.
8. Termination and Termination Benefits. Your employment with the
Company is "at will," which means that either you or the Company may terminate
your employment at any time, with or without cause or good reason.
a. The Company may terminate your employment other than for "cause"
at any time upon written notice to you and, in that event, (i) the Company will
continue to pay you your base salary for the longer of (A) one year following
the date of such
6
<PAGE>
termination or (B) two years following the date of such termination in the case
of any such termination occurring in connection with a Change in Control or (C)
until the third anniversary of the Effective Date, provided, however, that the
Company's obligation, if any, to pay such base salary on and after the second
anniversary of such termination shall be reduced, on a dollar-for-dollar basis,
by your total pre-tax compensation from any employment (including
self-employment). If subjection (C) applies, you agree to seek such employment
and accurately and promptly to report to the Company any such compensation
derived therefrom. In addition, the Time-Based Option will become fully vested
as to all unvested shares covered by such option as of the date your employment
terminates. To the maximum extent permitted by the Company's benefit plans, all
benefits provided to you hereunder shall continue for the longer of (A) one year
following the date of such termination or (B) two years following the date of
any such termination which occurs in connection with a Change in Control. The
Company shall not be obligated to purchase any special insurance or other
coverage in order to satisfy the foregoing obligation.
b. The Company may terminate your employment upon written notice to
you in the event that you become disabled during your employment through any
illness, injury, accident or condition of either physical or psychological
nature and, as a result, you are unable to perform substantially all of your
duties and responsibilities hereunder for ninety (90) days during any three
hundred and sixty-five (365) calendar days. In that event, the Company will
continue to pay you your base salary (i) for a period of six (6) months
following such termination or (ii) until you obtain other employment or (iii)
until you become eligible for disability income under any disability income plan
provided by the Company, whichever of these events shall first occur.
c. The Company may terminate your employment hereunder for cause at
any time upon written notice to you setting forth in reasonable detail the
nature of such cause. The following, as determined by the Company in its
reasonable judgment, shall constitute "cause" for termination: (i) your willful
failure to perform your material duties and responsibilities to the Company and
its Affiliates (including, without limitation, those duties and responsibilities
described in Section 1) and; (ii) your material breach of Paragraph 6 or
Paragraph 7 of this Agreement; (iii) fraud, embezzlement or other material
dishonesty with respect to the Company or any of its Affiliates; or (iv) your
conviction of, or plea of nolo contendere to, a felony.
d. You may terminate your employment at any time, with or without
good reason, upon written notice to the Company. If you decide to terminate
your employment without good reason, you agree to give the Company three
months' notice of termination. You may terminate your employment hereunder with
good reason at any time upon written notice to the Company. The following shall
constitute "good reason" for termination: material breach by the Company of any
provision of this Agreement, including, without limitation, any material
diminution in your authority or responsibilities from that
7
<PAGE>
contemplated by Section 1 hereof, which breach continues for more than ten (10)
business days following receipt by the Company of written notice from you
setting forth in reasonable detail the nature of such breach. If you terminate
your employment with good reason, the Company will be obligated to you under
Paragraph 8.a hereof as if the Company had terminated your employment other than
for cause.
e. If you resign without good reason or your employment is terminated
by the Company for cause, the Company shall have no further obligation to you
other than for base salary earned through the date of termination. No severance
pay or other benefits of any kind will be provided.
9. Withholding. All payments and reimbursements made by the Company
under this Agreement shall be reduced by any tax or other amounts required to be
withheld by the Company under applicable law.
10. Assignment. Neither you nor the Company may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other; provided, however, that the Company may
assign its rights and obligations under this Agreement without your consent to
one of its Affiliates or to any Person with whom the Company shall hereafter
affect a reorganization, consolidation or merger or to whom the Company
transfers all or substantially all of its properties or assets. This Agreement
shall inure to the benefit of and be binding upon you and the Company and each
of your respective successors, executors, administrators, heirs and permitted
assigns.
11. Waiver. Except as otherwise expressly provided in this Agreement, no
waiver of any provision hereof shall be effective unless made in writing and
signed by the waiving party. The failure of either party to require performance
of any term or obligation of this Agreement, or the waiver by either party of
any breach of this Agreement, shall not prevent any subsequent enforcement of
such term or obligation or be deemed a waiver of any subsequent breach.
12. Severability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
13. Notices. Except as otherwise expressly provided herein, any notices,
requests, demands and other communications provided for by this Agreement shall
be in writing and shall be effective when delivered in person or deposited in
the United States mail, postage prepaid, registered or certified, and addressed
to you at your last known
8
<PAGE>
address on the books of the Company or, in the case of the Company, at its main
office, attention of the Chairman of the Board.
14. Captions. The captions and headings in this Agreement are for
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.
15. Entire Agreement. This Agreement sets forth the entire agreement and
understanding between you and the Company and supersedes all prior
communications, agreements and understandings, written and oral, with respect to
the terms and conditions of your employment. This Agreement may not be amended
or modified, except by an agreement in writing signed by you and the Chairman of
the Board or other specifically authorized representative of the Company.
16. Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of Rhode Island, without regard to the
conflict of laws principles thereof.
17. No Conflicting Agreements. You hereby represent to the Company that
neither your execution and delivery of this Agreement nor your acceptance of
employment with the Company nor your performance under this Agreement will
conflict with or result in a breach of any of the terms, conditions or
provisions of any agreement to which you are a party or are bound or any order,
injunction, judgment or decrees of any court or governmental authority or any
arbitration award applicable to you.
18. Compliance with Agreement. The Company's obligations under this
Agreement and its obligation to deliver stock under the terms of the stock
options granted pursuant to the terms of this Agreement (or otherwise granted
you during the course of your employment) are conditioned on your compliance
with the terms and conditions of this Agreement and the accuracy of the
representations made to the Company by you herein.
19. Agreement Void. If the Effective Date does not occur, for any reason
whatsoever, this agreement shall be null and void and of no force or effect.
9
<PAGE>
If the foregoing is acceptable to you, please sign the enclosed copy of
this letter in the space provided below and return it to me, whereupon this
letter and such copy will constitute a binding agreement between you and the
Company on the basis set forth above as of the date first above written.
Sincerely yours,
CYTOTHERAPEUTICS, INC.
By: /s/ Seth A. Rudnick
----------------------------------------
Seth A. Rudnick, M.D.
Chairman
Accepted and agreed:
/s/ Richard M. Rose
- ----------------------------------
Richard M. Rose, M.D.
Date: ___________________________
<PAGE>
Schedule A
Performance-Based Incentive Option Agreement
<PAGE>
Optionee: Richard M. Rose Shares Subject to Option: 100,000
Dated: September 25, 1997
CYTOTHERAPEUTICS, INC.
PERFORMANCE-BASED INCENTIVE OPTION AGREEMENT
This Agreement is made as of the date set forth above by and between
CytoTherapeutics, Inc., a Delaware corporation (the "Company" or "CTI"), and the
Optionee specified above (the "Optionee").
WHEREAS, Optionee has entered into a Consulting or Employment Agreement
with the Company which provides for the grant of the options evidenced hereby
(the "Consulting/Employment Agreement"); and
WHEREAS, Optionee is in a position to make a significant contribution to
the long-term success of the Company, and in particular the Company's stemcell
research program.
NOW, THEREFORE, the Company and Optionee agree as follows:
1. Grant of Option. This agreement evidences the grant by the Company
to Optionee pursuant to the Company's 1997 Stemcells Research Stock Option
Plan (the "Plan") of an option to purchase, in whole or in part, on the terms
provided herein, the number of shares specified above of the Company's Common
Stock, $.01 par value (the "Common Stock"), at a per share price equal to
$5.25 (the "Option"). This Option is not intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. This Option shall terminate on the tenth
anniversary of the date of this Agreement (the "Final Exercise Date"), and is
subject to earlier termination as provided in Sections 6 and 7 below.
2. Exercisability of Option. Subject to the terms and conditions hereof,
this Option shall vest and become exercisable as follows:
<TABLE>
<CAPTION>
% of Shares
Milestone Vesting
- --------- -----------
<S> <C>
On the date of this Agreement 6.25%
First Corporate Partnership (as defined below)
(before September 1, 1998)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
If > $5,000,000 and $10,000,000 6.25%
If > $10,000,000 and $15,000,000 8.75%
If > $15,000,000 11.25%
Second Corporate Partnership (before September 1, 1999)
If > $5,000,000 and $10,000,000 6.25%
If > $10,000,000 and $15,000,000 8.75%
If > $15,000,000 11.25%
First Corporate Partnership resulting from
discovery of a new stem cell (before June 30, 2000)
If > $5,000,000 and $10,000,000 6.25%
If > $10,000,000 and $15,000,000 8.75%
If > $15,000,000 11.25%
Second Corporate Partnership resulting from
discovery of a new stem cell (before June 30, 2000)
If > $5,000,000 and $10,000,000 6.25%
If > $10,000,000 and $15,000,000 8.75%
If > $15,000,000 11.25%
Commencement of first clinical trial of a CTI 12.50%
stem cell product (before June 30, 2000)
Filing of first United States regulatory filing for
marketing approval of a CTI stem cell product
(before June 30, 2003) 12.50%
Filing of first European Union or Japanese regulatory
filing for market 12.50%
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
approval with respect to a CTI stem cell product
(before June 30, 2004)
First United States commercial approval of a
CTI stem cell product (before June 30, 2005) 25.00%
First European Union or Japanese commercial
approval of a CTI stem cell product
(before June 30, 2005) 25.00%
</TABLE>
For purposes of the foregoing, "Corporate Partnership" means any joint venture,
licensing agreement, collaboration agreement, or research and development
agreement to which the Company is a party and which is material to the long-term
success of the Company. A "Corporate Partnership resulting from the discovery
of a new stem cell" shall mean a Corporate Partnership which is formed to
commercially develop technology resulting from research conducted pursuant to
the Research Plan (as such term is defined in a letter agreement between the
Company and Messrs. Weissman, Gage and Anderson, dated as of September __, 1997)
which the corporate partner and CTI reasonably believe has resulted in the
discovery of a previously undiscovered stem cell. The dollar amounts set forth
above with respect to Corporate Partnerships refer to the receipt by the Company
of the aggregate amount of the following payments received in connection with
any such Corporate Partnership:
(i) any non-refundable up-front license fees;
(ii) the present value of all non-refundable, non-contingent
license fees payable at a later date;
(iii) the amount by which the purchase price paid for any
non-refundable, non-contingent equity investment in the
Company made in connection with such Corporate Partnership
exceeds the fair market value of such equity investment as
reasonably determined by the Board of Directors of the
Company; and
(iv) 50% of all non-contingent payments for sponsored research
under any sponsored research agreement, provided, however,
that in the case of the $5 million target in each of the
first two corporate partnership milestones, 100% of such
payments shall count toward satisfaction of such target.
The Company shall not structure any Corporate Partnership in a bad faith effort
to avoid giving rise to the vesting of options hereunder.
3
<PAGE>
3. Exercise of Option. Each election to exercise this Option shall be in
writing, signed by Optionee or by his duly appointed guardian or representative,
his executor or administrator or the person or persons to whom this Option is
transferred by will or the applicable laws of descent and distribution
(collectively, the "Legal Representative"), and received by the Company at its
principal office in Providence, Rhode Island, accompanied by payment in full as
provided in Section 4 below. In the event this Option is exercised by such
Legal Representative, the Company shall be under no obligation to deliver stock
hereunder unless and until the Company is reasonably satisfied that the person
or persons exercising this Option is or are the duly appointed guardian(s) or
representative(s) of Optionee, the duly appointed executor(s) or
administrator(s) of the deceased Optionee or the person or persons to whom this
Option has been transferred by will or the applicable laws of descent and
distribution.
4. Payment for Stock. Shares of Common Stock shall be issued only upon
receipt by the Company of full payment of the purchase price for the shares as
to which this Option is exercised. The purchase price is payable by Optionee to
the Company either (i) in cash or by certified check or cashier's check payable
to the order of the Company; or (ii) through the delivery of shares of Common
Stock (duly owned by Optionee and as to which Optionee has good title free and
clear of any liens and encumbrances) which have been outstanding for at least
six months and which have a fair market value (as determined by the Board of
Directors of the Company) on the last business day prior to the date of exercise
of this Option equal to the purchase price; or (iii) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price; or (iv) by any combination
of the forgoing permissible forms of payment. The Company will not be obligated
to deliver any shares unless and until, in the opinion of the Company's counsel,
all applicable federal and state laws and regulations have been complied with,
nor, in the event the outstanding Common Stock is at the time listed upon any
stock exchange, unless and until the shares to be delivered have been listed or
authorized to be listed upon official notice that legal matters in connection
with the issuance and delivery of such shares have been approved by the
Company's counsel. The Company will use its best efforts to effect any such
compliance or listing, and Optionee agrees to take any action reasonably
requested by the Company in connection therewith. Subject to any applicable
limitations under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, the Company will promptly file a Registration Statement
on Form S-8 (or any successor form), with respect to the shares of Common Stock
issuable upon exercise of this Option, and the Company will use all reasonable
efforts to maintain the effectiveness of such registration statement for so long
as this Option shall remain outstanding. The Company may require that Optionee
agree that he will notify the Company when he makes any disposition of the
shares issued upon exercise of this Option whether by sale, gift or otherwise.
Optionee will have the rights of a shareholder only as to shares actually
acquired by him upon exercise of this Option.
4
<PAGE>
5. Non-transferability of Option. This Option may not be transferred by
Optionee otherwise than by will or by the laws of descent and distribution.
During Optionee's lifetime this Option may be exercised only by Optionee or
Optionee's duly appointed guardian or representative.
6. Termination of Service. In the event Optionee ceases to be a
consultant to or employee of the Company because the Company terminates his
service for Cause (as defined in the Consulting/Employment Agreement) or
Optionee terminates his service without Good Reason (as defined in the
Consulting/Employment Agreement), this Option shall immediately terminate except
that Optionee may thereafter exercise this Option, to the extent he was entitled
to exercise it on the date when his service terminated, for a period of 90 days
after the date of such termination. In no event, however, may this Option be
exercised after the Final Exercise Date.
7. Death or Disability. In the event Optionee dies or Optionee's service
with the Company terminates by reason of disability (meaning the inability of
Optionee, because of physical or mental illness or injury, to perform
substantially all of his duties and responsibilities to the Company), this
Option shall continue to be eligible for vesting as set forth in Section 2 of
this Agreement for a period of two years after Optionee's death or the
termination of his service because of disability. In addition, this Option may
be exercised, as to all or any of (a) the shares that Optionee was entitled to
purchase immediately prior to his death or the termination of his service
because of disability and (b) the shares that vest in accordance with the
preceding sentence, by Optionee or his Legal Representative, at any time or
times within three years after his death or such termination of service. Except
as so exercised this Option will expire at the end of such period. In no event,
however, may this Option be exercised after the Final Exercise Date.
8. Administration. This Option will be administered by the Board of
Directors of the Company, which will have the authority to interpret this
agreement and to decide all questions and settle all controversies and disputes
which may arise in connection herewith. All decisions, determinations and
interpretations of the Board of Directors will be binding on all parties
concerned. A majority of the members of the Board of Directors will constitute
a quorum, and all determinations of the Board of Directors will be made by a
majority of its members. Any determination of the Board of Directors under this
agreement may be made without notice or meeting of the Board of Directors by a
written instrument signed by a majority of the members of the Board of
Directors. In the event of any conflict between the terms of this Option and
the terms of the Plan the terms of this Option will control.
9. Stock to be Delivered. Stock to be delivered upon exercise of this
Option may constitute an original issue of authorized but unissued stock or may
consist of previously issued stock acquired by the Company as determined from
time to time by the
5
<PAGE>
Board of Directors. The Board of Directors and the proper officers of the
Company will take any appropriate action required for such delivery.
10. Changes in Stock. In the event of a stock dividend, stock split or
combination of shares, recapitalization or other change in the Company's capital
structure, the Board of Directors of the Company (whose determination will be
binding on Optionee) will make appropriate adjustments to the number and kind of
shares of stock or other securities subject to this Option, the exercise price
and other relevant provisions. Except as provided in the following paragraph,
in the event of a Change in Control (as defined below), this Option will expire
and cease to be exercisable, provided that at least twenty days prior to the
effective date of any such Change in Control, the Board of Directors shall
either (a) make this Option immediately exercisable in full, or (b) arrange to
have the acquiror or an affiliate thereof grant a replacement option or other
replacement award containing terms that the Board of Directors reasonably
determines to be equitable under the circumstances. "Change in Control" means
any consolidation or merger in which the Company is not the surviving
corporation, a transaction or series of related transactions that result in the
acquisition of all or substantially all of the Company's outstanding Common
Stock by a single person or entity or by a group of persons or entities acting
in concert, or the sale or transfer of all or substantially all of the Company's
assets.
11. Acceleration of Options on Change in Control. Any Change in Control
will result in the accelerated vesting of the lesser of (i) 50% of the shares
originally issuable pursuant to this Option or (ii) all of the shares which
would become vested on the achievement of all milestones which are not
time-barred at the time of Change in Control.
In addition, the Shares subject to this Option shall be accelerated under the
circumstances and to the extent described in Section 1 (f) of the Agreement (the
"Research Agreement") dated September 25, 1997 among the Company, Irving
Weissman and Fred H. Gage.
12. Amendments. The Board of Directors of the Company may at any time or
times amend this Option for the purpose of satisfying the requirements of any
changes in applicable laws or regulations or for any other purpose which may at
the time be permitted by law, provided that no such amendment will adversely
affect the rights of Optionee without his consent.
13. Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (not including the conflict of
laws principles thereof).
6
<PAGE>
[Incentive Option Agreement]
IN WITNESS WHEREOF, the Company has caused this agreement to be executed by
its duly authorized officer. This Option is granted at the Company's office, on
the date stated above.
CYTOTHERAPEUTICS, INC.
By:___________________________
President
Accepted and Agreed:
_____________________________
Optionee
<PAGE>
Schedule B
Prior Inventions
None.
<PAGE>
Exhibit 10.75
Two Richmond Square
Providence, RI 02906
401.272.3310
FAX 401.272.3485
CytoTherapeutics
April 17, 1997
John S. McBride
5 Olde Connecticut Path
Westborough, MA 01581
Dear John:
This letter will confirm our understanding regarding your employment by
CytoTherapeutics, Inc. (the "Company") as Senior Vice President, Business
Operations and Chief Financial Officer.
1. Joining the Company. You will begin your employment with the Company
on the Starting Date, which will be June 2,1997, unless we mutually agree on a
different Starting Date.
2. Position and Duties. The Senior Vice President, Business Operations
and Chief Financial Officer, is a highly visible position which reports directly
to the Chief Executive Officer. As Senior Vice President, Business Operations,
you will be. responsible for developing and executing the business partnering
strategy, inlicensing new technology and financial stewardship of the Company
and such other duties and responsibilities as may be assigned to you from time
to time by the Company's Chief Executive Officer. In this role, you will
establish strategic alliances, lead the negotiation process and manage the
process of developing new alliances. As Chief Financial Officer, you will be
responsible for financial planning and accounting, SEC reporting, and financing
of the Company. As part of these responsibilities, Finance, Operations, and
Investor Relations/Public Relations will report directly to you.
The Senior Vice President/CFO is a member of the Company's Operating
Committee and is critical to the Company maintaining a strong financial
structure.
3. Salary and Bonuses.
a. Your base salary will be $7307.69 biweekly ($190,000 per
year), subject to review and adjustment from time to time by the Board, in its
sole discretion. Your base salary, as from time to time adjusted, is referred to
in this letter as your "Base Salary." In addition to
<PAGE>
Base Salary, you will be eligible to participate in the senior management bonus
plan, with a target bonus of 15% of your Base Salary. Your 1997 bonus will be
paid by the first payroll in January 1998 and will be 15% of your 1997
CytoTherapeutics' compensation. Bonus payments in future years will be based on
achievement of Company and individual goals and are determined from time to time
by the Board in its sole discretion.
4. Relocation. CytoTherapeutics will assist you with your relocation
from Westborough to the Providence area, as per the attached Relocation
Agreement, with the following two exceptions: 1) Since your "new" commute from
your residence in Westborough does not meet the Federal IRS relocation rule for
qualifying relocations, your relocation expenses will qualify for tax adder
treatment as discussed in Paragraph 4 of the Relocation Agreement with a cap of
$10,000 and, 2) the move can occur within 24 months of the starting date instead
of within 12 months.
In addition to the provisions of this policy, the Company will pay any
reasonable real estate commissions and closing costs incurred in connection with
the sale of your present home and loan origination fees and other reasonable
costs regarding the purchase of a new home (as specified in Addendum to the
Relocation Agreement). All expenses must be approved in advance by the Head of
Human Resources, and receipts must accompany the reimbursement request.
5. Stock Options. Through the Company's Stock Option Plan (a copy of
which is attached), and subject to the terms and conditions of such Plan, you
will receive options to acquire 130,000 shares of common stock of the Company
(the "Option Shares"), subject to Board approval. We will issue as many of your
options as Incentive Stock Options (ISOs) as is permitted by the Internal
Revenue Code; the remaining options will be issued as Non-Qualified Options; in
each case at an exercise price equal to the closing sale price on the Starting
Date. Absent a change of control in the first two years of your employment,
vesting for stock options will be based on continued employment as follows: (i)
there will be no vesting during the first twelve months; (ii) options to acquire
32,500 Option Shares will vest on the first anniversary of your Starting Date;
and (iii) 1/48th of Option Shares will vest each month thereafter for the next
36 months.
6. Benefits. You will be entitled to participate in any or all employee
benefit plans, medical and dental insurance plans, life insurance, disability
income plans, savings plans and other benefit plans from time to time in effect
for senior management of the Company generally, except to the extent that such
plans are duplicative of benefits otherwise provided to you under this
Agreement. Such participation shall be subject to (i) the terms of the
applicable plan documents, (ii) generally applicable policies of the Company and
(iii) the discretion of the Board of Directors or any administrative or other
committee provided for in or contemplated by such plan.
2
<PAGE>
7. Confidentiality and Restricted Activities. You agree that some
restrictions on your activities during and after employment are necessary to
protect the goodwill, Confidential Information (as defined below) and other
legitimate interests of the Company:
a. During your employment and thereafter, except as required
by applicable law or for the proper performance of your duties and
responsibilities hereunder, you shall not disclose to any person outside the
company, corporation or other entity, or use for your own benefit or gain or
otherwise, any Confidential Information. You understand that this restriction
shall continue to apply after your employment terminates, regardless of the
reason for such termination.
b. While you are employed by the Company and for a period of
one (1) year thereafter you shall not, directly or indirectly, engage in any
activity, whether as owner, partner, investor, consultant, employee, agent or
otherwise, that is competitive with the business of the Company.
c. You further agree that during your employment and for one
(1) year thereafter, you will not, directly or indirectly, attempt to hire any
employee of the Company, assist in such hiring by any other person, corporation
or entity, otherwise solicit, induce or encourage any employee of the Company to
terminate his or her relationship with the Company.
d. You agree that you will not, during your employment with
the Company, improperly use or disclose any proprietary information or trade
secrets of any former or concurrent employer, or other person or entity with
whom you have an agreement or duty to keep in confidence information acquired by
you in confidence, if any; and that you will not bring onto Company premises any
unpublished document or proprietary information belonging to any such employer,
person or entity, unless consented to in writing by such employer, person or
entity.
e. At the time of leaving the Company's employ, you will
deliver to the Company (and not keep in your possession or deliver to anyone
else) any and all devices, records, data, notes, reports, proposals, lists,
employee lists, organization charts, correspondence, specifications, drawings,
blueprints, sketches, materials, equipment, other documents or property, or
reproductions of any aforementioned items developed or obtained by you pursuant
to your employment with the Company, or otherwise belonging to the Company, its
successors or assigns, or containing or constituting Confidential Information.
f. You agree that the Company shall, in addition to any other remedies
available to it, be entitled to preliminary and permanent injunctive relief
against any breach by you of the covenants contained in this Paragraph 7,
without having to post bond. In the event that any provisions of this Paragraph
shall be determined by any court of competent jurisdiction to be unenforceable
by reason of its being extended over too great a time, too large a geographic
3
<PAGE>
area or too great a range of activities, it shall be interpreted to extend only
over the maximum period of time, geographic area or range of activities as to
which it may be enforceable.
g. For purposes of this Agreement:
i. A business shall be deemed to be competitive with the
Company if it engages or proposes to engage in any business activity (i)
utilizing or seeking to develop technology capable of utilizing the
transplantation of cells as a therapeutic agent for the diagnosis, prevention or
treatment of human disease, injury or condition or (ii) in any field the Company
is currently pursuing or has pursued within the previous two years.
ii. Confidential Information means any and all information of
whatever type (including, without limitation, data, results, inventions,
technology and all other information) of or relating to the Company including,
without limitation, information relating to (1) the development, research,
testing, production and marketing activities of the Company, (2) the Company's
employees, consultants and other agents, (3) the products and services of the
Company, (4) patients and clinical trials, (5) the costs, sources of supply and
strategic plans of the Company, (6) the identity and special needs of the
customers of the Company, (7) patents, trade secrets and other intellectual
property and (8) people and organizations with whom the Company has business
relationships and those relationships. Confidential Information also includes
comparable information that the Company has received or may receive in the
future of or relating to third parties where the Company has a duty to keep such
information confidential. Confidential Information does not, however, include
information that has become publicly known and generally available other than
through a wrongful act by you.
8. Termination and Termination of Benefits. Your employment with the
Company is "at will," which means that either you or the
Company may terminate your employment at any time, with or without cause or good
reason.
a. The Company may terminate your employment other than for
"cause" at any time upon written notice to you and, in that event, (i) the
Company will continue to pay you your Base Salary for the Severance Period (as
defined below) or until you obtain other employment, whichever occurs first and
(ii) all options which would have become vested during such Severance Period
shall be treated as vested at the time of such termination. If, under these
circumstances, you obtain other employment within the Severance Period, the
Company will pay you the amount, if any, by which your prorated Base Salary
exceeds your total compensation from your new employment for the remainder of
the Severance Period. The Severance Period shall be nine months. Notwithstanding
any other provision of this Agreement, if the value of your Option Compensation
is greater than eight times your Base Salary, the Company shall have no
obligation to continue to pay your Base Salary following your termination.
Option Compensation shall mean an amount equal to the sum of the following
(determined, in each case, by reference to the last closing sale price of the
Company's Common Stock on the day prior to the date of your termination and
including
4
<PAGE>
options awarded to you by the Company pursuant to this Agreement or otherwise):
(i) the aggregate difference between the value and exercise price of your vested
but unexercised in-the-money stock options; (ii) the market value of any stock
of the Company obtained by you on exercise of your stock options and still held
by you, less the aggregate exercise price paid by you to obtain such stock; and
(iii) the proceeds realized by you on the sale of any stock obtained by you on
exercise of your stock options, less the aggregate exercise price paid by you to
obtain such stock. In the event that you purchase stock from the Company (other
than through the Company's Employee Stock Purchase Plan, the Company's 401(k)
plan or as part of and on the same terms as a public or private offering of
securities to investors) or are granted stock by the Company, Option
Compensation shall also include (i) an amount equal to the market value of any
such stock still owned by you, less the amount paid by you for such stock and
(ii) the amount realized by you on the sale of any such stock sold by you, less
the amount paid by you for such stock. Stock options will not continue to vest
after your termination in the event of a resignation without good reason or
termination with cause.
b. The Company may terminate your employment upon written
notice to you in the event that you become disabled during your employment
through any illness, injury, accident or condition of either physical or
psychological nature and, as a result, you are unable to perform substantially
all of your duties and responsibilities hereunder for ninety (90) days during
any period of three hundred and sixty-five calendar days. In that event, the
Company will continue to pay you your Base Salary until: (i) the end of a period
of nine (9) months following such termination; (ii) you obtain other employment;
or (iii) you become eligible for disability income under any disability income
plan provided by the Company, whichever of these events shall occur first.
c. The Company may terminate your employment hereunder for
cause at any time upon written notice to you setting forth in reasonable detail
the nature of such cause. The following as determined by the Company in its
reasonable judgment, shall constitute "cause" for termination:
(1) Your failure to perform, or material negligence in the
performance of, (i) your principal duties and responsibilities to the Company
(which, to the extent assigned to you, shall include those duties and
responsibilities described in Paragraph numbered 2) or (ii) any other of your
duties and responsibilities following written notice from the Company and a
10-business day opportunity to cure any curable failure or negligence;
(2) Any misconduct by you which is substantially injurious to
the business or interests of the Company;
(3) Your violation of any federal, state or local law,
regulation or other requirement applicable to the business of the Company;
(4) Your conviction or plea of "no contest" to, any felony; or
5
<PAGE>
(5) Any material breach by you of any provision of this
Agreement.
d. You may terminate your employment at any time, with or
without good reason, upon written notice to the Company. If you terminate your
employment with good reason, the Company will be obligated to you to the same
extent as if the Company had terminated your employment other than for cause,
and the Provisions of Paragraph 8 (a), including the acceleration of option
vesting and the limitations on the Company's obligations contained therein,
shall apply. The following shall constitute "good reason" for termination:
material breach by the Company of any provision of this Agreement which breach
continues for more than ten (10) business days following written notice from you
to the Company setting forth in reasonable detail the nature of such breach.
e. If you resign other than for good reason or your employment
is terminated by the Company for cause, the Company shall have no further
obligation to you other than for Base Salary earned through the date of
termination. No severance pay or other benefits of any kind will be provided.
f. In the event of a change of control (as defined in the
Severance Practice; Change of Control Policy (10/94) (attached)) where
CytoTherapeutics is not the surviving entity and the change of control results
in a material change in job responsibility, compensation, or loss of job within
the first two years of your employment with the Company, your severance will be
the greater of the severance as defined in Paragraph 8(a) or the Severance
Policy dated (10/94). In addition, if such material change resulting from a
Change of Control occurs within the first two years of your employment, the
options for 130,000 Option Shares granted to you with this offer shall vest
fully upon such material change.
g. In the event we hire a new CEO, and that hiring results in
a material change in your job responsibility, compensation, or loss of your job
within the first two years of your employment with the Company, your severance
will be as defined in Paragraph 8(a). In addition, if such material change
resulting from a new CEO occurs within the first two years of your employment,
the options for 130,000 Option Shares granted to you with this offer shall vest
fully upon such material change.
9. Withholding. All payments and reimbursements made by the Company
under this Agreement shall be reduced by any tax or other amounts required to be
withheld by the Company under applicable law.
10. Assignment. This Agreement shall inure to the benefit of the
Company and any successor of the Company by reorganization, merger,
consolidation or liquidation and any assignee of all or substantially all of the
business or assets of the Company or any division or line of business of the
Company with which you are associated. The Company requires your personal
services and you may not assign this Agreement.
6
<PAGE>
11. Waiver. Except as otherwise expressly provided in this Agreement,
no waiver of any provision hereof shall be effective unless made in writing and
signed by the waiving party. The failure of either party to require performance
of any term or obligation of this Agreement, or the waiver by either party of
any breach of this Agreement, shall not prevent any subsequent enforcement of
such term or obligation or be deemed a waiver of any subsequent breach.
12. Severability. Should any provision of this Agreement, or portion
thereof, be found invalid in any circumstance, such invalidity shall not affect
any other provision or circumstance, and such provision shall be construed by
limiting it so as to be enforceable to the maximum extent compatible with
applicable law.
13. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be effective when
delivered in person or five days after deposit in the United States mail,
postage prepaid, registered or certified, and addressed to you at your last
known address on the books of the Company or, in the case of the Company, at its
main office, attention of the Chief Executive Officer.
14. Captions. The captions and headings in this Agreement are for
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.
15. Entire Agreement. This Agreement sets forth the entire agreement
and understanding between you and the Company and supersedes all prior
communications, agreements and understandings, written and oral, with respect to
the terms and conditions of your employment. This Agreement may not be changed
or modified except by an agreement in writing signed by you and the Chief
Executive Officer or other specifically authorized representative of the
Company.
16. Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of Rhode Island, without regard to
principles of conflicts of law.
17. No Conflicting Agreements. You hereby represent to the Company that
neither your execution and delivery of this Agreement nor your acceptance of
employment with the Company nor your anticipated service as Senior Vice
President, Operations and Chief Financial Officer will conflict with or result
in a breach of any of the terms, conditions or provisions of any agreement to
which you are a party or any order, injunction, judgment or decree of any court
or governmental authority or any court or governmental authority or any
arbitration award applicable to you.
18. Inventions. You hereby represent to the Company and agree that,
except as described on Exhibit A, you have no inventions, original works of
authorship, developments, improvements or trade secrets that were made by you
prior to your employment with the Company and which relate to the Company's
current or proposed business, products, or research and development. You will
promptly make full written disclosure to the Company,
7
<PAGE>
hold in trust for the Company's sole right and benefit, and hereby assign to the
Company or its designee, all of your right, title and interest in any and all
inventions, original works of authorship, developments, concepts, improvements
or trade secrets, whether or not patentable or registerable under copyright or
similar laws, that you may solely or jointly conceive, develop, reduce to
practice or cause to be conceived or developed, or reduced to practice, during
the period of time you are employed by the Company (collectively referred to as
the "Inventions"). You further acknowledge that all original works of authorship
made by you solely or jointly with others within the scope of your employment
and protectible by copyright are "works made for hire", as that term is defined
in the United States Copyright Act. You agree to keep and maintain adequate and
current records of all inventions made by you solely or jointly with others
during the term of your employment with the Company. Such records will be in the
form of notes, sketches, drawings or any other format that may be specified by
the Company. These records will be available through, and remain the sole
property of, the Company at all times. You agree to assist the Company or its
designee, at the Company's expense, in every proper way, to secure the Company's
rights in the Inventions and copyrights, including the disclosure to the Company
of all pertinent information and data with respect thereto, the execution of all
applications, specifications, oaths, assignments and all other instruments that
the Company shall deem necessary in order to apply for and obtain such rights,
and in order to assign and convey to the Company, its successors, designees and
nominees the sole and exclusive right, title, and interest in and to such
Inventions, and any copyrights, patents, or other intellectual property rights
relating thereto, both during your employment by the Company and thereafter. In
the event that the Company is unable for any reason to secure or to prosecute
any patent application with respect to such Invention (including, without
limitation, renewals, extensions, continuations, divisions or continuations in
part thereof), you hereby irrevocably designate and appoint the Company and its
duly authorized officers and agents, as your agents and attorney-in-fact to act
for and in your behalf and instead of you, to execute and file any such
application and to do all other lawfully permitted acts to further the
prosecution and issuance of patents thereon with the same legal force and effect
as if executed by you. You agree that you will assist the Company in the
prosecution and enforcement of the Company's intellectual property after
termination of your employment, at the Company's expense.
19. Physical Exam. This offer of employment is contingent upon
successful completion of a medical examination and a drug screen test which will
be paid for by CytoTherapeutics. You will begin employment only after
successfully passing both the medical exam and drug screen test. The results are
generally available within 72 hours and you will be notified of the results.
20. Verification of Employment Eligibility. The Immigration Reform and
Control Act of 1986 requires employers to verify the identity/employment
eligibility of each employee hired after November 6, 1986. As a result, you will
be asked to complete the attached Employment Eligibility Verification (Form I-9)
on your first day of work. Section 2 of this form lists the documents you will
be required to present.
8
<PAGE>
21. Compliance With Agreement. The Company's obligations under this
Agreement and its obligation to deliver stock under the terms of the stock
options granted pursuant to the terms of this Agreement (or otherwise granted to
you during the course of your employment) are conditioned on your compliance
with the terms and conditions of this Agreement and the accuracy of the
representations made to the Company by you herein.
If the foregoing is acceptable to you, please sign the enclosed copy of
this letter in the space provided below and return it to me, whereupon this
letter and such copy will constitute a binding agreement between you and the
Company on the basis set forth above as of the date of the first above written.
Sincerely yours,
CYTOTHERAPEUTICS, INC.
By:/s/ Denise M. Peppard
------------------------
Denise M. Peppard
Vice President, Human Resources
Accepted and agreed:
/s/ John McBride Date: 4/28/97
- ------------------- -----------------
John McBride
Enclosures:
Stock Option Plan Document/ Prospectus
Change of Control Policy
Relocation Policy and Addendum
Benefits Summary
Physical Exam form
Exhibit A - List of Prior Inventions
I-9 Form
9
<PAGE>
EXHIBIT A
LIST OF PRIOR INVENTIONS & ORIGINAL WORKS OF AUTHORSHIP
<TABLE>
<CAPTION>
Title Date Identifying Number or Brief Description
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
None
</TABLE>
/s/ John S. McBride
--------------------------------
Name of Employee (type or print)
10
<PAGE>
CYTOTHERAPEUTICS, INC.
2 RICHMOND SQUARE
PROVIDENCE, RHODE ISLAND 02906
July 21, 1997
BY HAND DELIVERY
Sandra Nusinoff Lehrman, M.D.
c/o CytoTherapeutics, Inc.
2 Richmond Square
Providence, Rhode Island 02906
Dear Sandra:
As you know, CytoTherapeutics, Inc. (the "Company") is discussing several
possible transactions, each of which (a "Transaction") would involve a material
acquisition by the Company or the merger or affiliation of the Company or a
subsidiary of the Company with another company. In addition, as we have also
discussed, the Company believes that it may be necessary or desirable, whether
in connection with a Transaction or in the absence of any Transaction, to effect
certain changes in the Company's senior management, some of which changes we
have, in fact, already accomplished.
In light of these developments, you and I have reviewed together your own
role with the Company and we have determined that it is in our mutual best
interests to effect a voluntary end to your employment with the Company, on the
basis agreed to in this letter.
1. In signing this agreement, you resign your employment, and all offices
and positions held by you, with the Company and its subsidiaries and other
affiliates, including, without limitation, your position as a director of the
Company, effective as of August 4, 1997 (the "Resignation Date"). It is
understood and agreed that the Company will take actions in reliance on your
resignation and that it is irrevocable.
2. During the period from the date of this letter, written above, through
the Resignation Date (the "Transitional Period"), you will continue to be
employed by the Company in your current position and at your current rate of
pay. You need not report to the office on a daily basis during this period, but
you do agree not to commence other employment during the Transitional Period and
to remain available, during normal business hours, to provide advice and
counseling to the Company, by telephone or at Company offices, as the Company
may reasonably request. You also agree that, during the
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<PAGE>
Transitional Period and thereafter, you will not to attempt to bind the Company
to the fulfillment of any condition, contract or obligation or to create any
liability binding on the Company.
3. During the Transitional Period, the Company will continue your
participation in those Company employee benefit plans in which you are currently
a participant, to the extent permitted by the terms of those plans and generally
applicable Company policies. Stock options granted you and not yet expired,
exercised, canceled or otherwise become unexercisable shall continue to vest
during the Transitional Period. In addition, subject to approval by the
Company's Board of Directors, the exercise period for all of the options
previously granted to you which shall have vested as of the Resignation Date
shall be extended to the first anniversary of the Resignation Date ("Exercise
Period Extension"), PROVIDED, HOWEVER, that all such options shall be
exercisable only for so long as you continue to comply with your obligations
under this agreement, including, without limitation, your obligations under
paragraph 6 of this agreement. I will strongly recommend approval of the
Exercise Period Extension at the August 4, 1997 meeting of the Board of
Directors. In the unlikely event that the Board of Directors fails to approve
the Exercise Period Extension at that meeting, the first Severance Period as
defined in paragraph 4(a) will be extended for an additional three (3) months
making a total Severance Period of nine (9) months.
4. In consideration of your acceptance of this agreement, and subject to
your meeting all of your obligations under it, the Company will provide you the
following:
(a) The Company will continue to pay you your salary, at your current
base rate of pay, for a period of six (6) months (the "Severance Period") from
the date of this letter, written above, reduced by the amount of any earnings
you have from other employment following the Resignation Date. You agree to
notify me immediately after obtaining any such employment and to provide
accurate information concerning your compensation from such employment each pay
period. Payments made to you hereunder after the Resignation Date shall
continue to be made at the Company's regular payroll periods and in accordance
with its usual payroll practices. In addition to the payments to be made to you
hereunder after the Resignation Date you will be paid for all vacation that you
may have earned but not used as of the Resignation Date.
(b) To the extent permitted by the terms of the Company's group
health and dental plan and by its health and dental plan insurer or providers,
as applicable, the Company will continue your participation and that of your
eligible dependents (your husband and son) in its group health and dental plan
to the same extent as you and they currently participate and will pay the
premium cost of such participation, to the same extent currently paid, from the
Resignation Date through the end of the Severance Period or the date you
commence other employment and become eligible for coverage under the plans of
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<PAGE>
your new employer, whichever occurs first. If the Company is unable to provide
the continuation as contemplated in the first sentence of this subsection (b),
you may exercise your right to continue your coverage and that of your eligible
dependents in the Company's group health and dental plan under the federal law
known as COBRA, provided you are eligible to do so, and, if you are eligible and
so elect, then, until the earlier of the end of the Severance Period or the date
you cease to be eligible for continuation under COBRA, the Company will pay the
premium cost of your coverage and that of your eligible dependents. The Company
will also continue your coverage under its group life insurance plan in the same
face amount in which your life is currently insured under such plan through the
end of the Severance Period, or the date you commence other employment,
whichever occurs first, provided such coverage is available under the plan. It
is understood and agreed, however, that the benefits of the group health and
group life insurance plans of the Company shall be subject to such conditions
and limitations as are set forth in the applicable plan, policy or contract
terms; that any disputes concerning eligibility for or payment of benefits under
those plans shall be settled in accordance with the terms thereof; and that the
Company shall have no liability to you, your dependents or anyone else claiming
through you, for payment of benefits under any of such plan.
(c) The Company will reimburse your expenditures for outplacement
services, to a maximum cost to the Company of Fifteen Thousand Dollars
($15,000).
(d) Promptly following the Resignation Date, the Company will provide
you a positive written reference, signed by me, in the form attached hereto and
marked "Exhibit A". In addition, I will respond personally to any inquiries
made of the Company in a manner consistent with Exhibit A.
5. All payments by the Company under this agreement will be reduced by
all taxes and other amounts that the Company is required to withhold under
applicable law and all other deductions authorized by you.
6. Your obligations under Section 6 and Section 17 of the employment
agreement between you and the Company dated July 2, 1996 (the "Employment
Agreement") are incorporated into this agreement by reference and shall remain
in full force and effect in accordance with their terms. You shall not be
obliged to refund any of the bonus paid you pursuant to the first sentence of
Section 3.b of the Employment Agreement.
7. You agree that you will not disclose this agreement or any of its
terms or provisions, directly or by implication, except to members of your
immediate family and to your legal and tax advisors, and then only on condition
that they agree not to further disclose this agreement or any of its terms or
provisions to others.
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<PAGE>
8. You agree that you will continue to use your best efforts to support
and promote the interests and reputation of the Company during the Transitional
Period. You agree that during the Transitional Period and thereafter, you will
not disparage the Company or any of the people or organizations connected with
it and that you will not otherwise do or say anything that could disrupt the
good morale of the employees of the Company or otherwise harm its interests or
reputation. Any representation made by you or on your behalf regarding your
separation from the Company shall state that you resigned voluntarily and, if a
Transaction shall occur or be announced by the Company on or before the
Resignation Date, in connection with or in anticipation of such a Transaction
or, if no such Transaction occurs or is so announced, in connection with a
general management reorganization. You agree to make no statements inconsistent
with the foregoing representation.
9. You agree to return to the Company, on the Resignation Date or such
earlier date as the Company may specify, any and all documents, materials and
information related to the Company's business, whether present or otherwise, and
all keys and other property of the Company then in your possession or control.
10. In order to be certain that this agreement will resolve any and all
concerns that you might have, the Company requests that you carefully consider
its terms, including the release of claims set forth below and, in that regard,
encourages you to seek the advice of an attorney before signing this agreement.
11. This letter contains the entire agreement between you and the Company
and replaces all prior and contemporaneous agreements, communications and
understandings, whether written or oral, with respect to your employment and its
termination and all related matters, excluding only your obligations under
Section 6 and Section 17 of the Employment Agreement and your obligations with
respect to the securities of the Company.
12. In exchange for the Exercise Period Extension and the payments
provided in paragraph 4(c), to which, you agree, you would not otherwise be
entitled, you agree that this agreement shall be in complete and final
settlement of any and all causes of action, rights or claims that you have had
in the past, now have, or might now have, in any way related to, connected with
or arising out of your employment or its termination or pursuant to Title VII of
the Civil Rights Act, the Americans with Disabilities Act, the Age
Discrimination in Employment Act, the Rhode Island fair employment practices
statute or any other federal, state or local employment law, regulation or other
requirement and you hereby release and forever discharge the Company, its
subsidiaries and other affiliates and all of their respective past and present
directors, shareholders, officers, employees, agents, successors and assigns and
all others connected with them, both individually and in their official
capacities, from any and all such causes of action, rights or claims.
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<PAGE>
13. In signing this agreement, you give the Company assurance that you
have signed it voluntarily and with a full understanding of its terms and that
you have had sufficient opportunity to consider this agreement and to consult
with your attorney before signing it.
If the terms of this agreement are acceptable to you, please sign, date and
return it to me within twenty-one days of the date you receive it. You may
revoke this agreement at any time during the seven-day period immediately
following the date of your signing by so notifying me in writing. If you do not
do so, then, at the expiration of that seven-day period, this letter will take
effect as a legally-binding agreement between you and the Company on the basis
set forth above. The enclosed copy of this letter, which you should also sign
and date, is for your records.
Sincerely,
CYTOTHERAPEUTICS, INC.
By: /s/ Seth A. Rudnick, President
-------------------------------
Seth A. Rudnick, President
Accepted and agreed:
Signature: /s/ Sandra Nusinoff Lehrman
-----------------------------
Sandra Nusinoff Lehrman
Date: July 21, 1997
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<PAGE>
EXHIBIT A
Sandra Nusinoff Lehrman served as President and Chief Operating Officer of
CytoTherapeutics, Inc. from July 1996 to August 1997. In addition, she served
on the Board of Directors of the Company during that period. As Chief Operating
Officer, all divisions of the Company's business reported to her, including
finance and business, manufacturing, research, core technology, regulatory
matters and human resources.
Dr. Lehrman's mission on her engagement as President and Chief Operating
Officer was to coordinate and focus all functions of the Company during its
critical period of transition from basic research to product development and
commercial application. She accomplished that mission well, providing
particularly strong leadership in defining critical path objectives for the
Company's development programs in chronic pain, ALS, ophthalmology, among
others. Dr. Lehrman's many talents include the ability to make the hard
decisions necessary to advance the development of innovative pharmaceutical
products and to manage the often complex process of obtaining critical
regulatory approvals. During her tenure at the Company, Dr. Lehrman
participated in the negotiation of significant alliances including the Company's
alliance with Genentech. She brought a unique scientific depth and management
breadth to the Company's product development and business operations.
Dr. Lehrman is a person of outstanding personal integrity. She is also a
valued friend and colleague. I am grateful for the skill and leadership and
talent she has given to the Company and its employees. We will miss her.
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<PAGE>
July 29, 1997
BY HAND DELIVERY
E. Edward Baetge, Ph.D.
c/o CytoTherapeutics, Inc.
Two Richmond Square
Providence, Rhode Island 02906
Dear Ed:
This letter will confirm the agreement reached between you and
CytoTherapeutics, Inc. (the "Company) concerning your employment at the Company
and the termination of such employment.
1. Your employment at the Company shall terminate effective on the
earlier of October 24, 1997 or the date on which you start new full-time
employment (the "Last Date"). (For purposes of this agreement, "full-time
employment" shall mean provision of services on a full or substantially
full-time basis, whether as an employee, consultant or otherwise, to an entity
other than the Company.) In signing this agreement, you resign your position as
Vice President, Research of the Company and all other officerships and
directorships you hold with the Company or any of its subsidiaries or other
affiliates, effective August 5, 1997, and your employment with the Company,
effective as of the Last Date. During the remainder of your employment and
thereafter, you shall not attempt to make any commitments on behalf of, or
otherwise bind, the Company or any of its subsidiaries or other affiliates or
cause any expenses to be incurred on their behalf. You will cease to represent
yourself as an employee, agent or other representative of the Company as of the
Last Date.
2. You will continue to receive your base salary on the Company's regular
pay days through October 24, 1997. All requisite statutory withholdings and
authorized deductions will be made from this pay. If you start new full-time
employment, as defined above, you will cease to be an employee on such date and
your salary payments will be discontinued as of the Last Date.
<PAGE>
3. You have 168.71 hours of accrued unused vacation through the end of
June 1997. You will receive a check for this vacation accrual on the Last Date.
You will not continue to accrue additional vacation hours or other paid time off
after June 30, 1997.
4. You may continue to participate in those Company employee benefit
plans in which you are currently enrolled until the Last Date. Notwithstanding
the foregoing, however, it is understood and agreed that your participation in
any of the employee benefit plans of the Company shall be subject to such
conditions and limitations as are set forth in the applicable plan, policy or
contract terms; that any disputes concerning eligibility for or payment of
benefits under those plans shall be settled in accordance with the terms
thereof; and that the Company shall have no liability to you, your dependents or
anyone else claiming through you, for payment of benefits under any of such
plan. After the Last Date, you may elect to continue participation in the
Company's group health and dental plans to the extent provided under COBRA. If
you do so, then the Company will pay the premium cost of your participation from
the Last Date until the earlier of the date you secure other employment or
December 31, 1997. Thereafter, you may continue participation in the health and
dental plans at your cost for any remainder of the COBRA period. Your
participation in all other Company employee benefit plans will end as of the
Last Date, in accordance with the terms of those plans.
5. The management shall recommend to its Board of Directors that all
options granted you to purchase the Company's Common Stock which would be vested
on December 18, 1997, and not yet exercised, expired, surrendered or canceled
shall be fully vested on the Last Date and shall be exercisable for the shorter
of the following two time periods: (i) nine months following the Last Date or
(ii) six months from December 12, 1997. The foregoing is subject to the
approval of the Board of Directors in its sole discretion. The management of
the Company shall also recommend to its Board of Directors that the 500 shares
of unvested restricted stock awarded to you on May 17, 1995 shall be vested on
the Last Date. The foregoing is subject to the approval of the Board of
Directors in its sole discretion. Except as otherwise expressly provided in this
paragraph 5, all options granted you shall be pursuant to the terms of any
applicable stock option certificate, agreement or plan and all options and
restricted stock granted you shall be pursuant to any employee stock repurchase
agreement or other restriction provisions generally applicable to shares
purchased by Company employees and, in the case of the restricted stock, to all
other applicable restrictions.
6. Nothing in this letter agreement is intended to alter or modify your
right to any benefit to which you are entitled under the Company's 401(k) plan.
Following the termination of your employment on the Last Date, you will receive
information under separate cover concerning your 401(k) plan account and any
distribution to you under that plan will be made in accordance with the terms of
the plan. Any loans that you may have
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<PAGE>
against your 401(k) will need to be paid in full by the Last Date, pursuant to
the terms of the 401(k) plan document.
7. Effective as of the close of business on the Last Date, your status as
an employee of the Company shall cease for all purposes.
8. The agreement between you and the Company captioned Employment
Agreement and signed by you on May 17, 1992 (the "Employment Agreement") shall
remain in full force and effect in accordance with its terms, with your
obligations under paragraphs 6 and 7 of the Employment Agreement with respect to
solicitation of employees and covenants against competition continuing for a
period of 12 months following the Last Date.
9. You and the Company shall be individually responsible for your and its
attorneys' fees, if any, respectively.
10. No later than the Last Date, you will return to the Company all
documents, files, books, keys, passes, identification materials, credit cards
and other property of the Company.
11. You agree that you will not at any time disparage the Company or any
of its subsidiaries or other affiliates or any of those associated with them and
will take no steps and make no statements detrimental to the reputation of the
Company or any of its subsidiaries or affiliates or any of those associated with
them.
12. You agree to keep the terms of this letter agreement strictly
confidential, and agree that you will not disclose, characterize, comment on,
convey, or in any sense reveal the content or nature of this letter agreement,
unless legally required to do so, to any persons other than your spouse,
children or legal/tax/financial advisors, in which event you shall assure that
your spouse, children and legal/tax/financial advisors shall be similarly bound
by this covenant of confidentiality. The Company agrees to hold this letter
agreement confidential and not reveal its terms except as its determines
appropriate for business or legal reasons.
13. You agree to cooperate with the Company with respect to matters
arising during or related to your employment, including but not limited to
cooperation in connection with any litigation or governmental investigation or
regulatory or other proceeding which may have arisen or which may arise
following the execution of this letter agreement. As part of the cooperation
agreed to herein, you shall provide complete and truthful information to the
Company, its subsidiaries and other affiliates and their attorneys with respect
to any matter arising during or related to your employment. Specifically, you
shall make yourself available to meet with personnel and attorneys of the
Company, its
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<PAGE>
subsidiaries and other affiliates and shall provide to them any and all
documentary or other physical evidence pertinent to any such matter; and, at the
Company's request upon reasonable notice, you shall travel to such places as the
Company may specify (for which the Company will reimburse you for your
reasonable travel and lodging expenses) and provide such complete and truthful
information and evidence to parties whom the Company may specify. Further, upon
the oral request of the Company or its attorneys, you shall testify, truthfully
and accurately, to any such matter in any civil case to which the Company or any
of its subsidiaries or other affiliates is a party or in connection with any
investigation or regulatory or other proceeding relating to the Company or any
of its subsidiaries or affiliates or their activities. Finally, you shall
promptly notify the Company's General Counsel, within three business days, of
your receipt from any third party or governmental entity of a request for
testimony and/or documents, whether by legal process or otherwise, relating to
any matter arising during or related to your employment.
14. This letter constitutes the entire agreement between you and the
Company and supersedes all prior and contemporaneous agreements, communications
and understandings, written and oral, with respect to your employment, its
termination and all related matters, excluding only (a) the Employment
Agreement, which shall remain in full force and effect in accordance with its
terms, and (b) any obligations which you may have with respect to the securities
of the Company or with respect to your loan under the 401(k) plan. In exchange
for the special benefits provided to you under this agreement, you agree that
this agreement shall be a complete and final settlement of, and releases the
Company, its subsidiaries and other affiliates and all of their respective
officers, directors, employees, shareholders, agents, successors and assigns
(both individually and in their official capacities) from any and all causes of
action, rights or claims that you have had in the past, now have, or might now
have, in any way related to or arising out of your employment or its termination
or pursuant to any federal, state or local employment laws, regulations or other
requirements (including but not limited to causes of action or claims arising
under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities
Act, the Age Discrimination in Employment Act and Rhode Island fair employment
practices statute, each as amended).
15. All payments to be made to you in accordance with the terms of this
letter agreement and the performance by the Company of any other obligations
hereunder is conditioned upon your performance of your obligations hereunder and
under the Employment Agreement.
16. The terms of this letter agreement shall be governed and construed in
accordance with the laws of the State of Rhode Island, without regard to
conflicts of laws rules thereof.
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17. This letter agreement creates binding obligations and the Company
therefore encourages you to seek the advice of an attorney before signing it.
In signing this agreement, you give the Company assurance that you have signed
it voluntarily and with a full understanding of its terms and that you have had
sufficient opportunity to consider this agreement and to consult with your
attorney before signing it and that you have done so.
If the foregoing is agreeable to you, please sign, date and return the
enclosed copy of this letter to me no later than twenty-one (21) days after the
date on which you received it. You may revoke this agreement within seven (7)
days after you execute it and this agreement shall not become effective or
enforceable until that revocation period has expired. If you do not revoke this
agreement timely, then, at the expiration of that seven (7) day period, this
letter and such copy shall take effect as a binding agreement between you and
the Company on the basis set forth above.
Very truly yours,
CytoTherapeutics, Inc.
By: /s/ Frederic A. Eustis III
-------------------------------
Title: Executive Vice President
Accepted and agreed:
/s/ E. Edward Baetge, Ph.D.
- ----------------------------------
E. Edward Baetge, Ph.D.
Date: 8/4/97
-----------------------------
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LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of May 15,1996, is entered into by and between
CytoTherapeutics, Inc., a Delaware corporation ("Borrower") and Fleet National
Bank, a national banking association organized and existing under the laws of
the United States of America ("Lender").
WHEREAS, Borrower desires to borrow funds from Lender in order to finance
the purchase of certain equipment for use in its facilities; and
WHEREAS, Lender is willing to enter into such transactions on the terms and
conditions hereinafter provided.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS
When used herein, the terms set forth below shall be defined as follows:
1.1 "Advance(s)" means advances of the Loan made by Lender to Borrower
pursuant Section 3.1 hereof.
1.2 "Approved Lien" means any Lien, on any property of Borrower that: (a)
Lender has consented to in writing; or (b) is listed on Exhibit D annexed hereto
and made a part hereof.
1.3 "Authorized Investment Vehicles" means those investments permitted by
the Policy.'Borrower's Address" means Two Richmond Square, Providence, Rhode
Island 02906.
1.4 "Borrowing Limit" means the Two Million ($2,000,000) Dollars.
1.5 "Borrowing Request" means a request made by the Borrower for an Advance.
1.6 "Business Day" means any day which is not a Saturday or a Sunday and on
which banks in the State of Rhode Island are not authorized to open or required
to close.
1.7 "Cash Equivalents" means (a) Negotiable certificates of deposit and
bankers' acceptances, maturing in one hundred eighty (180) days or less from the
date of issue, or demand deposit or money market accounts, with any commercial
bank or trust company which is organized under the laws of the United States or
of any state there of and which has, or which his owned by a bank holding
company which has, total assets in excess of $1,000,000,000; (b) any securities
(i) which are commonly known as "commercial paper", (ii) which are due and
payable within two hundred seventy (270) days from the date of issue, (iii)
which have been issued by any corporation organized under the laws of the United
States or of any state thereof or issued by a foreign corporation if such
securities are denominated in United States dollars, and (iv) the rating for
which, at the time of the acquisition thereof by the Borrower are not less than
T-1" if rated by Moody's Investors Services, Inc., and not less than "A-1" if
rated by Standard and Poor's Corporation; (c) any marketable direct or
unconditionally guaranteed obligations of the United States of America or any
agency thereof which mature within one (1) year from the date of the acquisition
thereof; and (d) Authorized Investment Vehicles.
1.8 "Closing Date" means any day on which Lender makes an Advance to
Borrower.
1.9 "Conversion Date" means that date which is one (l) year following the
Date of Agreement.
1.10 "Date of Agreement" means May 15, 1996.
1.11 "ERISA" means, at any date, the Employment Retirement income Security
Act of 1974 and the regulations thereunder, all as the same shall be in effect
at such date.
1.12 "Equipment" shall have the meaning set forth in the Security Agreement.
1.13 "Event of Default" means each and every event specified in Section 6 of
this Agreement.
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1.14 "Financial Statements" means the balance sheet of Borrower, income
statement of Borrower, and retained earnings statement of Borrower for the year
or other period then ended, prepared in accordance with generally accepted
accounting principles consistently applied and, in the case of the balance
sheet, income statement, retained earnings statement and cash flow statement, as
at the close of and for the fiscal year of Borrower, certified by Borrower's
independent certified public accountants, and any supporting schedules and the
notes to such financial statements.
1.15 "Indebtedness" means all obligations, contingent and otherwise, that in
accordance with generally accepted accounting principles should be classified
upon Borrower's balance sheet as liabilities, or to which reference should be
made by footnotes thereto, including thereto, including in any event and whether
or not so classified; (a) all debt and similar monetary obligations, whether
direct or indirect; (b) all liabilities secured by any mortgage, pledge,
security interest, lien, charge or other encumbrance existing on property owned
or acquired subject thereto, whether or not the liability secured thereby shall
have been assumed; and (c) all guarantees, endorsements and other contingent
obligations whether direct or indirect in respect of indebtedness of others,
including any obligation to supply funds to or in any manner to invest in,
directly or indirectly, the debtor, to purchase indebtedness, or to assure the
owner of indebtedness against loss, through an agreement to purchase goods,
supplies, or services for the purpose of enabling the debtor to make payment of
the indebtedness held by such owner or otherwise, and the obligations to
reimburse the issuer in respect of any letters of credit.
1.16 "Lender's Address" is: 111 Westminster Street, Providence, Rhode Island
02903, Attn: Virginia C. Roberts, Senior Vice President.
1.17 "Lien" means any encumbrance, mortgage, pledge, hypothecation, charge,
restriction or other security interest of any kind securing any obligation of
any entity or person.
1.18 "Loans" means and includes all Advances made by Lender to Borrower
pursuant to and payable in accordance with Section 3.1 hereof.
1.19 "Note" means that certain Note of Borrower in favor of Lender dated the
Date of Agreement evidencing the Loans in the maximum principal amount of Two
Million Dollars ($2,000,000.00) in the form attached hereto and made a part
hereof as Exhibit A, together with all attachments thereto, as the same may be
amended from time to time.
1.20 "Obligations" means all indebtedness, obligations and liabilities of
Borrower to Lender, of every kind and description, direct or indirect, secured
or unsecured, joint or several, absolute or contingent, due or to become due,
whether for payment or performance, now existing or hereafter arising under or
in connection with this Agreement, the Note, the Security Documents or in any
other document or instrument delivered herewith or therewith or pursuant to the
terms hereof or thereof, regardless of how the same may be evidenced, or whether
evidenced by any instrument, agreement or book account, including, without
limitation, all Loans, and all interest, taxes, fees, charges, expenses and
attorneys' fees chargeable to Borrower pursuant to the terms hereof or of the
Security Documents.
1.21 "Policy" means Borrower's Investment Policy, a copy of which is annexed
hereto as Exhibit E.
1.22 "Premises" means any real estate owned, use or leased by Borrower
including, without limitation, Borrower's Address.
1.23 "Security Agreement" means that certain Security Agreement by and
between Borrower and Lender of even date herewith, as the same may be amended
from time to time.
1.24 "Security Documents" means those instruments, agreements, documents and
other writings executed by Borrower and listed on Exhibit C attached hereto and
made a part hereof, together with any instruments, agreements, documents and
other writings executed by Borrower (or Lender as Borrower's attorney in fact)
in connection therewith.
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1.25 "Tangible Net Worth" means at any time the excess of Borrower's total
assets over its total liabilities at such time computed in accordance with
generally accepted accounting principles consistently applied, less all of its
intangible assets and deferred charges at such time, including, without
limitation, goodwill, debt discount, organization expenses, trademarks and trade
names, patents, deferred product development costs and similar items, also so
computed.
1.26 "Unrestricted Liquidity" means at any time the sum of (a) Borrower's
cash held in demand deposit accounts or interest bearing accounts at any
financial institution plus (b) Cash Equivalents.
To the extent not defined in Section 1, unless the context otherwise
requires, (a) all commercial terms not defined herein and defined in the Uniform
Commercial Code as enacted in the State of Rhode Island on the Date of Agreement
(the "Commercial Code") shall have the meanings set forth in the Commercial
Code; and (b) all accounting terms not defined herein shall be defined,
determined and calculated in accordance with generally accepted accounting
principles, consistently applied and as applied in connection with and at the
time of the preparation of the financial statements required under SECTION 5
hereof.
2. REPRESENTATIONS AND WARRANTIES
In order to induce Lender to enter into this Agreement and to make Advances
to Borrower hereunder, Borrower represents and warrants to Lender, and such
representations and warranties shall be continuing representations and
warranties during the term of this Agreement and so long thereafter as any
Obligations shall remain outstanding and shall be deemed repeated and confirmed
at the time of each Closing Date as follows:
2.1 Borrower (a) is duly organized, validly existing and in good standing
under the laws of the State of Delaware and has qualified to do business in the
State of Rhode Island and is in good standing in that State.; (b) has and will
have full power and authority to own its properties and to carry on business as
now being conducted and is and will remain qualified to do business in every
jurisdiction where such qualification is necessary and where failure to be so
qualified would have a material adverse effect on the business of Borrower; and
(c) has full power to execute, deliver and perform this Agreement and the
Security Documents.
2.2 The execution, delivery and performance by Borrower of the terms and
provisions of this Agreement, the Security Documents or any documents
contemplated hereby: (a) have been duly authorized by all requisite corporate
action; (b) do not violate any provision of law, any order of any court or other
agency of government, the corporate charter or by-laws of Borrower; (c) will not
violate any indenture, agreement or other instrument to which Borrower is a
party, or by which Borrower or its assets is or are bound, or be in conflict
with, result in a breach of, or constitute (with notice or lapse of time or
both) a default under any such indenture agreement or instrument; and (d) will
not result in the creation or imposition of any Lien, charge or encumbrance of
any nature whatsoever upon any of the property or assets of Borrower pursuant to
such indenture, agreement or instrument.
2.3 There is no action, suit or proceeding at law or in equity or by or
before any governmental instrumentality or other agency now pending or, to the
knowledge of Borrower, threatened, against or affecting Borrower which, if
adversely determined, could have a material adverse effect on the business,
properties, assets, liabilities, operations, results of operations, or
condition, financial or otherwise, of Borrower.
2.4 Borrower is not a party to any agreement or instrument or subject to any
charter or other corporate restriction adversely affecting its business,
properties, assets, liabilities, operations, results of operations, or
condition, financial or otherwise of Borrower.
2.5 Borrower is not in default in the performance, observance or fulfillment
of any material of obligation, covenantor condition contained in any agreement
or instrument to which it is a party.
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2.6 No financing statement or agreement is on file in any public office
pertaining to or affecting any property of Borrower, now owned or hereafter
acquired, except as specifically set forth on Exhibit D attached hereto and made
a part hereof.
2.7 Except for Approved Liens and liens permitted by Section 5.12, Borrower
has good title to all of its properties and assets, free and clear of all
mortgages, security interests, restrictions, Liens and encumbrances of any kind.
2.8 No statement of fact made by or on behalf of Borrower in this Agreement,
or any Security Document, or in any certificate or schedule furnished to Lender
pursuant hereto, or thereto contains any untrue statement of a material fact or
omits to state any material fact necessary to make statements contained therein
or herein not misleading. There is no fact presently known to Borrower which has
not been disclosed to Lender which materially affects adversely, nor as far as
Borrower can reasonably foresee, will materially affect adversely the business,
properties, assets, liabilities, operations, results of operations, prospects or
condition, financial or otherwise, of Borrower.
2.9 Borrower has filed all federal, state and local tax returns required to
be filed and has paid or made adequate provision for the payment of all federal,
state and local taxes, charges and assessments.
2.10 This Agreement and, the Security Documents have been duly executed and
delivered by Borrower and constitute legal, valid and binding obligations of
Borrower, enforceable in accordance with their respective terms, except to the
extent that enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws of general application
relating to or affecting the enforcement of the rights of creditors or by
equitable principles, whether enforcement is sought in equity or at law.
2.11 No Event of Default and no event which, with the passage of time or the
giving of notice, or both, would become such an Event of Default, has occurred
and is continuing.
2.12 No "prohibited transaction" or "accumulated funding deficiency" or
"reportable event" has occurred with respect to any "single employer plan" of
Borrower. Borrower has not received notice that any "multi-employer plan" as to
which it or any "commonly controlled entity" would have liability if it or any
"commonly controlled entity" were to withdraw therefrom, is in "reorganization"
or "insolvent" (as each of the quoted terms is defined or used in ERISA and the
Internal Revenue Code of 1986, as amended (the "Code")).
2.13 Borrower has heretofore furnished to Lender Borrower's Financial
Statements for the period ending December 31, 1995, which Financial Statements
fairly present the financial condition of Borrower as of their date, and the
results of its operations for the year or other period then ended. Since
December 31, 1995, there has been no material adverse change in the business,
properties, assets, liabilities, operations, results of operations, prospects or
condition, financial or otherwise, of Borrower;
2.14 Each of Borrower and, to the best knowledge of Borrower, any other
person relating to the Premises is in compliance in all material respects with
all applicable U.S. federal, state and local Environmental laws and regulations.
Borrower is not in violation of any law, rule, regulation or determination of an
arbitrator, court, or other governmental authority, in each case, applicable to
or binding upon Borrower or affecting any of its property, and in each case,
which would have a material adverse effect.
2.15 Borrower has furnished to Lender copies of all material collaborative
agreements to which it is a party.
2.16 None of the Equipment is an addition to, substitution for or
replacement of the property described on Financing Statement 600321 filed with
the Rhode Island Secretary of State, September 9, 1992, listing Borrower as
Debtor.
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3. LOAN AND PAYMENT PROVISIONS
Following the execution and delivery of this Agreement, and subject to the
terms and conditions precedent enumerated in this SECTION 3 and in SECTION 4
hereof, 'Lender agrees to make Advances to Borrower (the "Commitment"), as
follows:
3.1 ADVANCES
3.1.1 Subject to the terms and conditions of this Agreement, and
provided no Event of Default has occurred and is continuing, from the Date
of Agreement to the Conversion Date, Lender agrees to make Advances to
Borrower, pursuant in each case to a Borrowing Request, provided that: (a)
the dollar amount of the Loans, giving effect to the Borrowing Request, does
not exceed the Borrowing Limit; (b) the Borrowing Request shall be in a
minimum amount of, and thereafter in multiples of, One Hundred Thousand
Dollars ($100,000); (c) Borrower shall have delivered to Lender a complete
and accurate description of the Equipment to be purchased with the proceeds
of the Advance or the Equipment purchased by Borrower prior to the Advance
the purchase price of which shall be in the amount of the Advance and which
shall constitute reimbursement to Borrower for the purchase price thereof
together with such UCC Financing Statements duly executed on behalf of
Borrower as Lender shall require; and (d) the conditions set forth in this
SECTION 3.1 and in SECTION 4 shall have been fulfilled. The date on which
any Advance shall be made shall be deemed a Closing Date. Lender shall
disburse any such Advance into the general account of Borrower with Lender
and shall furnish Borrower with notice of the making of the Advance and its
disbursement. Advances made under this SECTION 3.1 shall be evidenced by and
be payable in accordance with the terms of the Note.
3.1.2 An Advance shall be made by Lender to Borrower upon telephonic
request to credit an Advance to Borrower's general account with Lender. Such
Borrowing Request shall be made by an officer of Borrower duly authorized by
Borrower's board of directors and whose name, along with a certified copy of
such resolutions, have been provided to Lender. Each such Borrowing Request
shall be confirmed in writing by Lender's receipt, within two (2) Business
Days thereafter, of a Request for Advance in the form of Exhibit B attached
hereto and made a part hereof. Borrower shall file with Lender specimen
signatures of each officer authorized to make a Borrowing Request.
3.2 NOTE
3.2.1 Lender shall enter as debits against the indebtedness evidenced by
the Note, all Advances, interest, charges, expenses and other items properly
chargeable with respect to the Advances hereunder; and shall enter as
credits against the indebtedness evidenced by the Note all payments made by
Borrower on account of such indebtedness.
3.2.2 Absent manifest error the aggregate unpaid amount of the Note set
forth on the Lender's internal records shall be PRIMA FACIE evidence of the
principal amount thereof owing and unpaid to the Lender. Such records and/or
schedule with respect to the indebtedness due under the Note shall not
impair Lender's rights hereunder or under the Note or limit or otherwise
affect Borrower's obligation to repay the Obligations in accordance with
this Agreement.
3.2.3 Upon the occurrence of and during the continuance of an Event of
Default, Lender shall be under no further obligation to make any additional
Advances to Borrower.
3.2.4 The aggregate outstanding principal balance of the Note from time
to time shall bear interest at the rate set forth in the Note and shall be
evidenced by and be repayable in accordance with the terms and provisions of
the Note.
3.3 BUSINESS DAY. Whenever any payment to be made hereunder or under the
Note shall become due and payable on a day which is not a Business Day, such
payment may be made on the next succeeding Business Day and, in the case of any
payment of principal, such extension of time shall in such case be included in
computing interest on such payment.
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3.4 RELIANCE ON NOTICE. Lender shall incur no liability to Borrower for
relying in good faith and in a commercially reasonable manner on any telephonic
or written notice including, without limitation, a Borrowing Request, that
purports to be from Borrower.
3.5 REPAYMENT. All payments of principal, interest, fees and all other
amounts payable under this Agreement and the Note shall be made to Lender at its
Providence, Rhode Island office (or at such other place as Lender may from time
to time in writing specify to Borrower) in lawful money of the United States of
America and in immediately available funds at the place of payment. If any
payment shall fall due on a day which is not a Business Day at the place of
payment, payment shall be made on the next succeeding Business Day at such place
of payment and interest shall be payable for such extended time. Payments shall
be made no later than 2:30 p.m. Providence time at the place of payment on the
due date and any payment received after 2:30 p.m. Providence time shall be
deemed to be paid on the following Business Day.
4. CONDITIONS PRECEDENT TO THE INITIAL AND SUBSEQUENT ADVANCES
Borrower shall satisfy the following conditions prior to the making of the
initial Advance and/or each subsequent Advance by Lender hereunder, as follows:
4.1 INITIAL ADVANCE. All of the representations and warranties of Borrower
set forth in Section 2 hereof shall be true and correct in all material respects
as of the date of the initial Advance; Borrower shall be in full compliance with
the terms and conditions hereof and no Event of Default shall have occurred and
be continuing; and, in addition, Borrower shall have delivered to Lender, all in
form and substance satisfactory to Lender, each of the Security Documents,
together with:
(a) A certificate of the Secretary of Borrower containing copies of
resolutions of the Board of Directors of Borrower authorizing the execution,
delivery and performance of this Agreement, any document or instrument to be
delivered pursuant hereto or in connection herewith and the transactions
contemplated herein and therein, and identifying the officer or officers
authorized to execute this Agreement and such other documents and to make
requests for loans hereunder, which certificate shall be dated and delivered on
the Date of Agreement;
(b) A certificate of reasonably recent date of the Secretary of State of
Delaware , together with certificates of qualification to do business in Rhode
Island and a Certificate of the Secretary of the State of Rhode Island,
certifying that Borrower is in good standing in such jurisdiction;
(c) A certificate of a duly authorized officer of Borrower to the effect
that:
(i) There has been no material adverse change in the condition
(financial or otherwise) operations, assets or liabilities of the Borrowers
since the date of the most recent Financial Statements delivered to Lender;
(ii) There have been no material adverse change in the corporate,
organizational or legal structure of Borrower since the date of the most
recent Financial Statements delivered to Lender;
(iii) Borrower is in compliance in all material respects with all
applicable foreign and U.S. federal, state and local laws and regulations,
including all applicable environmental laws and regulations.
(d) A list of all Equipment to be purchased with the proceeds of the Advance
(or the Equipment already purchased the purchase price of which shall be
refunded to Borrower from the proceeds of the Advance) in form and substance
satisfactory to Lender;
(e) Pro-forma income statements and balance sheets, prepared by the
management of Borrower for the fiscal years 1996-2000 inclusive;
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(f) Insurance certificates or other evidence satisfactory to Lender in its
sole discretion that Borrower has maintained insurance on its assets of such
types and in such amounts as shall be satisfactory to Lender;
(g) A legal opinion of Borrower's counsel in form and substance satisfactory
to Lender; and
(h) Copies of all material collaborative agreements between Borrower and
third parties which collaborative agreements shall be satisfactory to Lender in
its sole discretion.
4.2 SUBSEQUENT ADVANCES
4.2.1 All representations and warranties contained herein or otherwise
made to Lender in connection herewith, shall be true and correct in all
material respects with the same effect as though such representations and
warranties had been made on and as of the date of the Closing Date, except
to the extent such representations and warranties expressly relate to an
earlier date or except as previously disclosed in writing to and accepted by
Lender.
4.2.2 There shall exist (a) no Event of Default and (b) no condition,
event or act which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default.
4.2.3 There shall be delivered to Lender: (a) a certificate dated the
Closing Date signed by an officer of Borrower certifying in such detail as
Lender may request to the fulfillment of conditions specified in SECTION 4.1
(C). SECTION 4.2. 1. and SECTION 4.2-2, which certificate shall be in the
form of the Request for Advance attached hereto and made a part hereof as
EXHIBIT B; (b) a description of the Equipment to be purchased with the
proceeds of the Advance in accordance with Section 3.1.1; (c), such other
UCC-1 Financing Statements as shall be required with respect to the
Equipment and (d) documents and instruments as Lender shall reasonably
request.
5. AFFIRMATIVE AND NEGATIVE COVENANTS
Borrower covenants and agrees that, from the date hereof and until payment
and performance in full of all obligations of Borrower hereunder,, Borrower
shall:
5.1 Do or cause to be done all things necessary to preserve, renew and keep
in full force and effect its corporate existence, rights, licenses, permits and
franchises, and comply, in all material respects, with all laws and regulations
applicable to it; at all times maintain, preserve and protect all franchises and
trade names and preserve all the remainder of its property used or useful in the
conduct of its business and keep the same in good repair, working order and
condition, and from time to time, make, or cause to be made, all needful and
proper repairs, renewals, replacements, betterments and improvements thereto, so
that the business carried on in connection therewith may be properly conducted
in a manner consistent with the ordinary course of business at all times.
5.2 Pay and discharge or cause to be paid and discharged all taxes,
assessments and governmental charges or levies imposed upon it or upon its
respective income and profits or upon, any of its property, real, personal or
mixed, or upon any part thereof, before the same shall become in default, as
well as all lawful claims for labor, materials and supplies or otherwise, which,
if unpaid, might become a lien or charge upon such properties or any part
therefor; provided that Borrower shall not be required to pay and discharge or
cause to be paid and discharged any such tax, assessment, charge, levy or claim
so long as the validity thereof shall be contested in good faith by appropriate
proceedings and it shall have set aside on its books adequate reserves with
respect to any such tax, assessment, charge, levy or claim, so contested, and
provided, further, that payment with respect to any such tax, assessment,
charge, levy or claim shall be made before any of its property shall be seized
and/or sold in satisfaction thereof.
5.3 Give prompt written notice to Lender of any proceedings instituted
against Borrower by or in any federal or state court or before any commission or
other regulatory body, federal, state or local, which, if adversely determined,
would have a materially adverse effect upon its business, operations,
properties, assets, or condition, financial or otherwise.
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5.4 Furnish to Lender:
(a) Within one hundred twenty (1 20) days after the end of each fiscal
year, Financial Statements of Borrower certified by independent public
accountants approved by Lender and showing its financial condition at the
close of such fiscal year, the results of operations during such year
together with a Certificate of Compliance regarding the financial covenants
set forth in Sections 5.8 and 5.9;
(b) Within forty-five (45) days of the close of each of the first three
(3) fiscal quarters of each fiscal year of Borrower, Financial Statements of
the type specified in subsection (a) above, certified by the Chief Financial
Officer of Borrower, together with a Certificate of Compliance regarding the
financial covenants set forth in Sections 5.8 and 5.9;
(c) Within ten (10) days after their filing, any filing made with the
Securities and Exchange Commission including, without limitation, Forms 1OK,
10Q and 8K and any proxy statements.
5.5 Promptly, from time to time, furnish such other information regarding
Borrower's business, properties, assets, liabilities, operations, results of
operations, prospects or condition; financial or otherwise, as Lender may
reasonably request; and promptly advise Lender of any material adverse change in
the Borrower's business, properties, assets, liabilities, operations, results of
operations, prospects or condition, financial or otherwise, and of any condition
or event which constitutes, or with notice or lapse of time or both would
constitute, an Event of Default.
5.6 Permit agents or representatives of Lender at reasonable times, and upon
reasonable notice if no Event of Default shall have occurred and without notice
upon the occurrence and continuance of an Event of Default , to inspect
Borrower's books and records and to make abstracts or reproductions of such
books I and records, the cost of such inspections to be borne by Borrower.
5.7 Execute and deliver to Lender any financing statement, including any
amendment or continuation statement, which Lender deems necessary to be
executed, delivered or filed by Lender in connection with this Agreement or the
Security Documents, and Borrower does hereby (a) make, constitute and appoint
Lender or its agent its true and lawful attorney-in-fact, for, in its name and
on its behalf to execute and deliver for filing any financing statement,
including any amendment or continuation statement, which Lender or its agent
deems necessary to be executed, delivered or filed by Lender in connection with
this Agreement, (b) ratify and confirm all that said attorney-in-fact shall do
or cause to be done by virtue of this paragraph, and (c) agree to take any and
all actions and execute such other instruments as Lender may reasonable require.
5.8 Maintain at all times a ratio of its total liabilities to Tangible Net
Worth not to exceed .5:1, such ratio to be determined in accordance with
generally accepted accounting principles consistently applied.
5.9 Maintain at all times Unrestricted Liquidity in an amount equal to or in
excess of Eleven Million Dollars ($1 1,000,000).
5.10 Maintain Lender as Borrower's principal bank of account.
5.11 Not create, incur or assume any Indebtedness other than (i)
Indebtedness to Lender, (ii) Indebtedness in respect of the acquisition of
property which does not exceed $500,000 in the aggregate, (iii) current
liabilities of the Borrower not incurred through the borrowing of money or the
obtaining of credit except credit on an open account customarily extended, (iv)
Indebtedness in respect of taxes or other governmental charges contested in good
faith and by appropriate proceedings and for which adequate reserves have been
taken; and (v) Indebtedness not included above and listed on SCHEDULE 5.11
hereto;
5.12 Not create or incur any Liens on any property or assets of the Borrower
except (i) Liens securing the Obligations; (ii) Liens securing taxes or other
governmental charges not yet due; (iii) deposits or pledges made in connection
with social security obligations; (iv) Liens of carriers, warehousemen,
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mechanics and materialmen, less than 120 days old as to obligations not yet due;
(v) easements, rights-of-way, zoning restrictions and similar minor Liens which
individually and in the aggregate do not have a materially adverse effect; (vi)
purchase money security interests in or purchase money mortgages on real or
personal property securing purchase money indebtedness permitted by the
preceding Section 5.1 1, covering only the property so acquired; and (vii) other
Liens existing on the date hereof and listed on Exhibit D.
5.13 Not sell, lease, transfer or otherwise dispose of Borrower's
properties, assets, rights, licenses or franchises to any person, or turn over
the management of, or enter a management contract with respect to, such
properties, assets, encumbrances or rights, licenses and franchises other than
in the ordinary course of business.
5.14 Not dissolve, liquidate, consolidate with or merge with or otherwise
acquire all or substantially all of the assets or properties of, any other
person or business, or change the Borrower's corporate name.
5.15 Except for transactions listed on Schedule 5.20, not enter into any
arrangement, directly or indirectly, with any person whereby Borrower shall sell
or transfer any property, real, personal or mixed, used or useful in its
business, whether now owned or hereafter acquired, and thereafter rent or lease
such property.
5.16 Not purchase, invest in or otherwise acquire or hold securities,
including without limitation, capital stock and evidences of indebtedness of, or
make loans or advances to, or enter into any arrangement for the purpose of
providing funds or credit to, any other person, except:
(a) investments made by Borrower pursuant to the Policy;
(b) investments in readily marketable short term direct obligations of
the United State of America or United States federal government agencies or
instrumentalities;
(c) certificates of deposit, time deposits or banker's acceptances
issued by the Lender or any affiliate of the Lender or commercial banks of
recognized standing organized and existing under the laws of the United
States of America and having a commercial paper rating in one of the two
highest categories of Standard & Poor's Corporation or Moody's Investor's
Service Inc.; and
(d) such other investments as the Lender may from time to time approve
in writing.
5.17 Not engage, directly or indirectly, in a business substantially
different from the business now being conducted.
5.18 Maintain casualty insurance coverage on its physical assets and other
insurance against other risks, including public liability and product liability
insurance in such amounts and of such types as may be requested by Lender from
time to time and, in any event, as are ordinarily carried by similar businesses;
and, in the case of all policies insuring the Equipment, all such insurance
policies shall provide that the proceeds thereof shall be payable to Borrower
and Lender, as their respective interests may appear. Borrower has a right of
free choice of agent and insurer through or by which such insurance is to be
placed, subject only to the requirements that the insurer be authorized to do
business in each state where its property and/or assets are located and have a
licensed agent therein and that such insurer's financial condition is reasonably
satisfactory to Lender. All said policies or certificates thereof, including all
endorsements thereof and those required hereunder, shall be deposited with
Lender; and such policies shall contain provisions that no such insurance may be
canceled or decreased without thirty (30) days prior written notice to Lender If
Borrower shall at any time or times hereafter fail to obtain and maintain any of
the policies of insurance required herein, or fail to pay any premium in whole
or in part relating to any such policies, Lender may, but shall not be obligated
to, obtain and/or cause to be maintained insurance coverage with respect to the
Equipment, including, at Lender's option, the coverage provided by all or any of
the policies of Borrower and pay all or any part of the premiums thereunder,
without waiving any Event of Default by Borrower, and any sums so disbursed by
Lender shall be additional Obligations of Borrower
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to Lender, payable on demand. Lender shall have the right to settle and
compromise any and all claims under any of the policies required to be
maintained by Borrower hereunder, to demand, receive and receipt for all monies
payable thereunder, to execute in the name of Borrower or Lender or both any
proof of loss, notice or other instruments in connection with such policies or
any loss thereunder.
5.19 Not permit any pension plan maintained by Borrower or by any member of
a "controlled group" (ERISA 21 0(c)) or "corporation or group of trades or
businesses under common control" (ERISA 21 0(d)) of which Borrower is a member
to: (a) engage in any "prohibited transaction" (ERISA 2003(c)); (b) fail to
report to the Lender a "reportable event" (ERISA 4043) within thirty (30) days
after its occurrence; (c) incur any "accumulated funding deficiency" (ERISA
302); or (d) terminate its existence at any time in a manner which could result
in the imposition of a lien on the property of Borrower; or (e) fail to report
to Borrower any "complete withdrawal" or "partial withdrawal" by Borrower or any
affiliate from a "multi-employer plan" (ERISA 4203, 4205 and 4001 respectively)
(the quoted terms are defined in the respective sections of ERISA cited above).
5.20 Not declare or pay any dividends, or make any distribution of cash or
property, or both, to holders of shares of its capital stock, nor directly or
indirectly redeem, purchase or otherwise acquire for a consideration any shares
of its capital stock, of any class, provided, however, nothing in this Agreement
shall affect Borrower's right to enter into the transactions described on
Schedule 5.20.
5.21 Comply with all applicable laws and regulations, including all
applicable environmental and securities laws, whether now in effect or hereafter
enacted or promulgated by any governmental authority having jurisdiction in the
premises.
5.22 Use any Advance solely for the purchase of Equipment (or to reimburse
Borrower for the purchase price of Equipment a description of which has been
furnished to Lender).
6. EVENTS OF DEFAULT AND ACCELERATION
6.1 The occurrence of any one or more of the following events shall
constitute an Event of Default hereunder:
6.1.1 Default in the payment of any principal, interest or other charges
in respect of any of the Obligations for a period of five (5) days after the
same becomes due and payable;
6.1.2 Default in the observance or performance of any covenant or
agreement of the Borrower herein set forth, or default in the observance or
performance of any covenant or agreement of Borrower set forth in the
Security Documents;
6.1.3 If any representation, warranty, certificate, schedule or other
information made or furnished by Borrower herein or pursuant hereto is or
shall be untrue or misleading in any material respect;
6.1.4 Borrower defaults, receives notice of default or notice of
impending default with respect to any evidence of indebtedness, obligations
or liabilities or other material agreement of Borrower (other than to
Lender), if the effect of such default is to accelerate the maturity of such
indebtedness or to permit the holders thereof (or any portion thereof) to
cause such indebtedness to become due prior to the stated maturity thereof,
or if any indebtedness of Borrower (other than to Lender), is not paid when
due and payable, whether at the due date thereof or a date fixed for
prepayment or otherwise;
6.1.5 The occurrence of any material loss, theft, damage or destruction
of the property of Borrower, or the making of any levy, seizure or
attachment by any third party upon any collateral for the Obligations
hereunder;
6.1.6 Borrower shall (a) apply for, consent to, or suffer the
appointment of a custodian, receiver, trustee or liquidator of it or any of
its property, (b) file or suffer the filing of any voluntary or
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involuntary petition under any chapter of the Bankruptcy Code by or against
the Borrower, or (c) apply for or permit the appointment of a receiver,
trustee or custodian of any of the property or business of the Borrower, or
(d) become insolvent or suffer the entry of an order for relief under Title
1 1 of the United States Code, or (e) make an admission of its inability to
pay its debts as they become due, and which, in the case of any involuntary
proceeding under (a), (b), (c) or (d), is not dismissed or discharged within
thirty (30) days of its commencement;
6.1.7 An order, judgment or decree shall be entered, without the
application, approval or consent of Borrower by any court of competent
jurisdiction, approving a petition seeking reorganization of Borrower or
appointing a custodian, receiver, trustee or liquidator of Borrower or of
all or a substantial part of the assets of Borrower;
6.1.8 Borrower discontinues or suspends or threatens to discontinue or
suspend the operation of Borrowers business or a substantial part thereof
(as presently conducted) for any reasons; or
6.1.9 The occurrence of any event of default or default under any
Security Document or any other agreement by and between Borrower and Bank.
6.2 If any Event of Default shall occur, then or at any time thereafter,
while such Event of Default shall continue, Lender may terminate this Agreement
and declare all Obligations to be due and payable, without notice, protest,
presentment or demand, all of which are hereby expressly waived by Borrower.
7. MISCELLANEOUS
7.1 Lender shall have, in addition to any other rights and remedies
contained in this Agreement and the Security Documents, and any other
agreements, guarantees, notes, instruments and documents heretofore, now or at
any time or times hereafter executed by Borrower and delivered to Lender, all of
the rights and remedies of a secured party under the Uniform Commercial Code in
force in the State of Rhode Island, all of which rights and remedies shall be
cumulative, and none exclusive, to the extent permitted by law.
7.2 No failure to exercise and no delay in exercising on the part of Lender,
any right, power, privilege or remedy under this Agreement, shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. Every maker, endorser and
guarantor of this Agreement waives presentment, demand, notice and protest and
all defenses based on the giving of time and other indulgence, substitution,
exchange, or release of collateral or release of any person primarily or
secondarily liable thereunder.
7.3 Whether or not the financial accommodations provided for by this
Agreement are made, Borrower agrees to pay, or reimburse Lender, for actual and
reasonable out-of-pocket expenses, including counsel fees, reasonably incurred
by Lender in connection with the development, preparation, execution,
administration, collection or enforcement of or the preservation of any rights
under this Agreement. This Section shall survive the payment of any amounts due
in respect of the Revolving Note, this Agreement and the termination of this
Agreement. Notwithstanding the generality of the foregoing, Borrower will
defend, indemnify and hold harmless Lender, its employees, agents, officers and
directors, from and against any and all reasonable claims, demands, penalties,
causes of action, fines, liabilities, settlements, damages, penalties, costs or
expenses of whatever kind or nature known or unknown, foreseen or unforeseen,
contingent or otherwise arising out of any breach by Borrower of any of the
provisions of this Agreement.
7.4 This Agreement shall be binding upon and inure to the benefit of
Borrower and Lender and their respective successors and assigns, except that
Borrower may not transfer or assign any of its rights hereunder without the
prior written consent of Lender. Lender may transfer or assign all or part of
its rights under this Agreement and sell participating interests therein at any
time and from time to time. All
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references to Lender herein or in any instrument delivered to Lender in
connection herewith or therewith, shall be deemed to apply to any holder for the
time being of the Revolving Note.
7.5 This Agreement and the rights and obligations of the parties hereunder
shall be governed by, and construed and interpreted in accordance with the laws
of the State of Rhode Island. The article and section headings used herein are
solely for reference and shall not be used in the interpretation or the
construction hereof.
7.6 No modification or waiver of any provision of the Revolving Note or of
this Agreement and no consent by Lender to any departure therefrom by Borrower
shall be effective unless such modification or waiver shall be in writing and
signed by a duly authorized officer of Lender, and the same shall then be
effective only for the period and on the conditions and for the specific
instances and purposes specified in such writing. No notice to or demand on
Borrower in any case shall entitle Borrower to any other or further notice or
demand in similar or other circumstances.
7.7 BORROWER HEREBY EXPRESSLY WAIVES TRIAL BY JURY IN CONNECTION WITH ANY
SUIT OR ACTION ARISING OUT OF OR CONCERNING ITS OBLIGATIONS IN CONNECTION WITH
THIS AGREEMENT, THE NOTE OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO
THIS AGREEMENT.
7.8 Borrower hereby grants to Lender a continuing lien for all Obligations
upon any and all monies, securities and other property of Borrower and the
proceeds thereof, now or hereafter held or received by or in transit to, Lender
from or for Borrower, whether for safekeeping, custody, pledge, transmission,
collection or otherwise, and also upon any and all deposits (general or special)
and credits of Borrower with, and any and all claims of Borrower against,
Lender, at any time existing. Upon the occurrence and continuance of any Event
of Default, Lender is hereby authorized at any time and from time to time,
without notice to Borrower, to set off, appropriate and apply any or all items
hereinabove referred to against all Obligations.
7.9 Borrower hereby submits to the jurisdiction of the courts of the State
of Rhode Island and the United States District Court for the District of Rhode
Island, as well as to the jurisdiction of all courts from which an appeal may be
taken from the aforesaid courts for the purpose of any such suit, action or
other proceeding arising out of the breach by Borrower of any of its obligations
under and with respect to this Agreement, the Revolving Note or any instrument
delivered pursuant to this Agreement and expressly waives any and all objections
it may have as to venue in any of such courts and agrees that service of process
may be made on Borrower by mailing a copy of the summons to Borrower's Address.
7.10 All covenants, agreements, representations and warranties made in this
Agreement and in any certificates or schedules delivered pursuant hereto shall
survive the making by Lender of the financial accommodations hereunder and shall
continue in full force and effect until the Obligations are paid in full.
7.11 This Agreement may be executed by the parties hereto individually or in
any combination, in one or more counterparts, each of which shall be an original
and all of which shall together constitute one and the same Agreement.
7.12 If any provision of this Agreement shall be held to be invalid, illegal
or unenforceable, the validity of all other terms hereof shall in no way be
affected thereby.
7.13 All demands, notices and other communications hereunder shall be in
writing, except as otherwise provided in this Agreement, and shall be sent to
the other party by registered or certified mail, return receipt requested, by
overnight delivery service, by telegraph, telecopier or facsimile, or by hand
delivery, addressed:
(a) If to Borrower, to it at:
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CytoTherapeutics, Inc.
Two Richmond Square
Providence, Rhode Island 02906
Attn: Daniel E. Geffken
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
Attn: Geoffrey B. Davis, Esq.
and
(b) If to Lender, to it at:
Fleet National Bank
111 Westminster Street
Providence, Rhode Island 02903
Attn: Virginia C. Roberts, Senior Vice President
with a copy to:
Adler Pollock & Sheehan Incorporated
2300 Hospital Trust Tower
Providence, Rhode Island 02903-2443
Attn: Sarah T. Dowling, Attorney
The address of any party for such demands, notices and other communications
may be changed by giving notice in writing at any time to the other party
hereto. Any demand, notice or other communication shall be deemed to have been
given: (a) if sent by registered or certified mail, three (3) Business Days
following deposit in the United States mail; (b) if sent by overnight delivery
service, one (1) Business Day following delivery to the overnight delivery
service; (c) if sent by telegraph, telecopier or facsimile, when receipt of such
transmission is acknowledged; or (d) if sent by hand delivery, upon actual
delivery.
IN WITNESS WHEREOF, the parties have executed this Loan Agreement the day
and year first above written.
<TABLE>
<S> <C> <C>
WITNESS: CytoTherapeutics, Inc.
By: /s/ DANIEL E. GEFFKEN
-----------------------------------------
Daniel E. Geffken
VICE PRESIDENT/CHIEF FINANCIAL OFFICER
WITNESS:
Fleet National Bank
By: /s/ VIRGINIA C. ROBERTS
-----------------------------------------
Virginia C. Roberts
SENIOR VICE PRESIDENT
</TABLE>
13
<PAGE>
EXHIBIT A
NOTE
$2,000,000 May 15, 1996
FOR VALUE RECEIVED, the undersigned CytoTherapeutics, Inc. a Delaware
corporation ("Borrower"), unconditionally promises to pay to Fleet National
Bank, a national banking association ("Lender"), or order, at its offices at 1 1
1 Westminster Street, Providence, Rhode Island, or at such other place as may be
designated in writing by the holder hereof, in lawful money of the United
States, the principal sum of Two Million Dollars ($2,000,000), or such lesser
sum as may be outstanding pursuant to the terms hereof and pursuant to that
certain Loan Agreement of even date herewith by and between Borrower and the
Lender (hereinafter referred to as the "Loan Agreement"), together with interest
in arrears from the date hereof on the unpaid principal balances hereunder at
the rate of interest equal to (a) the rate of interest designated by Lender from
time to time as being its prime rate of interest plus one half (1/2%) percent
per annum ("Floating Rate") or (b) the Fixed Rate of Interest elected by
Borrower and offered by Lender in accordance with the terms and provisions set
forth on Exhibit A annexed hereto and made a part hereof.
As used herein,-the Prime Rate shall mean the rate of interest designated by
Fleet National Bank, a national banking association, from time to time as being
its prime rate of interest.
Interest shall be paid monthly commencing June 1, 996 and continuing on the
same day of each successive month thereafter.
The outstanding principal balance hereunder on May , 1997 shall be
paid in twelve (12) equal, consecutive quarterly installments of principal
together with interest thereon commencing August 1, 1997 and continuing on the
same day of each November, February, May and August thereafter with a final
payment of the entire balance then remaining due under this Note on May 1, 2000.
Each change in the Floating Rate resulting from a change in the Prime Rate shall
become effective as of the opening of business on the day on which such change
in such Prime Rate occurs. Interest shall be calculated in arrears on the basis
of a three hundred and sixty (360) day year but shall accrue and be payable on
the actual number of days elapsed.
In the event any payment hereunder is not paid in full when due, Obligors
(as hereinafter defined) shall pay to Lender, to the extent permitted by law, a
processing fee on such unpaid amount equal to five percent (5%) of such late
payment.
All payments made in connection with this Note shall be applied first to
interest then accrued and unpaid and the balance only to principal in inverse
order of maturity.
Notwithstanding anything herein to the contrary, in no event shall the
interest charged, reserved and/ or taken on the loan evidenced hereby exceed the
maximum allowed by and determined in accordance with applicable law.
Borrower, any indorser hereof, any other party hereto and any guarantor
hereof (collectively "Obligors") and each of them: (i) waive presentment,
demand, notice of demand, protest, notice of protest and notice of nonpayment
and any other notice required to be given under the law to any of Obligors, in
connection with the delivery, acceptance, performance, default or enforcement of
this Note, any endorsement or guaranty of this Note or any document or
instrument evidencing any security for payment of this Note; (ii) consent to any
and all delays, extensions, renewals or other modifications of this Note or
waivers of any term hereof or release or discharge by Lender of any of Obligors
or release, substitution or exchange of any security for the payment hereof or
the failure to act on the part of Lender or any other indulgence shown by
Lender, from time to time and in one or more instances (without notice to or
further assent from any of Obligors) and agree that no such action, failure to
act or failure to exercise any right or
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remedy on the part of Lender shall in any way affect or impair the obligations
of any Obligor or be construed as a waiver by Lender of, or otherwise affect,
any of Lender's rights under this Note, under any endorsement or guaranty of
this Note or under any document or instrument evidencing any security for
payment of this Note; and (iii) jointly and severally agree to pay, on demand,
all costs and expenses of collection of this Note or of any endorsement or any
guaranty hereof and/or the enforcement of Lender's rights with respect to, or
the administration, supervision, preservation, protection of, or realization
upon, any property securing payment hereof, including reasonable attorneys'
fees, and agree that Lender has a lien on, a continuing security interest in,
and a right to set off at any time, without notice, with respect to all of the
respective properties and deposit account of any of Obligors at, or under the
control of, Lender, or any of its affiliates.
Whenever there is an Event of Default under the Loan Agreement, Lender shall
have all the rights and remedies set forth therein and, in addition, the rate of
interest due and payable hereunder shall, from and after such Event of Default,
be equal to the then applicable interest rate plus three percent (3%) per annum
(the "Default Rate").
This Note shall be governed by and construed in accordance with the laws of
the State of Rhode Island, without reference to its conflict of laws principles.
The term "Lender" shall include Lender's successors, indorsees and assigns.
This Note is the Note referred to in, and is entitled to the benefits of,
the Loan Agreement. This Note is secured, inter alia, by the Security Agreement
(as defined in the Loan Agreement) and is entitled to the benefits thereof.
<TABLE>
<S> <C>
IN THE PRESENCE OF: CytoTherapeutics, Inc.
By:
Name:
Title:
</TABLE>
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<PAGE>
EXHIBIT A
To Note
Dated May 15, 1996 of CytoTherapeutics ("Borrower")
in favor of Fleet National Bank, a national
banking association (together with any other
holder of the Note, the "Lender")
1. DEFINITIONS OF CERTAIN TERMS
As used in this Exhibit A to Note, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"Business Day" means any day which is not Saturday or Sunday and on which
banks in the State of Rhode Island are not authorized or required to close.
"Cost of Funds Rate" means the rate of interest which the Lender is required
to pay (or offering to pay) on the date in question for such borrowing and
obligations (such as $100,000 certificates of deposit) having a term equal to
the applicable Fixed Rate Term, as the Lender, in its sole discretion, may deem
appropriate, but adjusted for reserve requirements and such other requirements
as may be imposed by federal, state and/or local government and regulatory
agencies and for fees assessed by the Lender's Money Management Department.
"Dollars" and the sign I" mean lawful money of the United States of America.
"Fixed Rate" means with respect to any portion of the Loan constituting a
Fixed Rate Loan, the Cost of Funds Rate plus three (3%) percent per annum.
"Fixed Rate Loan" means a Loan bearing interest at the Fixed Rate.
"Fixed Rate Term" has the meaning assigned thereto in paragraph 4(A), below.
"Floating Rate" shall have the meaning set forth in the Note.
"Interest Adjustment Date" means (i) as to any Prime Rate Loan, the Business
Day elected by the Borrower in its applicable Interest Rate Election, but being
no earlier than the Business Day of receipt by the Lender before 1:00 P.M. on a
Business Day of an Interest Rate Election changing the interest rate on such
Loan to the Fixed Rate; and (ii) as to any Fixed Rate Loan, the last Business
Day of the Fixed Rate Term pertaining to such Fixed Rate Loan.
"Interest Rate Election" means Borrower's irrevocable telecopied or
telephonic notice which in the case of telephonic notice shall be promptly
confirmed by a written notice of election that the Floating Rate or the Fixed
Rate shall apply to all or any portion of the Loans, which subject to this Note
and the Loan Agreement, shall be effective on the next Interest Adjustment Date,
such telecopied, telephonic or written notice and written confirmation thereof
to be in the form of SCHEDULE 1,attached hereto and by this reference fully
incorporated herein and to be received by the Lender prior to 1:00 P.M. on the
Business Day on which such Interest Rate Election is to take effect, each such
Interest Rate Election, subject to the terms of the Loan Agreement to effect a
change in the interest rate on the applicable portion of the Loan then
outstanding, with respect to which such Interest Rate Election was made, such
change to occur on the Interest Adjustment Date next succeeding receipt of such
telecopied or telephonic Interest Rate Election by the Lender. Any telecopied or
telephonic Interest Rate Election received by the Lender after 1:00 P.M. on a
Business Day shall be deemed, for all purposes of this Note to have been
received prior to 1:00 P.M. on the next succeeding Business Day.
"Loan" or "Loans" means the indebtedness outstanding under this Note, and
where the context so requires, as in the definition of Prime Rate Loan, all or a
portion of such indebtedness.
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"Loan Agreement" means the Loan Agreement between Borrower and Lender of
even date.
"Prime Rate Loan" means a Loan bearing interest at the Floating Rate (as
defined in the Note).
2. VOLUNTARY AND MANDATORY PREPAYMENTS AND PAYMENTS.
(A) VOLUNTARY PREPAYMENTS AND PAYMENTS. All or any portion of the unpaid
principal balance of any Prime Rate Loan may be prepaid at any time by a payment
to the Lender of immediately available Dollars by the Borrower and all or any
portion of the unpaid principal balance of any Fixed Rate Loan may be prepaid or
paid to the Lender by a payment of immediately available Dollars on the Interest
Adjustment Date for such Loan, upon concurrent telephonic or telecopied notice
promptly confirmed in writing, without premium or penalty, except as provided in
paragraph 4 hereof; provided that all such payments and prepayments of Fixed
Rate Loans shall be accompanied by the interest accrued on the principal amount
being paid or prepaid through the date of payment or prepayment and provided
further that each such partial payment or prepayment of principal of a Fixed
Rate Loan shall be in such amount so that each outstanding Fixed Rate Loan
remains in a principal amount of at least One Hundred Thousand Dollars
($100,000) and, to the extent in excess thereof, in the amount of Fifty Thousand
Dollars ($50,000) or an integral multiple thereof, and provided further that
each such partial payment or prepayment of principal of a Prime Rate Loan shall
be in the amount of at least One Hundred Thousand Dollars ($100,000) and, to the
extent in excess thereof, in the amount of Fifty Thousand Dollars ($50,000) or
an integral multiple thereof. The Borrower's notice of payment or prepayment to
the Lender shall designate whether such payment or prepayment is a payment or
prepayment of one or more Prime Rate Loans or Fixed Rate Loans.
(B) MANDATORY PAYMENTS. If at any time the aggregate principal amount of
the Loans shall exceed the maximum stated amount of this Note, the Borrower
shall immediately pay to the Lender in immediately available Dollars the amount
of such excess, such payment to be accompanied by Borrower's written notice
designating whether such payment is a payment of one or more Prime Rate Loans or
Fixed Rate Loans.
(C) ALLOCATION OF PAYMENT AND PREPAVMENTS. In the event that or to the
extent that at the time of any payment or prepayment of all or any portion of
the Loans, the Borrower fails to provide the Lender with telephonic or
telecopied notice, the former confirmed in writing and/or written notice
designating whether such payment or prepayment is a payment or prepayment of
Prime Rate Loans or Fixed Rate Loans, the Lender shall allocate any such payment
or prepayment to outstanding Prime Rate Loans, if any, until paid or prepaid in
full and thereafter to outstanding Fixed Rate Loans. In the event that any
mandatory payment is required under subparagraph 2(B) or upon acceleration or
for any other reason, and on the date any such payment is due, the amount of
Prime Rate Loans, if any, plus the amount of Fixed Rate Loans as to which such
date is an Interest Adjustment Date for such Fixed Rate Loans is less than the
amount of such required payment or prepayment, such payment or prepayment shall
nevertheless be paid in full by the Borrower when due and the proceeds thereof
will, to the extent not directed to be applied to specific Loans by Borrower's
above-referenced designation, be applied first to outstanding Prime Rate Loans
until paid in full and thereafter to the Fixed Rate Loans.
3. INTEREST IN ABSENCE OF INTEREST RATE ELECTION.
If at any time all or any portion of the outstanding principal balance of
the Loans is not subject to an Interest Rate Election because an Interest
Adjustment Date occurs and the Lender has not received a timely Interest Rate
Election from the Borrower which is effective in accordance with the terms and
conditions of this Revolving Note on such Interest Adjustment Date, the interest
rate on all or said portion of said outstanding principal balance shall
thereupon be and remain the Prime Rate until occurrence of an Interest
Adjustment Date applicable to said principal balance of the Loans for which the
Lender shall have received a timely Interest Rate Election effective in
accordance with the terms and conditions of this
17
<PAGE>
Revolving Note on such Interest Adjustment Date and which elects another
available interest rate on all or said portion of said outstanding principal
balance of the Loans.
4. SPECIAL COST OF FUNDS PROVISION.
The Fixed Rate Loans shall be subject to and governed by the following terms
and conditions:
(A) INTEREST RATE ELECTIONS. The Borrower shall have the right, by
submission of an Interest Rate Election to the Lender, to elect that the
interest rate payable on all or any portion of the Prime Rate Loans, or on all
or any portion of the Fixed Rate Loans on an Interest Adjustment Date applicable
thereto, shall be the Fixed Rate, as the same shall exist on the date in
question, for such term (the "Fixed Rate Term") of not less than thirty (30)
days and not more than four (4) years as the Lender shall offer to the Borrower
and the Borrower shall select. The Borrower shall have the right to make up to
three (3) such elections at any one time provided that each election is with
respect to at least One Hundred Thousand Dollars ($100,000) of principal and, to
the extent in excess thereof, in the amount of Fifty Thousand Dollars ($50,000)
or an integral multiple thereof. Once a Fixed Rate becomes applicable, such
Fixed Rate must remain in effect for the applicable Fixed Rate Term. An Interest
Rate Election electing the Fixed Rate shall only apply to that portion of the
Loans outstanding at the time of election and specified in such Interest Rate
Election. Once a Fixed Rate becomes applicable pursuant to the third (3rd)
Interest Rate Election, unless the Lender shall otherwise agree in writing, the
applicable Interest Rate payable under the Loans on all subsequent Advances of
the Loans shall be at the Prime Rate until the expiration of one of the then
applicable Fixed Rate Terms, at which time the Borrower may again elect a Fixed
Rate in accordance with the terms of this paragraph 4, it being understood that
at no time shall the Lender be under any obligation to permit the Borrower to
have more than three (3) Interest Rate Elections electing the Fixed Rate
outstanding as to any portions of the Loan. On the last Business Day of any
agreed upon Fixed Rate Term then in effect, the Borrower may submit to the
Lender a new Interest Rate Election electing the Fixed Rate, at which time the
Lender shall inform the Borrower of the Fixed Rate and the Fixed Rate Term which
the Lender is then prepared to offer the Borrower, and the Borrower shall
immediately elect whether or not to accept same. Upon the Borrower's making any
telephonic election of a Fixed Rate, the Borrower shall contemporaneously submit
to the Lender a written Interest Rate Election specifying that commencing with
the date in question, the applicable interest rate for a specified portion of
the Loans shall be specified Fixed Rate which shall remain in effect for a
specified Fixed Rate Term.
(B) VOLUNTARY PREPAYMENT. The Borrower shall be permitted to voluntarily
prepay, in whole or in part, any Fixed Rate Loan at any time, subject to the
Borrower giving the Lender not less than five (5) Business Days prior written
notice thereof, subject to current market conditions, as determined by the
Lender, and, subject to the Borrower's payment to the Lender of a prepayment
premium in an amount computed pursuant subparagraph 4(D) below. In the event of
any such voluntary prepayment the date upon which such computation of such
prepayment premium shall be based (the "Determination Date") shall be the date
upon which such prepayment is made.
(C) INVOLUNTARY PREPAYMENT. If the obligations of the Borrower to the
Lender evidenced by this Note shall be accelerated, then upon the Lender's
demand made at any time thereafter the Borrower shall pay to the Lender a
prepayment premium in an amount computed pursuant to subparagraph (D) below. In
such event the Determination Date upon which the computation of such prepayment
premium shall be based shall be such date as may be selected by the Lender, in
its sole discretion, within the period commencing with the date of such
acceleration and ending on the last day of any applicable Fixed Rate Term. In
the event of such acceleration, an involuntary prepayment of all Fixed Rate
Loans shall be deemed to have occurred upon the Determination Date selected by
the Lender regardless of whether funds are actually received by the Lender.
18
<PAGE>
(D) PREPAYMENT PREMIUM. The prepayment premium to be paid by the Borrower
shall be computed as follows: the latest published rate preceding the
Determination Date for United States Treasury Notes or Bills (Bills on a
discounted basis shall be converted to a bond equivalent) as published weekly in
the Federal Reserve Statistical Release with a maturity date closest to the
expiration date of the applicable Fixed Rate Term shall be subtracted from the
applicable Fixed Rate. If the result is zero or a negative number, there shall
be no prepayment premium. If the result is a positive number, then the resulting
percentage shall be multiplied by the amount of the principal balance being
prepaid. The resulting amount will be divided by three hundred sixty (360) and
multiplied by the number of days remaining between the Determination Date and
the expiration date of the applicable Fixed Rate Term (the "Unexpired Term").
Said amount shall be reduced to present value calculated by using the above
referenced United States Treasury Note or Bill rate and assuming that said
amount will be paid in equal monthly installments over the Unexpired Term and
assuming further that the first such monthly installment will be paid thirty
(30) days after the Determination Date. The resulting amount shall be the
prepayment premium due to the Lender upon notice by the Lender to the Borrower
of the amount thereof and shall thereupon be paid by the Borrower to the Lender
in immediately available Dollars.
(E) MULTIPLE FIX RATE TERMS. In the event that more than one Fixed Rate
and/or Fixed Rate Term in applicable to the Loans, then separate computations
shall be made of the prepayment premium applicable to each Fixed Rate and fixed
Rate Term and the prepayment premium payable by the Borrower to the Lender shall
be the sum of the amounts so determined. A certificate of an authorized officer
of the Lender as to the amount of such costs shall be conclusive and binding on
the Borrower and the Lender, absent manifest error.
19
<PAGE>
AMENDMENT TO LOAN AGREEMENT AND PROMISSORY NOTE
This Amendment to Loan Agreement and Promissory Note dated as of May 15,
1997 is entered into by and between CytoTherapeutics, Inc., a Delaware
corporation ("Borrower") and Fleet National Bank, a national banking association
organized and existing under the laws of the United States of America
("Lender").
WHEREAS, Borrower and Lender entered into a Loan Agreement as of May 15,
1996 (the "Loan Agreement"); and
WHEREAS, the obligations of Borrower to Lender in connection with the Loan
Agreement are evidenced by a Promissory Note of Borrower in favor of Lender in
the maximum principal amount of Two Million ($2,000,000) Dollars (the "Note");
and
WHEREAS, Borrower and Lender desire to amend certain terms of the Loan
Agreement and the Note.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and for the other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Paragraph 1.10 of the Loan Agreement is amended in its entirety to
read as follows: "1.10 Conversion Date means May 17, 1998."
2. The first sentence of the fourth paragraph of the Note is hereby
amended in its entirety to read as follows:
20
<PAGE>
"The outstanding principal balance hereunder on May 17, 1998 shall be paid
in eight (8) equal consecutive quarterly installments of principal together with
interest thereon commencing August 1, 1998 and continuing on the same day of
each November, February, May and August thereafter with a final payment of the
entire balance then remaining due under this Note on May 1, 2000."
3. Borrower represents and warrants to Lender that there exists no Event
of Default as defined in the Loan Agreement and that all representations and
warranties of Borrower set forth therein remain true, complete and correct as
of the date hereof.
4. Except as specifically amended hereby, all terms and provisions of
the Loan Agreement, the Note and the Security Documents (as defined in the
Loan Agreement) remain in full force and effect.
Dated and effective as of the 15th day of May, 1997.
WITNESS: CytoTherapeutics, Inc.
By:
- ---------------------------------- ------------------------------------
Title:
---------------------------------
WITNESS: Fleet National Bank
By:
- ---------------------------------- ------------------------------------
Title:
---------------------------------
21
<PAGE>
SUBSIDIARIES OF CYTOTHERAPEUTICS, INC.
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
StemCells, Inc. California
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-49524 and 333-29335) pertaining to the 1988 Incentive Stock
Plan, 1992 Equity Incentive Plan, 1992 Employee Stock Purchase Plan and 1992
Stock Option Plan for Non-Employee Directors, in the Registration Statement
(Form S-8 No. 333-10773) pertaining to the 1992 Equity Incentive Plan, in the
Registration Statement (Form S-8 No. 333-37313) pertaining to the 1996
StemCells, Inc. Stock Option Plan and the 1997 CytoTherapeutics, Inc.
StemCells Research Stock Option Plan and in the Registration Statements
(Form S-3 No. 33-68900 and No. 333-91228) of CytoTherapeutics, Inc. and in
the related Prospectuses of our report dated February 6, 1998, with respect
to the consolidated financial statements and schedule included in the Annual
Report (Form 10-K) of CytoTherapeutics, Inc. for the year ended December 31,
1997.
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,941,701
<SECURITIES> 13,108,497
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,179,392
<PP&E> 14,268,635
<DEPRECIATION> 6,345,884
<TOTAL-ASSETS> 44,301,466
<CURRENT-LIABILITIES> 5,203,576
<BONDS> 5,186,106
0
0
<COMMON> 175,262
<OTHER-SE> 28,900,155
<TOTAL-LIABILITY-AND-EQUITY> 44,301,466
<SALES> 0
<TOTAL-REVENUES> 10,617,443
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,105,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 437,991
<INCOME-PRETAX> (18,113,580)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,113,580)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,113,580)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
CYTOTHERAPEUTICS, INC. (THE "COMPANY") WISHES TO CAUTION READERS THAT THE
FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, IN SOME CASES HAVE AFFECTED AND IN
THE FUTURE COULD AFFECT THE COMPANY'S RESULTS AND COULD CAUSE ACTUAL RESULTS AND
NEEDS OF THE COMPANY TO VARY MATERIALLY FROM FORWARD-LOOKING STATEMENTS MADE IN
THIS ANNUAL REPORT BY THE COMPANY ON THE BASIS OF MANAGEMENT'S CURRENT
EXPECTATIONS. THE BUSINESS IN WHICH THE COMPANY IS ENGAGED IS RAPIDLY CHANGING,
EXTREMELY COMPETITIVE AND INVOLVES A HIGH DEGREE OF RISK, AND ACCURACY WITH
RESPECT TO FORWARD-LOOKING PROJECTIONS IS DIFFICULT.
EARLY STAGE DEVELOPMENT; HISTORY OF OPERATING LOSSES -- Substantially all of
the Company's revenues to date have been derived, and for the foreseeable future
substantially all of the Company's revenues will be derived, from collaborative
agreements, research grants and income earned on invested funds. The Company
will incur substantial operating losses in the future as the Company conducts
its research, development, clinical trial and manufacturing activities. There
can be no assurance that the Company will achieve revenues from product sales or
become profitable.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING -- The development
of the Company's products will require the commitment of substantial resources
to conduct the time-consuming research, preclinical development and clinical
trials that are necessary for regulatory approvals and to establish production
and marketing capabilities, if such approvals are obtained. The Company will
need to raise substantial additional funds to continue its product development
efforts and intends to seek such additional funds through partnership,
collaborative or other arrangements with corporate sponsors, public or private
equity or debt financings, or from other sources. Future cash requirements may
vary from projections based on changes in the Company's research and development
programs, progress in preclinical and clinical testing, the Company's ability to
enter into, and perform successfully under, collaborative agreements,
competitive and technological advances, the need to obtain proprietary rights
owned by third parties, facilities requirements, changes in regulations and
other factors. Lack of necessary funds may require the Company to delay, reduce
or eliminate some or all of its research and product development programs or to
license its potential products or technologies to third parties. No assurance
can be given that funding will be available when needed, if at all, or on terms
acceptable to the Company.
UNCERTAINTIES OF CLINICAL DEVELOPMENT AND NEW MODE OF THERAPY -- None of the
Company's proposed products has been approved for commercial sale or entered
Phase III clinical trials. Even if the Company's proposed products appear to be
promising at an early stage of research or development such products may later
prove to be ineffective, have adverse side effects, fail to receive necessary
regulatory approvals, be difficult or uneconomical to manufacture or market on a
commercial scale, be adversely affected by government price controls or
limitations on reimbursement, be precluded from commercialization by proprietary
rights of third parties, by regulatory restrictions, or be subject to
significant competition from other products. There can be no assurance that the
Company will be able to demonstrate, as required, that its implants, on a
consistent basis and on a commercial scale, among other things: (i) successfully
isolate transplanted cells from the recipient's immune system; (ii) remain
biocompatible with the tissue into which they are implanted, including, for
certain implants, brain tissue; (iii) adequately maintain the viability of cells
contained within the membrane for a sufficiently long time to be efficacious and
commercially viable; (iv) safely permit the therapeutic substances produced by
the cells within the membrane to pass through the membrane unto the patient in
controlled doses for extended periods; and (v) are sufficiently durable for the
intended indication. While clinicians have generally had little difficulty in
retrieving the Company's implants, there have been cases where the implant broke
on attempted explant. The Company has changed its implantation procedure and its
implants and is continuing a program of developing stronger implants. In
addition, the viability of implanted encapsulated cells varies depending of the
cell type, the implantation location and other factors. Lack of viability could
restrict certain of the Company's programs to indications
63
<PAGE>
where long-term delivery of the therapeutics substances is not required. There
can also be no assurance that the products that may be generated in the
Company's stem cell programs will: (i) survive and persist in the desired
locations, (ii) provide the therapeutic benefits intended, (iii) properly
differentiate and integrate into existing tissue in the desired manner, or (iv)
not cause tumors or other side effects.
There has been increasing regulatory concern about the risks of cell
transplantation. Concern has focused on the use of cells derived from cows (such
as are used in the Company's pain program) and cells from primates and pigs. The
United Kingdom has adopted a moratorium on xenotransplantation pending further
research and discussion; the EC Commission has introduced a ban on the use of
"high-risk material" from cattle and sheep in the Member States of the European
Union in the manufacture of pharmaceuticals (this ban would apparently not
include the type of cells used in the Company's pain program). In addition, the
FDA has proposed guidelines which impose significant constraints on the conduct
of clinical trials utilizing xenotransplantion and are likely to significantly
affect the cost of producing the Company's products using nonhuman cells; such
costs could make the Company's products cost more to produce than the Company
receives for their production. Furthermore, the FDA has published a "Proposed
Approach to Regulation of Cellular and Tissue-Based Products" which relates to
the use of human cells. The Company cannot presently determine the effects of
such actions nor what other actions might be taken. Restrictions on the testing
or use of cells, whether human or nonhuman, as human therapeutics, could
adversely affect the Company's product development programs and the Company
itself. See "Government Regulation."
DEPENDENCE ON OUTSIDE PARTIES -- The Company's strategy for the research,
development, commercialization and marketing of its products contemplates that
the Company will enter into various arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that the Company will be able to enter into any additional
arrangements on terms acceptable to the Company, or successfully perform its
obligations under its existing or any additional arrangements. If any of the
Company's collaborators fails to perform its obligations in a timely manner or
terminate their agreement with the Company, the development or commercialization
of the Company's product candidate or research program under such collaborative
agreement may be adversely affected. Moreover, the Company is particularly
dependent on its pain program partner, Astra AB, because changes in the
development of this particular program may significantly affect the Company's
stock price. In addition, because of the Company's obligation to repurchase
certain of the stock it sold to Genentech in connection with certain
terminations of the Parkinson's Agreement, any such termination could have an
adverse effect on the Company's liquidity.
NEED FOR AND UNCERTAINTY OF OBTAINING PATENT PROTECTION -- Patent protection
for products such as those the Company proposes to develop is highly uncertain
and involves complex factual and evolving legal questions. No assurance can be
given that any patents issued or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted under such patents will
provide competitive advantages to the Company.
EXISTENCE OF THIRD PARTY PATENTS AND PROPRIETARY RIGHTS; NEED TO OBTAIN
LICENSE -- A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent applications or have
been issued patents relating to cell therapy and encapsulation and other
technologies potentially relevant to or required by the Company's expected
products. The Company cannot predict which, if any, of such applications will
issue as patents or the claims which might be allowed. The Company is aware that
a number of entities have filed applications relating to stem and/or progenitor
cells. The Company is also aware of a number of third-party patent applications
and patents relating to cell encapsulation or claiming use of genetically
modified cells to treat disease, disorder or injury. In particular, the Company
is aware of a third-party U.S. patent which relates the use of cells for
alleviating chronic pain in humans and of two issued U. S. patents claiming
certain methods for treating defective, diseased or damaged cells in the
mammalian CNS by grafting genetically modified cells. The Company cannot predict
64
<PAGE>
the effect of existing patent applications and patents on future unencapsulated
products. In addition, the Company is aware of third-party patents and patent
applications claiming rights to the neurotrophic factors (such as CNTF, NT 4/5,
Neurturin, and CT-1) which the Company hopes to deliver with its technology, and
to the production of these factors through the use of genetically modified
cells. The Company expects to use genetically modified cells to produce these
factors for use in its encapsulated products and expects that it may wish to
genetically modify its stem/progenitor cells. The Company may also be required
to seek licenses in regard to other cell lines, the techniques used in creating,
obtaining or maintaining such cell lines, the materials used in the manufacture
of its implants or otherwise. There can be no assurance that the Company will be
able to establish collaborative arrangements or obtain licenses to the foregoing
technology or to other necessary or desirable technology on acceptable terms, if
at all, or that the patents underlying any such licenses will be valid and
enforceable. See "Patents, Proprietary Rights and Licenses" in the Company's
Annual Report on Form 10-K.
GOVERNMENT REGULATION -- The Company's research, preclinical development and
clinical trials, as well as the manufacturing and marketing of its potential
products, are subject to extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain. There can be
no assurance that the Company or its collaborators will be able to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market its potential products in anticipated time frames, if at all. In
addition, several legislative proposals have been made to reform the FDA. If
such proposals are enacted they may result in significant changes in the
regulatory environment the Company faces. These changes could result in
different, more costly or more time consuming approval requirements for the
Company's products, in the dilution of FDA resources available to review the
Company's products, or in other unpredictable consequences. See "Government
Regulation" in the Company's Annual Report on Form 10-K.
SOURCES OF CELLS AND OTHER MATERIALS -- The Company's potential products
require genetically engineered cell lines or living cells harvested from animal
or human sources. There can be no assurance that the Company will successfully
identify or develop sources of the cells required for its potential products and
obtain such cells in quantities sufficient to satisfy the commercial
requirements of its potential products. These supply limitations may apply, in
particular, to primary cells which must be drawn directly from animal or human
sources, such as the bovine adrenal chromaffin cells currently used in the
Company's product for the treatment of pain. As an alternative to primary cells,
the Company is developing products based on the use of genetically altered
cells. Intellectual property rights to important genetic constructs used in
developing such cells, including the constructs used to develop cells producing
neurotrophic factors, are or may be claimed by one or more companies, which
could prevent the Company from using such cells. In addition, many suppliers of
materials used by the Company in its media, implants, and other components have
restricted the use of such materials for implantation into humans; if the
Company cannot obtain the necessary materials for its implants, the Company
would be adversely affected.
MANUFACTURING UNCERTAINTIES -- The Company's pilot manufacturing plant, may
not have sufficient capacity to permit the Company to produce all the products
for all of the clinical trials it anticipates developing. In addition, the
Company has not developed the capability to commercially manufacture any of its
proposed products and is unaware of any other company which has manufactured any
membrane-encapsulated cell product on a commercial scale. There can be no
assurance that the Company will be able to develop the capability of
manufacturing any of its proposed products at a cost or in the quantities
necessary to make a commercially viable product, if at all.
COMPETITION -- Competitors of the Company are numerous and include major
pharmaceutical and chemical companies, biotechnology companies, universities and
other research institutions. Currently, several of these competitors market and
sell therapeutic products for the treatment of chronic pain, Parkinson's disease
and other CNS conditions. In addition, most of the Company's competitors have
65
<PAGE>
substantially greater capital resources, experience in obtaining regulatory
approvals and, in the case of commercial entities, experience in manufacturing
and marketing pharmaceutical products, than the Company. A number of other
companies are attempting to develop methods of delivering therapeutic substances
within or across the blood brain barrier. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than those being developed by the Company or that would
render the Company's technology and products obsolete or non-competitive. See
"Competition" in the Company's Annual Report on Form 10-K.
DEPENDENCE ON KEY PERSONNEL -- The Company is highly dependent on the
principal members of its management and scientific staff and certain of its
outside consultants. Loss of the services of any of these individuals could have
a material adverse effect on the Company's operations. In addition, the
Company's operations are dependent upon its ability to attract and retain
additional qualified scientific and management personnel. There can be no
assurance the Company will be able to attract and retain such personnel on
acceptable terms given the competition among pharmaceutical, biotechnology and
health care companies, universities and research institutions for experienced
personnel.
REIMBURSEMENT AND HEALTH CARE REFORM -- In both domestic and foreign
markets, sales of the Company's potential products will depend in part upon the
availability and amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health care insurers and
other health care payors such as health maintenance organizations and
self-insured employee plans. There is considerable pressure to reduce the cost
of therapeutic products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable the Company to sell its products on a profitable
basis. See "Reimbursement and Health Cost Control" in the Company's Annual
Report on Form 10-K.
66
